La-Z-Boy Incorporated — Form 10-Q Summary
Business Context and Reporting Period
This unaudited Form 10-Q covers the first quarter of fiscal 2024, ended July 29, 2023, compared with the quarter ended July 30, 2022. La-Z-Boy manufactures, distributes and retails upholstered and casegoods furniture through its Wholesale, Retail, Joybird and other operations. The company operated 175 company-owned La-Z-Boy Furniture Galleries stores and reported approximately 351 Galleries stores and 521 Comfort Studio locations worldwide.
The company stated that the prior-year quarter benefited from delivery of a significant backlog generated by unusually strong demand. Fiscal 2024 results reflect lower delivered volume and a return toward typical industry seasonality.
Financial Performance and Key Metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Sales | $481.7 million | $604.1 million | Down 20.3% |
| Gross profit | $205.7 million | $231.0 million | Down 11.0% |
| Gross margin | 42.7% | 38.2% | Up 450 basis points |
| Operating income | $34.5 million | $52.6 million | Down 34.4% |
| Operating margin | 7.2% | 8.7% | Down 150 basis points |
| Net income attributable to La-Z-Boy | $27.5 million | $38.5 million | Down 28.6% |
| Diluted EPS | $0.63 | $0.89 | Down $0.26 |
| Net cash from operating activities | $25.9 million | $33.1 million | Down $7.2 million |
Interest income increased to $3.1 million from $0.5 million, primarily because of higher interest rates. The effective tax rate was 26.5% in both periods.
At July 29, 2023, cash and equivalents were $336.4 million, restricted cash was $3.8 million, and total cash, cash equivalents and restricted cash were $340.3 million. Investments totaled $23.9 million, including $10.6 million designated to enhance cash returns. The company had no borrowings outstanding under its $200 million unsecured revolving credit facility and stated that it was in compliance with its covenants. Lease liabilities totaled $452.7 million, including $77.8 million current and $375.0 million long-term.
Capital expenditures were $13.5 million, acquisitions used $4.3 million, share repurchases totaled $10.0 million, and dividends paid totaled $7.9 million. Cash, cash equivalents and restricted cash declined by $6.4 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Consolidated sales declined primarily because of lower unit volume as the prior-year backlog was delivered and demand normalized. Favorable product mix partly offset the volume decline.
- Gross margin improved 450 basis points due to favorable segment mix, lower raw-material costs and product mix. However, operating margin fell because SG&A expenses represented a higher percentage of sales, principally due to reduced leverage on selling and occupancy costs.
- Wholesale sales decreased 24.5% to $333.5 million, while operating income declined 10.1% to $23.5 million. Wholesale operating margin improved to 7.0% from 5.9%.
- Retail sales declined 11.8% to $208.2 million and operating income declined 23.3% to $29.3 million. Delivered same-store sales fell 16%, partly offset by $9.1 million of sales from recent store acquisitions. Written same-store sales increased 2%.
- Corporate and Other operating loss increased to $18.2 million from $11.7 million, driven by higher intercompany inventory profit eliminations, lower Hong Kong trading-company profit and increased Joybird losses.
- Joybird sales declined $7.1 million to $35.6 million, and written sales decreased 17%, reflecting continuing demand challenges in the e-commerce home-furnishings market.
- The company retrospectively reclassified U.S. distribution-center costs from SG&A to cost of sales. The change affected presentation but had no impact on sales, operating income, net income, EPS, equity or net assets.
- The company completed the acquisition of two La-Z-Boy Furniture Galleries stores and one distribution center in Colorado Springs for $6.0 million, including $4.3 million of cash paid during the quarter.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2024 capital expenditures of approximately $50 million to $60 million, primarily for new and remodeled Galleries stores and manufacturing and distribution upgrades.
- Management believes cash, investments, operating cash flow and the available credit facility are adequate for near-term operations, growth plans and contractual obligations.
- The company expects to continue share repurchases using anticipated operating cash flow. Approximately 6.9 million shares remained available under the repurchase authorization at July 29, 2023.
- The board is expected to continue regular quarterly dividends for the foreseeable future, although future dividends remain at the board’s discretion.
- The company recognized a $1.2 million gain in Wholesale SG&A from terminating the lease on the previously closed Torreón, Mexico facility. Earlier closure-related charges totaled $10.8 million in fiscal 2023.
- Key operating risks include weaker consumer demand, lower order and delivered volumes, fixed-cost deleverage, e-commerce weakness affecting Joybird, raw-material and foreign-exchange volatility, supply-chain execution, impairment risk for goodwill and indefinite-lived assets, and warranty obligations. Management reported no material changes to previously disclosed risk factors or market-risk disclosures.
- The company stated that interim results are not necessarily indicative of full-year fiscal 2024 results. No material changes to contractual obligations or critical accounting policies were reported.
Investor Verification Points
- Verify whether written orders and same-store sales translate into delivered sales as backlog and seasonal patterns normalize.
- Monitor whether improved gross margin can offset SG&A deleverage and restore operating margin.
- Assess Joybird’s path to profitability and the effect of continued e-commerce demand weakness.
- Track cash generation against planned $50 million–$60 million capital expenditures, acquisitions, dividends and share repurchases.
- Review lease-adjusted leverage and fixed-charge coverage under the credit facility despite having no revolver borrowings.
- Evaluate exposure to foreign exchange, particularly the Mexican peso, and to raw-material and occupancy costs.
- Confirm the effect of the distribution-center cost reclassification when comparing reported margins with prior filings.