LZB

LA-Z-BOY INC - 10-Q Summary (Period Ended Jan 27, 2007)

Business Context and Reporting Period

This Form 10-Q covers the third quarter and first nine months of fiscal 2007 ended January 27, 2007. LA-Z-BOY INC is a manufacturer and retailer of upholstered and casegoods furniture. The reporting period is significantly impacted by the classification of certain operating units (Sam Moore, Clayton Marcus, and Pennsylvania House) as discontinued operations following a decision to sell them. Additionally, the company sold its American of Martinsville division in the prior year, which is also reported as discontinued.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated sales decreased 9.6% in Q3 and 2.8% for the nine months, driven by weakness in the Upholstery (-11.8%) and Casegoods (-14.6%) segments. Retail sales increased 6.5% in Q3 due to store acquisitions and openings.
• Discontinued Operations Impact: The company recorded a significant loss from discontinued operations of $14.8M in Q3 (net of tax), primarily due to a $17.5M pre-tax impairment charge on goodwill and intangible assets for businesses held for sale (Sam Moore, Clayton Marcus, Pennsylvania House).
• Margin Expansion: Despite lower sales volumes, gross margins improved to 27.9% in Q3 (from 25.6% prior year) due to cost reduction initiatives and a favorable shift in sales mix toward higher-margin retail operations.
• Restructuring Costs: Q3 included $2.9M in restructuring charges related to retail warehouse consolidations and store closures (specifically the Pittsburgh market). This compares to $0.6M in the prior year Q3.
• Unusual Income: The company recognized $3.4M in income from the Continued Dumping and Subsidy Offset Act (CDSOA) related to anti-dumping duties on Chinese bedroom furniture.

Guidance, Outlook, and Risks

• Q4 2007 Outlook: Management expects fourth-quarter sales to be down 8% to 10% compared to the prior year. Earnings per share are projected in the range of $0.03 to $0.07, including up to $0.01 per share in stock option expense.
• Strategic Shifts: The company is exiting the Pittsburgh retail market and consolidating warehouses to reduce fixed costs. The Retail Group is expected to achieve profitability within 15 months.
• Accounting Changes: Adoption of SFAS 123(R) resulted in $0.5M of stock-based compensation expense in Q3. Future adoption of SFAS 158 may increase pension liabilities by approximately $9.0M.
• Risks: Key risks include the challenging retail environment, the ability to sell discontinued operations at fair value, potential disruptions from Chinese imports, and the impact of new accounting standards on pension liabilities.

Investor Verification Checklist

• Discontinued Operations: Verify the valuation and sale timeline for Sam Moore, Clayton Marcus, and Pennsylvania House, as the $17.5M impairment charge significantly impacted net income.
• Retail Turnaround: Monitor the progress of the Retail Group's restructuring, specifically the closure of Pittsburgh stores and the timeline to profitability (projected 15 months).
• CDSOA Income: Assess the sustainability of the $3.4M CDSOA income, noting legislative changes that may repeal future distributions after September 2007.
• Debt Covenants: Review the amended credit agreement (reduced facility to $100M) and ensure compliance with the fixed charge coverage ratio requirements.
• Inventory Levels: Confirm that inventory reductions ($32.4M decrease in Q3) align with sales declines and do not indicate obsolescence risks.