La-Z-Boy Incorporated Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended January 25, 2020, compared with the periods ended January 26, 2019. Although the request identifies “2019 Q3,” the filing is for the third quarter of fiscal 2020. Results are unaudited.
Business Context
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 Upholstery, Casegoods and Retail; Corporate and Other includes Joybird, royalty revenue and corporate costs. The company owned 155 La-Z-Boy Furniture Galleries stores at January 25, 2020.
Key Financial Metrics
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Sales | $475.9 million | $467.6 million | $1.337 billion | $1.292 billion |
| Gross profit | $199.6 million | $189.9 million | $549.7 million | $512.8 million |
| Gross margin | 42.0% | 40.6% | 41.1% | 39.7% |
| Operating income | $52.3 million | $40.8 million | $105.3 million | $92.5 million |
| Operating margin | 11.0% | 8.7% | 7.9% | 7.2% |
| Net income attributable to La-Z-Boy | $34.5 million | $28.7 million | $75.2 million | $67.0 million |
| Diluted EPS | $0.74 | $0.61 | $1.60 | $1.42 |
- Q3 sales increased 1.8%; nine-month sales increased 3.5%.
- Q3 operating income increased 28.1%; nine-month operating income increased 13.9%.
- Q3 gross margin expanded 140 basis points and operating margin expanded 230 basis points.
- Net cash provided by operating activities was $119.8 million for the first nine months, versus $91.4 million in the prior-year period.
- Capital expenditures were $35.5 million for the first nine months. Free cash flow, as defined by the filing, is not presented.
- Cash, cash equivalents and restricted cash totaled $168.2 million at January 25, 2020, compared with $131.8 million at April 27, 2019. Investments totaled $50.8 million.
- The company had no borrowings under its revolving credit facility and reported $145.5 million of excess availability under the $150.0 million commitment.
- Lease adoption added approximately $318.2 million of right-of-use assets and $333.0 million of operating lease obligations to the balance sheet.
Material Changes Versus the Prior Comparable Period
- Retail growth: Q3 Retail sales increased 5.1%, including a 5.5% increase in delivered same-store sales. Nine-month Retail sales increased 9.7%, helped by acquired stores and a 3.6% increase in delivered same-store sales.
- Upholstery: Q3 sales increased 0.7% and operating margin rose to 13.8% from 10.3%. Efficiencies and lower commodity costs more than offset supply-chain inflation and restructuring-related costs.
- Casegoods weakness: Nine-month sales declined 3.6% and operating margin fell to 8.7% from 11.6%, primarily because of higher ocean freight and tariffs affecting certain occasional tables.
- Redlands facility sale: The company sold its approximately 200,000-square-foot Redlands, California facility for $10.8 million, recording a $9.7 million pretax gain in SG&A.
- Supply-chain optimization: The company closed the Redlands plant and shifted production to other facilities. It recognized $5.3 million of pretax related costs in cost of sales during the first nine months.
- Other expense: Q3 other expense increased to $6.0 million from $0.9 million, primarily due to a $6.0 million impairment of an investment in a privately held startup.
- Prior-year comparison: Q3 FY2019 included a $5.1 million noncash gain from employee vacation-policy changes, including approximately $3.8 million in SG&A and $1.3 million in cost of sales. The absence of that benefit affected year-over-year comparisons.
- Capital allocation: The company repurchased $35.3 million of common stock and paid $18.6 million in dividends during the first nine months, compared with $16.7 million and $17.4 million, respectively, in the prior-year period.
Outlook, Commentary, Risks and Unusual Items
- Management stated that cash, investments, operating cash flow and available credit were adequate for operating needs, dividends, capital expenditures and long-term growth plans.
- Fiscal 2020 capital expenditures were expected to be approximately $45 million to $55 million. No specific revenue or earnings guidance was provided in the filing.
- Management said Joybird’s operating loss improved sequentially during fiscal 2020, but integration was taking longer than anticipated and near-term growth and profitability expectations had been tempered.
- The company planned to review Joybird in the fourth quarter for potential impairment of goodwill and intangible assets and possible changes to contingent consideration. Joybird goodwill was $78.8 million at January 25, 2020.
- A major customer publicly disclosed that it was exploring options with creditors, investors and landlords. La-Z-Boy had an approximately $7 million receivable from that customer and had not recorded a credit-loss provision; management believed the receivable was materially collectible as of the filing date.
- Key disclosed risks include consumer demand and recessionary conditions, tariffs and trade policy, supply-chain and labor disruptions, freight and commodity costs, currency and interest-rate changes, product defects and warranty claims, information-technology failures, litigation, and potential goodwill or intangible-asset impairments.
- Product warranty liabilities totaled $23.3 million at January 25, 2020. The company also had $7.9 million of contingent consideration liability related to Joybird.
Important Facts for Investors to Verify
- Assess the sustainability of margin expansion after excluding the $9.7 million Redlands gain and considering the absence of the prior-year vacation-policy benefit.
- Monitor Joybird sales, losses, integration progress and the potential for impairment or contingent-consideration remeasurement.
- Evaluate tariff, freight and supply-chain costs, particularly in the Casegoods segment.
- Review the financial condition and payment performance of the customer associated with the approximately $7 million receivable.
- Reconcile reported liquidity with substantial operating lease obligations and planned capital expenditures.
- Track share repurchases, dividends and remaining repurchase authorization of approximately 4.8 million shares.