La-Z-Boy Incorporated 10-Q Summary
Business Context and Reporting Period
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories through the Upholstery, Casegoods and Retail segments. The filing covers the first quarter of fiscal 2012, ended July 30, 2011, compared with the first quarter of fiscal 2011, ended July 24, 2010. Fiscal 2012 has 52 weeks versus 53 weeks in fiscal 2011.
- The company operated 84 company-owned La-Z-Boy Furniture Galleries stores and consolidated one remaining variable interest entity with eight stores.
- Fifteen stores previously operated by a consolidated VIE were acquired during the fourth quarter of fiscal 2011 and are now included in the Retail Group.
Financial Results and Key Metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Sales | $280.1 million | $263.3 million | 6.4% increase |
| Gross profit | $80.9 million | $72.8 million | 11.1% increase |
| Gross margin | 28.9% | 27.7% | 1.2 percentage-point increase |
| Operating income | $3.5 million | $(1.7) million | Improved $5.1 million |
| Operating margin | 1.2% | (0.6)% | 1.8 percentage-point increase |
| Net income attributable to La-Z-Boy | $45.5 million | $(0.2) million | Significant increase |
| Diluted EPS | $0.85 | $0.00 | Improved |
| Operating cash flow | $3.0 million | $(12.1) million | Improved $15.1 million |
Net income was substantially affected by a $43.4 million reduction in the valuation allowance against U.S. deferred tax assets, which increased earnings per share by approximately $0.81. Excluding this discrete tax adjustment, the effective tax rate was 37.1%, compared with 42.9% in the prior-year quarter.
- Upholstery sales increased 7.7% to $217.5 million, and operating income increased 10.6% to $11.1 million.
- Casegoods sales declined 7.4% to $34.1 million, while operating income declined 64.6% to $0.6 million; operating margin fell to 1.6% from 4.3%.
- Retail sales increased 38.3% to $48.8 million, and the operating loss narrowed to $3.4 million from $4.9 million. The Retail Group remained unprofitable, principally because of its lease expense burden.
- SG&A increased in dollars but declined 0.6 percentage points as a percentage of sales. Restructuring charges were approximately $0.1 million in both periods.
Balance Sheet, Debt and Liquidity
| Metric | July 30, 2011 | April 30, 2011 |
|---|---|---|
| Cash and equivalents | $110.4 million | $115.3 million |
| Total assets | $628.0 million | $593.5 million |
| Total debt | $30.9 million | $35.1 million |
| Total equity | $410.9 million | $364.1 million |
| Debt-to-capitalization | 7.0% | 8.8% |
- The company had $20.0 million outstanding under its credit facility and $100.9 million of excess availability at July 30, 2011.
- A 1.05-to-1.00 fixed-charge coverage covenant becomes effective if excess availability falls below $30.0 million. Management did not expect to fall below that threshold within the next twelve months.
- Capital expenditures were $3.3 million in the quarter; fiscal 2012 capital expenditures were expected to range from $15 million to $20 million.
- Cash declined by $4.8 million, reflecting $3.0 million of operating cash flow, $3.3 million of investing outflows and $4.5 million of financing outflows, primarily debt repayment.
Material Changes, Outlook and Risks
Management reported favorable consolidated sales trends and improved operating performance, driven primarily by stronger Upholstery and Retail volume. Upholstery benefited from improved Mexico cut-and-sew efficiencies, although freight costs, product mix and higher advertising expenses pressured margins. Casegoods performance weakened because of lower order levels, the absence of a prior-year youth-line launch benefit and higher material costs that were not fully offset by price increases.
Management remained cautious because of volatile financial markets and consumer concerns about the macroeconomic environment. It expected the furniture industry to remain difficult but believed the company was positioned to gain market share during the typically stronger fall selling period. Management cited its brand, proprietary store network, marketing investments and operating leverage as potential drivers of future performance.
- Results may be affected by consumer confidence, housing and credit markets, recessionary conditions and demand for furniture.
- Material risks include commodity, freight, labor, supply-chain, import and foreign-exchange volatility; product recalls; technology failures; natural disasters; and regulatory or accounting changes.
- The company had $43.3 million of open purchase orders with foreign casegoods, leather and fabric suppliers; orders not yet in production were cancelable.
- Notes receivable from 15 customers totaled $9.1 million, with a $2.3 million allowance for credit losses and collateral consisting primarily of inventory or real estate.
- Dealer lease guarantees totaled $1.2 million. The company’s exposure to three non-consolidated dealers was $4.7 million, primarily consisting of receivables and notes receivable.
- CDSOA payments contributed $0.3 million in the quarter, but future distributions were uncertain and could vary based on litigation and administrative reviews.
- The remaining deferred-tax valuation allowance was $13.6 million, including U.S. federal and state items and foreign deferred tax assets.
Investor Verification Priorities
- Separate recurring operating earnings from the $43.4 million deferred-tax valuation allowance reversal and the $0.3 million CDSOA payment.
- Verify whether Upholstery margin improvements offset freight, mix and advertising pressures in subsequent quarters.
- Monitor Casegoods demand, material-cost inflation and the segment’s sharply lower operating margin.
- Assess whether the Retail Group can reach profitability as acquired stores are integrated and fixed lease costs are leveraged.
- Track cash conversion, inventory growth, debt repayments and compliance with the excess-availability covenant.
- Evaluate the collectability of customer notes and dealer-related exposures, including collateral values and allowance adequacy.