La-Z-Boy Incorporated Form 10-Q Summary
Business context and reporting period
La-Z-Boy manufactures, distributes and retails upholstered and casegoods furniture under the La-Z-Boy, England, Kincaid, American Drew, Hammary and Joybird brands. The filing covers the fiscal second quarter ended October 28, 2023, and the first six months of fiscal 2024. Results are unaudited and comparative figures were retrospectively adjusted for a change that reclassified U.S. distribution-center costs from SG&A to cost of sales.
Key financial metrics
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Sales | $511.4 million | $611.3 million | $993.1 million | $1,215.4 million |
| Gross profit | $222.6 million | $249.5 million | $428.3 million | $480.5 million |
| Gross margin | 43.5% | 40.8% | 43.1% | 39.5% |
| Operating income | $33.6 million | $61.9 million | $68.1 million | $114.5 million |
| Operating margin | 6.6% | 10.1% | 6.9% | 9.4% |
| Net income attributable to La-Z-Boy | $27.2 million | $46.1 million | $54.7 million | $84.6 million |
| Diluted EPS | $0.63 | $1.07 | $1.26 | $1.96 |
Six-month operating cash flow was $56.9 million, compared with $31.0 million in the prior-year period. Investing cash flow used $25.3 million, including $26.5 million of capital expenditures and $7.3 million for acquisitions. Financing cash flow used $43.9 million, including $20.0 million of share repurchases, $15.6 million of shareholder dividends and $5.0 million of acquisition holdback payments.
At October 28, 2023, cash, cash equivalents and restricted cash totaled $333.5 million, versus $346.7 million at fiscal year-end. Investments totaled $21.3 million. The company had no borrowings under its $200 million unsecured revolving credit facility, which matures in October 2026, and reported compliance with its financial covenants. Lease liabilities totaled $483.9 million, including $77.4 million current and $406.5 million long-term.
Material changes versus the prior comparable period
- Consolidated sales declined 16.3% in the quarter and 18.3% year to date, primarily because the prior-year period benefited from delivery of a significant backlog accumulated during earlier periods. Management described the current volume as a return toward normal seasonality and pre-pandemic backlog levels.
- Operating income declined 45.7% in the quarter and 40.5% year to date. Higher gross margins from lower raw-material and duty costs, favorable product mix and prior pricing actions were more than offset by lower volume, reduced fixed-cost leverage, promotional activity and higher marketing and other operating expenses.
- Retail sales decreased 15.0% in the quarter and 13.4% year to date, while Retail operating margin fell to 13.0% from 16.5% in the quarter. Delivered same-store sales declined, although written sales increased 3% in the quarter and 5% year to date.
- Wholesale sales decreased 18.2% in the quarter and 21.4% year to date. Wholesale operating margin declined to 5.9% from 8.6% in the quarter, despite significant input-cost benefits.
- Joybird sales declined to $32.3 million in the quarter and $67.9 million year to date, primarily because of lower delivered volume. Second-quarter written sales increased 5%, attributed to marketing-driven website traffic.
- Interest income increased to $4.0 million in the quarter and $7.1 million year to date, primarily due to higher interest rates and cash balances. The effective tax rate was 26.5% in both current-period comparisons.
Guidance, outlook, risks and unusual items
Management expects fiscal 2024 capital expenditures of approximately $60 million to $70 million, primarily for new and remodeled Furniture Galleries stores and manufacturing and distribution upgrades. Management stated that available cash, investments, operating cash flow and the undrawn credit facility should provide adequate liquidity for operations and growth plans over the next 12 months. The company expects to continue regular quarterly dividends and share repurchases, subject to board decisions, operating cash flow, market conditions and other factors.
The company launched its “Long Live the Lazy” brand campaign and is investing in digital platforms, store expansion, supply-chain capabilities and Joybird. Written sales trends were stronger than delivered sales, but the filing cautions that interim results are not necessarily indicative of the full fiscal year.
- Supply-chain optimization charges in the second quarter included $3.6 million of severance in cost of sales and $3.0 million of accelerated depreciation in SG&A related to the planned closure of a leased cut-and-sew facility in Parras, Mexico and production changes involving Ramos, Mexico.
- A $1.2 million gain from settling the Torreón, Mexico lease obligation was recognized in the first quarter.
- The company acquired retail businesses in Colorado Springs, Colorado, and Lafayette, Louisiana, for aggregate stated consideration of approximately $8.8 million, recording $4.3 million of goodwill and $2.8 million of reacquired rights.
- Key risks include consumer demand and housing-related conditions, sales-volume volatility, promotional pressure, supply-chain execution, raw-material and freight costs, foreign currency exposure, retail execution, Joybird demand, warranty obligations and impairment risk. The filing reports no material changes to previously disclosed risk factors.
Investor verification points
- Verify whether the gap between written and delivered sales narrows or widens, particularly as backlog and industry seasonality normalize.
- Monitor operating leverage, SG&A as a percentage of sales, promotional intensity and whether gross-margin gains from lower input costs persist.
- Assess execution and additional costs associated with the Mexico manufacturing and supply-chain restructuring.
- Compare actual fiscal 2024 capital expenditures with the $60 million to $70 million expectation and track acquisition spending.
- Review the sustainability of dividends and repurchases relative to operating cash flow and the company’s lease-adjusted leverage covenants.
- Evaluate Joybird’s written-sales trends, delivered volume and progress toward profitable growth.