La-Z-Boy Incorporated Fiscal 2014 Form 10-K Summary
Business context and reporting period
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and related accessories primarily in the United States and Canada. Reportable segments are Upholstery, Casegoods and Retail. The filing covers the 52-week fiscal year ended April 26, 2014; the referenced “2013 Q4” period corresponds to the fiscal fourth quarter ended April 26, 2014, not calendar-year 2013.
- The company operated 315 La-Z-Boy Furniture Galleries stores, including 101 company-owned stores, and 570 Comfort Studios locations.
- Fiscal 2014 included the sale of substantially all Bauhaus U.S.A. assets and classification of Lea Industries as held for sale; both are presented as discontinued operations.
Financial performance and key metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Sales | $1,357.3 million | $1,273.9 million | 6.6% increase |
| Gross profit | $464.5 million | $416.9 million | 11.4% increase |
| Gross margin | 34.2% | 32.7% | Up 1.5 points |
| Operating income | $89.3 million | $67.6 million | 32.1% increase |
| Operating margin | 6.6% | 5.3% | Up 1.3 points |
| Income from continuing operations attributable to La-Z-Boy | $58.9 million | $46.4 million | 26.9% increase |
| Net income attributable to La-Z-Boy | $55.1 million | $46.4 million | 18.7% increase |
| Diluted EPS | $1.02 | $0.85 | 20.0% increase |
| Cash flow from operations | $90.8 million | $68.4 million | 32.7% increase |
Fiscal 2014 segment results were mixed:
- Upholstery: Sales increased 6.7% to $1,099.1 million; operating income increased 23.1% to $117.7 million; operating margin improved to 10.7% from 9.3%.
- Casegoods: Sales declined 5.1% to $106.8 million; operating income declined 8.3% to $3.4 million; operating margin decreased to 3.2% from 3.3%.
- Retail: Sales increased 12.8% to $298.6 million; operating income increased 171.5% to $11.1 million; operating margin improved to 3.7% from 1.5%.
At April 26, 2014, cash and equivalents were $149.7 million, investments totaled approximately $60.9 million at fair value, working capital was $355.3 million and the current ratio was 3.1 to 1. Total debt was $7.8 million, equal to 1.5% of equity and 1.4% of capitalization. The company had no borrowings under its revolving credit facility and reported $140.0 million of excess availability.
Capital expenditures were $33.7 million, compared with $25.9 million in fiscal 2013. The company paid $10.5 million in dividends and repurchased 1.3 million shares for $32.1 million. Dividends declared increased to $0.20 per share from $0.08 per share.
Material changes versus the prior comparable period
- Sales growth was driven by higher Upholstery and Retail volume, favorable product mix and price increases. Upholstery volume contributed 4.4 percentage points of sales growth, while price increases contributed 1.8 points.
- Gross margin benefited from higher Retail sales mix, improved Retail merchandising, Upholstery volume leverage and operational efficiencies. These benefits more than offset approximately 2% higher Upholstery material costs.
- Retail performance improved significantly, aided by acquired stores, higher average sales tickets, marketing and improved merchandising; same-store traffic was essentially flat.
- Casegoods continued to weaken because of a longer replacement cycle, changing consumer preferences and insufficiently rapid product-line shifts toward casual, transitional and contemporary styles.
- Accounts receivable declined $7.4 million, and the allowance for doubtful accounts declined to $12.4 million from $21.6 million, reflecting improved collections and customer financial condition.
- Cash from operations increased by $22.4 million, while cash increased by $18.6 million after investing, financing and foreign-exchange effects.
- Capital expenditures increased primarily because of construction of the new world headquarters and other growth investments.
Guidance, outlook, risks and unusual items
Management remained optimistic about profitable growth from the integrated retail model, store expansion and manufacturing efficiencies, but cautioned that the first fiscal quarter is typically the weakest because of seasonal furniture demand and summer plant shutdowns.
- The “4-4-5” strategy targets 400 La-Z-Boy Furniture Galleries stores, averaging $4 million in sales per store, over five years beginning in fiscal 2014. Management planned to open, relocate or remodel 30 to 35 stores in fiscal 2015.
- Fiscal 2015 capital expenditures were expected to be $60 million to $70 million, including approximately $40 million for the new world headquarters.
- Management expected approximately $2 million of additional restructuring charges in fiscal 2015.
- The Casegoods business is being converted to an all-import model. Domestic casegoods manufacturing at Hudson, North Carolina, was expected to cease in the second quarter of fiscal 2015, with Kincaid and American Drew bedroom products transitioning to imports.
- Fiscal 2014 restructuring charges totaled $8.1 million pretax, including $4.8 million in continuing operations and $3.3 million in discontinued operations. Charges included asset, inventory and tradename write-downs.
- Bauhaus was sold for $6.8 million in cash plus specified assumed liabilities and generated a $1.1 million pretax loss. Fiscal 2014 discontinued operations produced a $3.8 million net loss.
- Key risks include consumer confidence and housing conditions, commodity and raw-material inflation, supplier concentration, foreign sourcing and logistics, competitive pressure including online channels, product liability and recalls, cybersecurity, ERP implementation, store performance and potential impairment charges.
- Approximately 82% of Upholstery polyurethane foam was sourced from one supplier. Foreign sourcing also remained concentrated among certain suppliers of Chinese leather and fabric sets.
- The company had approximately $339.4 million of future operating lease obligations and $100.9 million of purchase-order commitments, generally cancellable before production begins.
- CDSOA distributions were not received in fiscal 2014 or fiscal 2013. Future receipts are uncertain, and previously received amounts could potentially be subject to repayment if adverse court outcomes occur.
- The company expected no fiscal 2015 contribution to its defined-benefit pension plan, which had a $5.4 million funded-status deficit at year-end.
Important facts for investors to verify
- Confirm the fiscal-period treatment of Bauhaus and Lea Industries when comparing fiscal 2014 with prior periods, including the impact on continuing-operations margins and EPS.
- Assess whether the Casegoods all-import restructuring achieves expected cost savings without increasing sourcing, tariff, freight, inventory or quality risks.
- Monitor execution and total cost of the new headquarters project and the planned $60 million to $70 million fiscal 2015 capital program.
- Evaluate the sustainability of Retail margin improvement, store acquisitions and the planned expansion toward 400 galleries.
- Review exposure to raw-material inflation, especially leather, polyurethane, plywood and steel, and the concentration of key suppliers.
- Track cash deployment among dividends, share repurchases, investments, capital expenditures and potential debt repayment.
- Consider the effect of the ERP implementation on operating continuity, internal controls and implementation costs.
- Review product warranty, litigation, environmental, tax and CDSOA contingencies, including the possibility that actual losses or recoveries differ from recorded estimates.