La-Z-Boy Incorporated — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the third quarter and first nine months of fiscal 2016, ended January 23, 2016, compared with January 24, 2015. Fiscal 2016 is a 53-week year. La-Z-Boy manufactures, imports, distributes and retails upholstered and casegoods furniture through Upholstery, Casegoods and Retail segments.
Key financial metrics
| Metric | Q3 FY2016 | Q3 FY2015 | 9M FY2016 | 9M FY2015 |
|---|---|---|---|---|
| Sales | $384.0 million | $357.9 million | $1,108.3 million | $1,050.5 million |
| Operating income | $34.8 million | $26.9 million | $88.1 million | $73.6 million |
| Operating margin | 9.1% | 7.5% | 8.0% | 7.0% |
| Net income attributable to La-Z-Boy | $21.9 million | $17.9 million | $56.5 million | $50.6 million |
| Diluted EPS | $0.43 | $0.34 | $1.11 | $0.96 |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $69.7 million | $55.1 million |
- Gross profit was $148.0 million in Q3 and $418.0 million for nine months. Gross margin was approximately 38.5% and 37.7%, respectively, versus approximately 36.2% and 35.3% in the comparable periods.
- Net income attributable to La-Z-Boy increased 22.1% in Q3 and 11.8% for nine months. Diluted weighted-average shares declined to 50.5 million in Q3 and 50.9 million for nine months, reflecting share repurchases.
- At January 23, 2016, cash and equivalents were $97.7 million, restricted cash was $9.0 million, and investments intended to enhance cash returns were $31.4 million.
- Total debt was approximately $0.9 million, consisting of $0.3 million current and $0.6 million long-term debt. No borrowings were outstanding under the $150.0 million revolving credit facility; excess availability was $144.7 million.
- Cash used for investing was $27.8 million, including $19.8 million of capital expenditures and $19.2 million for retail acquisitions. Cash used for financing was $41.6 million, including $29.1 million of share repurchases and $13.1 million of dividends.
Material changes versus the prior comparable period
- Consolidated sales increased 7.3% in Q3 and 5.5% for nine months, driven primarily by Upholstery and Retail.
- Upholstery sales increased 5.6% in Q3 and 4.1% for nine months; nine-month operating margin improved to 10.7% from 10.2%, although Q3 margin declined slightly to 10.9% from 11.0%.
- Casegoods sales declined 5.3% in Q3 and 9.0% for nine months, but operating margin improved to 7.2% and 8.0%, respectively, from 3.3% and 6.4%, due to the all-import model, operational consolidation and lower promotional activity.
- Retail sales increased 22.7% in Q3 and 18.6% for nine months. Retail operating margin rose to 8.0% and 6.6%, respectively, from 4.7% and 3.3%. Results benefited from acquired and new stores, higher average tickets, custom orders, In Home design orders and increased powered-unit sales.
- During the first nine months, the company-owned store count increased by 13, including 10 acquired stores and three new stores. The La-Z-Boy Furniture Galleries network increased by six stores.
- Gross margin improvement reflected product mix, supply-chain efficiencies, Retail growth and Casegoods restructuring. Q3 FY2016 had no benefit from legal settlements, compared with a 1.5 percentage-point benefit in Q3 FY2015; nine-month FY2016 included a 0.3 percentage-point benefit versus 0.5 percentage point previously.
- SG&A increased as a percentage of sales because of higher advertising, ERP and e-commerce costs, new headquarters costs, warranty costs and the higher SG&A profile of Retail.
- Inventories increased to $183.2 million from $156.8 million at April 25, 2015, primarily to improve customer service levels. The company contributed $7.0 million to its pension plan.
- Fiscal 2015 included $2.9 million of after-tax discontinued-operations income, including a prior subsidiary settlement; fiscal 2016 included no discontinued-operations income.
Guidance, outlook, commentary, risks and unusual items
- Management remained optimistic about long-term profitable growth, citing its brand, product offering, lean operating structure and distribution network, while noting a somewhat volatile macroeconomic environment.
- Fiscal 2016 capital expenditures are expected to be $25 million to $30 million. No material future capital expenditure commitments were outstanding.
- Management expects regular quarterly dividends to continue but noted that the board may discontinue or modify them at any time. Management also expected to remain opportunistic with share repurchases; 4.6 million shares remained authorized for repurchase at January 23, 2016.
- The company acquired 10 La-Z-Boy Furniture Galleries stores for net consideration of $21.6 million, recognizing $18.3 million of goodwill and $2.5 million of reacquired rights-related intangible assets.
- Restructuring expense was $0.1 million in Q3 and $0.4 million for nine months, with approximately $0.2 million of related liability remaining. Restructuring activities are expected to be completed by the end of fiscal 2017.
- Key disclosed risks include consumer and housing-market weakness, recession, commodity and freight costs, import and supply disruptions, currency and interest-rate changes, product defects and warranty claims, litigation, store expansion and lease risks, ERP and information-technology implementation, and possible goodwill or intangible-asset impairment.
- The ERP sales-order-management implementation is expected to finish in the first half of fiscal 2017. Management stated that disclosure controls were effective, while implementation will require continuing internal-control testing.
- The product warranty liability was $18.7 million at January 23, 2016, and warranty costs were higher year over year for nine months due to more complex products, replacement parts and labor costs.
Important facts for investors to verify
- Whether Retail growth, acquired stores and higher custom-order mix remain sustainable after the acquisition-related benefit.
- Whether Casegoods margin improvements continue despite declining sales and the transition to an all-import model.
- Inventory levels, working-capital requirements and cash conversion, particularly after the $23.1 million inventory cash use.
- The effect of continued advertising, ERP, e-commerce, headquarters and warranty costs on future margins.
- Execution and control implications of the ERP implementation and the timing of remaining restructuring costs.
- Future share repurchases, dividends, acquisitions and capital expenditures relative to operating cash flow.
- Exposure to consumer demand, imports, freight and currency volatility, product claims, litigation and potential goodwill impairment.