La-Z-Boy Reports First-Quarter Operating Results

Furniture World Magazine

La-Z-Boy Incorporated reported its operating results for the first fiscal quarter ended July 29, 2006. Net sales for the quarter were $419 million, down 2.3%, compared with the prior-year period. Net income for the quarter was $2.3 million, or $0.04 per share, versus $3.2 million, or $0.06 per share, in last year's first quarter. Results for the fiscal 2007 first quarter included $0.02 from discontinued operations, primarily resulting from a gain on the sale of a division, and last year's results included $0.01 for discontinued operations. Additionally, results for the fiscal 2007 first quarter included a tax benefit from a change in Canadian tax law which reduced the effective income tax rate. Kurt L. Darrow, President and CEO, said, "We are encouraged by our ability to generate improved operating margins at the wholesale level on relatively flat volume during what is our historically slowest quarter due to seasonality factors. While the environment continues to be challenging, we remain focused on our strategic objective of differentiating our brand through quality, style and service while offering customers choice, customization and quick delivery. Additionally, growing and improving the performance of our proprietary store system is paramount to our longer term positioning in the marketplace." Upholstery Segment For the fiscal 2007 first quarter, upholstery sales were flat compared with the prior-year period while the operating margin improved year over year from 4.9% to 5.8%. The La-Z-Boy branded business and England continued to outperform the smaller upholstery companies. Darrow stated, "Our operating margin results demonstrate the work we have done to the underlying cost structure of the business. During the quarter, we worked through the excess backlog we experienced as a result of last Fall's foam supply shortage and, today, are fulfilling orders on a more timely basis and are entering the Fall selling season in an excellent service position." Going forward, we will continue to improve the efficiencies of our operations as our facilities convert to the cellular manufacturing process, increase the integration of our global sourcing, broaden our channels of distribution and strengthen our proprietary La-Z-Boy Furniture Galleries(R) store system." For the quarter, the La-Z-Boy Furniture Galleries(R) store system, which includes both company-owned and independent-licensed stores, opened one new store, relocated and/or remodeled six and closed four, bringing the total store count to 334, of which 159 are in the New Generation format. Darrow noted, "We are on track to open approximately 50 New Generation stores in fiscal 2007 and will add five new stores to the system in the second quarter, relocate or convert nine and close four." System-wide, for the second calendar quarter, including company-owned and independent-licensed stores, same-store written sales, which the company tracks as an indicator of retail activity, were down 5.5% and total sales, which includes new stores, decreased 2.7%. Casegoods Segment In the first quarter, casegoods sales were $78.3 million, down 15.6% from last year's first quarter, reflecting the difficult retail environment. The segment's operating margin, at 3.8%, was relatively flat compared with last year's margin of 3.9% on significantly lower volume. Darrow stated, "During the quarter, we sold our American of Martinsville operation which manufactured furniture for the hospitality, healthcare and government markets for $33.2 million, resulting in a gain of $1.3 million, net of tax. Although the hospitality industry had started to rebound, the business didn't fit with our long-term strategy as a residential furniture manufacturer and, given the sector's business cycle, it was an ideal time to sell the unit. The cash generated from the sale was utilized primarily to reduce our debt level." He continued, "During the last several years, we have significantly changed our business model, shifting our cost structure to a much greater variable component, and even with the decrease in volume compared with last year, we held margins. We continue to improve our overall operating structure and are taking initiatives to improve top-line growth. An example is our recently announced amalgamation of Clayton Marcus and Pennsylvania House, which will leverage the best of marketing, merchandising and manufacturing within each and will improve our product offering to our dealers and consumers." Retail Segment For the quarter, retail sales were $52.2 million compared with $52.7 million in last year's first quarter. On an operating basis, the segment incurred a loss, primarily the result of the sluggish retail environment, inefficiencies and the acquired fixed-cost structure relative to the segment's current volume. Darrow commented, "We made some incremental improvement over the fiscal 2006 fourth quarter in our retail segment's performance. With much work to do, our management team continues to take the necessary steps to improve the segment's operating results as it is integral to our company's future. Key to our strategy is building out the markets that were acquired and we plan to open, remodel and/or relocate 17 stores in fiscal 2007, bringing the total number of company-owned stores in the New Generation format to 48, representing approximately 70% of the 70 we will own at year end. During the quarter, we acquired six stores in Southeastern Florida, an under-penetrated market with tremendous growth potential, and, in a short period of time, will increase our store count from six to eight. In the second quarter, we will exit the Rochester, New York market, where we will close two stores and a warehouse, and are planning to consolidate four other warehouses into our remaining facilities, enabling us to enter the third quarter with an improved cost structure." Of the 334 stores in the Furniture Galleries(R) system, La-Z-Boy Incorporated owns 68, including 31 in the New Generation format. For the second quarter, the company plans to add five New Generation stores to its retail segment: two brand new stores and three relocations/conversions. Operating Cash Flow and Balance Sheet Darrow noted, "With the proceeds from the American of Martinsville sale and the sale of four retail properties, we reduced our debt this quarter by $23.1 million from last quarter, bringing our debt-to-capitalization ratio down to 24.2%. We also used a portion of the cash generated to repurchase approximately 290,000 shares at an average price of $12.77, leaving us with approximately 5.6 million shares remaining in our program." Business Outlook Commenting on the company's business outlook, Darrow noted: "While we are pleased with our progress in our upholstery and casegoods divisions from a margin perspective, we continue to be concerned about top-line growth given the challenging retail climate. Additionally, we continue to make changes in our company-owned retail segment to bring it to acceptable performance levels. We expect sales for the fiscal 2007 second quarter to be up in the mid single digits compared with last year's second quarter sales of $433.4 million and we expect earnings per share to be in the range of $0.11 to $0.15, including up to a $0.02 charge for stock option expense, compared with last year's second- quarter loss of $0.12, which included an after-tax restructuring charge of $0.10 and $0.01 in income from discontinued operations. It is important to note that last year's second quarter was unusual given the shortage of polyurethane foam." 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, Centurion, England, La-Z-Boy, and Sam Moore. The La-Z-Boy Casegoods Group companies are American Drew, Hammary, Kincaid, Lea, Clayton Marcus, and Pennsylvania House. The corporation's vast proprietary distribution network is dedicated exclusively to selling La-Z-Boy Incorporated products and brands, and includes 334 stand-alone La-Z-Boy Furniture Galleries(R) stores and 315 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/ .