La-Z-Boy Incorporated: Fiscal 2015 Second-Quarter 10-Q 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 quarter and six months ended October 25, 2014, compared with October 26, 2013. Results are unaudited and exclude Bauhaus and Lea Industries from continuing operations as discontinued operations.
Key financial metrics
| Metric | Quarter ended October 25, 2014 | Prior year quarter | Six months ended October 25, 2014 | Prior year six months |
|---|---|---|---|---|
| Sales | $365.6 million | $352.3 million | $692.6 million | $657.8 million |
| Operating income | $30.2 million | $26.1 million | $46.7 million | $40.9 million |
| Operating margin | 8.3% | 7.4% | 6.7% | 6.2% |
| Net income attributable to La-Z-Boy | $19.5 million | $16.7 million | $32.6 million | $26.3 million |
| Diluted EPS | $0.37 | $0.31 | $0.62 | $0.49 |
| Operating cash flow | Not separately provided | Not separately provided | $31.8 million | $32.4 million |
Quarterly sales increased 3.8%, operating income increased 15.6%, and diluted EPS increased $0.06. For the first six months, sales increased 5.3%, operating income increased 14.2%, and diluted EPS increased $0.13. Gross margin improved approximately 0.7 percentage point in the quarter and 0.8 percentage point year to date.
At October 25, 2014, cash and equivalents were $115.3 million, restricted cash was $5.3 million, and investments intended to enhance cash returns were $45.2 million. Total debt was approximately $0.4 million, consisting of $0.35 million current debt and $0.09 million long-term debt. The company had no borrowings under its $150 million revolving credit facility and reported $140.4 million of excess availability.
Six-month investing cash outflows were $33.2 million, including $40.6 million of capital expenditures. Financing cash outflows were $32.9 million, including $19.7 million for share repurchases, $6.3 million of dividends and $7.4 million of debt repayments. Cash declined $34.3 million during the six months to $115.3 million.
Material changes versus the prior comparable period
- Upholstery sales increased 3.6% in the quarter and 5.1% year to date, driven primarily by higher volume. Segment operating margin declined to 11.0% from 11.4% in the quarter and to 9.8% from 10.3% year to date because of product-mix changes, manufacturing and ERP implementation disruptions, and higher raw-material costs.
- Casegoods sales were approximately flat in the quarter but increased 7.5% year to date. Operating margin rose to 10.4% from 4.0% in the quarter and to 7.8% from 3.0% year to date, aided by the transition to an all-import model and a $2.0 million reduction in the LIFO reserve.
- Retail sales increased 15.3% in the quarter and 12.8% year to date, supported by new and acquired stores and improved ticket counts and units per ticket. Year-to-date operating margin declined to 2.5% from 3.7% because of higher promotional activity and approximately $1.5 million of investments in new stores and related infrastructure.
- SG&A benefited from lower incentive compensation, but the company increased spending on technology, its ERP system, e-commerce platform, distribution centers, advertising and store expansion.
- The company ceased domestic casegoods manufacturing at its Hudson, North Carolina facility, transitioned remaining bedroom products to imports, exited the hospitality business and sold one North Wilkesboro facility. A second facility was being marketed for sale.
Outlook, commentary, risks and unusual items
Management stated that it was well positioned to pursue growth in the second half of fiscal 2015 through product and distribution expansion, manufacturing efficiencies, the integrated retail model and the “Live Life Comfortably” marketing campaign. The company continued its “4-4-5” initiative, targeting 400 La-Z-Boy Furniture Galleries stores averaging $4 million in sales per store over five years from fiscal 2014.
Fiscal 2015 capital expenditures were expected to range from $70 million to $75 million, including approximately $44 million for the new world headquarters. The headquarters project was expected to continue through the third quarter of fiscal 2015.
Discontinued operations generated $0.3 million after-tax income in the quarter and $2.8 million for the first six months, compared with losses in the prior-year periods. The year-to-date result included $3.8 million of pre-tax income related to duties received under the Continued Dumping and Subsidy Offset Act from a previously sold subsidiary; this was an unusual, non-operating item.
The restructuring plan had incurred $7.7 million of cumulative pre-tax charges since inception and had a remaining liability of $0.4 million expected to be settled by the end of fiscal 2015. Key risks include consumer demand and economic conditions, import and logistics disruptions, commodity and labor costs, ERP and information-technology execution, product defects and warranty costs, currency and interest-rate changes, store expansion, restructuring execution and regulatory or accounting changes.
The company was implementing an ERP system in its largest operating unit, with phased implementation expected through fiscal 2016. Management concluded that disclosure controls were effective and reported no material change in internal controls during the quarter.
Most important facts for investors to verify
- Whether sales growth and improved consolidated margins persist after the $2.0 million LIFO-reserve benefit and other restructuring-related effects.
- Whether Upholstery manufacturing and ERP disruptions are resolved without further margin pressure.
- Whether Retail store expansion can produce targeted returns despite promotional activity and pre-opening costs.
- Whether the $70 million to $75 million fiscal 2015 capital-spending plan, including the headquarters project, remains on schedule and within budget.
- Whether cash generation remains sufficient to fund capital expenditures, dividends and share repurchases without increasing borrowings.
- The sustainability of earnings excluding the $3.8 million unusual discontinued-operations benefit and other nonrecurring items.
- Progress in completing the casegoods restructuring, selling the remaining North Wilkesboro facility and resolving the remaining restructuring liability.