La-Z-Boy Incorporated — Fiscal 2015 Third-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended January 24, 2015, compared with January 25, 2014. La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and related accessories through Upholstery, Casegoods and Retail segments. The company operated 108 company-owned La-Z-Boy Furniture Galleries stores within a broader network of 326 Galleries stores and 567 Comfort Studio locations.
Financial performance and liquidity
| Metric | Q3 FY2015 | Q3 FY2014 | 9M FY2015 | 9M FY2014 |
|---|---|---|---|---|
| Sales | $357.9 million | $346.5 million | $1,050.5 million | $1,004.3 million |
| Operating income | $26.9 million | $25.9 million | $73.6 million | $66.8 million |
| Operating margin | 7.5% | 7.5% | 7.0% | 6.6% |
| Net income attributable to La-Z-Boy | $17.9 million | $16.5 million | $50.6 million | $42.8 million |
| Diluted EPS | $0.34 | $0.31 | $0.96 | $0.80 |
| Dividends declared per share | $0.08 | $0.06 | $0.20 | $0.14 |
- Quarterly sales increased 3.3%, operating income increased 4.0%, and diluted EPS increased $0.03. Nine-month sales increased 4.6%, operating income increased 10.3%, and diluted EPS increased $0.16.
- Gross margin improved 1.1 percentage points in the quarter and 0.9 percentage point for the nine months. SG&A as a percentage of sales increased 1.1 percentage points in the quarter and 0.5 percentage point for the nine months.
- Quarterly segment results were: Upholstery sales of $286.3 million and operating income of $31.5 million; Casegoods sales of $26.0 million and operating income of $0.9 million; and Retail sales of $89.8 million and operating income of $4.2 million.
- Nine-month net cash provided by operating activities was $55.1 million, down from $62.8 million. Cash used for investing was $53.0 million, including $56.5 million of capital expenditures, while cash used for financing was $53.0 million, including $35.8 million of share repurchases and $10.4 million of dividends.
- Cash and equivalents were $98.4 million at January 24, 2015, versus $149.7 million at April 26, 2014. Investments held to enhance cash returns were $45.3 million.
- Total debt was $0.4 million, including $0.3 million current debt and $0.1 million long-term debt. The amended $150.0 million revolving credit facility had no borrowings outstanding and $142.2 million of excess availability; maturity was extended to December 30, 2019.
- Inventories increased to $160.1 million from $147.0 million at fiscal year-end, partly reflecting purchases from China before the Chinese New Year and higher finished-goods inventory for distribution centers.
Material changes versus the prior comparable period
- Upholstery sales increased 2.2% in the quarter and 4.1% for the nine months, but operating margin declined to 11.0% from 11.3% in the quarter and to 10.2% from 10.6% for the nine months. ERP-related manufacturing inefficiencies, raw-material costs, warranty expense and unfavorable product mix offset volume and pricing benefits.
- Casegoods operating margin improved to 3.3% from 1.5% in the quarter and to 6.4% from 2.5% for the nine months, primarily from the transition to an all-import model and a $2.1 million reduction in the LIFO reserve.
- Retail sales increased 11.9% in the quarter and 12.5% for the nine months. Quarterly operating margin improved to 4.7% from 3.8%, but nine-month margin declined to 3.3% from 3.8% because of promotional activity and investments in eight new company-owned stores.
- Shares outstanding declined as the company repurchased 1.5 million shares for $35.8 million during the first nine months. A further 6.3 million shares remained authorized for repurchase at January 24, 2015.
- The company ceased domestic Casegoods manufacturing at Hudson, North Carolina, transitioned remaining bedroom lines to imports, exited the hospitality business and sold North Wilkesboro facilities and most Hudson woodworking equipment.
Outlook, commentary, risks and unusual items
- Management stated that it expects long-term profitable growth from brand marketing, new products, expanded branded distribution and the “4-4-5” initiative, which targets 400 Furniture Galleries stores averaging $4 million in sales per store over five years. No specific earnings or revenue guidance was provided.
- Management expects fiscal 2015 capital expenditures of $70 million to $75 million, including substantial spending on the new world headquarters, with occupancy expected in the fourth quarter of fiscal 2015. The headquarters project is estimated at approximately $61 million.
- A legal settlement was recorded in cost of sales and increased gross margin by 1.5 percentage points in the quarter and 0.5 percentage point for the nine months. The filing does not provide the settlement amount separately.
- Discontinued operations included Bauhaus and Lea Industries. Lea Industries was liquidated and ceased operations during the quarter. Nine-month discontinued-operations income included $3.8 million of pre-tax income, or $2.4 million after tax, related to duties from the previously sold American Furniture Company.
- Restructuring income was $0.8 million in the quarter and $1.1 million for the nine months, primarily from gains on the sale of a North Wilkesboro warehouse and inventory recoveries. Approximately $0.3 million of restructuring liability remained, primarily for severance.
- Key risks include consumer demand and economic conditions, real estate and credit markets, import logistics, commodity, labor and supply disruptions, currency and interest-rate changes, product defects and warranty costs, litigation, store expansion, ERP implementation, technology failures and execution of restructuring initiatives.
- The ERP implementation is expected to continue in phases into fiscal 2016 and affected manufacturing efficiency during the period. Management reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether gross-margin benefits from the legal settlement and LIFO reserve reduction are nonrecurring and how normalized margins compare with reported results.
- The remaining cost, timing and cash requirements for the headquarters project and fiscal 2015 capital-expenditure plan.
- Progress and potential disruption from the ERP and e-commerce implementations, including effects on manufacturing, controls and customer fulfillment.
- Whether Retail sales growth can offset promotional pressure, new-store investment and lower traffic, while Upholstery margins recover from warranty, raw-material and operational costs.
- The sustainability of cash generation after capital expenditures, share repurchases, dividends and inventory growth.
- The accounting and comparability effects of discontinued operations, restructuring, the American Furniture Company distribution and the all-import Casegoods transition.