La-Z-Boy Incorporated — Fiscal 2023 First-Quarter Form 10-Q Summary
Business context and reporting period
La-Z-Boy Incorporated manufactures, markets, distributes and retails upholstered and casegoods furniture through Wholesale, Retail and Corporate & Other activities, including Joybird. This unaudited report covers the quarter ended July 30, 2022, compared with the quarter ended July 24, 2021. The company operated 166 company-owned La-Z-Boy Furniture Galleries stores and a broader network of independent galleries and Comfort Studio locations.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Consolidated sales | $604.1 million | $524.8 million | 15.1% increase |
| Gross profit | $241.5 million | $202.1 million | 19.5% increase |
| Gross margin | 39.97% | 38.51% | Up 150 basis points |
| Operating income | $52.6 million | $34.4 million | 53.2% increase |
| Operating margin | 8.7% | 6.5% | Up 220 basis points |
| Net income attributable to La-Z-Boy | $38.5 million | $24.6 million | 56.6% increase |
| Diluted earnings per share | $0.89 | $0.54 | 64.8% increase |
| Net cash from operating activities | $33.1 million | $6.2 million | Increase of $26.9 million |
Segment sales and operating income were $441.8 million and $26.1 million for Wholesale, and $236.0 million and $38.2 million for Retail. Wholesale operating margin was 5.9%, compared with 4.7% in the prior-year quarter. Retail operating margin was 16.2%, compared with 11.2%.
Cash, cash equivalents and restricted cash totaled $241.4 million at July 30, 2022, compared with $248.9 million at April 30, 2022. The company also held $49.0 million of investments, including $24.9 million intended to enhance cash returns. Total debt borrowings were not outstanding under the $200.0 million unsecured revolving credit facility. Lease liabilities totaled $434.8 million, including current and long-term amounts.
Capital expenditures were $21.0 million, acquisitions used $7.2 million, share repurchases totaled $5.0 million, and dividends paid totaled $7.1 million. The company generated $33.1 million from operations but used $25.9 million in investing activities and $13.8 million in financing activities, resulting in a $7.4 million decrease in cash and restricted cash during the quarter.
Material changes versus the prior comparable period
- Sales growth reflected pricing and surcharge actions, favorable mix, higher delivered volume and the conversion of a significant order backlog following earlier supply-chain disruptions.
- Gross margin improved despite higher raw-material, freight, labor and plant-production costs. The company also incurred costs related to closing its temporarily reactivated Newton, Mississippi manufacturing facility.
- SG&A as a percentage of sales declined 70 basis points because higher sales volume provided fixed-cost leverage, partially offset by increased marketing investment.
- Wholesale sales increased 12.3%; delivered volume was pressured by external dealers delaying receipts because of warehouse constraints.
- Retail sales increased 29.8%, including a 25% increase in delivered same-store sales and $12.2 million from recent store acquisitions. However, written same-store sales declined 15%, reflecting seasonal normalization, economic uncertainty and softer consumer sentiment.
- Corporate & Other operating loss increased to $11.7 million from $4.4 million, primarily because of Joybird freight and plant costs and increased marketing investment. Joybird sales increased 10% to $42.7 million.
- On July 18, 2022, the company acquired a Denver, Colorado retail business operating five La-Z-Boy Furniture Galleries stores and one distribution center for $10.2 million, including $7.2 million paid in cash during the quarter. The acquisition added $7.7 million of goodwill and $4.3 million of reacquired rights.
- Shares outstanding declined to 43.0 million from 43.1 million at fiscal year-end, while the diluted weighted-average share count declined to 43.1 million from 45.4 million in the prior-year quarter.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2023 capital expenditures of approximately $85 million to $95 million.
- Management stated that cash on hand and the available credit facility are expected to provide adequate liquidity for operations over the next 12 months.
- The company expects its board to continue declaring regular quarterly dividends for the foreseeable future, but dividends may be discontinued at any time. Management also expects to continue share repurchases based on anticipated operating cash flow; 7.3 million shares remained authorized for repurchase at July 30, 2022.
- Key operating risks include global supply-chain and product-availability challenges, elevated raw-material and freight costs, labor-market pressures, consumer sentiment and economic uncertainty, dealer warehouse constraints, foreign-exchange movements, and the continuing uncertainty associated with COVID-19.
- The company reported no material changes to previously disclosed risk factors, contractual obligations, market risks, critical accounting policies or internal controls.
- Customer deposits and deferred revenue totaled $272.8 million at July 30, 2022, down from $322.2 million at April 30, 2022. The company recognized $192.4 million of revenue during the quarter from the prior year-end contract-liability balance.
- The effective tax rate increased to 26.5% from 25.9%. The filing attributes the rate primarily to state taxes above the 21% federal statutory rate.
Important facts for investors to verify
- Whether pricing and surcharge actions continue to offset raw-material, freight, labor and manufacturing-cost inflation.
- Whether the 15% decline in Retail written same-store sales signals sustained demand weakness after backlog normalization.
- Progress on Joybird profitability, including the effect of freight, plant-opening and marketing costs.
- Execution of the Denver retail acquisition and the planned Newton facility closure.
- Cash conversion, inventory growth to $331.8 million from $303.2 million at fiscal year-end, and the ability to fund planned capital expenditures, dividends and repurchases.
- Compliance with the revolving credit facility’s net lease-adjusted leverage and fixed-charge coverage covenants.
- The filing’s forward-looking statements and assumptions regarding supply-chain conditions, consumer demand, COVID-19 effects and future operating performance.