La-Z-Boy Third Quarter Operating Results

Furniture World Magazine

La-Z-Boy Incorporated reported operating results for its third fiscal quarter ended January 24, 2004. Net sales for the quarter declined 3.6% from a year earlier, to $492 million, from $511 million in the same period of fiscal 2003. Earnings per fully diluted share for the quarter were $0.29 -- including a $0.01 per share restructuring charge on an after-tax basis -- which was within management's previously announced guidance range. This compares to $0.41 per fully diluted share earned in the January 2003 quarter. For the nine months ended January 24, 2004, net sales declined 7.4%, to $1.455 billion from $1.572 billion in fiscal 2003's first nine months.Diluted earnings per share for the nine months totaled $0.67, including restructuring charges of $0.11 per share on an after-tax basis. This compares to $1.22 per diluted share earned in the same period of fiscal 2003 – before the cumulative effect of an accounting change related to goodwill and trade names. After the cumulative effect of the accounting change, net income for last year's first nine months was $0.19 per diluted share. Consolidated operating margin for the most recent quarter was 5.3%, down from 7.7% a year earlier, while the nine month operating margin was 4.4% this year, compared to 7.6% in the same period of fiscal 2003. La-Z-Boy Incorporated president and CEO Kurt L. Darrow said, "This quarter's operating profit margins were weakened by lower capacity utilization, continued price competition and discounting pressures, particularly in the casegoods(wood) segment of our business, as well as certain specific product-related cost issues. While our current operating margins remain below our expectations, particularly in the casegoods segment, we believe a modest volume increase will provide meaningful upside margin leverage. Meanwhile, we are encouraged by stronger incoming upholstery orders during the most recent quarter, representing a continuation of the positive trend we noted in mid-November. This improved order trend produced a higher upholstery backlog at quarter-end, which should contribute to improved performance during our fourth fiscal quarter." Upholstery segment: Upholstery segment sales were virtually flat for the January quarter compared to the same period of fiscal 2003, and were down 5.2% through the first nine months of the fiscal year. Darrow said, "Our year-over-year upholstery sales comparisons have shown relative improvement quarter by quarter this year, moving from a decline of 8.5% in the July quarter to unchanged in the just-ended January quarter." The January quarter operating margin for the upholstery segment was 8.4%, down from 9.9% in the year-earlier quarter, while nine-month operating margin declined to 7.9% from 9.5% a year earlier. Despite flat sales during thequarter margins dropped due to a number of factors including a change in product mix combined with minor increases in certain selling, general and administrative expenses. Additionally, our margins for the quarter were negatively impacted by the additional rent and advertising expense without the benefit of offsetting revenues from the opening of several new company-owned La-Z-Boy Furniture Galleries retail locations. For the year-to date period, the upholstery group's margin decline additionally reflected lower sales volume, as well as substantial plant downtime in the first quarter and higher promotional expenses in the first two quarters of the current year period. Darrow noted that four free-standing 'New Generation' La Z-Boy Furniture Galleries(R) stores were opened during the January quarter and two other stores were remodeled to the more productive New Generation format. At quarter-end, the total Furniture Galleries store count stood at 322, including 65 stores featuring the New Generation format. Darrow commented, "As we have previously indicated, we have a comprehensive plan to aggressively expand La- Z-Boy's mostly independently-owned Furniture Galleries store system and accelerate the pace at which old format stores are converted to the New Generation format. This entails opening as many as 20 or more new stores per year and relocating or remodeling an equal number of stores annually for the next 4-5 years." Darrow added, "Subsequent to quarter end, we reached an agreement in principle with our independent licensee to acquire four La-Z-Boy Furniture Galleries stores in the Baltimore, Maryland area, which will bring the total number of company-owned stores to 35. The Washington Baltimore corridor represents the second largest home furnishings market in the country, and is also one of the most underserved major metropolitan areas in terms of retailfurnishings outlets. This strategic acquisition will complement our existing infrastructure in Washington, D.C. and quickly be accretive to our earnings. With this acquisition, La-Z-Boy will have a total of 12 company owned stores in the Washington-Baltimore market, with 5 of the stores featuring the New Generation format. In order to quickly maximize our store productivity within this exciting market, we are planning to upgrade or relocate a substantial number of the remaining stores." Casegoods Segment: Casegoods segment sales for the January quarter declined 14.0% from a year earlier and were down 13.9% through the first nine months. Darrow noted, "Most of the companies comprising this group continue to face challenges to effectively compete against imported products being directly sourced by large retailers. However, the major element of the quarter's sales decline was the group's hospitality business which caters to the hotel industry, where sales comparison for the quarter were hurt by continuing weakness in the lodging market. The U.S. hospitality market has continued to remain under steady pressure since the September 11th terrorist attacks and is just beginning to show signs of rebounding. Absent the hospitality business in our casegoods group, we have slowed down the negative trends of the last two years and are optimistic we will begin to grow this business by strengthening the service, delivery and quality aspects of this highly competitive business segment." Casegoods margins for both periods were sharply below those of a year earlier, primarily reflecting the lower sales, increased plant downtime, continued promotional activity and some disruptions resulting from recent plant closures. For the January quarter, the casegoods segment's operating margin was (1.5)% including restructuring charges, down from 5.7% a year earlier -- while the nine-month operating margin fell to (2.0)% including restructuring, from 6.5% in the same period of fiscal 2003. All of this year's third quarter and nine month restructuring charges related to the casegoods segment. Darrow said, "As we continue to source product internationally, we are mindful of the critical balance between our domestic production and sourcing capabilities, while striving to maximize our casegoods manufacturing utilization. We will continue our blended strategy of both sourced and domestic product and will closely examine two key elements, quality and delivery times, which are important to the success of our retail partners. We have five casegoods manufacturing facilities for our five companies producing domestic product and with the uncertainty surrounding the antidumping petition on Chinese bedroom furniture, we are unlikely to take further plant rationalization action until the result of the antidumping action is known. However, we actively continue to evaluate other means to grow our volume and reduce costs in these businesses." Casegoods Group restructuring charge: The closure of three casegoods group manufacturing facilities, announced last June, will result in total pre-tax charges of approximately $10 million, or $0.11 per diluted share on an after-tax basis. The first largely non-cash charge of $6.3 million was incurred during the July 2003 first quarter, and was taken to cover the write-down of certain fixed assets and inventories. In the October 2003 and January 2004 quarters, respectively, pre-tax expense of $2.0 million, or $0.02 per diluted share on an after-tax basis, and $1.0 million or $0.01 per diluted share on an after-tax basis was recorded - primarily for severance and relocation costs related to the plant closures. The balance will be incurred in the fiscal fourth quarter.