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The Science of Hitting
The Science of Hitting
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La-Z-Boy: Q1 2012 Results

August 24, 2011 | About:

La-Z-Boy (NYSE:LZB), the leading producer of reclining chairs in the world and a manufacturer of upholstery and wood furniture products (which are sold through furniture retailers and company owned stores), reported first quarter earnings and held a conference call with investors on Wednesday morning. La-Z-Boy is smack dam in the middle of the discretionary category, selling products that consumers can hold off on purchasing, or simply skip all together; as such, I find it interesting to analyze how they manage to drive sales (and hopefully profits) in this type of environment while maintaining brand equity and margins. Here are some of the highlights from the first quarter of fiscal 2012 and the call:

Net sales for the first quarter were $280.1 million, an increase of 6.4% compared with the first quarter of last year ($263.3 million); this was driven by a 9.7% same-store sales comp for the La-Z-Boy Furniture Galleries network of stores (comprised of 306 company owned and independent licensed stores at the end of the first quarter).

For the quarter, sales in the company’s upholstery segment increased 7.7% to $217.5 million ($201.9 million last year), while decreasing 7.4% to $34.1 million in the casegoods segment; CEO Kurt Darrow had this to say about the decline in casegoods: “[it] continues to face greater challenges compared to our upholstery business, given the higher price structure of the category (and longer replacement timeframes… along with the sales decline, we experienced higher raw material and finished goods costs throughout the quarter. We instituted a price increase across all our casegoods brands in the latter part of the quarter, which should improve our profitability going forward.”

GAAP net income in the quarter was $45.5 million, or $0.85 per share, of which $43.4 million ($0.81) was due to the reversal of certain valuation reserves against deferred tax assets. The adjusted profit figure of roughly $2 million compares to a loss of $216,000 in the same quarter last year.

The company generated $3 million in from operations and ended the quarter with $110.4 million in cash, compared to roughly $31 million in total debt (debt-to-capitalization ratio of 7.0%); as a result, the company had roughly $80 million in net cash as of the end of Q1 (roughly 20% of the market capitalization), and is trading at a price-to-book ratio of 1.02. Considering the stock price, management has noted that they consider share repurchases a viable option for their excess cash, but “at the same time, given the volatility of the markets, don't [want to] do anything that would change our solid financial position.”

While management was encouraged by sales in the first quarter (typically their slowest volume period of the year), the reality is that there is too much uncertainty in the air for them to get too excited about the coming quarters:

“It goes without saying, however, that the volatility pervading in the financial market is unsettling to the consumer, and we remain cautious given the macroeconomic environment… I guess our best point of reference is when a similar situation, not exactly to the same degree, but when it happened in late 2008, we saw an immediate 20% to 25% drop in sales, and it stayed there for an extended period of time. We have seen nothing to that magnitude today. We have seen a normal run rate of the business and have not seen the customer totally pull back, although I'm not -- I'm pretty positive that none of the news is good for the consumer and their confidence, but right now, she hasn't decided to stop shopping, and we'll see how the fall plans out here.”

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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