LZB

LA-Z-BOY INC - 10-K Summary (Fiscal Year Ended April 30, 2011)

Business Context and Reporting Period

LA-Z-BOY INC is a leading global producer of reclining chairs and manufacturer of upholstery and casegoods furniture. The company operates through three reportable segments: Upholstery Group, Casegoods Group, and Retail Group. The reporting period covers the fiscal year ended April 30, 2011, which consisted of 53 weeks (compared to 52 weeks in the prior year). The company reported net income attributable to La-Z-Boy Incorporated of $24.0 million.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Consolidated sales increased 0.7% to $1.187 billion, primarily driven by the additional week in the fiscal year. Excluding the extra week, sales levels were slightly lower due to weaker demand and a shift to more promotional products.
• Profitability: Operating income decreased 35.9% to $25.9 million. The operating margin declined from 3.4% to 2.2%. Gross margin decreased by 1.8 percentage points, largely due to a 1.6 percentage point impact from increased raw material costs (steel, leather, foam) and product mix changes.
• Segment Performance:
  • Upholstery Group: Sales up 1.3%; Operating income down 24.0% due to raw material costs and increased warehousing/advertising expenses.
  • Casegoods Group: Sales up 4.0%; Turned a loss of $0.2 million into an operating profit of $6.7 million due to warehouse consolidation efficiencies and reduced employee expenses.
  • Retail Group: Sales up 15.2%; Operating loss improved by 23.9% (from $19.8M to $15.1M) due to effective promotions and the acquisition of 15 stores from a Variable Interest Entity (VIE).
• Balance Sheet: Total debt decreased by $12.9 million. Inventory levels increased by $10.5 million as the company focused on improving service positions for customers.

Guidance, Outlook, and Risks

• Outlook: Management expects raw material costs to rise in fiscal 2012 due to global demand for steel, leather, and wood, as well as increased transportation costs. Capital expenditures are expected to range between $15.0 million and $20.0 million for fiscal 2012.
• Seasonality: The company anticipates weaker demand in the summer period (first fiscal quarter) and plans a one-week plant shutdown for maintenance.
• Risks: Key risks include the prolonged economic downturn affecting consumer confidence and housing markets, volatility in raw material prices, and reliance on foreign sourcing (particularly for casegoods and cut-and-sewn leather sets). The company noted that a natural disaster in Japan was not expected to significantly impact operations.
• Unusual Items: The company recorded a $4.5 million write-down of long-lived assets related to impaired leasehold improvements at certain retail locations. Additionally, the company received $1.1 million from the Continued Dumping and Subsidy Offset Act (CDSOA), a decrease from $4.4 million in the prior year.

Investor Verification Checklist

• Raw Material Exposure: Verify the extent of price increases for steel, leather, and polyurethane foam and the company's ability to pass these costs to consumers.
• Retail Segment Turnaround: Monitor the Retail Group's path to profitability, as it continues to generate an operating loss despite sales growth.
• Inventory Levels: Assess the $10.5 million increase in inventory to ensure it aligns with sales velocity and does not lead to future write-downs.
• Deconsolidation Impact: Review the financial impact of deconsolidating the Toronto VIE and the acquisition of the California VIE stores on future comparability.
• Valuation Allowance: Note the $65.7 million valuation allowance on deferred tax assets; verify future taxable income projections required to realize these assets.