La-Z-Boy Incorporated: Q1 Fiscal 2017 Form 10-Q Summary
Business Context and Reporting Period
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories through wholesale channels and company-owned La-Z-Boy Furniture Galleries stores. This unaudited filing covers the quarter ended July 30, 2016, the first quarter of fiscal 2017, compared with the quarter ended July 25, 2015. Fiscal 2017 has 52 weeks, compared with 53 weeks in fiscal 2016.
The company operated 127 company-owned La-Z-Boy Furniture Galleries stores and maintained a broader network of 342 Furniture Galleries stores and 551 Comfort Studio locations. During the quarter, it acquired one independent dealer-operated store in Reno, Nevada for approximately $5.3 million.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Sales | $340.8 million | $341.4 million | (0.2%) |
| Gross profit | $133.5 million | $124.2 million | 7.5% |
| Gross margin | 39.2% | 36.4% | +2.8 pts |
| Operating income | $21.8 million | $20.0 million | 9.0% |
| Operating margin | 6.4% | 5.8% | +0.6 pts |
| Net income attributable to La-Z-Boy | $13.8 million | $13.7 million | 1.0% |
| Diluted EPS | $0.28 | $0.27 | 3.7% |
| Net cash from operating activities | $34.1 million | $1.5 million | +$32.5 million |
SG&A increased to $111.8 million from $104.3 million. The effective tax rate was 35.7%, compared with 35.9%. Dividends declared increased to $0.10 per share from $0.08.
At July 30, 2016, cash and equivalents were $117.2 million, restricted cash was $9.0 million, and investments totaled $46.3 million, including $32.7 million held to enhance cash returns. Total debt was approximately $0.7 million, consisting of $0.3 million current debt and $0.4 million long-term debt. The company had no borrowings under its $150.0 million revolving credit facility and $145.2 million of excess availability.
Capital expenditures were $5.2 million, compared with $6.5 million in the prior-year quarter. Fiscal 2017 capital expenditures are expected to be $35 million to $40 million. The company repurchased approximately 0.5 million shares for $13.6 million and paid $4.9 million in dividends.
Material Changes Versus the Prior Comparable Period
- Consolidated sales were essentially flat, reflecting lower Upholstery sales partially offset by growth in Retail and Casegoods.
- Upholstery sales declined 1.9% to $267.4 million, while operating income increased 21.2% to $29.8 million. The margin improvement reflected supply-chain efficiencies, favorable product mix and legal settlements.
- Casegoods sales increased 7.0% to $25.0 million, and operating income increased 27.0% to $2.1 million, primarily from higher volume, improved in-stock levels and lower discounting.
- Retail sales increased 10.5% to $95.7 million, driven by acquired and new stores. However, Retail operating income declined 53.8% to $2.2 million as comparable-store sales fell 4.4%, traffic declined, and advertising and other fixed costs increased.
- Gross margin benefited from supply-chain improvements, mix, a higher proportion of Retail sales and legal settlements. Legal settlements increased gross margin by 0.7 percentage points in Q1 FY2017 versus 0.5 points in the prior-year quarter.
- SG&A as a percentage of sales increased because of higher advertising, incentive compensation and the greater contribution from the higher-SG&A Retail segment. Stock-based compensation expense increased to $4.8 million from $2.6 million, partly due to the company’s higher stock price.
- Other income declined to a $0.1 million expense from $2.0 million of income, primarily because foreign currency losses replaced prior-year foreign currency gains.
- Operating cash flow improved substantially, aided by receivable collections and stable inventory levels. Investing cash flow turned negative because of the Reno acquisition, capital expenditures and net investment purchases.
Guidance, Outlook, Risks and Unusual Items
Management remained optimistic about long-term growth and continued to emphasize the 4-4-5 store strategy, expansion of Comfort Studio locations, company-owned store acquisitions, growth in stationary upholstery and increased distribution through multiple channels. The company expects to continue opportunistic share repurchases and regular quarterly dividends, although future dividends remain subject to board approval.
Key near-term considerations include lower comparable-store traffic, elevated promotional and advertising spending, the profitability of acquired and new stores, foreign exchange volatility, supply-chain and labor disruptions, commodity costs, import and logistics risks, product defects and warranty claims, litigation, consumer confidence, economic conditions, and potential goodwill or intangible-asset impairments.
The product warranty liability was $20.9 million at July 30, 2016, up from $17.2 million a year earlier. The company reported a $0.8 million net liability for uncertain income tax positions and does not expect a significant change over the following 12 months. Management disclosed no material changes to contractual obligations or risk factors from the fiscal 2016 Form 10-K.
The company is implementing an ERP system in its largest operating unit and expects to complete the sales order management component by the end of fiscal 2018. Management stated that disclosure controls were effective, while the implementation will require continued internal-control testing.
Important Facts for Investors to Verify
- Whether lower comparable-store sales and traffic persist and offset growth from acquired and newly opened stores.
- Whether Upholstery supply-chain efficiencies and favorable mix benefits are sustainable after legal-settlement benefits normalize.
- The level and volatility of liability-based stock compensation and its effect on SG&A and earnings.
- Progress, cost and internal-control effects of the ERP implementation.
- Cash deployment among acquisitions, capital expenditures, dividends and share repurchases, including remaining repurchase authorization of approximately 3.5 million shares.
- Future effects of pending accounting standards, particularly revenue recognition, lease accounting, equity investment measurement and credit-loss guidance.