La-Z-Boy Incorporated — Fiscal 2020 First-Quarter 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter ended July 27, 2019, compared with the quarter ended July 28, 2018. La-Z-Boy manufactures, imports, distributes and retails upholstered and casegoods furniture through its Upholstery, Casegoods and Retail segments, with Joybird included in Corporate and Other.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Sales | $413.6 million | $384.7 million | 7.5% |
| Gross profit | $167.7 million | $148.5 million | 12.9% |
| Gross margin | 40.6% | 38.6% | +200 bps |
| Operating income | $23.4 million | $23.2 million | 1.1% |
| Operating margin | 5.7% | 6.0% | -30 bps |
| Net income attributable to La-Z-Boy | $18.1 million | $18.3 million | -1.3% |
| Diluted EPS | $0.38 | $0.39 | Down $0.01 |
| Cash flow from operations | $19.3 million | $32.2 million | Down $12.8 million |
- Retail sales increased 19.9% to $143.0 million, supported by acquired stores and a 3.5% delivered same-store sales increase. Retail operating income rose 90.2% to $8.5 million, and margin improved to 5.9%.
- Upholstery sales were essentially flat at $293.4 million, while operating income increased 10.0% to $26.3 million and margin improved to 9.0%.
- Casegoods sales declined 4.4% to $27.1 million; operating income declined 15.7% to $2.6 million and margin fell to 9.6%.
- Corporate and Other sales increased primarily from Joybird, but the operating loss widened to $13.9 million from $8.3 million, including $1.1 million of purchase accounting charges.
- Cash, cash equivalents and restricted cash were $113.6 million at July 27, 2019, versus $131.8 million at April 27, 2019. Investments to enhance cash returns totaled $32.9 million.
- The company had no borrowings under its revolving credit facility and reported $138.8 million of excess availability under the $150.0 million commitment.
- Capital expenditures were $12.3 million. Fiscal 2020 capital expenditures are expected to be $50 million to $60 million.
- The company repurchased $12.3 million of common stock and paid $6.1 million in dividends during the quarter. Approximately 5.5 million shares remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Sales growth was driven by Retail and the inclusion of Joybird, partly offset by lower Casegoods volume and flat Upholstery sales.
- Gross margin benefited from favorable sales mix, improved raw-material costs and supply-chain performance, but was reduced by a $1.5 million severance liability related to planned manufacturing changes.
- Overall operating margin declined because SG&A as a percentage of sales increased, primarily due to the higher SG&A profile of Retail and Joybird and acquisition-related purchase accounting charges.
- Operating cash flow decreased, primarily because the prior-year period benefited from larger receivable collections and the current period included a significant payout of fiscal 2019 incentive compensation.
- Cash used for investing included $5.4 million related to the Joybird acquisition installment and $12.3 million of capital expenditures. The filing states that no acquisitions were completed during the quarter; the payment related to the prior-year Joybird acquisition.
- Adoption of ASC 842, Leases, added $312.4 million of right-of-use lease assets and $326.4 million of lease liabilities to the balance sheet. Comparative periods were not restated.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2020 capital expenditures of $50 million to $60 million and believes available liquidity is adequate for operations, growth plans, dividends and capital expenditures.
- The company announced plans to close its Redlands, California upholstered-furniture plant by October 2019 and move production to other North American facilities. The plant employs approximately 350 people and represents about 10% of La-Z-Boy-branded upholstery production.
- The company also plans to move the Newton, Mississippi leather cut-and-sew operation, affecting approximately 105 of the location’s 525 employees, with transition expected by the end of calendar 2019. The Redlands facility will be idled and marketed for sale.
- Reported risks include consumer and housing-market conditions, recession, tariffs and trade restrictions, freight and logistics costs, labor and supply disruptions, foreign exchange, product defects and warranty claims, technology failures, e-commerce execution, litigation, and potential goodwill or intangible-asset impairments.
- Tariffs and higher ocean freight costs negatively affected Casegoods and Retail margins. Other income and expense shifted from $0.9 million of income to $0.8 million of expense, primarily because of foreign-exchange losses.
- Joybird has earn-out opportunities based on fiscal 2021 and fiscal 2023 performance. The related contingent consideration liability was valued at $7.9 million, with an undiscounted potential earn-out range of zero to $65 million.
- The effective tax rate was 22.0%, compared with 22.8% in the prior-year quarter; excluding discrete adjustments, the current-quarter rate would have been 25.2%.
Important facts for investors to verify
- Confirm whether Retail same-store sales, acquired-store contribution and Joybird growth continue to offset weaker Casegoods volume and relatively flat Upholstery sales.
- Assess whether tariffs, freight, labor and other input costs continue to pressure segment gross margins.
- Track Joybird’s operating losses, customer-acquisition costs, purchase accounting charges and progress toward earn-out milestones.
- Monitor cash generation after share repurchases, dividends, capital expenditures, lease payments and remaining Joybird obligations.
- Verify the timing, costs and operational benefits of the Redlands closure and Newton relocation, including potential severance, impairment or other restructuring charges.
- Review the effect of ASC 842 lease liabilities on leverage, liquidity and future cash commitments.
- Consider warranty exposure, with product warranty liabilities totaling $22.8 million at July 27, 2019, and the company’s stated risks concerning product defects and recalls.