La-Z-Boy Incorporated — Fiscal 2023 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended January 28, 2023, compared with January 22, 2022. Fiscal year ends April 29, 2023. Financial statements are unaudited.
Business Context
La-Z-Boy manufactures, distributes, and retails upholstered and casegoods furniture through its Wholesale and Retail segments, company-owned La-Z-Boy Furniture Galleries stores, independent dealers, online channels, and the Joybird brand. The Retail segment comprised 167 company-owned stores at period-end.
Key Financial Metrics
| Metric | Q3 FY2023 | Q3 FY2022 | Change |
|---|---|---|---|
| Sales | $572.7 million | $571.6 million | 0.2% |
| Gross profit | $246.4 million | $219.4 million | 12.3% |
| Gross margin | 43.0% | 38.4% | +460 bps |
| Operating income | $42.8 million | $39.5 million | 8.5% |
| Operating margin | 7.5% | 6.9% | +60 bps |
| Net income attributable to La-Z-Boy | $31.7 million | $28.5 million | 11.4% |
| Diluted EPS | $0.74 | $0.65 | 13.8% |
| Metric | Nine Months FY2023 | Nine Months FY2022 | Change |
|---|---|---|---|
| Sales | $1.788 billion | $1.672 billion | 6.9% |
| Operating income | $157.4 million | $128.0 million | 23.0% |
| Operating margin | 8.8% | 7.7% | +110 bps |
| Net income attributable to La-Z-Boy | $116.3 million | $92.5 million | 25.7% |
| Diluted EPS | $2.70 | $2.07 | 30.4% |
| Operating cash flow | $127.1 million | $45.2 million | Increase of $81.9 million |
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash, cash equivalents, and restricted cash totaled $284.0 million at January 28, 2023, versus $248.9 million at April 30, 2022.
- Investments totaled $39.7 million, including $15.8 million held to enhance cash returns.
- Operating cash flow was $127.1 million, supported by net income and a $42.5 million reduction in receivables, partially offset by a $61.2 million reduction in customer deposits.
- Investing cash outflows were $58.0 million, including $57.4 million of capital expenditures and $11.9 million for acquisitions, partly offset by net investment proceeds.
- Financing cash outflows were $33.9 million, including $22.0 million of dividends, $5.0 million of acquisition-related holdback payments, and $5.0 million of share repurchases during the first nine months.
- No borrowings were outstanding under the $200 million unsecured revolving credit facility at January 28, 2023. The facility matures October 15, 2026, subject to extension provisions, and the company was in compliance with its covenants.
- Total assets were $1.846 billion and total equity was $916.5 million. Lease liabilities totaled $427.3 million, including current and long-term amounts.
Material Changes Versus the Prior Comparable Period
- Consolidated quarterly sales were essentially flat because pricing, surcharges, and favorable mix offset lower delivered unit volume.
- Retail sales increased 27.5% in the quarter and 29.4% year to date. Delivered same-store sales increased 23% in the quarter and 24% year to date, aided by pricing, improved conversion, acquisitions, and execution.
- Retail operating margin expanded to 17.6% from 12.2%, while Retail operating income increased 83.4%.
- Wholesale quarterly sales declined 3.7% and operating income declined 38.7%. Wholesale operating margin fell to 4.2% from 6.5%, primarily reflecting lower volume, reduced fixed-cost leverage, higher marketing expense, and Torreón closure charges.
- Corporate and Other operating loss increased to $18.3 million from $12.3 million in the quarter. Joybird sales declined 35% to $28.9 million, reflecting lower online traffic, demand challenges, and lower prior-period written sales.
- Gross margin benefited from pricing and surcharge actions, favorable Retail mix, and lower freight costs. SG&A increased as a percentage of sales because of higher marketing and selling expenses and the Torreón-related charges.
- The effective tax rate increased to 27.7% from 24.8% in the quarter and to 26.6% from 25.9% for the nine-month period.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2023 capital expenditures of approximately $75 million to $80 million; no material future capital-expenditure commitments were outstanding.
- Management stated that cash on hand and the available credit facility should provide adequate liquidity for operations over the next 12 months. The filing does not provide consolidated earnings or revenue guidance.
- La-Z-Boy closed its Torreón, Mexico manufacturing facility during the third quarter to improve plant efficiency. The facility represented approximately 3% of La-Z-Boy-branded production. The company recorded $9.2 million of asset impairment in SG&A and $0.9 million of severance-related cost of sales.
- The company continues to face softer consumer demand, weaker consumer sentiment, lower delivered volumes, and industry-wide e-commerce pressures. Global supply-chain, freight, raw-material, foreign-exchange, and operating-efficiency risks remain relevant.
- The company expects regular quarterly dividends to continue for the foreseeable future, but future dividends remain subject to board approval and may be discontinued.
- The company reduced a $0.8 million Joybird contingent consideration liability to zero during the second quarter based on its latest projections.
- Management reported no material changes to previously disclosed risk factors, market risks, critical accounting policies, or internal controls.
Investor Verification Items
- Verify whether Retail growth and margin expansion can continue as backlog normalizes and consumer demand remains pressured.
- Monitor Wholesale volume, plant utilization, raw-material and freight costs, and the financial effect of the Torreón closure.
- Assess whether Joybird can return to sales growth and reduce its operating losses despite weaker online traffic and demand.
- Reconcile capital spending, acquisitions, dividends, and share repurchases with projected free cash flow and liquidity.
- Review compliance with the revolving credit facility’s lease-adjusted leverage and fixed-charge coverage covenants.
- Track customer deposits, deferred revenue, backlog levels, warranty liabilities, and inventory composition as indicators of future deliveries and working-capital requirements.