La-Z-Boy Incorporated — Form 10-Q Summary
Business Context and Reporting Period
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories through wholesale channels and company-owned and independent La-Z-Boy Furniture Galleries and Comfort Studios locations. The filing covers the second quarter and first six months of fiscal 2014, ended October 26, 2013, compared with October 27, 2012. The interim financial statements are unaudited.
Reportable segments are Upholstery, Casegoods and Retail. The company owned 97 La-Z-Boy Furniture Galleries stores in 12 markets and had approximately 900 branded outlets, including independent locations and Comfort Studios.
Financial Performance and Key Metrics
| Metric | Second quarter fiscal 2014 | Second quarter fiscal 2013 | Change |
|---|---|---|---|
| Sales | $366.4 million | $322.3 million | 13.7% increase |
| Gross profit | $123.8 million | $100.3 million | 23.4% increase |
| Gross margin | 33.8% | 31.1% | 2.7 percentage-point increase |
| Operating income | $25.4 million | $10.6 million | 140.6% increase |
| Operating margin | 6.9% | 3.3% | 3.6 percentage-point increase |
| Net income attributable to La-Z-Boy | $16.7 million | $6.6 million | 153.0% increase |
| Diluted earnings per share | $0.31 | $0.12 | Increase of $0.19 |
| Dividend declared per share | $0.04 | None | Dividend continued |
| Metric | Six months fiscal 2014 | Six months fiscal 2013 | Change |
|---|---|---|---|
| Sales | $685.3 million | $623.8 million | 9.9% increase |
| Operating income | $40.2 million | $18.2 million | 121.2% increase |
| Operating margin | 5.9% | 2.9% | 3.0 percentage-point increase |
| Net income attributable to La-Z-Boy | $26.3 million | $11.0 million | 138.9% increase |
| Diluted earnings per share | $0.49 | $0.20 | Increase of $0.29 |
| Net cash provided by operating activities | $32.4 million | $(2.5) million | Improvement of $34.9 million |
Segment Results and Material Changes
- Upholstery: Second-quarter sales increased 14.2% to $296.2 million and operating income increased 49.3% to $32.5 million. Operating margin improved to 11.0% from 8.4%, supported by higher volume, pricing, product mix, fixed-cost absorption and cost reductions.
- Casegoods: Second-quarter sales declined 1.7% to $33.9 million and operating income declined 28.5% to $0.6 million. The six-month operating margin fell to 1.9% from 3.2% because of weaker sales and lower cost absorption.
- Retail: Second-quarter sales increased 19.9% to $73.4 million and the segment moved to $3.3 million of operating income from a $0.6 million loss. The improvement reflected higher average tickets, merchandise mix, pricing and leverage of fixed occupancy and administrative costs.
- Consolidated gross margin benefited from a greater mix of higher-margin Retail sales, improved Upholstery fixed-cost absorption and improved Retail merchandising. SG&A leverage improved, although incentive compensation increased by $3.1 million in the quarter and $5.7 million for the six-month period.
- The company acquired the assets of one independent La-Z-Boy Furniture Galleries dealer during the quarter in exchange for notes and accounts receivable valued at $1.6 million and recorded a $0.8 million reacquired-rights intangible asset.
- The company purchased approximately 0.7 million shares for $13.7 million during the first six months and paid $4.2 million of dividends. Approximately 3.5 million shares remained available for repurchase at October 26, 2013.
Cash Flow, Liquidity, Debt and Capital Resources
- Cash and equivalents were $136.2 million at October 26, 2013, compared with $131.1 million at April 27, 2013. Restricted cash was $12.6 million.
- Six-month cash flow consisted of $32.4 million provided by operations, $16.9 million used in investing activities and $9.9 million used in financing activities, producing a $5.2 million increase in cash.
- Inventories increased to $158.6 million from $146.3 million, primarily to improve raw-material and finished-goods availability for the fall selling season.
- Total debt was approximately $8.1 million, consisting of $7.6 million current debt and $0.5 million long-term debt. The debt-to-capitalization ratio was 1.6%.
- The company had no borrowings under its $150 million revolving credit facility and reported $140.4 million of excess availability. It was not subject to the facility’s fixed-charge coverage covenant at quarter-end.
- Capital expenditures were $14.3 million for the first six months. Fiscal 2014 capital expenditures were expected to be $45 million to $50 million, including construction of a new world headquarters estimated at approximately $57 million.
Guidance, Outlook, Risks and Unusual Items
Management remained optimistic about the business model and expected to pursue profitable growth through its “4-4-5” strategy, supported by marketing, merchandising, operating efficiencies and the company’s branded distribution network. The filing does not provide specific consolidated revenue or earnings guidance.
- The second-quarter effective tax rate was 32.4%, reduced by a $0.9 million benefit from releasing part of a valuation allowance on U.S. state deferred tax assets. Excluding that discrete benefit, the rate would have been 35.8%.
- The company reported a $1.4 million net liability for uncertain tax positions, of which $0.2 million could be settled within 12 months.
- Warranty liabilities increased to $15.9 million. More than 90% relates to the Upholstery segment, whose products carry warranties ranging from one year to lifetime coverage for certain components.
- Management identified risks involving consumer confidence, economic conditions, housing and credit markets, commodity and energy costs, imports and logistics, labor and supply disruptions, foreign exchange, product defects and recalls, warranty costs, litigation, technology systems, ERP implementation, store expansion and regulatory or tax changes.
- The company was implementing an ERP system in its largest operating unit. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- The interim results are not necessarily indicative of full-year results, and the filing reported no material changes to previously disclosed contractual obligations or risk factors.
Important Facts for Investors to Verify
- Whether Upholstery and Retail sales momentum and margin expansion continue, and whether Casegoods weakness persists.
- The sustainability of earnings growth after excluding the $0.9 million discrete tax benefit and considering higher incentive compensation.
- Inventory levels, working-capital requirements and execution of the planned headquarters construction and $45 million to $50 million fiscal-year capital program.
- Future share repurchases and dividends relative to operating cash flow and capital needs.
- Potential effects of warranty claims, product defects, ERP implementation, tax-law changes and the company’s largely consumer-sensitive demand profile.