La-Z-Boy Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the first quarter of fiscal 2018 ended July 29, 2017, compared with the quarter ended July 30, 2016. La-Z-Boy manufactures, imports, distributes and retails upholstered and casegoods furniture through its Upholstery, Casegoods and Retail segments. The company operated 145 company-owned La-Z-Boy Furniture Galleries stores.
Financial Results and Liquidity
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Sales | $357.1 million | $340.8 million | 4.8% |
| Gross profit | $139.1 million | $134.2 million | 3.6% |
| Gross margin | 39.0% | 39.4% | Down 0.4 pts |
| Operating income | $16.3 million | $22.5 million | Down 27.4% |
| Operating margin | 4.6% | 6.6% | Down 2.0 pts |
| Net income attributable to La-Z-Boy | $11.7 million | $13.8 million | Down 15.6% |
| Diluted EPS | $0.24 | $0.28 | Down $0.04 |
| Effective tax rate | 35.6% | 35.7% | Broadly stable |
Net cash provided by operating activities was $19.5 million, compared with $35.8 million in the prior-year quarter. Investing activities used $29.1 million, including $15.9 million for payment related to the United Kingdom and Ireland wholesale business acquisition and $9.1 million of capital expenditures. Financing activities used $16.5 million, including $11.5 million for share repurchases and $5.3 million for dividends.
Cash, cash equivalents and restricted cash totaled $125.6 million at July 29, 2017, compared with $150.9 million at April 29, 2017. The company also held $33.4 million of investments intended to enhance returns on cash. Total debt was approximately $0.4 million, consisting of current and long-term debt. No borrowings were outstanding under the $150.0 million revolving credit facility; excess availability was $140.5 million.
Material Changes Versus the Prior Comparable Period
- Sales increased in all three operating segments, led by Retail sales growth of 15.5% and Upholstery sales growth of 2.6%.
- Upholstery operating income declined 23.6%, and its margin fell to 8.5% from 11.4%, primarily because of supply-chain inefficiencies associated with lower production volume and the absence of favorable legal settlements recorded in the prior-year quarter.
- Casegoods operating income increased 27.6%, with margin improving to 10.7% from 8.6% because of higher volume, product mix and better fixed-cost absorption.
- Retail sales benefited from acquired and newly opened stores, but comparable-store sales declined 1.1% because of lower traffic. Retail operating margin decreased to 1.6% from 2.3% as fixed costs were not leveraged against lower comparable-store sales.
- SG&A expense increased as a percentage of sales by 1.6 percentage points, reflecting the larger Retail mix, higher advertising spending and lower comparable-store sales.
- Other income was $1.7 million compared with $0.8 million of expense in the prior-year quarter, including a $2.2 million gain related to conversion of an available-for-sale convertible debt security into preferred shares of a private company.
- Weighted average diluted shares declined to 48.8 million from 49.6 million, reflecting share repurchases.
Guidance, Outlook, Commentary and Risks
Management expects fiscal 2018 capital expenditures of approximately $50 million to $55 million, including approximately $14 million for the new Innovation Center in Dayton, Tennessee. Construction and related upgrades are expected to continue into fiscal 2020. Management stated that liquidity is adequate to fund operations, growth plans, dividends and capital expenditures, and expects to remain opportunistic in repurchasing shares.
Strategic priorities include expanding the proprietary distribution network toward a target of 400 La-Z-Boy Furniture Galleries stores and 600 Comfort Studio locations, increasing company-owned retail locations, expanding digital and e-commerce channels, and improving product and supply-chain execution. The filing does not provide specific earnings or revenue guidance.
Key risks include consumer confidence and recessionary conditions, real estate and credit-market changes, commodity and freight costs, labor or supply disruptions, import duties and regulatory changes, currency fluctuations, product defects and warranty costs, litigation, information-technology or ERP implementation failures, store expansion and lease risks, e-commerce execution, and potential goodwill or intangible-asset impairments. The company reported no material changes to previously disclosed risk factors or contractual commitments.
The company is implementing an ERP system in its largest operating unit and expects to complete the sales-order-management component by the end of fiscal 2018. Management concluded that disclosure controls were effective, while noting that the implementation will require ongoing internal-control testing.
Important Facts for Investors to Verify
- Whether Upholstery production volume and supply-chain inefficiencies improve sufficiently to restore segment margins.
- Comparable-store sales trends, traffic and fixed-cost leverage in the Retail segment.
- Execution and total cost of the Innovation Center, manufacturing upgrades and ERP implementation.
- Cash conversion and operating cash flow after acquisition payments, capital expenditures, dividends and share repurchases.
- Progress toward the proprietary-store and Comfort Studio expansion targets and the economics of acquired stores.
- Potential effects of the fiscal 2019 revenue-recognition standard and fiscal 2020 operating-lease standard, whose impacts were still being assessed.
- The sustainability of the $2.2 million investment-related gain and the valuation of private-company investments and contingent consideration.