La-Z-Boy Incorporated Fiscal 2018 Form 10-K Summary
Business context and reporting period
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories through wholesale channels, company-owned La-Z-Boy Furniture Galleries stores and e-commerce. Reportable segments are Upholstery, Casegoods and Retail. The filing covers the 52-week fiscal year ended April 28, 2018; fiscal 2017 also comprised 52 weeks, while fiscal 2016 comprised 53 weeks. The filing is an annual report rather than a fiscal 2017 fourth-quarter filing.
Key financial metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Sales | $1,583.9 million | $1,520.1 million | 4.2% |
| Gross profit | $622.7 million | $609.3 million | 2.2% |
| Gross margin | 39.3% | 40.1% | Down 0.8 percentage points |
| Operating income | $129.4 million | $133.3 million | Down 3.0% |
| Operating margin | 8.2% | 8.8% | Down 0.6 percentage points |
| Net income attributable to La-Z-Boy | $80.9 million | $85.9 million | Down 5.9% |
| Diluted EPS | $1.67 | $1.73 | Down 3.5% |
| Cash flow from operations | $115.8 million | $148.0 million | Down $32.2 million |
| Capital expenditures | $36.3 million | $20.3 million | Up $16.0 million |
Fourth-quarter fiscal 2018 sales were $420.0 million, operating income was $45.7 million, net income attributable to La-Z-Boy was $34.2 million and diluted EPS was $0.72. Fourth-quarter sales increased from $412.7 million in the prior-year quarter, while diluted EPS increased from $0.57.
Segment performance
- Upholstery: Sales increased 3.0% to $1,227.4 million, but operating income declined 12.5% to $130.3 million and operating margin fell to 10.6% from 12.5%. Sales benefited from the United Kingdom and Ireland acquisition, mix toward leather and powered products, and price increases, partly offset by a 2.5% unit-volume decline. Raw-material inflation and lower production-volume absorption pressured margins.
- Casegoods: Sales increased 11.1% to $111.4 million. Operating income increased 35.0% to $11.6 million and operating margin improved to 10.5% from 8.6%, driven by higher volume, expanded retailer floor space, improved product mix and lower SG&A as a percentage of sales.
- Retail: Sales increased 7.1% to $474.6 million and operating income increased 7.8% to $20.7 million. Operating margin improved slightly to 4.4% from 4.3%. Acquired and newly opened stores contributed growth, while comparable-store sales declined 1.0% because of lower traffic.
Liquidity, debt and cash flow
- Cash, cash equivalents and restricted cash were $136.9 million at year-end, compared with $150.9 million in the prior year. Investments totaled $59.4 million, including $34.4 million held to enhance returns on cash.
- The company had no borrowings under its $150.0 million revolving credit facility and had $148.1 million of excess availability. The facility maturity was extended to December 19, 2022.
- Total debt was only $0.4 million, consisting primarily of capital leases. Total equity was $625.2 million, and the current ratio was 2.9 to 1.
- Operating cash flow declined primarily because inventory increased $8.0 million in cash-flow terms, compared with a $12.5 million inventory reduction in fiscal 2017. Accounts payable provided $6.6 million of operating cash flow as vendor payment terms were standardized and extended.
- Financing uses included $56.7 million for repurchases of approximately 2.0 million shares and $22.0 million for dividends. The annual dividend declared per share increased to $0.46 from $0.42.
Material changes, outlook and unusual items
- Raw-material prices for steel, polyurethane foam and wood increased, reducing Upholstery margins. Management expects further increases in fiscal 2019, including transportation costs, and raised selling prices to offset them.
- The company recorded an additional $4.1 million charge in the third quarter for settlement of a civil dispute involving royalties on certain power units. The settlement required a $13.5 million payment and resolved past and future claims.
- The Tax Cuts and Jobs Act produced a net fiscal 2018 tax charge of approximately $5.5 million in the MD&A discussion, while the tax footnote describes a $10.2 million gross net charge before related effects. The company’s effective tax rate was 36.7%, compared with 33.5% in fiscal 2017; fiscal 2018 tax accounting remained provisional.
- Other unusual items included a $1.8 million insurance gain after a fire at the England subsidiary’s corporate office and a $2.2 million gain on conversion of an investment into preferred shares.
- Management expects fiscal 2019 capital expenditures of $55 million to $65 million, including a new corporate office, an England plant expansion, manufacturing upgrades and a distribution-center relocation. A new Innovation Center was expected to be completed in the first quarter of fiscal 2019.
- The company planned to open, relocate or remodel 20 to 25 La-Z-Boy Furniture Galleries stores in fiscal 2019 and expected to continue opportunistic share repurchases.
Principal risks and contingencies
- Consumer confidence, housing activity, employment, interest rates and discretionary spending materially affect demand.
- Dependence on concentrated suppliers creates exposure to raw-material prices, quality problems and supply interruptions. Approximately 50% of polyurethane foam was sourced from one supplier, while significant imported fabric and leather volumes came from a limited number of Chinese suppliers.
- Trade policy changes, tariffs, duties, transportation costs, currency movements, Brexit-related effects and international political or regulatory developments could affect costs and margins.
- Competition from online retailers and lower-overhead brick-and-mortar competitors may reduce store traffic, market share and operating margins.
- Risks include product liability, warranty claims, recalls, litigation, cybersecurity incidents, information-technology failures, store underperformance and potential goodwill or intangible-asset impairments.
- The company reported various legal and environmental matters but did not believe additional losses would be material. Product warranty liabilities totaled $21.2 million at year-end, and non-cancelable operating lease obligations totaled $360.4 million.
Important facts for investors to verify
- Whether fiscal 2019 price increases offset continuing steel, foam, wood and transportation inflation without adversely affecting demand.
- Comparable-store sales, traffic and profitability across the company-owned Retail network.
- Execution and returns from the planned $55 million to $65 million fiscal 2019 capital program and strategic e-commerce investments.
- Final effects of the Tax Cuts and Jobs Act and any revision to the provisional tax amounts.
- Cash allocation among dividends, share repurchases, acquisitions, pension contributions and capital expenditures.
- Potential impact of tariffs, supplier concentration, import disruptions and online competition on margins and product availability.