La-Z-Boy Incorporated: Fiscal 2020 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended October 26, 2019, compared with October 27, 2018. The filing identifies this as the second quarter of fiscal 2020; interim results are unaudited and may not represent full-year performance.
Business Context
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 Upholstery, Casegoods and Retail. The company operated 155 company-owned La-Z-Boy Furniture Galleries stores and had 353 total Galleries stores and 559 Comfort Studio locations as of October 26, 2019.
Financial Performance
| Metric | Q2 FY2020 | Q2 FY2019 | Change |
|---|---|---|---|
| Sales | $447.2 million | $439.3 million | 1.8% |
| Gross profit | $182.4 million | $174.4 million | 4.6% |
| Gross margin | 40.8% | 39.7% | +110 bps |
| Operating income | $29.6 million | $28.5 million | 3.9% |
| Operating margin | 6.6% | 6.5% | +10 bps |
| Net income attributable to La-Z-Boy | $22.6 million | $20.0 million | 12.9% |
| Diluted EPS | $0.48 | $0.42 | 14.3% |
| Metric | Six months FY2020 | Six months FY2019 | Change |
|---|---|---|---|
| Sales | $860.8 million | $824.0 million | 4.5% |
| Operating income | $53.0 million | $51.7 million | 2.6% |
| Operating margin | 6.2% | 6.3% | -10 bps |
| Net income attributable to La-Z-Boy | $40.7 million | $38.3 million | 6.1% |
| Diluted EPS | $0.86 | $0.81 | 6.2% |
| Cash flow from operations | $53.7 million | $46.1 million | Increase of $7.6 million |
Segment Results and Material Changes
- Upholstery: Q2 sales increased 1.2% to $320.9 million, while operating income was essentially flat at $32.1 million. Tariff surcharges increased sales, but unit volume was flat and product mix shifted toward stationary sofas and sectionals from higher-priced power motion and leather products.
- Casegoods: Q2 sales declined 6.3% to $29.4 million and operating income fell 41.4% to $2.2 million. Higher ocean freight, tariffs on certain occasional tables and delayed supplier shipments pressured margins.
- Retail: Q2 sales increased 6.2% to $148.4 million and operating income increased 28.2% to $8.4 million. Same-store delivered sales rose 5.0%, supported by improved traffic and store execution.
- Corporate and Other: The operating loss improved to $13.1 million from $14.0 million, although the six-month loss increased because of continued investment in Joybird customer acquisition. Joybird Q2 sales increased 11.9% to $20.8 million.
- Consolidated gross margin benefited from favorable sales mix, lower acquisition-related purchase accounting charges and lower raw material costs. These benefits were partly offset by supply-chain transition costs, inflation, tariffs and freight.
Cash Flow, Liquidity and Capital Allocation
- Cash, cash equivalents and restricted cash were $119.5 million at October 26, 2019, compared with $131.8 million at April 27, 2019. Investments totaled $59.5 million, including $33.2 million held to enhance cash returns.
- The company had no borrowings under its $150.0 million revolving credit facility and reported $148.1 million of excess availability. The facility matures December 19, 2022.
- Six-month investing cash outflows were $32.3 million, including $22.9 million of capital expenditures and $5.9 million of Joybird-related guaranteed payments.
- The company repurchased $23.2 million of common stock and paid $12.2 million of dividends during the first six months. Approximately 5.2 million shares remained available for repurchase at October 26, 2019.
- Fiscal 2020 capital expenditures were expected to total approximately $50 million to $60 million, primarily for manufacturing plant upgrades and retail store improvements.
Debt, Leases and Accounting Changes
- Traditional long-term debt was effectively zero at October 26, 2019; liquidity primarily consisted of cash, investments and unused revolver capacity.
- Adoption of ASC 842 resulted in recognition of approximately $302.3 million of right-of-use lease assets and $316.5 million of lease liabilities, including current and long-term amounts.
- The company closed its Redlands, California upholstery plant at the end of the quarter and is transferring production to other North American facilities. The plant employed approximately 350 people. The Newton, Mississippi leather cut-and-sew operation is expected to transition by the end of the third quarter, affecting approximately 105 employees.
- The supply-chain optimization initiative generated $4.3 million of pre-tax costs in the first six months, recorded in cost of sales. These costs reduced Q2 and six-month gross margins by approximately 60 and 50 basis points, respectively.
Outlook, Risks and Unusual Items
- Management stated that available liquidity is adequate for operations, growth plans, dividends and capital expenditures. No formal revenue or earnings guidance was provided in the filing.
- Management expects regular quarterly dividends to continue, but the board may change or discontinue them. The company also expects to remain opportunistic in repurchasing shares.
- Q2 other income included a $1.9 million pre-tax refund related to settlement of the terminated defined-benefit pension plan. This benefited pretax income and diluted comparability with the prior year.
- Key risks include consumer demand and recessionary conditions, tariffs and trade policy, freight and logistics costs, supply and labor disruptions, commodity prices, currency movements, product defects and warranty claims, information technology failures, e-commerce execution, and potential goodwill or intangible-asset impairments.
- The effective tax rate was 26.6% in Q2 and 24.6% for the six-month period, compared with 22.9% in the corresponding prior-year periods.
Investor Verification Checklist
- Verify whether Retail same-store sales momentum and acquired-store contributions can continue without increasing SG&A disproportionately.
- Assess whether tariffs, ocean freight and supply-chain transition costs continue to pressure Casegoods and Upholstery margins.
- Review the financial performance and customer-acquisition spending of Joybird, including potential earn-out payments of up to $65 million based on future performance.
- Reconcile reported liquidity with substantial lease obligations, including approximately $316.4 million of operating lease liabilities.
- Monitor the financial and operational effects of the Redlands closure and Newton production transition.
- Evaluate the sustainability of share repurchases and dividends relative to operating cash flow and planned capital expenditures.