La-Z-Boy Incorporated: Fiscal 2020 Form 10-K Summary
Reporting period: The provided filing is the Form 10-K for the 52-week fiscal year ended April 25, 2020, with quarterly information for the fourth quarter ended April 25, 2020. It does not represent 2019 Q4; the comparable prior-year quarter ended April 27, 2019.
Business context
La-Z-Boy manufactures, imports, distributes and retails upholstered and casegoods furniture under the La-Z-Boy, England, Kincaid, American Drew, Hammary and Joybird brands. Reportable segments are Upholstery, Casegoods and Retail; Joybird and corporate activities are included in Corporate & Other. The company operated 154 company-owned La-Z-Boy Furniture Galleries stores, within a broader network of 354 Galleries stores and 555 Comfort Studio locations.
Financial performance and liquidity
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Sales | $1,704.0 million | $1,745.4 million | Down 2.4% |
| Gross profit | $721.4 million | $702.6 million | Up 2.7% |
| Gross margin | 42.3% | 40.3% | Up 200 basis points |
| Operating income | $118.8 million | $129.7 million | Down 8.4% |
| Operating margin | 7.0% | 7.4% | Down 40 basis points |
| Net income attributable to La-Z-Boy | $77.5 million | $68.6 million | Up 13.0% |
| Diluted EPS | $1.66 | $1.44 | Up 15.3% |
| Cash provided by operating activities | $164.2 million | $150.7 million | Up $13.5 million |
Fiscal 2020 ended with cash, cash equivalents and restricted cash of $263.5 million, investments of $48.0 million, and working capital of $276.2 million. The company drew $75.0 million on its $150.0 million revolving credit facility during the fourth quarter; reported excess availability was $55.5 million at year end. Total debt was $75.0 million, compared with $0.2 million at the prior year end, while total equity was $716.3 million.
Capital expenditures were $46.0 million, compared with $48.4 million in fiscal 2019. The company paid $25.1 million in dividends and spent $43.4 million repurchasing 1.4 million shares before suspending repurchases in March 2020. The June 2020 quarterly dividend was eliminated to preserve liquidity.
Fourth-quarter results and material changes
| Metric | Q4 FY2020 | Q4 FY2019 | Change |
|---|---|---|---|
| Sales | $367.3 million | $453.8 million | Down 19.1% |
| Operating income | $13.4 million | $37.2 million | Down $23.7 million |
| Operating margin | 3.7% | 8.2% | Down 450 basis points |
| Net income attributable to La-Z-Boy | $2.3 million | $1.5 million | Up $0.8 million |
| Diluted EPS | $0.05 | $0.03 | Up $0.02 |
- COVID-19 caused temporary manufacturing, distribution and company-owned retail-store closures, delivery restrictions and supply-chain disruption. First-three-quarter consolidated sales increased 3.5%, but fourth-quarter sales declined $86.5 million year over year.
- Upholstery sales declined 5.0% for the year, but operating income rose 5.3% to $134.7 million and margin improved to 11.2%. A $16.3 million tariff rebate and lower commodity costs were significant benefits.
- Casegoods sales declined 7.4% and operating income declined 38.4% to $7.7 million, reflecting tariffs, freight costs, lower volume and COVID-19 disruption.
- Retail sales increased 5.0% to $598.6 million and operating income increased 27.3% to $48.3 million, benefiting from acquired stores and stronger performance during the first three quarters. Fourth-quarter same-store sales declined 10.0%.
- Joybird generated $75.3 million of fiscal 2020 sales, but its goodwill was impaired by $26.9 million in the fourth quarter. The company also reversed a $7.9 million Joybird contingent consideration liability because additional earn-out payments were no longer expected.
- Accounts receivable declined $43.9 million, including a $7.9 million write-off primarily related to the bankruptcy of Art Van Furniture Group. The allowance for doubtful accounts increased to $7.5 million from $2.2 million.
- Fiscal 2020 benefited from a $1.9 million pension termination refund, whereas fiscal 2019 included a $32.7 million pension termination charge. Fiscal 2020 also included a $6.0 million impairment of an investment in a privately held start-up company.
Guidance, outlook and risks
- Management stated that it could not predict the duration or full financial impact of COVID-19, the pace of recovery, consumer demand or the timing of a return to normal operations.
- Fiscal 2021 capital expenditures were expected to range from $25 million to $40 million, subject to liquidity, economic conditions and demand.
- The company expected most furloughed employees to return by July 1, 2020, subject to government restrictions, economic conditions and demand. Executive salary reductions remained in effect as of the filing date.
- On June 4, 2020, the company announced a workforce reduction of approximately 850 employees, or about 10% of its global workforce, and closure of its Newton, Mississippi upholstery plant. It expected approximately $5 million to $7 million of one-time pretax fiscal 2021 charges.
- Key risks include prolonged pandemic-related closures, reduced consumer discretionary spending, accelerated migration to online furniture purchases, customer credit losses, supplier concentration, tariffs and freight costs, foreign sourcing, cybersecurity, impairment of goodwill or long-lived assets, and limited borrowing-base availability.
- Management represented that available cash, investments, operating cash flow and current credit availability were sufficient for expected requirements for at least the next 12 months, but noted that sustained revenue deterioration could require additional external funding.
Important facts for investors to verify
- Confirm that the applicable period is fiscal 2020, not 2019 Q4, and distinguish audited annual results from unaudited quarterly data.
- Assess the sustainability of earnings excluding the $16.3 million tariff rebate, the $9.7 million gain on the Redlands facility sale, the $7.9 million Joybird liability reversal and other unusual items.
- Evaluate Joybird’s post-impairment sales, profitability, integration progress and potential for further goodwill impairment.
- Monitor liquidity after the $75.0 million revolver draw, including borrowing-base availability, covenant compliance and lease obligations.
- Track the effects of COVID-19 on store traffic, written and delivered sales, production capacity, backlog, customer collections and supply-chain costs.
- Verify the reinstatement and sustainability of dividends and share repurchases, which were suspended or reduced to preserve liquidity.