La-Z-Boy Incorporated Fiscal 2022 Form 10-K Summary
Business Context and Reporting Period
La-Z-Boy manufactures, imports, distributes and retails upholstered and casegoods furniture under the La-Z-Boy, England, Kincaid, American Drew, Hammary and Joybird brands. Reportable segments are Wholesale and Retail; Joybird and corporate activities are included in Corporate & Other.
The filing covers the fiscal year ended April 30, 2022. Fiscal 2022 included 53 weeks, compared with 52 weeks in fiscal 2021. Accordingly, the filing is not a 2021 quarterly report; it is the fiscal 2022 annual report, with the additional week included in the fourth quarter.
Financial Performance and Key Metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Sales | $2,356.8 million | $1,734.2 million | 35.9% |
| Operating income | $206.8 million | $136.7 million | 51.2% |
| Operating margin | 8.8% | 7.9% | Up 90 basis points |
| Net income attributable to La-Z-Boy | $150.0 million | $106.5 million | 41.0% |
| Diluted EPS | $3.39 | $2.30 | 47.4% |
| Effective tax rate | 25.9% | 26.3% | Down 40 basis points |
Gross profit was $916.0 million, representing an approximately 38.9% gross margin versus approximately 42.7% in fiscal 2021. Net income attributable to La-Z-Boy represented an approximately 6.4% net margin, compared with approximately 6.1% in the prior year.
- Wholesale: Sales increased 35.9% to $1,768.8 million, but operating income was essentially flat at $134.0 million. Operating margin declined to 7.6% from 10.3% because of material and freight inflation, higher production costs, labor constraints and component shortages.
- Retail: Sales increased 31.2% to $804.4 million. Delivered same-store sales increased 28%, and operating income rose 134.5% to $109.5 million. Operating margin increased to 13.6% from 7.6%.
- Joybird and Corporate & Other: Sales increased 53.9% to $196.0 million, including Joybird sales of $176.4 million, up 62%. The operating loss narrowed to $36.8 million from $44.3 million, helped by a $3.3 million gain from reducing the Joybird contingent consideration liability, compared with a $14.1 million charge in fiscal 2021.
- Backlog: Wholesale backlog was $697.2 million at April 30, 2022, compared with $616.7 million at April 24, 2021.
Cash Flow, Balance Sheet, Debt and Liquidity
| Metric | Fiscal 2022 | Fiscal 2021 |
|---|---|---|
| Cash flow from operations | $79.0 million | $309.9 million |
| Capital expenditures | $76.6 million | $38.0 million |
| Cash used for investing | $78.4 million | $40.7 million |
| Cash used for financing | $144.6 million | $141.1 million |
| Cash, cash equivalents and restricted cash | $248.9 million | $394.7 million |
| Investments | $51.5 million | $55.4 million |
Operating cash flow declined primarily because fiscal 2021 benefited from a significant increase in customer deposits, while fiscal 2022 required substantial investment in inventory and receivables. Inventory increased $77.1 million and receivables increased $44.4 million year over year.
On October 15, 2021, the Company entered into a new five-year $200.0 million unsecured revolving credit facility, with potential commitments of up to an additional $100.0 million subject to lender participation. No borrowings were outstanding at year-end, and the Company was in compliance with its financial covenants.
Fiscal 2022 financing uses included $90.6 million for repurchases of 2.5 million shares, $27.7 million of shareholder dividends and $23.0 million of holdback payments related to prior acquisitions. The Company had 7.5 million shares remaining under its repurchase authorization at year-end.
Contractual obligations included $477.1 million of operating lease payments, $267.9 million of purchase obligations payable within 12 months and $10.8 million of future guaranteed and contingent acquisition payments related to Joybird, including $5.0 million payable within 12 months.
Material Changes Versus the Prior Comparable Period
- Consolidated sales increased 35.9%, supported by strong post-pandemic demand, pricing and surcharges, expanded production capacity and the additional fiscal week. Management estimated the extra week contributed $48.9 million of sales.
- Operating margin increased despite a 380-basis-point decline in gross margin because SG&A as a percentage of sales declined 470 basis points.
- Wholesale profitability weakened materially on a margin basis, while Retail profitability improved substantially because of sales leverage, acquired stores and lower SG&A as a percentage of sales.
- Operating cash flow fell by $230.9 million, largely reflecting working-capital investment and the absence of the unusually large customer-deposit benefit recorded in fiscal 2021.
- Capital expenditures doubled approximately from fiscal 2021, reflecting manufacturing, retail, Mexico capacity and technology investments.
- The Company acquired Furnico, a U.K. upholstery manufacturer, and retail businesses in Alabama, Chattanooga, Tennessee, and Long Island, New York. Total acquisition cash payments were $26.3 million.
- The Company recognized a $10.7 million gain on sale-leaseback transactions involving three retail-store properties and a gain on the sale of the Newton, Mississippi manufacturing facility.
- No goodwill impairment was recorded in fiscal 2022. Fiscal 2020 included a $26.9 million Joybird goodwill impairment charge.
Guidance, Outlook, Management Commentary and Risks
- Management expected fiscal 2023 capital expenditures of approximately $85 million to $95 million, primarily for retail and Joybird store improvements and expansion, completion of Neosho plant upgrades and technology investments.
- The La-Z-Boy Furniture Galleries network planned to open, relocate or remodel 40 to 45 stores during fiscal 2023.
- Management expected raw-material prices to remain historically high and anticipated further inflation in imported-product and freight costs. Pricing increases and surcharges may not fully offset these pressures.
- Demand exceeded production capacity during fiscal 2022, creating elevated backlog and order-delivery delays. Management did not expect normal seasonal patterns to resume until the second half of fiscal 2023.
- Management stated that cash on hand, operating cash flow and available credit capacity should be adequate to meet operating and capital requirements for at least the next 12 months.
- Key risks include COVID-19 resurgence, inflation, supply-chain disruptions, labor shortages, raw-material availability and pricing, freight costs, tariffs and trade restrictions, consumer confidence, housing-market conditions, competition from online and direct-to-consumer retailers, cybersecurity incidents, foreign-exchange exposure and potential impairment of goodwill or other assets.
- The Company depends on a limited number of suppliers for certain foam, fabric, leather and imported casegoods products. Disruptions could adversely affect production, costs and delivery times.
- The filing reports ordinary-course litigation and environmental matters but states that additional material losses are not considered probable. Product warranty liability was $27.0 million at year-end and was identified as the audit’s critical audit matter.
Most Important Facts for Investors to Verify
- Whether pricing and surcharge actions can offset continuing material, freight and labor inflation without weakening demand.
- Whether the $697.2 million backlog converts into revenue at expected margins and whether delivery delays improve.
- Whether operating cash flow recovers as inventory and receivables normalize and whether fiscal 2023 capital expenditures remain within the $85 million to $95 million range.
- Whether Retail and Joybird store expansion generates acceptable returns and whether Joybird reaches sustained profitability.
- Whether demand remains resilient as COVID-related restrictions ease, inflation rises and housing and consumer-spending conditions change.
- Whether the Company continues to maintain covenant compliance and sufficient liquidity without drawing on the $200 million revolving facility.
- Whether supplier concentration, tariffs, geopolitical conditions and Asian sourcing create additional cost or product-availability pressure.