La-Z-Boy Reports Better First-Quarter Operating Results

Furniture World Magazine

La-Z-Boy Incorporated reported its operating results for the first quarter ended July 30, 2005. Net sales for the quarter were $451 million, compared with $455 million in the prior fiscal year's first quarter. Net income for the quarter was $3.2 million, or $0.06 per share, versus a loss of $3.5 million, or $0.07 per share, in the comparable period last year. The operating margin for the first quarter was 1.7% compared with a loss of 0.9% last year, which included 2.3% of restructuring charges. Kurt L. Darrow, President and CEO, said, "Year over year, we are encouraged with the profitability improvement we achieved at the wholesale level. However, our results for the quarter were impacted primarily by two factors, as detailed in our July 28, 2005 release: a weaker- than-expected retail environment in what is typically the slowest quarter of the year; and, greater- than- expected expenses and costs from the additional 21 La-Z-Boy Furniture Galleries(R) stores acquired in the fourth quarter of fiscal 2005. Although momentum slowed due to seasonal factors, we look forward to the stronger Fall selling season with a solid business model in place." Darrow added, "Now that our company-owned La-Z-Boy Furniture Galleries(R) stores represent a more significant portion of our overall business, we have aligned our management reporting structure, accordingly. Beginning with this quarter's results, we have broadened our segment reporting to include three business lines -- upholstery, casegoods and retail -- and have restated last year's numbers to reflect the three segments. This will give investors better visibility and transparency." Upholstery Segment For the fiscal 2006 first quarter, upholstery sales were flat compared with the prior-year period while the operating margin improved year over year from 4.2% to 4.9%. Darrow noted, "We are transforming our manufacturing and sourcing process into an efficient and lean globally integrated system, and when combined with the strength of our La-Z-Boy brand, our platform from which to grow will be inevitably stronger." Darrow continued, "Noteworthy in the quarter was our La-Z-Boy Furniture Galleries dealer meeting, held in Las Vegas, where we rolled out our Furniture Galleries Excellence Program, a tool designed to assist dealers in operating their stores with best practices across a multiple of disciplines, including: marketing; sales; merchandising; operations; and administration. The program will give dealers several benchmarks and metrics to evaluate their performance, training and tools to achieve those benchmarks. We are confident this new program will continue to strengthen our dealer network. "During the first quarter, we continued to expand the La-Z-Boy Furniture Galleries(R) store system, which includes both company-owned and independent licensed stores. Our system opened four additional stores, closed two and remodeled and/or relocated five stores, bringing our total store count to 336, of which 61 are company owned, and 118 are in the new format. Since rolling out the 'New Generation' format program, we have seen a significant increase in traffic levels, greater total sales volumes and higher average sales per square foot. For the full fiscal year, we plan to open 45 to 50 new format stores, with at least 20 of those being new stores and the remainder being store remodels or relocations. Increasing the quality and focus of our proprietary store program is of paramount importance." System-wide, including company-owned and independent licensee stores, same-store written sales, which the company tracks as an indicator of retail activity, for the second calendar quarter, were down 1.3%, and total sales, which include new stores, increased 2.9%. Casegoods Segment Casegoods sales were $105 million for the fiscal 2006 first quarter. Darrow said, "Although our sales were relatively flat year over year after two quarters of increases, we are pleased that our operating margin in this segment of the business continues to improve. For this quarter, the operating margin was 4.1% compared with 0.5% in the prior-year period and 2.1% last quarter as our residential business has moved primarily to an import model. Our sales in the hospitality portion of this segment continue to strengthen with a concurrent increase in operating margin. Overall, we are beginning to achieve the type of results in the casegoods segment that we expected when we changed our business model." Retail Segment For the quarter, retail sales were up $14.2 million to $52.7 million, a 36.9% increase from last year's first quarter. The increase was due primarily to the acquisition of stores in several markets, which the company will build out, including two unprofitable VIEs and the Chicagoland market. On an operating basis, the segment incurred a loss as a result of slower retail sales throughout all the company's markets and greater-than-anticipated expenses and transition costs from the 21 stores acquired in the fiscal 2005 fourth quarter. Darrow noted, "Refreshing merchandise on the floor and moving out older inventory adversely impacted the gross margin. Longer term, we will need to invest in updating information systems as well as relocating and refurbishing a number of stores. Same-store company-owned written sales for the second calendar quarter were down 1.7% while total sales increased 2.0%. It is important to note that last year the unprofitable VIEs were consolidated in 'Corporate and Other,' while this year, the two acquired VIEs are included in our Retail Segment's income statement. We recorded a $0.04 loss in last year's first quarter for VIEs and $0.11 for the full year. For the first quarter of fiscal 2006, we recorded a loss of $0.02 for VIEs." Darrow continued, "Our overall retail volume was weaker than anticipated during the period. Although it was a challenging quarter, we are excited about the future of this business and are committed to it as a core element of our three-part business strategy. Our company-owned stores are in larger urban markets where we can build out our store program to achieve significant market penetration and distribution efficiencies. Our proprietary retail system helps to differentiate La-Z-Boy from commodity products and it is a natural extension to broaden and strengthen the power of our brand. Additionally, it positions us to better understand the market firsthand so that we can help all dealers be successful. The retail business is an offensive move for us and we are assembling the right team to build this segment of our business profitably." Variable Interest Entities (VIEs) Last year, VIEs were included in "Corporate and Other;" this year, those now owned by the company are included in the Retail Segment, with those not owned by the company remaining in "Corporate and Other." Performance by the company's VIEs impacted results for the period. A fourth VIE was added during the quarter and the three that were expected to report breakeven results for the period, were slightly unprofitable. Darrow said, "While we fully expect these four VIEs to be profitable for the full year, we understand, due to seasonality, there may be quarters when they will lose money and they, too, were hurt by the unusually slower retail environment this Summer." Balance Sheet For the quarter, cash flow from operations was $19.8 million. Total debt for the quarter was down to $219 million. The debt-to-captalization ratio was 29.7% at quarter end, down slightly from last quarter. Darrow commented, "Although our target for debt to total capital is in the mid 20s, given our share price, we were opportunistic during the quarter and repurchased 500,000 shares at an average price of $14.49. We have 6.2 million shares remaining in our program." Business Outlook Darrow explained, "While we have continued to make steady progress in the evolution of our business model, we remain concerned with several macro economic factors, including continued rising energy prices and interest rates, which could impact the industry's growth prospects and dampen consumer confidence. Additionally, there has been fierce competition for consumers' discretionary income, with employee pricing offers from the automotive industry, which is contributing to weak retail furniture demand." Darrow continued, "With the current tepid view on our industry, we expect our second quarter sales to decrease in the low single-digit range compared with last year's second quarter sales of $521 million. Reported earnings for the second fiscal quarter are forecasted to be in the range of $0.17 - $0.21 per share. This compares to earnings of $0.17 per share in fiscal 2005's second quarter, which included an after-tax restructuring charge of $0.01 per share and an extraordinary gain of $0.01 per share." Background Information With annual sales of over $2 billion, La-Z-Boy incorporated is one of the world's leading residential furniture producers, marketing furniture for every room of the home, as well as for he hospitality, health care and assisted- living industries. The La-Z-Boy Upholstery Group companies are Bauhaus, Centurion, Clayton Marcus, England, La-Z-Boy, and Sam Moore. The La-Z-Boy Casegoods Group companies are American Drew, American of Martinsville, Hammary, Kincaid, Lea and Pennsylvania House. The corporation's vast proprietary distribution network is dedicated exclusively to selling La-Z-Boy Incorporated products and brands, and includes 336 stand-alone La-Z-Boy Furniture Galleries(R) stores and 340 La-Z-Boy In- Store Galleries, in addition to in-store gallery programs at the company's Kincaid, Pennsylvania House, Clayton Marcus, England and Lea operating units. According to industry trade publication In Furniture, the La-Z-Boy Furniture Galleries retail network is North America's largest single-brand furniture retailer. Additional information is available at http://www.la-z-boy.com