La-Z-Boy Incorporated Fiscal 2017 Form 10-K Summary
Business context and reporting period
The filing covers the 52-week fiscal year ended April 29, 2017. The requested period is labeled “2016 Q4,” but the filing is the fiscal 2017 annual report; fiscal 2016 included 53 weeks and ended April 30, 2016.
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories. Reportable segments are Upholstery, Casegoods and Retail. The company operated 347 La-Z-Boy Furniture Galleries stores, including 143 company-owned stores, and 557 Comfort Studio locations. During fiscal 2017, it acquired 14 independent Furniture Galleries stores and the La-Z-Boy wholesale business in the United Kingdom and Ireland.
Financial performance and position
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Sales | $1,520.1 million | $1,525.4 million | (0.3%) |
| Gross profit | $606.5 million | $582.0 million | +4.2% |
| Gross margin | 39.9% | 38.2% | +1.7 percentage points |
| Operating income | $130.6 million | $122.4 million | +6.7% |
| Operating margin | 8.6% | 8.0% | +0.6 percentage points |
| Net income attributable to La-Z-Boy | $85.9 million | $79.3 million | +8.4% |
| Diluted earnings per share | $1.73 | $1.55 | +11.6% |
| Cash flow from operations | $146.2 million | $112.4 million | +30.1% |
| Capital expenditures | $20.3 million | $24.7 million | $(4.4) million |
Fiscal 2017 sales were essentially flat despite weaker home-furnishings demand and the loss of the extra week included in fiscal 2016. Gross-margin improvement reflected favorable product mix, supply-chain efficiencies, growth in higher-margin Retail sales, lower Casegoods promotional activity and lower imported-product freight costs. The company also received legal-settlement benefits equal to approximately 0.2 percentage points of gross margin.
- Upholstery: Sales declined 2.0% to $1,191.4 million, while operating income increased 9.0% to $146.2 million and operating margin rose to 12.3% from 11.0%. Lower unit volume and higher promotions were partly offset by more motion and powered products and $8.9 million of sales from the United Kingdom and Ireland acquisition.
- Casegoods: Sales declined 2.3% to $100.2 million, while operating income increased 11.5% to $8.6 million and operating margin rose to 8.6% from 7.5%.
- Retail: Sales increased 10.1% to $443.2 million, primarily from acquired and new stores. Operating income declined 24.9% to $19.2 million, and operating margin fell to 4.3% from 6.4% because of lower comparable-store traffic, higher advertising and fixed store costs.
At April 29, 2017, cash and equivalents were $141.9 million, investments totaled $53.7 million, working capital was $318.7 million and the current ratio was 2.6 to 1. Total debt was only $0.5 million, consisting primarily of capital leases. The company had no revolving-credit borrowings and $141.9 million of excess availability under its $150.0 million facility. Total assets were $888.9 million and total equity was $601.1 million.
Cash increased $29.5 million during fiscal 2017. Financing uses included $36.0 million for share repurchases and $20.7 million for dividends. The company repurchased 1.4 million shares and declared dividends of $0.42 per share, compared with $0.36 in fiscal 2016.
Material changes versus the prior comparable period
- Revenue declined modestly, but operating income, net income and diluted EPS increased because of improved gross margins, lower legal costs and reduced share count.
- Retail sales grew through acquisitions and new stores, but comparable-store sales declined 7.2%, and Retail operating profitability deteriorated.
- Operating cash flow improved by $33.8 million, principally reflecting net income and a $12.5 million reduction in inventory.
- The company acquired 14 Furniture Galleries stores and the United Kingdom and Ireland wholesale business. Goodwill increased from $37.2 million to $74.2 million, and other intangible assets increased from $8.6 million to $18.5 million.
- Accounts payable increased $6.6 million, primarily because of the United Kingdom and Ireland acquisition. Accrued expenses increased $34.7 million, including the acquisition purchase-price liability.
- Backlog declined to approximately $45.1 million in Upholstery from $50.8 million and to $6.9 million in Casegoods from $7.6 million, reflecting improved shipping and in-stock positions.
Guidance, outlook, risks and unusual items
Management expressed optimism about the La-Z-Boy brand, digital platforms and long-term growth opportunities, but did not provide specific revenue or earnings guidance. The company expects fiscal 2018 capital expenditures of approximately $50 million to $55 million, including approximately $14 million for the new Innovation Center in Dayton, Tennessee. Construction and related facility upgrades are expected to continue into fiscal 2020.
- The company expects a slight increase in upholstery raw-material costs and imported casegoods prices and transportation costs in fiscal 2018; it has implemented modest price increases.
- The 4-4-5 store-growth initiative is expected to extend beyond five years. The company plans to open, relocate or remodel 25 to 30 stores in fiscal 2018, and targets 600 Comfort Studio locations.
- Furniture demand is sensitive to consumer confidence, housing activity, employment, interest rates and discretionary spending. The first fiscal quarter is typically the weakest due to seasonality and plant shutdowns.
- Material risks include commodity costs, supplier concentration, offshore sourcing, tariffs and trade-policy changes, foreign exchange, logistics disruptions, online competition, changing consumer preferences, store impairment, product liability, warranty claims, litigation, cybersecurity and ERP implementation risks.
- A court ruled against the company’s affirmative defenses in a dispute concerning royalties on certain power units. The company appealed, recognized $0.5 million of fiscal 2017 interest expense, and had not paid the judgment or interest at year-end.
- Total contractual obligations were $476.4 million, including $384.6 million of operating leases, $74.1 million of purchase obligations, $15.9 million related to the United Kingdom and Ireland acquisition, and $1.2 million of contingent consideration.
- The company reported no goodwill impairment in fiscal 2017. Legal and environmental matters were not expected to result in additional material losses based on currently known information.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of April 29, 2017. The sales-order-management portion of the ERP implementation was expected to be completed by the end of fiscal 2018.
Most important facts for an investor to verify
- Whether comparable-store traffic and Retail margins recover after the fiscal 2017 decline.
- Actual fiscal 2018 sales, earnings and capital spending relative to management’s outlook and the planned Innovation Center investment.
- The outcome and potential financial exposure of the power-unit royalty litigation appeal.
- The integration, profitability and contingent consideration associated with the United Kingdom and Ireland acquisition.
- Exposure to raw-material inflation, tariffs, foreign sourcing and concentrated suppliers.
- Progress and cost of the ERP implementation and any effect on internal controls or operations.
- Future share repurchases and dividends relative to operating cash flow and the company’s substantial operating-lease commitments.