LA-Z-BOY INCORPORATED - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the second quarter and first six months of fiscal year 2008, ended October 27, 2007. LA-Z-BOY INC is a leading global producer of reclining chairs and upholstered furniture, operating through three segments: Upholstery Group, Casegoods Group, and Retail Group. The company reported a net loss for the period, driven by weak consumer demand, a decline in the housing market, and significant charges related to discontinued operations and goodwill impairments.
Key Financial Metrics
| Metric | Q2 2008 | Q2 2007 | 6 Months 2008 | 6 Months 2007 |
|---|---|---|---|---|
| Sales | $365.4M | $414.6M | $709.8M | $808.5M |
| Gross Profit | $98.3M | $108.7M | $181.0M | $206.6M |
| Gross Margin | 26.9% | 26.2% | 25.5% | 25.5% |
| Operating Income (Loss) | ($6.1M) | $6.5M | ($19.0M) | $9.7M |
| Net Income (Loss) | ($9.9M) | $2.0M | ($18.6M) | $4.2M |
| Diluted EPS (Continuing Ops) | ($0.07) | $0.06 | ($0.24) | $0.08 |
| Cash and Equivalents | $32.7M | $20.5M | $32.7M | $20.5M |
| Total Debt | $149.1M | $182.8M | $149.1M | $182.8M |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated sales decreased 11.9% in Q2 and 12.2% for the six months ended Oct 27, 2007, compared to the prior year. All three segments (Upholstery, Casegoods, Retail) experienced sales declines due to weak consumer demand and housing market slowdowns.
- Operating Loss: The company shifted from an operating profit of $6.5M in Q2 2007 to a loss of $6.1M in Q2 2008. This was primarily due to a $5.8M goodwill impairment charge and increased restructuring costs.
- Discontinued Operations: A significant loss of $6.3M (net of tax) was recorded in Q2 2008 from discontinued operations, largely due to the sale of the Clayton Marcus operating unit and Pennsylvania House trade name, and inventory write-downs.
- Intangible Write-down: A $5.8M impairment charge was recorded for goodwill associated with the South Florida retail market due to delayed store openings and double-digit sales declines in that region.
Guidance, Outlook, and Risks
- Updated Guidance: Management withdrew previous full-year guidance. For the second half of fiscal 2008, the company expects sales to be down 4% to 8% and earnings per share from continuing operations to range from $0.06 to $0.14.
- Debt Covenant Compliance: The company was not in compliance with the fixed charge coverage ratio under its revolving credit facility as of the end of Q2. An amendment was obtained on November 6, 2007, to achieve compliance for the quarter. Management anticipates non-compliance again by the end of Q3 and is negotiating a new secured credit facility to refinance private placement notes.
- Refinancing Risk: There is a risk that if a new credit facility is not secured, lenders could accelerate the maturity of private placement notes, potentially causing a default. A "make-whole" premium of $2.5M to $3.0M is expected to be paid upon refinancing.
- Restructuring: Ongoing restructuring efforts include facility closures and warehouse consolidations. A remaining liability of $3.2M is expected to be paid out over the next few years.
Key Facts for Investor Verification
- Debt Refinancing Status: Verify the progress of negotiations for the new secured credit facility and the likelihood of avoiding default on private placement notes.
- South Florida Market: Assess the long-term viability of the South Florida retail market given the goodwill impairment and sales decline.
- Discontinued Operations: Monitor the liquidation of remaining Pennsylvania House inventory and the finalization of the Clayton Marcus sale.
- Cash Flow: Review the ability to generate positive operating cash flow given the net loss and ongoing restructuring costs.
- Consumer Demand: Evaluate the impact of the broader housing market and consumer confidence on future sales volumes across all segments.