La-Z-Boy Incorporated: Fiscal 2014 First-Quarter 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter ended July 27, 2013, compared with the quarter ended July 28, 2012. La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories through its Upholstery, Casegoods and Retail segments. Its network included 312 La-Z-Boy Furniture Galleries stores, including 93 company-owned locations, and 567 Comfort Studios locations.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Sales | $318.9 million | $301.5 million | Up 5.8% |
| Gross profit | $103.3 million | $89.6 million | Up 15.3% |
| Gross margin | 32.4% | 29.7% | Up 2.7 percentage points |
| Operating income | $14.8 million | $7.6 million | Up 94.4% |
| Operating margin | 4.6% | 2.5% | Up 2.1 percentage points |
| Net income attributable to La-Z-Boy | $9.6 million | $4.4 million | Up 118.1% |
| Diluted EPS | $0.18 | $0.08 | Up $0.10 |
| Effective tax rate | 35.5% | 37.0% | Down 1.5 percentage points |
| Cash flow from operations | $13.0 million | $(15.3) million | Improved $28.4 million |
Segment performance was mixed. Upholstery sales rose 7.0% to $254.9 million and operating income increased 42.7% to $22.2 million. Casegoods sales declined 14.9% to $29.4 million and operating income fell 56.5% to $0.6 million. Retail sales increased 16.0% to $66.3 million, helped by the acquisition of nine southern Ohio stores, and the segment moved from a $2.0 million operating loss to $1.9 million of operating income.
Cash and equivalents were $139.5 million at July 27, 2013, compared with $131.1 million at April 27, 2013. Total debt was approximately $8.0 million, consisting of $7.6 million of current debt and $0.4 million of long-term debt. The debt-to-capitalization ratio was 1.6%. The company had no borrowings under its $150 million revolving credit facility and reported $141.9 million of excess availability.
Investing activities provided $1.0 million, including investment-sale proceeds, while capital expenditures were $3.2 million. Financing activities used $5.3 million, including $7.1 million for share repurchases and $2.1 million for dividends. The company also held $12.7 million of restricted cash and $39.9 million of marketable securities.
Material changes versus the prior comparable period
- Sales growth reflected stronger volume, favorable product mix and selling-price increases.
- Gross margin improved primarily from the higher Retail sales mix, favorable Upholstery fixed-cost absorption, improved merchandising and a higher-priced Retail product mix.
- SG&A increased as a percentage of sales by 0.6 percentage points. Higher incentive compensation, driven partly by the increase in the company’s share price, more than offset lower doubtful-account provisions.
- Stock-based compensation expense increased to $5.1 million from $3.5 million, including higher liability-based award expense.
- Inventory increased to $158.0 million from $146.3 million, reflecting planned raw-material purchases and additional finished goods associated with strong Upholstery orders.
- The company reinstated quarterly dividends in fiscal 2013; dividends declared were $0.04 per share in the current quarter.
Guidance, outlook, risks and unusual items
Management expressed optimism entering the stronger fall selling season and expects its strategy, advertising campaign and lean-manufacturing initiatives to support profitable long-term growth. The company is pursuing its “4-4-5” strategy: 400 Furniture Galleries stores averaging $4 million in sales per store within five years.
Management began construction of a new world headquarters during the quarter. The project is estimated at approximately $57 million over 16 months, and total fiscal 2014 capital expenditures are expected to be $60 million to $65 million. Management stated that liquidity is adequate for operations, debt service, dividends, growth plans and capital expenditures.
Key risks include consumer demand and housing conditions, retailer and supplier credit, commodity and energy costs, import logistics, foreign exchange, labor or distribution disruptions, product defects and warranty costs, litigation, store expansion execution, ERP implementation, regulatory changes and severe weather. The Casegoods segment remained weak. The product warranty liability was $15.8 million at quarter-end, and notes receivable of $7.6 million were subject to a $1.7 million allowance for credit losses. The company also reported a $1.4 million net liability for uncertain tax positions.
The company repurchased approximately 0.4 million shares under its board authorization for $7.1 million; 3.8 million shares remained authorized for repurchase at quarter-end. A Rule 10b5-1 repurchase plan was effective July 1, 2013, and expires September 30, 2013.
Important facts for investors to verify
- Whether Upholstery and Retail momentum continues to offset persistent Casegoods weakness.
- The pace and return on investment of the store expansion program and nine-store southern Ohio acquisition.
- Execution, timing and final cost of the approximately $57 million headquarters project and the broader $60 million–$65 million fiscal 2014 capital expenditure plan.
- Whether higher incentive compensation and liability-based stock awards continue to pressure SG&A.
- Inventory levels, finished-goods shipments and cash conversion as the fall selling season progresses.
- Warranty claims, notes-receivable recoveries and the resolution of uncertain tax positions.
- The effect of the ERP implementation on internal controls and operating performance.
- Future share repurchases and dividends relative to capital needs and liquidity.