La-Z-Boy Incorporated — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the first quarter of fiscal 2015, ended July 26, 2014, compared with the quarter ended July 27, 2013. La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and related accessories through its Upholstery, Casegoods and Retail segments.
- The company operated 102 company-owned La-Z-Boy Furniture Galleries stores and reported a broader network of 317 Galleries stores and 586 Comfort Studio locations.
- Results for Bauhaus and Lea Industries are presented as discontinued operations. Lea Industries remained classified as held for sale.
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Sales | $327.0 million | $305.5 million | 7.0% increase |
| Gross profit | $111.5 million | $101.5 million | 9.9% increase |
| Gross margin | 34.1% | 33.2% | 0.9 percentage-point increase |
| Operating income | $16.5 million | $14.8 million | 11.7% increase |
| Operating margin | 5.0% | 4.8% | 0.2 percentage-point increase |
| Income from continuing operations attributable to La-Z-Boy | $10.6 million | $9.6 million | Increase |
| Net income attributable to La-Z-Boy | $13.1 million | $9.6 million | Increase |
| Diluted earnings per share | $0.25 | $0.18 | Increase |
| Cash flow from operating activities | $(1.2) million | $13.0 million | Decrease |
- Net income included $2.5 million after-tax income from discontinued operations, including approximately $2.4 million after-tax income related to distributions under the Continued Dumping and Subsidy Offset Act.
- SG&A increased to $95.0 million from $86.7 million. SG&A as a percentage of sales increased by 0.7 percentage point, reflecting investments in advertising, distribution, technology and new stores.
- The effective tax rate on continuing operations was 35.3%, compared with 35.5% in the prior-year quarter.
- Cash and equivalents were $116.3 million at July 26, 2014, compared with $149.7 million at April 26, 2014. The company also held $45.2 million of investments intended to enhance cash returns.
- Total debt was approximately $0.6 million, consisting of $0.4 million current debt and $0.2 million long-term debt. The company had no borrowings under its revolving credit facility and $138.5 million of excess availability.
- Capital expenditures were $19.4 million, primarily for the new world headquarters, new stores and manufacturing equipment. Fiscal 2015 capital expenditures were expected to be $60 million to $70 million, including approximately $44 million for the headquarters project.
- Inventory increased to $161.3 million from $147.0 million at fiscal year-end, partly to prepare for a potential West Coast port labor strike and to improve in-stock levels.
Material changes versus the prior comparable period
- Upholstery sales rose 6.8% to $262.9 million, but operating income declined 1.2% to $22.0 million and operating margin fell to 8.4% from 9.1%. Higher volume and pricing were offset by product mix, service-level costs, raw-material inflation and increased investment spending.
- Casegoods sales increased 16.6% to $28.9 million. Operating income increased to $1.5 million from $0.5 million, and operating margin improved to 5.3% from 1.8%, aided by new product introductions and volume leverage.
- Retail sales rose 10.0% to $72.9 million due to new and acquired stores. Operating income fell 83.6% to $0.3 million, and operating margin declined to 0.4% from 2.9% because of pre-opening, staffing, training, distribution and occupancy costs.
- Operating cash flow changed from $13.0 million provided to $1.2 million used, primarily because of inventory growth, incentive compensation settlements and other liability changes.
- Investing cash use increased to $16.3 million from $1.0 million provided, driven mainly by higher capital expenditures and purchases of investments.
- Financing cash use increased to $16.0 million from $5.3 million, including repayment of a $7.1 million industrial revenue bond, $6.1 million of share repurchases and $3.1 million of dividends.
Guidance, outlook, risks and unusual items
- Management expressed confidence in its long-term profitable-growth strategy, including the 4-4-5 initiative to expand the La-Z-Boy Furniture Galleries network toward 400 stores averaging $4 million in annual sales per store over five years.
- The company planned to open five additional company-owned stores in the second quarter of fiscal 2015 and continued investing in its Live Life Comfortably marketing campaign, new products and technology systems.
- Casegoods restructuring is expected to cease manufacturing at the Hudson, North Carolina facility during the second quarter of fiscal 2015, transition remaining bedroom products to imports, exit the hospitality business and move warehouse and repair functions. Cumulative restructuring charges were $7.7 million pretax, with a remaining liability of $0.4 million expected to be settled by the end of fiscal 2015.
- Management identified risks relating to consumer demand, economic and credit conditions, commodity and freight costs, import logistics, labor or supply disruptions, foreign exchange, severe weather, product defects and warranty claims, litigation, store expansion, restructuring execution and potential legal challenges relating to the dumping-duty distribution.
- The company was implementing an ERP system in its largest operating unit, with phased implementation expected into fiscal 2016. Management stated that disclosure controls were effective and that no material internal-control changes had occurred during the quarter.
- The board authorized an additional 5.0 million shares for repurchase in August 2014. At July 26, 2014, 2.6 million shares remained available under the then-existing authorization.
Investor verification points
- Verify the sustainability of the $3.8 million pretax discontinued-operations benefit and exclude it when assessing recurring earnings.
- Monitor operating performance and margin recovery in the Retail segment as new-store investments mature.
- Assess whether the casegoods restructuring achieves expected cost and margin benefits without additional charges or operational disruption.
- Track cash conversion, inventory normalization and the funding demands of the headquarters and store expansion projects.
- Evaluate the impact of advertising, ERP, distribution and pre-opening investments on future SG&A leverage.
- Confirm the timing and outcome of the Hudson plant closure, facility sales and Lea Industries disposition.