La-Z-Boy Incorporated: Fiscal 2014 Third-Quarter 10-Q Summary
Business Context and Reporting Period
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and related accessories through its Upholstery, Casegoods and Retail segments. The filing covers the third quarter and first nine months of fiscal 2014, ended January 25, 2014, compared with January 26, 2013. The company operated 100 company-owned La-Z-Boy Furniture Galleries stores within a broader network of 312 La-Z-Boy Furniture Galleries stores and 564 Comfort Studios locations.
Financial Performance and Position
| Metric | Q3 FY2014 | Q3 FY2013 | 9M FY2014 | 9M FY2013 |
|---|---|---|---|---|
| Sales | $350.4 million | $340.2 million | $1,017.7 million | $945.8 million |
| Operating income | $25.4 million | $22.8 million | $65.9 million | $40.7 million |
| Operating margin | 7.3% | 6.7% | 6.5% | 4.3% |
| Income from continuing operations | $17.6 million | $16.9 million | $44.7 million | $28.2 million |
| Net income attributable to La-Z-Boy | $16.5 million | $17.1 million | $42.8 million | $28.1 million |
| Diluted EPS | $0.31 | $0.32 | $0.80 | $0.52 |
| Dividends declared per share | $0.06 | $0.04 | $0.14 | $0.04 |
Gross margin increased 1.9 percentage points in the quarter and 2.5 percentage points for the nine-month period. SG&A as a percentage of sales increased 1.3 percentage points in the quarter and 0.3 percentage points for the nine months, primarily due to higher incentive compensation and advertising expenses. Nine-month stock-based compensation expense increased to $13.4 million from $9.4 million.
Cash provided by operating activities was $62.8 million for the first nine months, compared with $33.5 million in the prior-year period. Capital expenditures were $23.1 million, including spending on the new world headquarters, versus $21.8 million in the prior year. Net cash used in investing activities was $34.3 million, while net cash used in financing activities was $18.8 million, including $20.3 million of share repurchases and $7.4 million of dividends paid.
Cash and equivalents were $140.1 million at January 25, 2014, compared with $131.1 million at April 27, 2013. The company had no borrowings under its $150 million revolving credit facility and excess availability of $139.5 million. Total debt was approximately $7.9 million, and the debt-to-capitalization ratio was 1.5%.
Material Changes Versus the Prior Comparable Period
- Upholstery: Third-quarter sales increased 3.4% to $280.3 million and operating income increased 13.1% to $31.6 million. The nine-month sales increase was 8.4%, while operating income increased 33.4%. Volume, pricing, product mix, operational efficiencies and higher sales of motion and power furniture supported results.
- Retail: Third-quarter sales increased 10.2% to $80.2 million and operating income increased 15.7% to $3.1 million. Nine-month sales increased 15.0% to $219.8 million, and operating income increased to $8.3 million from $0.1 million. Acquired stores, improved merchandise mix and higher average tickets contributed to growth.
- Casegoods: Third-quarter sales declined 9.1% to $29.6 million, producing a $0.04 million operating loss. Nine-month sales declined 8.6% to $93.0 million, and operating income fell 51.2% to $1.2 million. Management cited a longer replacement cycle, changing consumer preferences and an insufficiently rapid shift toward casual, transitional and contemporary styles.
- Profitability: Consolidated nine-month operating income increased 62.0%, despite higher incentive compensation and advertising costs. Third-quarter net income attributable to La-Z-Boy declined modestly because the prior-year period included higher other income and the current period included a loss from discontinued operations.
- Shareholder returns: The company repurchased 0.9 million shares for $20.3 million during the first nine months. A Rule 10b5-1 repurchase plan became effective January 2, 2014, and 3.3 million shares remained authorized for repurchase at quarter-end.
Outlook, Unusual Items and Risks
Management remained optimistic about continued profitable growth, stating that business momentum was strong heading into the fourth quarter, historically the company’s largest volume period. The company plans continued investment in store expansion and enterprise growth. Fourth-quarter capital expenditures were expected to be $13.0 million to $17.0 million, and the new headquarters project was estimated at approximately $57 million with completion expected during the third quarter of fiscal 2015.
During the quarter, La-Z-Boy agreed in principle to sell its Bauhaus operating unit. Bauhaus was classified as held for sale and presented as discontinued operations for all periods. The company recorded a $1.1 million impairment. The transaction was expected to close in the fourth quarter of fiscal 2014. Bauhaus generated a nine-month after-tax loss of $0.9 million in fiscal 2014 compared with after-tax income of $0.5 million in the prior-year period.
Other considerations include exposure to consumer confidence, housing and credit markets, commodity and energy costs, import logistics, labor and supply disruptions, foreign exchange, product defects and warranty claims, litigation, store expansion and integration of acquired businesses. The company also noted that an ERP implementation at its largest operating unit will occur in phases over several years. Management reported effective disclosure controls and no material change in internal control during the quarter.
The nine-month effective tax rate for continuing operations was 33.5%, compared with 34.6% in the prior year. The current period benefited from discrete tax items; excluding those items, management estimated the rate would have been 35.0%. A $1.4 million net liability for uncertain tax positions was recorded, with approximately $0.2 million potentially settling within the next 12 months.
Important Facts for Investors to Verify
- Whether the Bauhaus sale closed as expected and whether additional proceeds, losses or closing adjustments were recorded.
- Whether Upholstery volume, pricing and margin momentum continued while raw-material costs remained elevated.
- Whether the Casegoods product refresh reversed the segment’s declining sales and profitability.
- The pace and returns of Retail store acquisitions and expansion, including integration and transition costs.
- Actual spending and cash requirements for the new headquarters project and other capital investments.
- The effect of liability-based incentive and share-based compensation on future SG&A expense and earnings volatility.
- Continued cash generation, share repurchases, dividends and availability under the revolving credit facility.
- Potential warranty, product-defect, litigation, tax, ERP implementation and supply-chain exposures.