La-Z-Boy Incorporated — Fiscal 2017 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended October 29, 2016, compared with October 24, 2015. Fiscal 2017 has 52 weeks, versus 53 weeks in fiscal 2016. Financial statements are unaudited.
Business Context
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories through its Upholstery, Casegoods and Retail segments. The company operated 132 company-owned La-Z-Boy Furniture Galleries stores and continued its branded distribution, store-acquisition and marketing initiatives.
Key Financial Metrics
| Metric | Quarter Ended 10/29/16 | Quarter Ended 10/24/15 | Six Months 10/29/16 | Six Months 10/24/15 |
|---|---|---|---|---|
| Sales | $376.6 million | $382.9 million | $717.4 million | $724.3 million |
| Operating income | $33.2 million | $33.4 million | $54.9 million | $53.4 million |
| Operating margin | 8.8% | 8.7% | 7.7% | 7.4% |
| Net income attributable to La-Z-Boy | $20.8 million | $21.0 million | $34.6 million | $34.6 million |
| Diluted EPS | $0.42 | $0.41 | $0.70 | $0.67 |
| Dividends declared per share | $0.10 | $0.08 | $0.20 | $0.16 |
Quarterly sales declined 1.6%, while six-month sales declined 1.0%. Gross margin improved 1.4 percentage points in the quarter and 2.1 percentage points year to date. SG&A as a percentage of sales increased 1.3 percentage points in the quarter and 1.8 percentage points year to date.
The effective tax rate was 36.1% for the quarter and 35.9% for the six months, compared with 36.2% and 36.1%, respectively, in the prior-year periods.
Cash Flow, Balance Sheet, Debt and Liquidity
- Operating cash flow was $52.4 million for the first six months, compared with $21.7 million in the prior-year period.
- Investing cash outflow was $34.1 million, including $16.0 million for acquisitions, $10.2 million of capital expenditures and net investment purchases.
- Financing cash outflow was $24.9 million, including $19.8 million of share repurchases and $9.9 million of dividends.
- Cash and equivalents were $105.6 million at October 29, 2016, compared with $112.4 million at April 30, 2016. Investments to enhance cash returns totaled $31.2 million.
- Total debt was approximately $0.6 million, consisting of $0.3 million current and $0.4 million long-term debt.
- The $150.0 million revolving credit facility had no borrowings outstanding and $144.4 million of excess availability. The company was not subject to the fixed-charge coverage ratio requirement at period-end.
- Capital expenditures are expected to be $30 million to $35 million for fiscal 2017; no material future capital-expenditure commitments were outstanding.
Material Changes Versus Prior Comparable Period
- Upholstery: Sales declined 3.3% in the quarter and 2.6% year to date, primarily from lower unit volume and increased promotions related to phasing out frames and fabrics. Operating margin improved to 12.7% from 12.1% in the quarter and to 12.0% from 10.7% year to date, supported by supply-chain efficiencies and favorable product mix.
- Casegoods: Sales declined 8.3% in the quarter and 1.3% year to date because of lower volume. Operating margin improved to 11.0% from 9.3% in the quarter and to 9.8% from 8.4% year to date, primarily due to lower imported-product freight expense.
- Retail: Sales increased 11.3% in the quarter and 10.9% year to date due to new and acquired stores. Operating margin fell to 2.8% from 5.9% in the quarter and to 2.6% from 5.7% year to date. Lower traffic, increased promotions, higher advertising and fixed-cost deleverage pressured profitability.
- Retail same-store sales declined $5.1 million in the quarter and $8.7 million year to date, although average ticket and conversion improved.
- Lower sales were offset by improved gross margins, primarily from mix, supply-chain efficiencies and lower freight costs. The company also benefited less from legal settlements than in the prior year.
- Other income shifted to expense: $0.3 million of expense in the quarter and $0.4 million year to date, versus $0.5 million and $2.5 million of income, respectively, primarily because of foreign-currency losses versus prior-year gains.
Acquisitions, Outlook and Risks
During the second quarter, the company acquired four La-Z-Boy Furniture Galleries stores in Canada for $11.9 million, including cash and forgiveness of dealer receivables. It also acquired one Reno, Nevada store for $5.3 million in the first quarter. The acquisitions added $10.2 million of goodwill and $3.2 million of reacquired rights; contingent consideration totaled approximately $2.8 million. Management stated that the acquisitions were not material to reported results.
Management described consumer demand during the prior six months as choppy and noted weaker demand across the home-furnishings sector. It remains focused on expanding Furniture Galleries and Comfort Studio distribution, acquiring stores, improving store formats, increasing marketing investment and broadening the La-Z-Boy customer base. No specific full-year revenue or earnings guidance was provided. Management expects fiscal 2017 capital expenditures of $30 million to $35 million and expects to continue opportunistic share repurchases and regular quarterly dividends, subject to board approval.
Key risks include consumer confidence and recession risk, real-estate and credit-market conditions, commodity, freight and currency volatility, supply-chain and labor disruptions, product defects and warranty costs, litigation, store expansion and lease risks, goodwill or intangible-asset impairment, information-technology failures and the ongoing ERP implementation. The company reported a $0.8 million net liability for uncertain tax positions and does not expect a significant change within 12 months. Product warranty liabilities totaled $20.9 million at October 29, 2016.
The company’s disclosure controls were deemed effective. ERP implementation in the largest operating unit is expected to continue through fiscal 2018 and will require ongoing internal-control testing.
Investor Verification Points
- Verify whether weak home-furnishings demand and declining same-store traffic persist, particularly in the Retail segment.
- Assess whether Retail margins recover as acquired Canadian inventory is sold and promotional activity moderates.
- Monitor the sustainability of gross-margin gains from product mix, supply-chain efficiencies and freight costs.
- Reconcile cash generation with acquisitions, share repurchases, dividends and planned $30 million to $35 million of fiscal-year capital expenditures.
- Review the execution, timing and control implications of the ERP implementation.
- Track contingent consideration, acquired-store performance, warranty claims and the pending legal matter referenced in the filing.
- Confirm future dividend and repurchase decisions, which remain subject to board authorization and available cash flow.