Business Context and Reporting Period
La-Z-Boy Incorporated filed this unaudited Form 10-Q for the first quarter of fiscal 2021, ended July 25, 2020, with comparative results for the quarter ended July 27, 2019. The company manufactures, distributes and retails upholstered and casegoods furniture through its Wholesale segment, 155 company-owned La-Z-Boy Furniture Galleries stores in its Retail segment, and Corporate & Other businesses including Joybird.
Results were materially affected by COVID-19-related temporary store and manufacturing closures, phased reopenings, supply-chain disruption and reduced product deliveries. Effective in the quarter, the company combined its former Upholstery and Casegoods segments into the Wholesale segment for reporting purposes.
Financial Results and Key Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Sales | $285.5 million | $413.6 million | Down 31.0% |
| Gross profit | $116.4 million | $167.7 million | Down 30.6% |
| Gross margin | 40.8% | 40.6% | Up 20 basis points |
| Operating income | $4.3 million | $23.4 million | Down 81.5% |
| Operating margin | 1.5% | 5.7% | Down 420 basis points |
| Net income attributable to La-Z-Boy | $4.8 million | $18.1 million | Down 73.4% |
| Diluted earnings per share | $0.10 | $0.38 | Down $0.28 |
| Net cash from operating activities | $106.3 million | $19.3 million | Up $87.0 million |
| Capital expenditures | $9.8 million | $12.3 million | Down $2.5 million |
Interest expense was $0.5 million and interest income was $0.5 million. Other income, net, was $1.5 million, compared with other expense of $0.8 million in the prior-year quarter, primarily reflecting investment and company-owned life insurance gains. The effective tax rate was 19.8%, compared with 22.0%; excluding discrete items, primarily stock-based compensation deductions, the current-quarter rate would have been 26.1%.
At July 25, 2020, cash and equivalents were $334.2 million and restricted cash was $2.5 million, for total cash, cash equivalents and restricted cash of $336.7 million. Investments totaled $37.9 million. Short-term borrowings were $50.0 million, down from $75.0 million at April 25, 2020, and total current liabilities were $424.5 million. The company reported $28.3 million of excess availability under its $150.0 million revolving credit facility and was not subject to the fixed-charge coverage ratio requirement at quarter-end.
Material Changes Versus the Prior Comparable Period
- Consolidated sales declined $128.2 million, primarily because COVID-19 closures and phased reopenings reduced production and deliveries.
- Wholesale sales declined 30.3% to $223.6 million; operating income declined 37.8% to $17.9 million, and operating margin decreased to 8.0% from 9.0%.
- Retail sales declined 36.3% to $91.1 million. Retail operating income shifted to a $6.6 million loss from $8.5 million of income, and operating margin fell to negative 7.3% from 5.9%.
- Reported delivered same-store sales declined 36.7%, while written same-store sales increased 11.1% as stores reopened and demand for home furnishings improved.
- Joybird sales declined 21.7%, but written sales increased 38.2%, supported by online traffic and demand while brick-and-mortar stores were closed.
- Operating margin contracted despite a 20-basis-point improvement in consolidated gross margin because fixed SG&A costs represented a larger percentage of substantially lower sales.
- Operating cash flow increased substantially, primarily due to a $61.1 million increase in customer deposits associated with higher written Retail and Joybird sales, as well as working-capital changes.
- The company paid down $25.0 million of revolving debt, made no share repurchases, and paid no shareholder dividend during the quarter. It paid $8.5 million to joint-venture minority partners.
Guidance, Outlook, Risks and Unusual Items
- Management stated that written-order trends were strong after reopening and that manufacturing was ramping to meet demand, but it did not provide consolidated earnings or revenue guidance.
- Fiscal 2021 capital expenditures are expected to be approximately $40 million to $45 million, subject to liquidity, economic conditions and consumer demand.
- The June 4, 2020 business realignment plan reduced the global workforce by approximately 10% and permanently closed the Newton, Mississippi upholstery facility. Production was shifted to Dayton, Tennessee; Neosho, Missouri; and Siloam Springs, Arkansas.
- The company recorded approximately $3.5 million of first-quarter realignment expenses, primarily severance and impairment related to the Newton facility.
- Most furloughed employees had returned and all manufacturing facilities and stores had reopened by quarter-end. Temporary salary reductions for most employees ended June 1, 2020; named executive officer reductions, the 401(k) match and board cash compensation were reinstated effective August 1, 2020.
- On August 18, 2020, after quarter-end, the board reinstated a quarterly dividend of $0.07 per share, or 50% of the prior regular dividend. The filing does not state that share repurchases had resumed.
- COVID-19 remains the principal uncertainty, including potential additional closures, changes in government restrictions, supply-chain disruption, consumer demand volatility, production capacity constraints and the timing of economic recovery.
- Customer deposits and deferred revenue increased to $101.8 million and $39.7 million, respectively, primarily because of higher written Retail and Joybird sales. These balances support liquidity but represent obligations to deliver products or services in the future.
Investor Verification Priorities
- Verify whether strong written orders converted into delivered sales and sustainable revenue growth after the reporting date.
- Monitor production recovery, delivery lead times, capacity utilization and the financial impact of the Newton facility closure.
- Assess whether customer deposits and deferred revenue remain elevated and whether they generate future delivery, refund or working-capital obligations.
- Reconcile cash generation with the substantial working-capital benefit from customer deposits and evaluate normalized operating cash flow.
- Track revolving-credit availability, covenant compliance and debt levels if sales or eligible receivables weaken.
- Evaluate the sustainability of the reinstated dividend and any future resumption of share repurchases.
- Review COVID-19 developments, impairment and restructuring charges, warranty costs, and potential additional workforce or facility actions.