La-Z-Boy Incorporated: Fiscal 2021 Form 10-K Summary
Business context and reporting period
This filing is the annual report for the 52-week fiscal year ended April 24, 2021, with comparison to fiscal 2020 ended April 25, 2020. Although the request references “2020 Q4,” the filing reports fiscal 2021 full-year results and separately provides fourth-quarter comparisons. La-Z-Boy manufactures, imports, distributes and retails residential upholstered and casegoods furniture through its Wholesale, Retail and Corporate & Other activities, including Joybird.
COVID-19 caused temporary manufacturing and retail closures late in fiscal 2020 and early in fiscal 2021. Demand subsequently increased sharply as consumer spending shifted toward home furnishings. The Company operated 159 company-owned La-Z-Boy Furniture Galleries stores, supported 354 total Galleries stores and 561 Comfort Studio locations, and employed approximately 11,500 full-time equivalent employees at year-end.
Financial performance and key metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Sales | $1,734.2 million | $1,704.0 million | Up 1.8% |
| Operating income | $136.7 million | $118.8 million | Up 15.1% |
| Operating margin | 7.9% | 7.0% | Up 90 basis points |
| Net income attributable to La-Z-Boy | $106.5 million | $77.5 million | Up 37.4% |
| Diluted earnings per share | $2.30 | $1.66 | Up $0.64 |
| Effective tax rate | 26.3% | 31.4% | Down 510 basis points |
| Net cash from operating activities | $309.9 million | $164.2 million | Up $145.7 million |
- Gross profit was $740.3 million versus $721.4 million in fiscal 2020. Gross margin increased 40 basis points, helped by favorable Retail and Joybird mix and pricing actions, despite higher materials, freight and production costs.
- SG&A was $603.5 million versus $575.8 million. Higher incentive compensation, the $14.1 million increase in Joybird contingent consideration and the absence of a prior-year facility-sale gain offset cost controls and lower bad-debt expense.
- Wholesale sales declined 0.7% to $1,301.3 million; operating income declined 5.7% to $134.3 million and operating margin fell to 10.3% from 10.9%.
- Retail sales increased 2.4% to $612.9 million; operating income declined 3.2% to $46.7 million and operating margin fell to 7.6% from 8.1%. The Seattle store acquisition contributed $18.8 million of delivered sales.
- Joybird sales increased 43.0% to $109.2 million. Written sales increased 64.5%, and operating performance improved materially, although Joybird remained within Corporate & Other.
- Fiscal 2021 benefited from the absence of the $26.9 million non-cash Joybird goodwill impairment recorded in fiscal 2020. Fiscal 2020 also included a $16.3 million tariff rebate benefit and a $9.7 million gain on the sale of the Redlands facility.
- Other income was $9.5 million versus $7.0 million of expense in fiscal 2020, including a $5.2 million CARES Act employee-retention payroll tax credit and investment gains.
Fourth-quarter fiscal 2021 performance
| Metric | Q4 FY2021 | Q4 FY2020 |
|---|---|---|
| Consolidated sales | $519.5 million | $367.3 million |
| Consolidated operating income | $50.1 million | $13.4 million |
| Operating margin | 9.6% | 3.7% |
| Diluted EPS attributable to La-Z-Boy | $0.81 | $0.05 |
Fourth-quarter sales increased 41.4%, led by Wholesale sales growth of 39.8%, Retail sales growth of 38.6% and Joybird sales growth of 144%. The prior-year quarter was significantly affected by COVID-19 closures.
Cash flow, liquidity and capital structure
- Cash, cash equivalents and restricted cash totaled $394.7 million at April 24, 2021, compared with $263.5 million a year earlier. Investments totaled $55.4 million, including $32.5 million held to enhance cash returns.
- Operating cash flow of $309.9 million was driven principally by net income and a $140.0 million increase in customer deposits from higher written Retail and Joybird orders.
- Capital expenditures were $38.0 million, down from $46.0 million. Management expects fiscal 2022 capital expenditures of approximately $55 million to $65 million.
- The Company repaid the full $75.0 million drawn on its revolving credit facility during the first half of fiscal 2021. Borrowings were zero at year-end, with $61.7 million of excess availability under the $150.0 million facility. The facility matures December 19, 2022.
- Customer deposits increased $140.0 million to $180.8 million, while deferred revenue increased to $108.5 million. These balances reflect significant orders not yet delivered and are a source of operating liquidity but also represent future fulfillment obligations.
- The Company paid $16.5 million of dividends and repurchased $44.2 million of common stock during fiscal 2021. The board increased the quarterly dividend to $0.15 per share in February 2021. Approximately 3.4 million shares remained available for repurchase at year-end.
- Total contractual obligations were $656.2 million, including $403.4 million of operating lease obligations, $212.6 million of purchase obligations and $14.1 million of contingent consideration.
Material changes versus the prior comparable period
- Demand recovered substantially after COVID-19 disruptions, but production capacity and supply-chain constraints limited deliveries. Wholesale backlog reached a record $616.7 million at year-end versus $37.6 million a year earlier.
- Inventory increased $44.5 million, accounts receivable increased $40.0 million and accounts payable increased $38.6 million, primarily reflecting higher production and sales activity.
- The Company closed its Newton, Mississippi upholstery facility as part of a workforce realignment, then partially reactivated the facility to address demand. It also added production shifts, expanded Mexico capacity and opened a leased upholstery assembly plant in San Luis Rio Colorado, Mexico.
- The Company acquired six independently owned La-Z-Boy Furniture Galleries stores and one warehouse in the Seattle market for a total purchase price of $13.5 million, including future guaranteed payments.
- Reportable segments were revised in fiscal 2021 by combining the former Upholstery and Casegoods segments into Wholesale; prior-period segment data was revised for comparability.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2022 demand patterns to differ from normal seasonality because of the record backlog, but does not view fiscal 2021 demand patterns as evidence of a permanent change in industry seasonality.
- The Company plans to open, relocate or remodel 25 to 30 Galleries stores in fiscal 2022 and expects capital expenditures of $55 million to $65 million.
- Management expects raw-material, freight and imported-product costs to remain elevated because of inflation, constrained supply, container shortages, labor availability, tariffs and COVID-19-related disruptions. Pricing actions and surcharges may not fully offset these costs, and backlog timing may delay the benefit of price increases.
- Key risks include renewed COVID-19 disruptions, inability to fulfill the record backlog, supply concentration, commodity and transportation inflation, tariffs and foreign sourcing, competition from online and direct-to-consumer retailers, consumer discretionary spending volatility, cybersecurity incidents, credit losses and labor availability.
- Joybird contingent consideration was remeasured upward by $14.1 million in fiscal 2021; the year-end liability was $14.1 million. The ultimate payment depends on Joybird revenue and earnings performance.
- The Company believes available cash, operating cash flow, investments and credit availability are sufficient for at least the next 12 months. However, credit availability is borrowing-base dependent and is reduced by reserves associated with customer deposits.
- Environmental and ordinary-course legal matters were not considered probable to result in additional material losses. The accrued product warranty liability was $23.6 million at year-end.
Most important facts for an investor to verify
- Whether the $616.7 million backlog converts to revenue without material cancellations, delivery delays or customer dissatisfaction.
- Whether pricing actions offset continued inflation in foam, fabric, leather, steel, wood, labor and freight without weakening demand or margins.
- Whether Wholesale margins recover from the fiscal 2021 decline as capacity utilization improves and one-time fiscal 2020 comparisons roll off.
- Whether Joybird sustains its sales and margin improvement and whether the contingent consideration liability results in the disclosed future payments.
- Whether cash remains sufficient after planned capital expenditures, dividends, share repurchases and working-capital investment.
- Whether COVID-19, supply-chain, tariff, labor, cybersecurity and consumer-demand risks materially affect fiscal 2022 operations.
- The filing reports effective internal controls and an unqualified audit opinion from PricewaterhouseCoopers LLP; investors should review the complete audited financial statements and related notes for detailed commitments, estimates and contingencies.