La-Z-Boy Incorporated — Form 10-Q Summary
Business context and reporting period
This filing covers the first quarter of fiscal 2016, ended July 25, 2015, compared with the quarter ended July 26, 2014. La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories through its Upholstery, Casegoods and Retail segments. The company operated 111 company-owned La-Z-Boy Furniture Galleries stores within a broader network of 327 Galleries and 573 Comfort Studio locations.
Fiscal 2016 is a 53-week year, compared with 52 weeks in fiscal 2015. The interim financial statements are unaudited and are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Sales | $341.4 million | $327.0 million | 4.4% increase |
| Gross profit | $124.2 million | $111.5 million | 11.4% increase |
| Gross margin | 36.4% | 34.1% | 2.3 percentage-point increase |
| Operating income | $20.0 million | $16.5 million | 21.1% increase |
| Operating margin | 5.8% | 5.0% | 0.8 percentage-point increase |
| Income from continuing operations | $14.1 million | $10.5 million | 33.9% increase |
| Net income attributable to La-Z-Boy | $13.7 million | $13.1 million | 4.5% increase |
| Diluted earnings per share | $0.27 | $0.25 | Increase |
| Operating cash flow | $1.5 million | $(1.2) million | Improved |
The effective tax rate on continuing operations was 35.9%, compared with 35.3% in the prior-year quarter. The company declared dividends of $0.08 per share, compared with $0.06 previously.
- Segment performance: Upholstery sales increased 3.7% to $272.7 million, with operating income up 11.7% to $24.6 million and margin improving to 9.0%.
- Casegoods sales declined 19.1% to $23.4 million, but operating income increased 10.8% to $1.7 million and margin improved to 7.2% as the business transitioned to an all-import model.
- Retail sales increased 18.9% to $86.7 million, while operating income rose to $4.7 million from $0.3 million. Comparable-store sales for active stores open at least 12 months increased 7.2%.
Liquidity, balance sheet and capital allocation
- Cash and equivalents were $87.5 million at July 25, 2015, down from $98.3 million at April 25, 2015.
- The company held $37.0 million of investments intended to enhance returns on cash, compared with $45.5 million at fiscal year-end. Total investments were $51.1 million.
- Total debt was approximately $1.1 million, consisting of $0.4 million current debt and $0.7 million long-term debt.
- The revolving credit facility had no borrowings outstanding and $144.8 million of excess availability under the $150.0 million commitment. The fixed-charge coverage covenant was not applicable at quarter-end.
- Capital expenditures were $6.5 million, compared with $19.4 million in the prior-year quarter. Fiscal 2016 capital expenditures are expected to range from $30 million to $35 million.
- Financing activities used $12.8 million, including $9.2 million for share repurchases and $4.1 million for dividends.
- The company repurchased 342,000 shares under its board authorization during the quarter; 5.4 million shares remained available for repurchase at July 25, 2015.
- Inventory increased to $178.9 million from $156.8 million at April 25, 2015, primarily because of seasonal raw-material requirements.
Material changes versus the prior comparable period
- Sales growth was driven by higher Upholstery volume and favorable product mix, as well as Retail growth from comparable stores, new stores and acquired stores.
- Consolidated gross margin benefited from higher Upholstery volume, supply-chain efficiencies, the Retail segment mix, the Casegoods all-import model and a 0.5 percentage-point benefit from legal settlements.
- SG&A increased as a percentage of sales because of higher warranty expense, professional fees related to technology and e-commerce investments, incentive compensation, new headquarters costs and the higher SG&A profile of the Retail segment.
- Other income was $2.0 million versus $0.3 million of expense in the prior-year quarter, primarily due to foreign-currency gains and higher investment-sale gains.
- Prior-year results included $2.5 million of after-tax income from discontinued operations, including a $2.4 million after-tax benefit related to antidumping-duty distributions. No discontinued-operations income was recorded in Q1 FY2016.
- Corporate and Other operating loss increased by $3.2 million, reflecting higher headquarters depreciation, incentive compensation, professional fees and $0.8 million of start-up costs for a new Hong Kong global trading company.
- Restructuring expense was $0.2 million in Q1 FY2016, versus $0.4 million of restructuring income in the prior-year quarter. Approximately $0.5 million of restructuring liability remained at quarter-end.
Guidance, outlook, risks and unusual items
Management remained optimistic that its fiscal 2016 growth and profitability strategy would improve performance and market share. Key initiatives include expanding branded distribution, pursuing the 4-4-5 store-growth program toward 400 Galleries, investing in marketing and e-commerce, improving the Casegoods product line and leveraging the company-owned Retail platform. The filing does not provide specific revenue or earnings guidance.
The company completed ERP implementation at its fifth and largest La-Z-Boy manufacturing facility and expected to complete the sales-order-management component by the end of fiscal 2016. Management stated that disclosure controls were effective, while noting that ERP implementation will require continued internal-control testing.
- Important operating risks include consumer demand, recessionary conditions, real estate and credit markets, commodity and energy costs, import logistics, labor or distribution disruptions, foreign-exchange movements and regulatory changes.
- Additional risks include product defects and warranty claims, recalls, litigation, store expansion and lease terms, restructuring execution, goodwill or intangible-asset impairment, severe weather, supply availability and information-technology failures.
- The company had a $0.9 million net liability for uncertain tax positions and did not expect a significant change over the following 12 months.
- Warranty liability increased to $17.2 million from $15.3 million a year earlier; approximately 95% relates to the Upholstery segment.
- The new revenue-recognition standard was deferred to fiscal 2019; the company was assessing its potential impact.
Facts investors should verify
- Whether Retail comparable-store growth and new or acquired-store contributions continue through fiscal 2016.
- Whether the Casegoods all-import strategy and newer product collections improve sales while preserving the reported margin gains.
- How much of the gross-margin improvement is recurring versus attributable to the one-time legal-settlement benefit.
- Whether higher warranty costs, headquarters expenses, technology investments and incentive compensation pressure future operating margins.
- Progress and control implications of the ERP and sales-order-management implementation.
- Cash generation after seasonal inventory investments, planned $30 million to $35 million of capital expenditures, dividends and share repurchases.
- Exposure to consumer demand, imports, currency movements, logistics disruptions and product-liability or warranty claims.