La-Z-Boy Incorporated: Fiscal 2013 First-Quarter 10-Q Summary
Business Context and Reporting Period
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and related products through upholstery, casegoods and retail segments. The report covers the unaudited quarter ended July 28, 2012, compared with the quarter ended July 30, 2011. The company operated 85 company-owned La-Z-Boy Furniture Galleries stores in nine markets and had 312 total branded Galleries stores and approximately 550 Comfort Studios locations.
Financial Performance and Liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Sales | $301.5 million | $280.1 million | 7.6% increase |
| Gross profit | $89.6 million | $80.9 million | 10.7% increase |
| Gross margin | 29.7% | 28.9% | 0.8 percentage-point increase |
| Operating income | $7.6 million | $3.5 million | 119.6% increase |
| Operating margin | 2.5% | 1.2% | 1.3 percentage-point increase |
| Net income attributable to La-Z-Boy | $4.4 million | $45.5 million | Decrease from prior period |
| Diluted earnings per share | $0.08 | $0.85 | Decrease from prior period |
| Cash flow from operations | $(15.3) million | $3.0 million | Decline |
Net income in the prior-year quarter included a substantial income tax benefit from releasing part of the valuation allowance on U.S. federal and state deferred tax assets. Excluding that discrete item, the prior-year effective tax rate would have been 37.1%, compared with 37.0% in the current quarter.
Cash and equivalents were $112.6 million at July 28, 2012, compared with $152.4 million at April 28, 2012. Total debt was approximately $7.8 million, consisting of $0.4 million current debt and $7.4 million long-term debt. The debt-to-capitalization ratio was 1.7%. The company had no borrowings under its $150 million revolving credit facility and reported $142.6 million of excess availability.
Investing cash outflows were $19.8 million, including $5.2 million of capital expenditures, $6.9 million transferred to restricted cash and net investment purchases. Financing cash outflows were $4.6 million, including $2.1 million of debt repayments and $4.0 million of share repurchases. Fiscal 2013 capital expenditures are expected to be $25 million to $30 million.
Material Changes Versus the Prior Comparable Period
- Upholstery sales increased 9.5% to $238.2 million, and operating income increased 40.0% to $15.6 million. The operating margin improved to 6.5% from 5.1%.
- Casegoods sales increased 1.4% to $34.6 million, while operating income increased 129.6% to $1.3 million. The operating margin improved to 3.7% from 1.6%.
- Retail sales increased 17.0% to $57.1 million. The operating loss narrowed to $2.0 million from $3.4 million, and the operating margin improved to negative 3.5% from negative 6.9%.
- Consolidated gross margin benefited from fixed-cost leverage, selling-price changes and cost reductions. These benefits were partly offset by higher raw-material costs and increased incentive compensation.
- SG&A increased in absolute dollars, principally because incentive compensation rose by $3.2 million, but SG&A improved as a percentage of sales by 0.5 percentage points.
- Operating cash flow turned negative, primarily because of accrued-benefit payments and a planned inventory build of fabric and leather materials ahead of the fall selling season.
- The company deconsolidated its last variable-interest entity during fiscal 2012; consequently, current-quarter results contain no VIE sales or operating income compared with $3.3 million of sales and $0.6 million of operating income in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
Management stated that the furniture operating environment remained challenging and dependent on improvement in the economy, housing conditions and consumer confidence. Management expects to continue investing selectively in areas intended to improve performance and believes its brand, marketing programs and distribution network support continued growth and market-share gains. No specific revenue or earnings guidance was provided.
On August 13, 2012, the company agreed to acquire La-Z-Recliner Shops, Inc., an operator of nine La-Z-Boy Furniture Galleries stores in southern Ohio, for $18.0 million. Completion was expected in the second quarter of fiscal 2013, and management did not expect a material effect on results.
Key risks include consumer confidence and housing conditions, commodity and energy-price volatility, import logistics, supply and labor disruptions, currency and interest-rate movements, product defects and warranty or recall costs, litigation, dealer and store-owner availability, information-technology failures and potential court actions involving prior Continued Dumping and Subsidy Offset Act distributions. The company reported a $14.3 million product-warranty liability at quarter-end and $47.5 million of open purchase orders, most of which were cancelable before production.
The company recorded $1.7 million of net liabilities for uncertain tax positions, of which $0.3 million could be settled within the next 12 months. No material changes to previously disclosed risk factors, contractual obligations or critical accounting policies were reported.
Investor Verification Items
- Verify whether improved sales volumes and segment margins persist after promotional activity and higher incentive compensation.
- Monitor operating cash flow, inventory levels and the effect of the planned raw-material inventory build.
- Assess liquidity after the $18.0 million Ohio retail acquisition, ongoing capital expenditures and potential share repurchases.
- Review the sustainability of earnings excluding the prior-year tax valuation-allowance release.
- Evaluate exposure to raw-material costs, product-warranty claims, import and supply-chain disruptions, and consumer-demand weakness.
- Confirm the timing, financing and operating performance of the La-Z-Recliner Shops acquisition.