La-Z-Boy Incorporated — Fiscal 2022 Second-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended October 23, 2021, compared with October 24, 2020. La-Z-Boy manufactures, distributes and retails upholstered and casegoods furniture through its Wholesale, Retail and Corporate & Other businesses, including Joybird. The company operated 159 company-owned La-Z-Boy Furniture Galleries stores and maintained a broader network of independently owned galleries and Comfort Studio locations.
Financial performance and liquidity
| Metric | Quarter ended Oct. 23, 2021 | Quarter ended Oct. 24, 2020 | Six months ended Oct. 23, 2021 | Six months ended Oct. 24, 2020 |
|---|---|---|---|---|
| Sales | $575.9 million | $459.1 million | $1,100.7 million | $744.6 million |
| Gross profit | $223.3 million | $200.6 million | $425.4 million | $316.9 million |
| Gross margin | 38.8% | 43.7% | 38.6% | 42.6% |
| Operating income | $54.1 million | $47.9 million | $88.5 million | $52.3 million |
| Operating margin | 9.4% | 10.4% | 8.0% | 7.0% |
| Net income attributable to La-Z-Boy | $39.5 million | $34.9 million | $64.1 million | $39.7 million |
| Diluted earnings per share | $0.89 | $0.75 | $1.43 | $0.86 |
- Quarterly sales increased 25.4%; six-month sales increased 47.8%. Quarterly operating income increased 12.9%; six-month operating income increased 69.3%.
- Quarterly gross margin declined 490 basis points, primarily from higher raw-material and freight costs, labor challenges and costs associated with expanding manufacturing capacity. Pricing and surcharge actions partially offset these pressures.
- SG&A leverage supported operating income, including the benefit of a gain on the sale of the Newton, Mississippi manufacturing facility. The prior-year periods included business-realignment expenses.
- Six-month cash flow from operations was $15.4 million, down from $195.7 million. Working-capital investment included higher inventories, receivables and other assets; inventory increased to $285.8 million from $226.1 million at fiscal year-end.
- Capital expenditures were $33.3 million versus $15.4 million in the prior-year period. Investing cash outflow was $32.5 million, and financing cash outflow was $80.7 million.
- Cash, cash equivalents and restricted cash totaled $296.6 million at October 23, 2021, down from $394.7 million at April 24, 2021. Investments totaled $54.5 million, including $31.0 million intended to enhance returns on cash.
- The company had no borrowings under its new $200.0 million unsecured revolving credit facility. The facility matures October 15, 2026, with potential extensions and up to $100.0 million of additional commitments subject to lender participation. The company was in compliance with its covenants.
- Lease liabilities totaled $362.1 million, consisting of $67.9 million current and $294.3 million long-term liabilities.
Material changes versus the prior comparable period
- Wholesale sales rose 28.0% in the quarter and 46.9% for six months, but Wholesale operating margin fell to 9.8% from 12.2% in the quarter and to 7.4% from 10.5% for six months.
- Retail sales increased 18.6% in the quarter and 47.7% for six months. Retail operating margin improved to 12.5% from 9.3% in the quarter and to 11.9% from 3.3% for six months.
- Joybird sales increased 36.6% in the quarter to $40.2 million and 84.0% for six months to $78.9 million, but Corporate & Other operating losses increased due to marketing, technology, raw-material and freight costs.
- The company repurchased $50.6 million of common stock, or approximately 1.4 million shares, during the first six months and paid $13.4 million in shareholder dividends. The quarterly dividend was $0.15 per share.
- The company acquired three La-Z-Boy Furniture Galleries stores and related assets in Long Island, New York, for approximately $4.5 million, recognizing $4.4 million of goodwill and $0.8 million of reacquired rights. On October 25, 2021, after the reporting period, it acquired U.K. upholstery manufacturer Furnico Furniture Ltd. for approximately $11.5 million.
Guidance, outlook, commentary and risks
- Management reported record quarterly sales and continued strong written-order demand, but production capacity and backlog remained constrained.
- The company expanded capacity through additional shifts, new or reactivated facilities and Mexico operations. Additional Torreon, Mexico capacity was expected to begin operating in the latter part of the third quarter of fiscal 2022.
- Fiscal 2022 capital expenditures were expected to range from $75 million to $85 million, focused on retail stores, manufacturing and distribution facilities, Mexico capacity and technology.
- Management expects to continue regular quarterly dividends and stated that it expected to continue share repurchases using anticipated fiscal 2022 operating cash flow; future dividends remain subject to board approval.
- Key risks include COVID-19 uncertainty, supply-chain availability and pricing, freight costs, labor constraints, manufacturing ramp-up costs, consumer demand, foreign exchange, and the ability to satisfy credit-facility covenants. The filing reported no material changes to previously disclosed risk factors.
- Other income included approximately $1.0 million of quarterly income, primarily unrealized investment gains. The company also recognized a $0.5 million increase in the fair value of its Joybird contingent consideration liability during the quarter.
Important facts for investors to verify
- Whether pricing and surcharge actions can offset persistent raw-material, freight and labor inflation without further gross-margin deterioration.
- The pace and cost of manufacturing-capacity expansion, including the Mexico facilities and Torreon ramp-up, and its effect on backlog and deliveries.
- Working-capital requirements, particularly inventories, receivables, customer deposits and deferred revenue, given the sharp decline in operating cash flow.
- Execution and profitability of Joybird while marketing and technology investments remain elevated.
- Terms, covenant requirements and borrowing availability under the new $200.0 million revolving credit facility.
- Capital-allocation sustainability, including the planned $75 million–$85 million of capital expenditures, share repurchases and quarterly dividends.
- Integration and financial contribution of the Long Island acquisition and the post-quarter Furnico acquisition.