La-Z-Boy Incorporated Fiscal 2016 Form 10-K Summary
Business context and reporting period
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories through its Upholstery, Casegoods and Retail segments. The filing covers the fiscal year ended April 30, 2016, which included 53 weeks; the comparable fiscal 2015 period included 52 weeks. The supplied metadata refers to 2015 Q4, but the filing is an annual fiscal 2016 report and includes the quarter ended April 30, 2016.
The company operated 338 La-Z-Boy Furniture Galleries stores, including 124 company-owned stores, and 559 Comfort Studio locations. Fiscal 2016 included the acquisition of 11 stores from four independent operators.
Financial performance and key metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Sales | $1,525.4 million | $1,425.4 million | 7.0% |
| Gross profit | $582.0 million | $504.5 million | 15.4% |
| Gross margin | 38.2% | 35.4% | +2.8 points |
| Operating income | $122.4 million | $103.2 million | 18.6% |
| Operating margin | 8.0% | 7.2% | +0.8 points |
| Net income attributable to La-Z-Boy | $79.3 million | $70.8 million | 11.9% |
| Diluted EPS | $1.55 | $1.34 | 15.7% |
| Effective tax rate | 35.3% | 35.0% | +0.3 points |
- Segment results: Upholstery sales rose 5.6% to $1,215.8 million and operating income rose 10.5% to $134.2 million. Casegoods sales declined 6.5% to $102.5 million, while operating income increased 20.7% to $7.7 million. Retail sales increased 20.5% to $402.5 million and operating income increased 123.0% to $25.6 million.
- Cash flow: Operating cash flow was $112.4 million, compared with $86.8 million in fiscal 2015. Investing cash outflow was $36.6 million and financing cash outflow was $61.0 million.
- Liquidity: Cash and equivalents were $112.4 million; investments totaled $47.0 million, including $33.6 million held to enhance cash returns. The company had $146.9 million of excess availability under its $150.0 million revolving facility and no revolver borrowings.
- Debt and capital structure: Total debt was only $0.8 million, consisting primarily of capital leases. Total equity was $557.2 million.
- Working capital: Inventory increased $18.8 million to $175.6 million, primarily to improve upholstery in-stock levels. Accounts receivable declined $12.0 million to $146.5 million.
- Capital allocation: The company repurchased 1.7 million shares for $44.1 million and paid $18.1 million of dividends. Dividends declared increased to $0.36 per share from $0.28.
Material changes versus the prior comparable period
- Sales growth benefited from higher Upholstery and Retail volume, store acquisitions and the additional fiscal week, which contributed approximately 2% of fiscal 2016 sales.
- Gross margin improved primarily from Upholstery supply-chain efficiencies, improved procurement and product flow, favorable product mix, stronger Retail custom and In-Home Design orders, and the all-import Casegoods model.
- Retail operating performance strengthened materially as same-store sales increased 7.5%, average ticket values improved and acquired stores contributed $22.4 million of sales.
- Casegoods sales declined because the company eliminated its hospitality product line and reduced promotional activity while transitioning fully to imported wood furniture. The restructuring improved the segment’s operating margin to 7.5% from 5.8%.
- Corporate operating loss increased by $8.0 million, primarily because of higher incentive compensation, costs associated with the Hong Kong global trading company and depreciation for the new headquarters.
- Capital expenditures fell to $24.7 million from $70.3 million because fiscal 2015 included substantial new headquarters construction.
- Goodwill increased to $37.2 million from $15.2 million, primarily from the fiscal 2016 retail acquisitions; no goodwill impairment was recorded.
Guidance, outlook, risks and unusual items
- Outlook: Management remained optimistic and expected growth initiatives to drive continued increases in sales and earnings. The 4-4-5 strategy targets 400 Furniture Galleries stores, although the store buildout is now expected to extend beyond five years. Management planned to open, relocate or remodel 25 to 30 stores in fiscal 2017.
- Fiscal 2017 investment: Expected capital expenditures were $35 million to $40 million. Management also expected supply-chain initiatives to offset anticipated material-cost increases and keep raw-material costs flat as a percentage of sales.
- ERP and technology: The company expected to complete the final ERP implementation in its largest operating unit by the end of fiscal 2017. Delays, cost overruns, system failures or control deficiencies could disrupt operations and reporting.
- Litigation: The company recorded a $5.5 million accrual for a civil contract-dispute lawsuit. The verdict had not been affirmed, and a reversal could result in the accrual being released; an appeal could create additional expense.
- Restructuring: Fiscal 2016 continuing-operations restructuring expense was $0.6 million. Remaining restructuring costs were expected to be completed by the end of fiscal 2017.
- Supply-chain concentration: Approximately 55% of polyurethane foam was purchased from one supplier. Two Chinese suppliers produced almost 90% of imported cut-and-sewn leather sets and two other Chinese suppliers produced more than 95% of fabric products.
- Market exposure: Demand is sensitive to consumer confidence, housing starts, employment, credit conditions and broader economic cycles. The company also faces competition from traditional furniture retailers, mass merchants and online sellers.
- Other contingencies: The company reported ordinary-course legal and environmental matters, product-liability exposure and warranty obligations of $20.5 million at year-end. Management did not believe additional losses from legal or environmental matters were probable and material.
- Pension: The defined-benefit pension plan was underfunded by $3.9 million at year-end. Management expected a discretionary contribution of approximately $2 million in fiscal 2017.
Most important facts for an investor to verify
- Whether sales and earnings growth can continue after adjusting for the 53rd week and the benefit of acquired Retail stores.
- Whether Upholstery supply-chain efficiencies and Retail mix improvements are sustainable after the favorable fiscal 2016 margin expansion.
- The ultimate outcome of the $5.5 million contract-dispute accrual, including any reversal or appeal-related costs.
- Progress, cost and internal-control effects from completing the ERP implementation.
- Execution of the 25-to-30-store fiscal 2017 expansion and the profitability of acquired and remodeled stores.
- Exposure to concentrated suppliers, imported goods, freight costs, currency movements and potential material-price inflation.
- Cash deployment priorities, including share repurchases, dividends, acquisitions and planned fiscal 2017 capital expenditures.