La-Z-Boy Incorporated Fiscal 2015 Form 10-K Summary
Business context and reporting period
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories primarily in the United States and Canada. Its reportable segments are Upholstery, Casegoods and Retail. The filing covers the 52-week fiscal year ended April 25, 2015. The requested “2014 Q4” period corresponds to the fiscal fourth quarter ended April 25, 2015, for which quarterly data are also provided.
- Distribution included 325 La-Z-Boy Furniture Galleries stores, 573 Comfort Studio locations and approximately 2,800 other dealers. The Company owned 110 Furniture Galleries stores at year-end.
- Fiscal 2015 included completion of the new world headquarters, expansion of company-owned stores, implementation of an all-import casegoods model and closure of the Lea Industries youth furniture business.
Financial performance and key metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Sales | $1,425.4 million | $1,357.3 million | Up 5.0% |
| Gross profit | $504.5 million | $464.5 million | Up 8.6% |
| Gross margin | 35.4% | 34.2% | Up 1.2 points |
| Operating income | $103.2 million | $89.3 million | Up 15.5% |
| Operating margin | 7.2% | 6.6% | Up 0.6 points |
| Income from continuing operations attributable to La-Z-Boy | $67.5 million | $58.9 million | Up 14.7% |
| Net income attributable to La-Z-Boy | $70.8 million | $55.1 million | Up 28.5% |
| Diluted EPS | $1.34 | $1.02 | Up $0.32 |
| Cash flow from operations | $86.8 million | $90.8 million | Down $4.1 million |
| Capital expenditures | $70.3 million | $33.7 million | Up $36.6 million |
Fourth-quarter fiscal 2015 sales were $374.9 million, operating income was $29.6 million, continuing-operations income attributable to La-Z-Boy was $19.8 million and diluted EPS was $0.39. Fiscal 2015 net income included $3.3 million after-tax income from discontinued operations, including proceeds under the Continued Dumping and Subsidy Offset Act.
- Upholstery sales increased 4.8% to $1,151.8 million; operating income rose 3.2% to $121.4 million, while margin declined to 10.5% from 10.7%.
- Casegoods sales increased 2.8% to $109.7 million; operating income increased 88.6% to $6.4 million, and margin improved to 5.8% from 3.2%.
- Retail sales increased 11.8% to $334.0 million; operating income increased 3.0% to $11.5 million, while margin declined to 3.4% from 3.7%.
Liquidity, debt and capital allocation
- Cash and equivalents were $98.3 million at April 25, 2015, compared with $149.7 million a year earlier. The Company also held $45.5 million of investments intended to enhance cash returns.
- Total debt declined to $0.8 million from $7.8 million, primarily because the remaining $7.1 million industrial revenue bond was repaid. The Company had no revolving-credit borrowings outstanding.
- The revolving credit facility was amended to extend maturity to December 30, 2019. Availability was $145.0 million against a $150.0 million commitment, and the Company was not subject to the fixed-charge coverage requirement at year-end.
- Working capital was $321.6 million and the current ratio was 3.1 to 1. Total equity was $533.1 million.
- The Company repurchased 2.1 million shares for $51.9 million and paid $14.5 million of dividends during fiscal 2015. Quarterly dividends declared increased to $0.28 per share for the year from $0.20 in fiscal 2014.
Material changes versus the prior comparable period
- Sales and operating income increased, supported by higher volume, selling prices, stronger retail sales and improved product mix in portions of the business.
- Gross margin benefited from higher volume and pricing, a higher Retail sales mix, the Casegoods transition to imported products and a reduction in LIFO reserves. A legal settlement also improved fiscal 2015 gross margin by approximately 0.4 percentage point.
- SG&A as a percentage of sales increased 0.6 percentage point because of ERP, website and e-commerce investments, distribution-center expansion and Retail growth.
- Casegoods manufacturing in Hudson, North Carolina ceased during the second quarter. Remaining Kincaid and American Drew bedroom products were transitioned to imports, and the hospitality product line was eliminated.
- Lea Industries was liquidated and ceased operations during the third quarter after the Company was unable to find a buyer. Bauhaus results and Lea Industries results were reported as discontinued operations.
- Capital spending more than doubled, largely because of the new world headquarters, new stores and manufacturing equipment. Net property, plant and equipment increased to $174.0 million from $127.5 million.
- Company-owned stores increased from 101 to 110 through openings and acquisitions. The Company opened eight stores, closed four and acquired five during fiscal 2015.
Guidance, outlook, risks and unusual items
- Management expressed optimism about long-term growth, citing brand strength, product introductions, the Live Life Comfortably campaign, the 4-4-5 store strategy and supply-chain initiatives.
- Management expected fiscal 2016 capital expenditures of $30 million to $35 million and planned to open, relocate or remodel 35 to 40 Furniture Galleries stores.
- Fiscal 2016 is a 53-week year, with the additional week in the fourth quarter. Management cautioned that the first fiscal quarter is normally the weakest because of seasonality and a planned one-week plant shutdown.
- Raw material costs increased approximately 2% in fiscal 2015; management expected raw-material costs to remain flat as a percentage of sales in fiscal 2016. Imported casegoods prices and transportation costs were expected to increase slightly.
- Principal risks include consumer confidence and housing conditions, intense competition including online retailers, raw-material availability and pricing, reliance on selected suppliers, foreign sourcing and logistics, product liability and recalls, cyberattacks, ERP implementation, store performance and potential asset impairments.
- About 77% of polyurethane foam was sourced from one supplier, and a significant portion of imported cut-and-sewn fabric and leather came from a small number of Chinese suppliers.
- The Company reported a $7.3 million pension underfunding for its hourly plan and expected to contribute approximately $7 million to that plan in fiscal 2016. It also had $364.1 million of future operating lease obligations and $95.5 million of purchase obligations.
- Management stated that legal and environmental matters were not expected to result in material additional losses, although the Company remains involved in ordinary-course litigation and environmental investigations.
Most important facts for an investor to verify
- Whether sales growth and margin improvement can continue after benefits from the Casegoods transition, LIFO reserve reduction and legal settlement.
- The sustainability of Retail growth and whether promotional activity continues to pressure Retail gross margin.
- Execution and cost risks associated with the ERP implementation, supply-chain transformation and fiscal 2016 store expansion.
- Cash conversion after elevated fiscal 2015 capital expenditures, share repurchases and dividends.
- Supplier concentration, import logistics, commodity costs and exposure to foreign currency, trade and geopolitical disruptions.
- The terms, borrowing-base availability and covenant requirements of the revolving credit facility.
- The impact of discontinued operations, CDSOA proceeds and other unusual items when evaluating recurring earnings.
- Future pension funding requirements, operating lease commitments, warranty reserves and potential litigation, environmental or product-liability costs.