Business Context and Reporting Period
La-Z-Boy Incorporated filed this unaudited Form 10-Q for the third quarter and first nine months of fiscal 2024, ended January 27, 2024, compared with January 28, 2023. The company manufactures, imports, distributes and retails upholstered and casegoods furniture through its Wholesale segment, 184 company-owned La-Z-Boy Furniture Galleries stores, independent dealers, websites and other channels.
The company retrospectively reclassified U.S. distribution-center costs from selling, general and administrative expense to cost of sales. The change had no effect on sales, operating income, net income, earnings per share or equity.
Key Financial Metrics
| Metric | Q3 FY2024 | Q3 FY2023 | 9M FY2024 | 9M FY2023 |
|---|---|---|---|---|
| Sales | $500.4 million | $572.7 million | $1,493.5 million | $1,788.1 million |
| Gross profit | $213.3 million | $235.6 million | $641.6 million | $716.1 million |
| Gross margin | 42.6% | 41.1% | 43.0% | 40.1% |
| Operating income | $32.6 million | $42.8 million | $100.7 million | $157.4 million |
| Operating margin | 6.5% | 7.5% | 6.7% | 8.8% |
| Net income attributable to La-Z-Boy | $28.6 million | $31.7 million | $83.3 million | $116.3 million |
| Diluted EPS | $0.66 | $0.74 | $1.92 | $2.70 |
Net cash provided by operating activities was $105.4 million for the first nine months, compared with $127.1 million in the prior-year period. Investing activities used $54.0 million, including $38.0 million of capital expenditures and $26.3 million for acquisitions. Financing activities used $64.5 million, including $40.0 million of share repurchases and $24.2 million of dividends. Cash, cash equivalents and restricted cash totaled $333.2 million at January 27, 2024, compared with $346.7 million at April 29, 2023.
The company had $329.3 million of cash and equivalents, $20.8 million of investments and no borrowings under its $200 million unsecured revolving credit facility. Lease liabilities totaled $495.8 million, including $77.6 million current and $418.1 million long term. The company was in compliance with its credit facility covenants.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 12.6%; nine-month sales declined 16.5%. Management attributed the decrease primarily to the normalization of demand and delivery volumes after a significant prior-year backlog, a challenging consumer environment and January winter weather.
- Operating income decreased 24.0% in the quarter and 36.0% for the nine-month period. Operating margin declined 100 basis points and 210 basis points, respectively, despite higher gross margins.
- Gross margin improved because of lower input costs, improved sourcing and favorable product mix, including higher-margin Joybird products. These benefits were partly offset by weather-related plant inefficiencies, Mexico supply-chain transition costs, selective pricing and promotional activity.
- Retail sales declined 18.5% in the quarter and 15.2% year to date. Retail operating margin fell to 10.9% from 17.6% in the quarter, primarily because lower delivered sales reduced leverage over selling and occupancy costs. Written same-store sales declined 8% in the quarter and 2% for the first nine months.
- Wholesale sales declined 12.6% in the quarter and 18.6% year to date, while Wholesale operating income increased 34.1% in the quarter but declined 17.0% year to date. The quarterly margin improved to 6.4% from 4.2%.
- Corporate and Other operating loss improved to $12.5 million from $18.3 million in the quarter, primarily due to improved Joybird performance. Joybird sales increased to $34.0 million in the quarter but declined to $101.9 million for the first nine months.
- The company repurchased 1.3 million shares for $40.0 million during the first nine months and had 6.0 million shares remaining under its repurchase authorization at period end.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expects fiscal 2024 capital expenditures of approximately $50 million to $60 million and believes cash, investments, operating cash flow and available borrowing capacity are adequate for the next 12 months.
- Management expects to continue quarterly dividends and share repurchases, subject to board approval, market conditions and other relevant factors. Future dividends may be discontinued at the board’s discretion.
- The company is pursuing its Century Vision strategy, including expanding the La-Z-Boy store network, improving its omni-channel brand presence, growing Joybird profitably and enhancing supply-chain and enterprise capabilities.
- Supply-chain optimization actions included the permanent closure of a leased cut-and-sew facility in Parras, Mexico and production changes involving the Ramos, Mexico operations. Fiscal 2024 included $3.8 million of cost-of-sales transition and severance charges and $3.0 million of accelerated depreciation. A $1.2 million gain was recognized from settlement of the Torreón, Mexico lease obligation.
- January winter weather temporarily shut U.S. manufacturing facilities, delayed deliveries and reduced store traffic in parts of the central United States.
- The third-quarter effective tax rate was 20.2%, compared with 27.7% in the prior year, primarily due to favorable prior-year return-to-provision adjustments. Management stated that the rate would have been 25.6% absent these discrete items.
- Key continuing risks include consumer demand weakness, seasonality, weather disruption, pricing and promotional pressure, supply-chain execution, commodity and input-cost variability, retail occupancy cost deleverage, acquisition integration, warranty obligations and the risks described in the fiscal 2023 Form 10-K. The filing states that there were no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Confirm whether sales and delivered same-store sales stabilize after the prior-year backlog normalization and January weather disruptions.
- Assess whether improved gross margins can offset lower volume, promotional activity and fixed-cost deleverage, particularly in Retail.
- Monitor the results and integration of the Illinois and Indiana, Lafayette and Colorado Springs retail acquisitions.
- Review the sustainability of cash generation after capital expenditures, acquisitions, dividends and the planned continuation of share repurchases.
- Track Mexico supply-chain restructuring costs, manufacturing efficiency and any further facility closures or impairment charges.
- Evaluate Joybird’s ability to achieve profitable growth after lower year-to-date demand and higher product-mix contribution.
- Reconcile the company’s substantial lease liabilities and warranty liability, which totaled approximately $31.3 million at January 27, 2024.