LA-Z-BOY INCORPORATED - 10-Q Summary
Business Context and Reporting Period
This filing covers the second quarter of fiscal 2007 ended October 28, 2006. LA-Z-BOY INC is a manufacturer, marketer, and retailer of upholstery and casegoods furniture. The company operates through three reportable segments: Upholstery Group, Casegoods Group, and Retail Group. During the period, the company completed the sale of its American of Martinsville division (discontinued operations) and continued restructuring efforts in its Retail Group, including warehouse consolidations and store closures.
Key Financial Metrics
| Metric | Q2 2007 | Q2 2006 | 6 Months 2007 | 6 Months 2006 |
|---|---|---|---|---|
| Sales | $440.5 million | $433.4 million | $859.4 million | $862.2 million |
| Gross Margin | 25.4% | 20.6% | 24.9% | 22.2% |
| Operating Income | $4.1 million | ($7.9 million) | $6.9 million | ($1.3 million) |
| Net Income | $2.0 million | ($6.4 million) | $4.2 million | ($3.2 million) |
| Diluted EPS | $0.04 | ($0.12) | $0.08 | ($0.06) |
| Cash & Equivalents | $20.5 million | $15.0 million | $20.5 million | $15.0 million |
| Total Debt | $186.1 million | $227.4 million | $186.1 million | $227.4 million |
| Debt-to-Capitalization | 27.2% | 31.1% | 27.2% | 31.1% |
Note: Total Debt includes short-term borrowings ($35.0M) and long-term debt ($147.8M). Net cash used in operating activities for the six months ended Oct 28, 2006, was $27.5 million, compared to $18.8 million provided in the prior year period.
Material Changes vs. Prior Period
- Profitability Turnaround: The company returned to profitability in Q2 2007 ($2.0M net income) compared to a net loss of $6.4M in Q2 2006. This improvement was driven by a significant reduction in restructuring charges ($2.3M in Q2 2007 vs. $8.9M in Q2 2006) and improved gross margins.
- Gross Margin Expansion: Consolidated gross margin improved to 25.4% in Q2 2007 from 20.6% in Q2 2006. This was primarily due to the elimination of supply chain disruptions (polyurethane foam shortage) experienced in the prior year, price increases, and cost reduction efforts.
- Segment Performance:
- Upholstery: Sales were flat (+0.8%), but operating margin improved significantly to 6.3% from 3.9%.
- Casegoods: Sales declined 1.0%, but operating margin improved to 4.8% from 1.8% due to a transition to an import-based model with a more variable cost structure.
- Retail: Sales increased 6.6% due to acquisitions, but the segment reported an operating loss of $8.8M (margin -16.7%) due to high fixed costs, store transitions, and a weak retail environment.
- Discontinued Operations: The company sold the American of Martinsville division in July 2006 for $33.2 million, recognizing a pre-tax gain of $2.1 million. Results for this unit are now classified as discontinued operations.
- Accounting Changes: The company adopted SFAS No. 123(R) for stock-based compensation, resulting in an expense of $0.9 million for the quarter and $1.5 million for the six months, which reduced net income.
Guidance, Outlook, and Risks
- Q3 2007 Guidance: Management expects sales to be down in the mid-single-digit range compared to Q3 2006 sales of $477 million. Earnings per share are expected to be in the range of $0.06 to $0.10, including up to a $0.01 per share charge for stock option expense.
- Outlook: Management remains optimistic about the Retail Group, anticipating profitability within 18 months as store conversions to the "New Generation" format are completed. The company plans to add seven new stores and convert/relocate five more in the remainder of fiscal 2007.
- Risks and Contingencies:
- Market Risk: Exposure to interest rate changes and foreign currency fluctuations (though most imports are denominated in USD).
- Regulatory: Uncertainty regarding the Continued Dumping and Subsidy Offset Act (CDSOA) distributions, which could be material depending on legal appeals and administrative reviews.
- Accounting: Adoption of SFAS No. 158 is expected to result in a $9.0 million increase in pension liability in the next fiscal year.
- Operational: Risks related to turning around under-performing retail stores and the impact of a volatile retail climate.
Key Facts for Investor Verification
- Restructuring Impact: Verify the sustainability of margin improvements given the significant reduction in restructuring charges compared to the prior year ($2.3M vs $8.9M).
- Retail Segment Turnaround: Monitor the Retail Group's path to profitability, as it currently operates at a significant loss (-16.7% margin) despite sales growth.
- Stock-Based Compensation: Note the new expense recognition under SFAS 123(R) ($1.5M for six months) and its impact on future earnings.
- Cash Flow: Operating cash flow turned negative ($27.5M used) for the six-month period, primarily due to a $17.1M increase in inventory for the Fall selling season.
- Debt Reduction: Confirm the utilization of proceeds from the American of Martinsville sale ($33.2M) to reduce total debt by approximately $41M year-over-year.