La-Z-Boy Reports Net Sales Increase For Quarter

Furniture World Magazine

La-Z-Boy Incorporated reported its operating results for the 2007 second fiscal quarter ended October 28, 2006. Net sales for the quarter were $440.5 million, up 2%, compared with the prior-year period. Net income for the quarter was $2.0 million, or $0.04 per share, versus a loss of $6.4 million, or a $0.12 loss per share, in last year's second quarter. Results for the fiscal 2007 second quarter included a $0.01 per share charge for stock option expense and $0.02 per share in restructuring charges. Last year's second quarter included an after-tax restructuring charge of $0.10 per share related to the closure of the company's Waterloo, Ontario upholstery facility and $0.01 per share in income from discontinued operations. Kurt L. Darrow, President and CEO, said, "We were challenged with sales volume this quarter which was reflective of recent trends in furniture demand throughout the broader industry. We continue, however, to be encouraged by our ability to improve wholesale margins on essentially flat volume during what continues to be a difficult period. Our focus remains on our efforts to improve the performance of our company-owned proprietary store system and, this quarter, we took a number of the necessary steps to move in that direction. Additionally, we are working to leverage the unparalleled strength of the La-Z-Boy brand and strategically position ourselves for the future. Upholstery For the fiscal 2007 second quarter, upholstery sales increased 0.8% compared with the prior-year period while the operating margin improved year over year from 3.9% to 6.3%. Darrow stated, "We continue to improve our cost structure through increased global sourcing, cost containment and the conversion of our facilities to the cellular production process. A substantial part of our operating margin improvement this quarter demonstrates the success of these initiatives. Paramount to our service and value proposition is the ability to deliver custom furniture quickly and, today, approximately 45% of our orders flow through our system within a three-week timeframe and our objective is to deliver 100% of custom orders in four weeks or less. Going forward, in addition to a focus on customization and speed, we will work to broaden our distribution and further strengthen the 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 four new stores, relocated and/or remodeled eight and closed three, bringing the total store count to 335, of which 171 are in the New Generation format. Darrow noted, "We are on track to open, relocate or remodel approximately 50 New Generation stores in the overall network in fiscal 2007 and plan to add eight new stores to the system in the third quarter, relocate or convert nine and close two." System-wide, for the third 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 3.2% and total sales, which includes new stores, decreased 0.8%. Casegoods In the second quarter, casegoods sales were $92.1 million, down 1.0% from last year's second quarter. The segment's operating margin was 4.8%, up from last year's margin of 1.8%. Darrow stated, "We saw a rebound in sales from this year's first quarter. Compared with last year's second quarter, on slightly lower volume, we improved our operating profit by $2.7 million as a result of the successful conversion to primarily an import model where we have a much greater variable cost structure. Looking ahead, we will maintain our focus on the continued improvement of our cost structure and service levels to customers." Retail For the quarter, retail sales were $52.5 million compared with $49.2 million in last year's second quarter. On an operating basis, the segment incurred a loss, primarily the result of the sluggish retail environment, inefficiencies related to transitional issues and the current fixed cost structure relative to volume. Darrow commented, "We made numerous changes to our retail operation this quarter. We opened three new stores, relocated two and exited the Rochester, New York market, by closing two stores. We also consolidated six warehouses into two large regional distribution centers. Additionally, in the Northeast region, we rolled out an enhanced operating system which will enable us to better manage our business while reducing redundancies and costs. Although there were various one-time expenses associated with these moves, we are confident they will drive meaningful improvement in our operating efficiency." Darrow added, "Our emphasis will continue to be on improving our cost structure, particularly in the markets we acquired over the past 18 months. We also have the ability to strengthen our gross margin performance now that we are through a number of closing and clearance sales at the older stores. And, we are focused on increasing the system's volume through greater penetration of the markets in which we operate -- both through additional stores and the relocation and conversion to stores in the New Generation format. In fiscal 2007, we plan to open, remodel and/or relocate 20 company- owned stores, bringing the total number of stores in the new format to 49, representing 70% of the 70 stores we plan to have in our system at year end. La-Z-Boy Incorporated owns 68 stores, including 37 in the New Generation format. For the third quarter, the company plans to add seven New Generation stores to its retail segment: four brand new stores and three relocations/conversions. Restructuring During the quarter, a pre-tax restructuring charge of $2.3 million, or $0.03 per share, was recorded stemming from the consolidation of retail warehouses, store closings and related contract termination costs for leases on these facilities, severance and benefits and the write-down of certain leasehold improvements in addition to other relocation costs. Balance Sheet Darrow noted, "For the quarter, our debt-to-capitalization ratio stood at 27.2%, a slight increase from fiscal 2006 year end's ratio of 26.5%. We repurchased approximately 250,000 shares during the quarter at an average price of $12.98, leaving us with approximately 5.4 million shares remaining in our program." Business Outlook Commenting on the company's business outlook, Darrow noted: "Although we have made strides in our wholesale divisions from a margin perspective, the volatility of the retail climate continues to concern us. For the fiscal 2007 third quarter, we expect sales to be down in the mid-single-digit range compared with last year's third quarter sales of $477 million and we expect earnings per share to be in the range of $0.06 to $0.10, including up to a $0.01 per share charge for stock option expense. In last year's third- quarter, we reported earnings per share of $0.20, which included $0.01 per share in restructuring charges and $0.01 per share of discontinued operations." 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 proprietary distribution network is dedicated exclusively to selling La-Z-Boy Incorporated products and brands, and includes 335 stand-alone La-Z-Boy Furniture Galleries(R) stores and 307 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/.