La-Z-Boy Incorporated: Fiscal 2021 Second-Quarter Form 10-Q
Business context and reporting period
La-Z-Boy Incorporated designs, manufactures, imports, distributes and retails upholstered and casegoods furniture under the La-Z-Boy, England, Kincaid, American Drew, Hammary and Joybird brands. The filing covers the quarter and six months ended October 24, 2020, compared with October 26, 2019. The interim financial statements are unaudited. The company operated 159 company-owned La-Z-Boy Furniture Galleries stores and five major U.S. manufacturing locations, along with facilities in Mexico.
Effective in fiscal 2021, the former Upholstery and Casegoods segments were combined into the Wholesale segment; prior-period segment results were revised for comparability.
Key financial metrics
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Sales | $459.1 million | $447.2 million | $744.6 million | $860.8 million |
| Gross profit | $200.6 million | $182.4 million | $316.9 million | $350.1 million |
| Gross margin | 43.7% | 40.8% | 42.6% | 40.7% |
| Operating income | $47.9 million | $29.6 million | $52.3 million | $53.0 million |
| Operating margin | 10.4% | 6.6% | 7.0% | 6.2% |
| Net income attributable to La-Z-Boy | $34.9 million | $22.6 million | $39.7 million | $40.7 million |
| Diluted EPS | $0.75 | $0.48 | $0.86 | $0.86 |
Second-quarter sales increased 2.7%, operating income increased 62.0%, and operating margin expanded 380 basis points. Six-month sales declined 13.5% and operating income declined 1.4%, primarily reflecting COVID-19-related closures and delivery constraints in the first quarter.
- Wholesale sales declined 2.1% in the quarter and 15.5% year to date; operating margin improved to 12.2% from 9.8% in the quarter.
- Retail sales increased 9.3% in the quarter, supported by a 6.3% increase in same-store delivered sales and $3.5 million of sales from the acquired Seattle stores. Retail operating margin increased to 9.3% from 5.7%.
- Joybird sales increased 41.9% in the quarter to $29.4 million and delivered a profitable quarter. Six-month Joybird sales increased $5.0 million to $42.9 million.
- Net cash provided by operating activities was $195.7 million for the first six months, compared with $53.7 million in the prior-year period. The increase was driven principally by higher customer deposits and net income.
- Capital expenditures were $15.4 million, compared with $22.9 million in the prior-year period. Investing cash outflow was $21.4 million and financing cash outflow was $86.4 million.
- Cash, cash equivalents and restricted cash totaled $353.4 million at October 24, 2020, compared with $263.5 million at April 25, 2020. The company also held $27.2 million of investments intended to enhance cash returns.
- The company had no borrowings outstanding under its $150.0 million revolving credit facility at quarter end, with $62.8 million of excess availability. The facility matures December 19, 2022.
- Total lease liabilities were $360.4 million, including $65.8 million current and $294.6 million long term. Total equity was $754.6 million.
Material changes versus the prior comparable period
- COVID-19 caused temporary manufacturing and retail closures, phased reopenings and lower deliveries during the first quarter, resulting in substantially lower first-half sales.
- Demand rebounded strongly after reopening, with written orders outpacing production capacity. A temporary polyurethane foam shortage constrained Wholesale unit volume in the second quarter.
- Gross margin benefited from favorable sales mix, higher-margin Retail and Joybird growth, improved Joybird supply-chain performance and the absence of higher prior-year supply-chain initiative costs.
- SG&A expense was lower as a percentage of sales in the second quarter due to disciplined spending, lower advertising and travel costs, and workforce reductions. First-half SG&A as a percentage of sales increased because of lower volume and business realignment costs.
- The company incurred $3.9 million of business realignment expenses during the first six months, primarily severance and impairment related to the closure of the Newton, Mississippi facility and an approximately 10% global workforce reduction.
- The company repaid the $75.0 million borrowed from its revolving facility during the first and second quarters.
- The quarterly shareholder dividend was reinstated at $0.07 per share in the second quarter, versus the prior suspension. On November 17, 2020, the board declared a $0.14 per-share dividend payable December 15, 2020.
- The company acquired a Seattle, Washington business operating six La-Z-Boy Furniture Galleries stores and one warehouse for $13.5 million, including $2.0 million paid in the second quarter and $9.4 million of future guaranteed payments over 36 months. The acquisition added $12.9 million of goodwill and $2.2 million of reacquired rights.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2021 capital expenditures of approximately $40 million to $45 million, subject to liquidity, economic conditions and consumer demand.
- The company is expanding capacity by adding Mexico manufacturing cells, weekend production shifts, temporarily reactivating part of the Newton facility and opening a leased upholstery plant in San Luis Rio Colorado, Mexico, early in the third quarter.
- Management states that liquidity is adequate for short- and long-term requirements, growth plans, operations and capital expenditures, but COVID-19 continues to create uncertainty regarding demand, operations, supply chains and financial results.
- Supply-chain availability and pricing remain risks, including the temporary polyurethane foam shortage. Production capacity constraints could delay fulfillment and revenue recognition.
- The $2.5 million increase in the fair value of the Joybird contingent consideration liability was recorded as a pre-tax SG&A charge. The liability totaled $2.5 million at October 24, 2020 and depends on projected Joybird revenue and earnings.
- Customer deposits increased to $140.7 million from $40.7 million at fiscal year-end, while deferred revenue increased to $67.9 million from $17.1 million. These balances supported operating cash flow but represent future fulfillment obligations.
- Share repurchases remained suspended; 4.5 million shares remained authorized for future repurchase, subject to management’s discretion and financial conditions.
- The filing states that there were no material changes to previously disclosed risk factors, contractual obligations, market risks or critical accounting policies.
Important facts for investors to verify
- Whether strong written-order trends convert into delivered sales as manufacturing capacity expands.
- The duration and financial impact of COVID-19, supply-chain disruptions and potential future operating restrictions.
- The sustainability of second-quarter gross-margin gains and Retail and Joybird profitability.
- The cash-flow effect of elevated customer deposits and deferred revenue as orders are produced and delivered.
- Progress, costs and expected returns from the Seattle acquisition and new Mexico production capacity.
- Future dividend payments, the potential resumption of share repurchases and compliance with revolving-credit covenants.
- Potential changes in the Joybird earnout liability and other unusual or nonrecurring charges.