La-Z-Boy Incorporated: Fiscal 2013 Third-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the third quarter and first nine months of fiscal 2013 ended January 26, 2013, compared with January 28, 2012. La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories through its Upholstery, Casegoods and Retail segments. The company owned 97 La-Z-Boy Furniture Galleries stores and operated within a broader network of 316 Galleries and 558 Comfort Studios locations.
Key financial metrics
| Metric | Q3 FY2013 | Q3 FY2012 | Change |
|---|---|---|---|
| Sales | $349.1 million | $316.5 million | +10.3% |
| Gross profit | $113.4 million | $99.8 million | +13.7% |
| Operating income | $23.3 million | $17.0 million | +36.8% |
| Operating margin | 6.7% | 5.4% | +1.3 percentage points |
| Net income attributable to La-Z-Boy | $17.1 million | $15.0 million | +14.1% |
| Diluted EPS | $0.32 | $0.28 | +$0.04 |
| Metric | First nine months FY2013 | First nine months FY2012 | Change |
|---|---|---|---|
| Sales | $973.0 million | $904.3 million | +7.6% |
| Operating income | $41.5 million | $32.7 million | +26.7% |
| Operating margin | 4.3% | 3.6% | +0.7 percentage points |
| Net income attributable to La-Z-Boy | $28.1 million | $68.4 million | Down from prior-year tax benefit |
| Diluted EPS | $0.52 | $1.28 | Down from prior-year tax benefit |
| Operating cash flow | $33.5 million | $55.9 million | Down $22.4 million |
Quarterly gross margin was approximately 32.5%, versus 31.5% in the prior-year quarter. Cash and equivalents were $112.0 million at January 26, 2013, compared with $152.4 million at April 28, 2012. Total debt was $7.6 million, consisting of $0.3 million current and $7.3 million long term; debt-to-capitalization was 1.6%. The company had no borrowings under its $150 million revolving credit facility and reported $140.4 million of excess availability.
Material changes versus the prior comparable period
- Upholstery sales increased 12.3% in the quarter and segment operating margin improved to 10.1% from 9.1%, driven by higher volume, pricing, product mix and fixed-cost absorption. Raw-material cost increases partially offset these benefits.
- Casegoods sales declined 4.7% and operating margin fell to 0.6% from 5.4%. Results were affected by weaker demand, lower fixed-cost absorption and a charge related to a probable import-duty adjustment.
- Retail sales increased 24.6%, including $8.4 million from the acquisition of nine southern Ohio stores. Retail operating margin improved to 3.7% from negative 1.1%, marking the sixteenth consecutive quarter of year-over-year improvement.
- The company acquired nine stores and one distribution center in southern Ohio for $17.4 million, recognizing $12.8 million of goodwill and approximately $2.2 million of reacquired rights and other intangible assets.
- A $2.7 million restructuring charge was recorded for the closure of the Casegoods lumber-processing operation and the outsourcing of component lumber parts.
- First-nine-month operating cash flow declined primarily because inventory increased to support sales growth and working capital used $17.1 million, compared with working capital providing $13.4 million in the prior-year period.
- First-nine-month net income and EPS were substantially lower than the prior year because fiscal 2012 included a substantial deferred-tax benefit from releasing a valuation allowance. The fiscal 2013 nine-month effective tax rate was 34.6%, versus negative 102.2% in fiscal 2012.
Outlook, risks and unusual items
Management expressed cautious optimism based on improving housing-market trends and the historically strong fourth quarter. It cited brand strength, broad distribution and an efficient operating platform, but provided no specific consolidated revenue or earnings guidance. Fiscal 2013 capital expenditures were expected to total $27 million to $30 million.
Third-quarter other income of $2.4 million and nine-month other income of $2.5 million primarily reflected gains on sales of investments. The company held approximately $33.7 million of marketable securities at January 26, 2013. It also had $46.4 million of open purchase orders with foreign casegoods, leather and fabric suppliers, most of which were cancelable before production.
Key risks include consumer confidence and housing-market conditions, credit and real-estate markets, commodity and freight costs, import logistics and duties, labor or supply disruptions, currency and interest-rate changes, product defects and warranty costs, store expansion and lease terms, acquisition integration, ERP implementation, and potential litigation or regulatory actions. Management stated that Hurricane Sandy had not caused material damage to company-owned stores and was not then expected to materially affect operations.
Important facts for investors to verify
- Whether Upholstery volume and pricing momentum continue while raw-material costs remain elevated.
- Whether the Casegoods segment recovers from weak demand, the import-duty charge and restructuring effects.
- Whether the acquired southern Ohio stores generate the expected sales and profitability without integration problems.
- Inventory growth, operating cash conversion and the decline in cash from $152.4 million to $112.0 million.
- The sustainability of quarterly $0.04 dividends and opportunistic share repurchases; 0.4 million shares were repurchased for $5.2 million during the first nine months.
- The impact of the ERP implementation on internal controls and transaction processing as additional phases are deployed.
- Potential changes in warranty liabilities, uncertain tax positions, import duties and other contingencies not fully quantifiable from the filing text.