LZB

LA-Z-BOY INC 10-Q Summary: Quarter Ended October 24, 2009

Business Context and Reporting Period

This Form 10-Q covers the second quarter and first six months of fiscal year 2010, ended October 24, 2009. LA-Z-BOY INC is a leading global producer of reclining chairs and upholstered furniture, operating through three segments: Upholstery Group, Casegoods Group, and Retail Group. The company operates 68 company-owned stores and manages a network of independent dealers, some of which are consolidated as Variable Interest Entities (VIEs). The reporting period reflects continued challenging economic conditions, including weak consumer confidence and a poor credit environment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated sales decreased 9.4% in Q2 and 13.8% YTD compared to the prior year, driven by weak consumer demand. The Casegoods segment saw the steepest decline at 23.0% (Q2) and 24.3% (YTD), while Upholstery sales fell 6.1% (Q2) and 11.5% (YTD).
• Profitability Turnaround: Despite lower sales, the company returned to profitability, reporting net income of $5.9M for Q2 compared to a loss of $53.7M in the prior year. This was driven by significant cost reductions and improved gross margins.
• Margin Expansion: Gross margin improved by 5.5 percentage points in Q2 (to 31.6%) due to selling price increases, lower raw material costs, and manufacturing efficiencies from restructuring. Operating margin improved from -4.8% to 3.3% in Q2.
• Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 16.6% in Q2, primarily due to reduced advertising spend, lower bad debt expense, and overall cost alignment with sales volume.
• Restructuring: Restructuring charges decreased significantly to $1.2M in Q2 (net of reversals) compared to $2.9M in the prior year. Reversals were recorded due to lower estimated healthcare costs.
• Liquidity Improvement: Cash and equivalents increased to $59.0M from $17.4M at the start of the fiscal year. This was aided by a $13.1M net income tax refund and the release of $18.2M in restricted cash following changes to the company's insurance subsidiary.

Guidance, Outlook, and Risks

• Outlook: Management remains cautious about the macroeconomic environment and does not predict an immediate industry recovery. The focus remains on driving sales through efficiency and maintaining a strong balance sheet.
• Restructuring Plans:
  • Casegoods Consolidation: Consolidation of North Carolina plants is underway, expected to save $5M-$6M annually. Additional charges of ~$0.7M are expected in fiscal 2010.
  • Mexico Transition: Transition of domestic cutting and sewing operations to Mexico is ongoing (33% complete). Expected to save ~$20M annually. Additional charges of $1.0M-$1.5M are expected over the next 12 months.
• Dividends: The quarterly dividend was suspended in Q4 2009 to conserve cash and remains suspended.
• Capital Expenditures: Expected to range between $12M and $14M for fiscal 2010.
• Risks: Key risks include continued economic recession, fluctuations in consumer confidence, credit market conditions, and the ability to procure raw materials. The company also faces uncertainty regarding CDSOA (Continued Dumping and Subsidy Offset Act) payments.
• Subsequent Event: A new federal law enacted November 6, 2009, allows a five-year carryback of net operating losses, which may impact the effective tax rate in Q3 2010.

Investor Verification Checklist

• Restructuring Savings Realization: Verify if the projected annual savings of $25M+ from restructuring plans are being realized as sales volumes remain depressed.
• Casegoods Segment Viability: Monitor the Casegoods segment, which continues to operate at a loss and saw the largest sales decline, to assess the impact of plant consolidations.
• Dealer Credit Exposure: Review the company's exposure to independent dealers and VIEs, particularly given the decision to limit credit support to certain dealers.
• Tax Refund Sustainability: Confirm the sustainability of cash flows given the significant one-time impact of the $13.1M tax refund in the first half of the year.
• Inventory Levels: Assess inventory turnover and potential write-down risks as the company manages inventory levels against declining sales.