LA-Z-BOY INC - Fiscal 2007 10-K Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended April 28, 2007. LA-Z-BOY INC is the largest reclining-chair manufacturer in the world and North America's largest manufacturer of upholstered furniture. The company operates through three segments: Upholstery Group, Casegoods Group, and Retail Group. The reporting period was characterized by a difficult macroeconomic environment, including volatile energy markets and declining housing starts, which impacted consumer confidence and retail sales.
Key Financial Metrics
| Metric | Fiscal 2007 | Fiscal 2006 |
|---|---|---|
| Sales | $1,617.3 million | $1,695.0 million |
| Gross Profit | $426.1 million | $413.0 million |
| Gross Margin | 26.3% | 24.4% |
| Operating Income | $32.0 million | $14.5 million |
| Operating Margin | 2.0% | 0.9% |
| Net Income (Loss) | $4.1 million | $(3.0) million |
| Diluted EPS (Continuing Ops) | $0.38 | $(0.11) |
| Operating Cash Flow | $33.2 million | $89.8 million |
| Total Debt | $149.4 million | $184.2 million |
| Debt-to-Capital Ratio | 23.5% | 26.5% |
| Current Ratio | 2.4 to 1 | 2.5 to 1 |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated sales decreased 4.6% year-over-year. The Upholstery Group sales fell 5.7% and Casegoods sales fell 10.2% due to a weak retail environment. Conversely, the Retail Group sales increased 3.2%, driven by the acquisition of six stores in southeastern Florida.
- Profitability Improvement: Despite lower sales, operating income increased 119.8% to $32.0 million. This was primarily due to a $22.7 million goodwill impairment charge in the prior year (Bauhaus division) that did not recur, and improved gross margins (up 1.9 percentage points) driven by cost reduction efforts and favorable workers' compensation reserve adjustments.
- Discontinued Operations: The company recorded a net loss of $15.6 million from discontinued operations, compared to a gain of $2.5 million in the prior year. This includes a $17.5 million pre-tax impairment charge related to the decision to sell the Sam Moore, Clayton Marcus, and Pennsylvania House operating units.
- Restructuring: Restructuring costs totaled $11.0 million in 2007 (up from $8.5 million in 2006), related to facility closures in North Carolina and Mississippi, retail warehouse consolidations, and store closures in Pittsburgh and Rochester.
Guidance, Outlook, and Risks
- Guidance: Management expects fiscal 2008 sales to be down 5% to 10% compared to fiscal 2007. Earnings per share from continuing operations are expected to range from $0.45 to $0.60. This guidance excludes restructuring charges, potential anti-dumping monies, and gains/losses on discontinued operations.
- Outlook: The company anticipates challenging market conditions to prevail. The Retail Group is expected to become profitable by the first half of fiscal 2009. The company plans to continue closing underperforming stores and consolidating operations to match costs with revenue streams.
- Risks: Key risks include reliance on foreign sourcing (particularly from China), fluctuations in raw material costs (fabrics, steel, lumber), and the financial stability of independent dealers classified as Variable Interest Entities (VIEs). The company consolidates four VIEs, absorbing their net losses.
- Unusual Items: The company recorded $3.4 million in income from the Continued Dumping and Subsidy Offset Act (CDSOA). Future receipts are uncertain due to legal challenges and legislative changes.
Investor Verification Checklist
- Discontinued Operations: Verify the final sale price and timing for the Sam Moore, Clayton Marcus, and Pennsylvania House units to assess potential additional losses or gains.
- Retail Segment Turnaround: Monitor the Retail Group's path to profitability, specifically the impact of store closures in Pittsburgh and Rochester and the conversion to the "New Generation" format.
- Foreign Sourcing Exposure: Review the concentration of cut and sewn fabric/leather suppliers in China (62% of cut and sewn parts) and potential logistics or trade barrier risks.
- VIE Consolidation: Assess the financial health of the four consolidated Variable Interest Entities, as their losses directly impact the company's net income.
- CDSOA Income: Evaluate the sustainability of the $3.4 million CDSOA income, given the legislative repeal of distributions for duties collected after September 30, 2007.