Business Context and Reporting Period
La-Z-Boy Incorporated manufactures, imports, distributes and retails upholstered furniture, casegoods and related accessories through its Upholstery, Casegoods and Retail segments. The company operates primarily in the United States and Canada through independent retailers, 309 La-Z-Boy Furniture Galleries stores, 549 Comfort Studios and 84 company-owned Galleries stores.
This unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2012, ended January 28, 2012. Comparative periods ended January 22, 2011. Fiscal 2012 has 52 weeks versus 53 weeks in fiscal 2011.
Financial Performance and Position
| Metric | Q3 FY2012 | Q3 FY2011 | 9M FY2012 | 9M FY2011 |
|---|---|---|---|---|
| Sales | $316.5 million | $291.9 million | $904.3 million | $848.2 million |
| Operating income | $17.0 million | $10.0 million | $32.7 million | $13.7 million |
| Operating margin | 5.4% | 3.4% | 3.6% | 1.6% |
| Net income attributable to La-Z-Boy | $15.0 million | $10.0 million | $68.4 million | $13.7 million |
| Diluted EPS | $0.28 | $0.19 | $1.28 | $0.26 |
| Cash flow from operations | Not separately provided | Not separately provided | $55.9 million | $10.7 million |
- Third-quarter sales increased 8.4%; operating income increased 70.3%. Nine-month sales increased 6.6%; operating income increased 139.3%.
- Third-quarter gross profit was $99.8 million, or approximately 31.5% of sales, versus $88.3 million, or approximately 30.3%, in the prior-year quarter.
- Net income for the nine months included a $46.2 million reduction in deferred-tax valuation allowances. The resulting nine-month effective tax rate was negative 102.2%; excluding discrete tax adjustments, management reported an effective rate of approximately 35.5%.
- Cash and equivalents were $148.1 million at January 28, 2012, compared with $115.3 million at April 30, 2011. Total debt was approximately $29.8 million, consisting of $1.8 million current debt and $28.0 million long-term debt.
- Net cash used in investing activities was $13.0 million, including $11.5 million of capital expenditures. Net cash used in financing activities was $10.1 million, including $5.7 million of debt repayments and $4.5 million of share repurchases.
- Debt-to-capitalization was 6.4% at January 28, 2012, compared with 8.8% at April 30, 2011.
Material Changes Versus the Prior Comparable Period
- Upholstery: Third-quarter sales rose 10.7% to $249.3 million and operating income rose 22.4% to $22.6 million. Volume, promotional activity, cost reductions and Mexican operating efficiencies improved results, partly offset by higher raw-material and warranty costs.
- Casegoods: Third-quarter sales declined 3.4% to $34.2 million, reflecting lower order levels and consumer postponement of higher-ticket purchases. Operating income increased 11.7% to $1.8 million due primarily to lower selling, general and administrative costs.
- Retail: Third-quarter sales increased 32.3% to $58.4 million, while the operating loss narrowed to $0.6 million from $2.8 million. The improvement reflected higher average tickets, increased volume and the prior acquisition of the Southern California market, although the segment remained unprofitable because of lease costs.
- Consolidated operating margin improved by 2.0 percentage points in both the quarter and nine-month period, supported by volume, gross-margin improvements and selling, general and administrative leverage.
- Interest expense declined as average debt decreased and the company’s interest-rate swap expired in May 2011.
- During the third quarter, the company deconsolidated its last variable interest entity after expiration of the operating agreement. This reduced consolidated net liabilities by $2.7 million and generated a $1.1 million non-cash operating gain.
Guidance, Outlook, Risks and Unusual Items
- Management stated that macroeconomic headwinds remain but expressed confidence in continued sales-volume growth, same-store sales momentum and improving retail performance. Management expects to continue investing in growth, retail profitability and strategic initiatives.
- Fiscal 2012 capital expenditures are expected to be approximately $15.0 million to $18.0 million; $11.5 million had been incurred through nine months.
- The amended revolving credit facility has $150 million of capacity, matures October 19, 2016, and had $20 million borrowed and $111.6 million of excess availability at January 28, 2012. The facility is secured primarily by receivables, inventory and cash and securities accounts.
- The company received $1.7 million of Continued Dumping and Subsidy Offset Act payments in the first nine months. Future amounts are uncertain and depend on litigation, administrative reviews and allocation percentages.
- Key risks include consumer demand and confidence, real-estate and credit conditions, raw-material and energy costs, import logistics, labor or supply disruptions, currency and interest-rate changes, product defects and warranty claims, technology failures, regulatory developments and the ability to develop profitable retail locations.
- Product warranty liabilities were $13.7 million at January 28, 2012. The company also had $56.8 million of open purchase orders with foreign suppliers, although unstarted orders were cancelable.
- The company had $2.2 million of liabilities for uncertain tax positions, with approximately $0.4 million reasonably possible to settle within 12 months.
Investor Verification Points
- Separate recurring operating performance from the $46.2 million deferred-tax valuation allowance reversal and its approximately $0.88 diluted-EPS benefit for the nine-month period.
- Assess whether Retail can achieve profitability after the operating loss improved to $0.6 million in the third quarter but remained negative.
- Verify the sustainability of Upholstery margin gains given raw-material inflation, warranty costs and compensation expenses.
- Review the effect of the VIE deconsolidation and Southern California acquisition on segment comparability and reported sales.
- Confirm credit-facility availability, covenant compliance and the impact of secured borrowing terms on future share repurchases or dividends.
- Monitor the uncertain and non-recurring nature of CDSOA payments and the remaining deferred-tax valuation allowance of $11.4 million.