La-Z-Boy Incorporated — Fiscal 2023 Second-Quarter Form 10-Q
Business Context and Reporting Period
La-Z-Boy manufactures, imports, distributes and retails upholstered and casegoods furniture under the La-Z-Boy, England, Kincaid, American Drew, Hammary and Joybird brands. Its reportable segments are Wholesale and Retail; Corporate & Other includes corporate functions, Joybird and other activities.
The filing covers the quarter and six months ended October 29, 2022, compared with October 23, 2021. The interim financial statements are unaudited. The company operated 169 company-owned La-Z-Boy Furniture Galleries stores and participated in a broader network of 351 Galleries stores and 526 Comfort Studio locations.
Key Financial Metrics
| Metric | Quarter Ended Oct. 29, 2022 | Prior Year Quarter | Six Months Ended Oct. 29, 2022 | Prior Year Six Months |
|---|---|---|---|---|
| Sales | $611.3 million | $575.9 million | $1,215.4 million | $1,100.7 million |
| Gross profit | $260.7 million | $223.3 million | $502.2 million | $425.4 million |
| Gross margin | 42.7% | 38.8% | 41.3% | 38.6% |
| Operating income | $61.9 million | $54.1 million | $114.5 million | $88.5 million |
| Operating margin | 10.1% | 9.4% | 9.4% | 8.0% |
| Net income attributable to La-Z-Boy | $46.1 million | $39.5 million | $84.6 million | $64.1 million |
| Diluted EPS | $1.07 | $0.89 | $1.96 | $1.43 |
| Effective tax rate | 25.8% | 26.6% | 26.2% | 26.3% |
For the six months ended October 29, 2022, operating cash flow was $31.0 million, investing cash flow was an outflow of $44.1 million and financing cash flow was an outflow of $25.9 million. Capital expenditures were $40.4 million. The company paid $14.2 million in shareholder dividends, spent $5.0 million on share repurchases and paid $5.0 million of acquisition-related holdbacks.
At October 29, 2022, cash, cash equivalents and restricted cash totaled $207.9 million, compared with $248.9 million at April 30, 2022. Investments totaled $42.2 million, including $19.0 million of investments intended to enhance cash returns. The company had no borrowings outstanding under its $200.0 million unsecured revolving credit facility, which matures October 15, 2026, and was in compliance with its covenants. Lease liabilities totaled $430.5 million, including current and long-term amounts.
Material Changes Versus the Prior Comparable Period
- Consolidated sales increased 6.2% in the quarter and 10.4% for the six-month period, primarily from pricing and surcharge actions and favorable product and channel mix. Delivered unit volume declined.
- Gross margin expanded 390 basis points in the quarter and 270 basis points year to date, aided by pricing, surcharges and a greater contribution from the higher-margin Retail segment. Higher raw-material costs and plant inefficiencies partially offset those benefits.
- SG&A increased as a percentage of sales by 320 basis points in the quarter and 130 basis points year to date, reflecting increased marketing investment and the higher SG&A profile of the Retail segment.
- Wholesale sales increased 1.6% in the quarter and 6.7% year to date, while operating margin declined to 8.6% from 9.8% in the quarter. Dealer warehouse constraints and lower unit volume affected results.
- Retail sales increased 31.0% in the quarter and 30.4% year to date. Delivered same-store sales increased 25% in both periods, while written same-store sales declined 10% and 13%, respectively. Retail operating margin improved to 16.5% from 12.5% in the quarter.
- Corporate & Other operating loss increased to $18.1 million in the quarter from $13.0 million, primarily because of Joybird’s lower volume, unfavorable product mix, higher input costs and increased marketing investment.
- Customer deposits and deferred revenue declined to $209.7 million from $322.2 million at April 30, 2022, primarily as the company worked down its pandemic-era backlog. Inventories increased to $342.7 million from $303.2 million.
- Goodwill increased to $203.5 million, including $10.6 million from the Denver and Spokane retail acquisitions. The company also recorded $5.5 million of reacquired rights related to those transactions.
- The company reduced the Joybird contingent consideration liability by $0.8 million, recording a favorable impact in SG&A because management expected no additional earnout payment.
Outlook, Commentary, Risks and Unusual Items
- Management expects fiscal 2023 capital expenditures of approximately $75 million to $80 million, primarily for retail-store improvements and openings and manufacturing and distribution facility upgrades.
- Management stated that cash on hand, investments and available revolver capacity should provide adequate liquidity for operations over the next 12 months. The board is expected to continue regular quarterly dividends, although future dividends remain discretionary.
- Management identified softer consumer demand, economic uncertainty, weaker consumer sentiment, slowing online traffic, supply-chain availability, higher material and freight costs, lower unit volumes and manufacturing inefficiencies as key operating considerations.
- Forward-looking statements are subject to risks described in the fiscal 2022 Form 10-K, including factors that could affect demand, costs, supply chains, liquidity, acquisitions, dividends, share repurchases and operating performance. The filing states that there were no material changes to previously disclosed risk factors.
- Other comprehensive loss attributable to the company was $3.2 million in the quarter and $4.7 million for the six-month period, primarily reflecting currency translation losses and unrealized investment losses.
- There were no material changes in market risk disclosures, critical accounting policies, contractual obligations or internal controls. Management concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether pricing and surcharge actions can continue to offset raw-material, freight and other manufacturing costs.
- Whether declining written same-store sales and weaker consumer sentiment lead to lower future delivered sales, particularly in Retail.
- Progress in reducing backlog and inventories without adversely affecting margins or cash flow.
- Joybird’s sales trajectory, marketing efficiency and operating losses, including the effect of lower online traffic and demand.
- Actual fiscal 2023 capital expenditures versus the $75 million to $80 million expectation and the resulting effect on liquidity.
- Future acquisition spending, integration results and any additional obligations related to contingent consideration or acquisition holdbacks.
- Availability under, and compliance with, the revolving credit facility and related leverage and fixed-charge covenants.
- Future dividend and share-repurchase decisions, which remain subject to board approval and available cash.