La-Z-Boy Incorporated Form 10-K Summary
Reporting period: Fiscal year ended April 27, 2019, consisting of 52 weeks. The source metadata references “2018 Q4,” but the supplied filing is the fiscal 2019 Form 10-K and includes fourth-quarter results for the 13 weeks ended April 27, 2019.
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; Joybird and certain corporate activities are included in Corporate and Other.
- The company operated 353 La-Z-Boy Furniture Galleries stores, including 156 company-owned stores, and approximately 550 Comfort Studio locations.
- Joybird was acquired in the second quarter of fiscal 2019 and sells primarily through e-commerce.
- The company employed approximately 9,700 full-time equivalent employees at year-end, compared with approximately 9,000 at the end of fiscal 2018.
Financial Performance
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Sales | $1.745 billion | $1.584 billion | +10.2% |
| Gross profit | $702.6 million | $622.7 million | +12.8% |
| Gross margin | 40.3% | 39.3% | +100 basis points |
| Operating income | $129.7 million | $129.4 million | +0.2% |
| Operating margin | 7.4% | 8.2% | -80 basis points |
| Net income attributable to La-Z-Boy | $68.6 million | $80.9 million | -15.2% |
| Diluted EPS | $1.44 | $1.67 | -13.8% |
| Effective tax rate | 26.4% | 36.7% | Lower by 10.3 percentage points |
Fiscal 2019 earnings were reduced by a $32.7 million non-cash, pre-tax pension termination charge recorded in the fourth quarter. Excluding discrete tax effects, management stated that the effective tax rate would have been 25.1% in fiscal 2019.
Segment Results
| Segment | Fiscal 2019 Sales | Sales Change | Fiscal 2019 Operating Income | Operating Margin |
|---|---|---|---|---|
| Upholstery | $1.268 billion | +3.3% | $127.9 million | 10.1% |
| Casegoods | $114.5 million | +2.8% | $12.6 million | 11.0% |
| Retail | $570.2 million | +20.1% | $37.9 million | 6.7% |
| Corporate and Other | $74.0 million | Primarily Joybird | $(48.7) million | Not meaningful |
- Upholstery sales benefited from price increases, favorable product mix and tariff surcharges, but unit volume declined 1.4% and operating margin fell 50 basis points.
- Casegoods operating margin improved 50 basis points, supported by higher volume and newer, higher-margin collections.
- Retail sales included $67.0 million from acquired stores; delivered same-store sales increased 5.7%, and operating income rose 83.1%.
- Corporate and Other operating loss increased by $15.4 million, primarily because of Joybird operating losses, purchase accounting adjustments and higher incentive compensation.
Cash Flow, Liquidity and Capital Structure
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Cash provided by operating activities | $150.7 million | $115.8 million |
| Cash used for investing activities | $(122.6) million | $(55.2) million |
| Capital expenditures | $48.4 million | $36.3 million |
| Cash used for acquisitions | $76.5 million | $16.5 million |
| Cash used for share repurchases | $23.0 million | $56.7 million |
| Dividends paid | $23.5 million | $22.0 million |
| Cash, cash equivalents and restricted cash at year-end | $131.8 million | $136.9 million |
| Total debt | $0.2 million | $0.4 million |
- The company had $31.5 million of investments intended to enhance cash returns and no borrowings under its $150.0 million revolving credit facility.
- Excess availability under the credit facility was $148.1 million at year-end.
- Working capital was $302.5 million and the current ratio was 2.3 to 1, compared with $336.9 million and 2.9 to 1, respectively, in fiscal 2018.
- Inventory increased $12.1 million, primarily from fiscal 2019 acquisitions, while accounts receivable decreased $10.8 million.
- Total contractual obligations were $516.3 million, including $392.2 million of operating lease obligations and $87.3 million of purchase obligations.
Material Changes Versus the Prior Period
- Sales increased 10.2%, driven by core business growth, acquired retail stores and the Joybird acquisition.
- Gross margin improved due to favorable sales mix, including growth in Retail and Joybird, but higher supply-chain costs and product mix pressure reduced Upholstery margins.
- SG&A rose to 32.8% of sales from approximately 31.1%, reflecting the higher expense profiles of Retail and Joybird, increased incentive compensation and acquisition-related costs.
- Net income and diluted EPS declined despite higher sales, primarily because of the pension termination charge and higher Corporate and Other losses.
- Fiscal 2019 included $76.5 million of acquisition spending, compared with $16.5 million in fiscal 2018, including Joybird and acquisitions of independent Furniture Galleries operators.
- The company adopted the revenue recognition standard ASC 606 in fiscal 2019 using the modified retrospective method. Management reported no material change in the amount or timing of revenue recognition, but customer deposits, contract assets and deferred revenue disclosures changed.
- Goodwill increased from $75.3 million to $185.9 million, principally from the Retail acquisitions and Joybird. No goodwill impairment was recorded.
Outlook, Commentary and Risks
- Management expected fiscal 2020 capital expenditures of approximately $50 million to $60 million for manufacturing upgrades and retail-store improvements.
- The La-Z-Boy Furniture Galleries network planned to open, relocate or remodel 20 to 25 stores in fiscal 2020, all using the new concept design.
- Management expected higher raw-material, transportation and ocean-freight costs in fiscal 2020, as well as potentially higher duties and tariffs, particularly on products and components sourced from China. The company may raise prices, impose surcharges and shift sourcing away from China.
- Imported finished goods represented 8% of consolidated sales in both fiscal 2019 and fiscal 2018; approximately 25% of Casegoods products were imported from China.
- Demand is sensitive to consumer confidence, employment, housing activity, credit conditions and discretionary spending. The company noted that the furniture industry experienced negative growth in the first calendar quarter of 2019.
- Key risks include competition from online and direct-to-consumer furniture sellers, pressure on physical-store traffic, raw-material and labor availability, concentrated suppliers, tariffs, logistics disruptions, cybersecurity incidents, product liability, warranty claims, litigation and potential goodwill or intangible-asset impairment.
- Joybird contingent consideration had a year-end fair value of $7.9 million. The undiscounted earn-out range was zero to $65 million, based on Joybird sales and profitability targets for fiscal 2021 and fiscal 2023.
- The company stated that its internal control over financial reporting was effective, but excluded Joybird and the acquired Arizona store business from the fiscal 2019 assessment under permitted SEC guidance.
Important Facts for Investors to Verify
- Reconcile reported fiscal 2019 earnings with the $32.7 million non-cash pension termination charge and related tax effects.
- Assess whether Retail same-store sales growth and acquired-store profitability can offset weaker Upholstery volume and higher Corporate and Other costs.
- Monitor the effect of China tariffs, transportation costs, sourcing changes and the company’s ability to pass cost increases to customers.
- Evaluate Joybird’s revenue growth, operating losses, integration progress, goodwill carrying value and potential earn-out obligations.
- Review the company’s significant operating lease commitments and the expected fiscal 2020 balance-sheet impact of adopting the new lease accounting standard, estimated at a $300 million to $325 million gross-up.
- Verify cash generation after acquisitions, capital expenditures, dividends and share repurchases, together with the continued availability of the revolving credit facility.
- Review legal, environmental, product-liability, warranty and cybersecurity contingencies; the filing does not identify any additional probable material loss beyond amounts recorded.