La-Z-Boy Incorporated reported its operating results for the fiscal third quarter ended January 22, 2011.
Fiscal 2011 third-quarter:
- Sales for the third quarter declined 4.3%, of which 2.1% was due to the deconsolidation of a VIE, with the remainder reflecting ongoing macroeconomic challenges relating to housing and consumer confidence;
- Net income for the fiscal 2011 third quarter was $0.19 per share, which includes a $0.06 tax benefit, versus $0.21 per share in last year's third quarter;
- The fiscal 2011 third quarter included $0.01 per-share in anti-dumping duties and last year's third quarter included $0.05 per share in anti-dumping duties;
- The upholstery segment's sales declined 3.9% and its operating margin was 8.2% versus 11.1% in last year's third quarter;
- The casegoods segment's sales decreased 1.7% and its operating margin was 4.7% compared with 0.8% in the previous year's third quarter;
- The retail segment's sales increased 9.2% and it experienced its eighth consecutive quarterly improvement of operating margin performance compared with the prior year;
- The company generated $29.5 million of cash from operations during the quarter, ending the period with $109.6 million of cash on its balance sheet and $89.4 million of availability on its revolving line of credit.
Net sales for the third quarter were $292 million, down 4.3% compared with the prior year's third quarter. The company reported net income attributable to La-Z-Boy Incorporated of $10.0 million, or $0.19 per share, compared with $11.2 million, or $0.21 per share in the fiscal 2010 third quarter. During the quarter, the company reduced its estimated annual effective tax rate and realized a $0.06 tax benefit. The reduction in the effective tax rate primarily related to tax benefits associated with our southern California VIE. The fiscal 2011 third-quarter's results also include income of $0.9 million, or $0.01 per share, reflecting anti-dumping duties received on imports of Chinese wood bedroom furniture compared with $4.4 million, or $0.05 per share, in anti-dumping duties received in the third quarter of fiscal 2010. The fiscal 2010 third-quarter results also included a $0.01 per share restructuring charge, primarily related to costs associated with the consolidation in the company's casegoods facilities and the previously announced store closures within the company's retail segment.
Kurt L. Darrow, President and Chief Executive Officer of La-Z-Boy, said, "We continue to execute effectively against our strategic objectives and achieved improved operating results in both the casegoods and retail business segments. We are also encouraged by the improvement of the La-Z-Boy Furniture Galleries® store network's same-store sales comparison after last quarter's negative 7.1% performance and this quarter's increase of 4.7%. Although macroeconomic challenges continue to impact our overall business, we are cautiously optimistic the consumer is more confident in returning to the marketplace."
Wholesale Segments
For the fiscal 2011 third quarter, sales in the company's upholstery segment decreased 3.9% to $225.2 million compared with $234.3 million in the prior year's third quarter. The operating margin for the 2011 quarter was 8.2% compared with 11.1% in last year's comparable quarter. In the casegoods segment, sales for the fiscal third quarter were $35.4 million, down 1.7% from $36.0 million in the fiscal 2010 third quarter, and the segment's operating margin was 4.7% compared with 0.8%.
Darrow commented, "Sales in our upholstery segment declined for the quarter, primarily due to the weaker demand environment during the Fall selling season leading up the holiday period. Our operating margin remains solid and continues to demonstrate the benefit of the cellular production process throughout the La-Z-Boy branded facilities. We are also continuing to make efficiency gains at our Mexico cut-and-sew facility. Raw material pricing remains higher quarter over quarter, but the magnitude of change is somewhat lower compared to the first half of the year.
"The launch in November of our new marketing platform, featuring Brooke Shields as the La-Z-Boy brand ambassador, has met with positive reaction. While still too early to quantify the results of the campaign, anecdotal evidence suggests it is bearing fruit and we are optimistic the campaign will drive additional traffic to all our retailers while highlighting La-Z-Boy as a brand that offers consumers a full array of comfortable and stylish furniture. The investment in this marketing platform is just one example of the various initiatives underway to ensure the company is well positioned to increase its market share and fuel growth and profitability."
Darrow added, "On the casegoods side of the business, the consolidation last year of our two manufacturing facilities and the transitions from a leased warehouse to a company-owned building, as well as combining our American Drew/Lea and Hammary operations has enabled us to run the business with much greater efficiencies, contributing to the 4.7% operating margin on reduced sales. In addition to increasing sales, service remains a key priority for our team. With our ability to deliver to customers quickly, we are gaining floor space among retailers who do not want to warehouse significant quantities of casegoods inventory. At the same time, we are seeing the consumer gradually moving toward higher price point items and, going forward, we believe we are well positioned to participate in this trend given that most of our product lines fall into the medium-to-medium-high price range."
Retail Segment
For the quarter, retail sales were $44.1 million, up 9.2% compared with the prior-year period. The retail group posted an operating loss of $2.8 million for the quarter, and its operating margin was (6.2%) compared with a loss of $4.1 million and operating margin of (10.2%) in last year's third quarter. Darrow stated, "The increase in sales was a result of an effective promotional plan which led to improved conversion on customer traffic. The higher conversion and the lower cost structure throughout the business are improving the segment's operating results. Furthermore, our team is continuing to pursue lease renegotiations or other opportunities to bring our sales-to-occupancy ratio into balance.
"Following the close of the quarter, due to a dealer retirement, the company-owned retail segment assumed responsibility for 15 La-Z-Boy Furniture Galleries® stores in Los Angeles, San Diego and Orange County, which previously had operated as a VIE. The southern California market has great potential from a demographic standpoint and we are confident our retail team will improve the results of the 15-store operation as they institute the sales, marketing and operational processes alongside cost-containment initiatives that have fueled the improvements in the retail segment over the past two years. As a result of taking on the 15 stores, the store count within our retail segment has been brought to 83."
La-Z-Boy Furniture Galleries® Stores Network
System-wide, for the third quarter of fiscal 2011, including company-owned and independent-licensed stores, same-store written sales, which the company tracks as an indicator of retail activity, were up 4.7%. Total written sales, which include new and closed stores, were up 3.6%. At the end of the third quarter, 305 stand-alone stores comprised the La-Z-Boy Furniture Galleries® store system.
Balance Sheet
During the quarter, the company generated $29.5 million in cash provided by operating activities and ended the quarter with $109.6 million in cash and $89.4 million of availability under its revolving line of credit. At quarter end, La-Z-Boy's debt-to-capitalization ratio was 11.2% compared with 12.9% a year ago and 11.6% at the end of the fiscal 2011 second quarter.
Business Outlook
Darrow stated, "With a rebound in same-store sales for the quarter, it appears the consumer is more comfortable making larger ticket furniture purchases. However, until the housing sector strengthens and we see a steady improvement in the overall consumer confidence level, we are guardedly optimistic that we are experiencing a turnaround in the marketplace for furniture. We believe La-Z-Boy is well positioned to capitalize on an increase in furniture spending based on our industry-leading brand and strong network of branded distribution outlets. We believe our new marketing campaign will continue to drive additional traffic to our dealer network and the changes we have made and continue to make to our cost structure across all business segments are positioning the company for growth and profitability."
Note: The 2011 fiscal fourth quarter will comprise 14 weeks rather than 13.
Background Information: La-Z-Boy Incorporated is one of the world's leading residential furniture producers, marketing furniture for every room of the home. The La-Z-Boy Upholstery Group companies are Bauhaus, England and La-Z-Boy. The operating units in the Casegoods Group consist of two groups, one including American Drew, Lea and Hammary, and the second being Kincaid.
The corporation's proprietary distribution network is dedicated exclusively to selling La-Z-Boy Incorporated products and brands, and includes 305 stand-alone La-Z-Boy Furniture Galleries® stores and 536 independent Comfort Studios®, in addition to in-store gallery programs for the company's Kincaid, England and Lea operating units. Additional information is available at http://www.la-z-boy.com/.