La-Z-Boy Incorporated — Fiscal 2019 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended January 26, 2019, compared with the comparable periods ended January 27, 2018. The interim financial statements are unaudited. La-Z-Boy manufactures, distributes and retails upholstered and casegoods furniture through wholesale, company-owned retail and e-commerce channels, including the newly acquired Joybird business.
Financial performance and key metrics
| Metric | Q3 FY2019 | Q3 FY2018 | 9M FY2019 | 9M FY2018 |
|---|---|---|---|---|
| Sales | $467.6 million | $413.6 million | $1,291.6 million | $1,163.9 million |
| Gross profit | $189.9 million | $162.5 million | $512.8 million | $456.6 million |
| Gross margin | 40.6% | 39.3% | 39.7% | 39.2% |
| Operating income | $40.8 million | $33.1 million | $92.5 million | $83.7 million |
| Operating margin | 8.7% | 8.0% | 7.2% | 7.2% |
| Net income attributable to La-Z-Boy | $28.7 million | $12.1 million | $67.0 million | $46.7 million |
| Diluted EPS | $0.61 | $0.25 | $1.42 | $0.96 |
- Sales increased 13.0% in the quarter and 11.0% year to date. Operating income increased 23.4% and 10.6%, respectively.
- Net income benefited substantially from lower effective tax rates: 26.9% in Q3 and 24.6% for nine months, versus 62.0% and 43.9% in the prior-year periods. Management attributed the prior-year rates primarily to the phased implementation of the lower federal corporate tax rate and deferred-tax revaluation.
- Net cash provided by operating activities was $91.4 million for nine months, essentially unchanged from $91.2 million in the prior-year period.
- Investing cash outflow was $114.4 million, including $78.6 million for acquisitions and $35.8 million of capital expenditures. Financing cash outflow was $10.3 million, including $16.7 million of share repurchases and $17.4 million of dividends, partly offset by $20.0 million of net credit-facility borrowings.
- Cash, cash equivalents and restricted cash totaled $103.6 million at January 26, 2019, compared with $136.9 million at April 28, 2018. Investments intended to enhance cash returns were $32.2 million.
- Debt consisted primarily of $20.0 million of short-term borrowings under the revolving credit facility, plus $0.3 million of current and long-term capital lease obligations. The company reported $128.1 million of excess availability under its $150.0 million credit commitment and was not subject to the fixed-charge coverage covenant at period end.
Material changes versus the prior comparable period
- Upholstery: Sales increased 4.2% in Q3 and 5.0% for nine months. Price increases, tariff surcharges and product mix offset lower quarterly unit volume and supply-chain inflation. Nine-month operating margin declined to 9.6% from 9.8%.
- Casegoods: Sales increased 3.1% in Q3 and 8.7% for nine months, while operating margin improved to 11.9% and 11.6%, respectively, supported by higher volume and newer, higher-margin collections.
- Retail: Sales increased 26.7% in Q3 and 18.5% for nine months. Acquired stores contributed $24.2 million and $42.8 million, respectively, while delivered same-store sales increased 6.7% and 5.0%. Operating margin improved to 8.9% from 5.6% in Q3 and to 6.0% from 3.6% for nine months.
- Corporate and Other: Sales increased primarily from Joybird, which contributed $18.6 million in Q3 and $37.2 million for nine months. The operating loss increased to $11.2 million in Q3 and $33.5 million for nine months, reflecting incentive compensation, Joybird operating and purchase-accounting costs, and corporate expenses.
- Consolidated gross margin improved due largely to the higher-margin Retail and Joybird mix. SG&A as a percentage of sales increased because these businesses carry higher SG&A intensity, although higher volume, the absence of a prior-year legal-settlement charge and a vacation-policy benefit provided offsets.
- The company adopted ASC 606 revenue recognition using the modified-retrospective method. Management reported no material effect on the amount or timing of revenue, but presentation and disclosure changes were significant.
Acquisitions, outlook, risks and unusual items
- La-Z-Boy acquired nine-store and one-store Furniture Galleries operators in Arizona and Massachusetts for aggregate consideration of $42.8 million, including $32.0 million of goodwill.
- La-Z-Boy acquired Joybird on July 30, 2018. Revised purchase consideration was $70.0 million, with $78.1 million of goodwill, a $6.4 million trade-name intangible and a provisional $7.5 million earn-out liability. The undiscounted earn-out range is zero to $65 million based on Joybird performance in fiscal 2021 and 2023.
- Management expected fiscal 2019 capital expenditures of approximately $45 million to $50 million, primarily for the Innovation Center, manufacturing and plant upgrades, an England facility and distribution-center relocation.
- Management expected to continue regular quarterly dividends and to remain opportunistic in share repurchases. The company had 6.1 million shares remaining under its repurchase authorization at January 26, 2019.
- The company intends to terminate its defined-benefit pension plan in the fourth quarter of fiscal 2019. It expects $9 million to $11 million of additional contributions and an approximate $33 million to $38 million total non-cash charge, net of tax.
- Employee vacation-policy changes generated a one-time non-cash gain of $5.1 million in Q3, partly offset by $0.3 million of incremental factory-hourly expense.
- Key risks include consumer demand and recessionary conditions, interest rates, currency and commodity costs, tariffs and trade-policy changes, supply-chain and labor disruptions, product defects and warranty costs, e-commerce execution, integration of Joybird and acquired stores, and potential goodwill or intangible-asset impairments.
- Operating leases totaled $399.4 million of contractual obligations, and total contractual obligations were $531.7 million. The filing states that adoption of the new lease standard in fiscal 2020 is expected to materially affect the balance sheet.
- Management stated that disclosure controls were effective and that there were no material changes to internal controls. Joybird and the acquired Arizona operations were being integrated and were excluded from management’s fiscal 2019 internal-control assessment under SEC guidance.
Investor verification priorities
- Verify whether Retail and Joybird growth translates into sustainable consolidated margins after one-time vacation benefits and acquisition-related costs.
- Reconcile the $78.6 million acquisition cash outflow with the purchase-accounting amounts and monitor the provisional Joybird earn-out liability and potential payments.
- Assess liquidity after planned $45 million to $50 million of capital expenditures, pension-plan termination funding and ongoing dividends and repurchases.
- Evaluate exposure to tariffs, imported materials, logistics costs and supply-chain inflation, particularly in the Upholstery segment.
- Monitor the estimated $33 million to $38 million net-of-tax pension-termination charge expected in the fourth quarter of fiscal 2019.
- Confirm the effect of operating-lease capitalization beginning in fiscal 2020 and assess related leverage and liquidity presentation changes.