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(Exact name of registrant as specified in its charter)
iMichigan
i38-0751137
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
iOne La-Z-Boy Drive,
iMonroe,
iMichigan
i48162-5138
(Address
of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (i734) i242-1444
None
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $1.00 Par Value
iLZB
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes ☒ No ☐
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
iYes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer
☒
Accelerated
filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No i☒
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Adjustments
to reconcile net income to cash provided by operating activities
(Gain)/loss on disposal and impairment of assets
i559
i1
(Gain)/loss
on sale of investments
(i1,136)
i77
Provision
for doubtful accounts
i44
i694
Depreciation and amortization
i25,092
i19,258
Amortization
of right-of-use lease assets
i37,285
i38,580
Lease
impairment/(settlement)
(i1,175)
i—
Equity-based
compensation expense
i7,337
i5,079
Change
in deferred taxes
(i340)
i27
Change
in receivables
(i9,843)
i19,550
Change
in inventories
i9,757
(i36,771)
Change
in other assets
(i1,361)
i4,890
Change
in payables
(i4,040)
i8,027
Change
in lease liabilities
(i38,121)
(i39,380)
Change
in other liabilities
(i22,802)
(i74,797)
Net
cash provided by operating activities
i56,876
i30,954
Cash
flows from investing activities
Proceeds from disposals of assets
i4,037
i63
Capital
expenditures
(i26,501)
(i40,442)
Purchases
of investments
(i17,485)
(i4,714)
Proceeds
from sales of investments
i21,956
i12,660
Acquisitions
(i7,311)
(i11,705)
Net
cash used for investing activities
(i25,304)
(i44,138)
Cash
flows from financing activities
Payments on debt and finance lease liabilities
(i206)
(i61)
Holdback
payments for acquisitions
(i5,000)
(i5,000)
Stock
issued for stock and employee benefit plans, net of shares withheld for taxes
(i1,859)
(i1,711)
Repurchases
of common stock
(i20,014)
(i5,004)
Dividends
paid to shareholders
(i15,632)
(i14,161)
Dividends
paid to minority interest joint venture partners (1)
(i1,172)
i—
Net
cash used for financing activities
(i43,883)
(i25,937)
Effect
of exchange rate changes on cash and equivalents
(i900)
(i1,841)
Change
in cash, cash equivalents and restricted cash
(i13,211)
(i40,962)
Cash,
cash equivalents and restricted cash at beginning of period
i346,678
i248,856
Cash,
cash equivalents and restricted cash at end of period
$
i333,467
$
i207,894
Supplemental
disclosure of non-cash investing activities
Capital expenditures included in payables
$
i3,079
$
i4,251
(1)Includes
dividends paid to joint venture minority partners resulting from the repatriation of dividends from our foreign earnings that we no longer consider permanently reinvested
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
(1)Non-controlling
interests include dividends paid to joint venture minority partners resulting from the repatriation of dividends from our foreign earnings that we no longer consider permanently reinvested.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: iBasis
of Presentation
The accompanying consolidated financial statements include the consolidated accounts of La-Z-Boy Incorporated and our majority-owned subsidiaries (collectively, the "Company"). We derived the April 29, 2023 balance sheet from our audited financial statements. We prepared the interim financial information in conformity with generally accepted accounting principles ("US GAAP"), which we applied on a basis consistent with those reflected in our fiscal 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), but the information does not include all of the disclosures required by US GAAP. In management’s opinion, the interim financial information includes all adjustments and accruals, consisting only
of normal recurring adjustments (except as otherwise disclosed), that are necessary for a fair statement of results for the respective interim periods. The interim results reflected in the accompanying financial statements are not necessarily indicative of the results of operations that will occur for the full fiscal year ending April 27, 2024.
At October 28, 2023, we owned investments in itwo
privately-held companies consisting of non-marketable preferred shares, warrants to purchase common shares, and convertible notes. Each of these companies is a variable interest entity and we have not consolidated their results in our financial statements because we do not have the power to direct those activities that most significantly impact their economic performance and, therefore, are not the primary beneficiary.
i
Accounting Pronouncements Adopted in Fiscal 2024
i
The
following table summarizes Accounting Standards Updates ("ASUs") which were adopted in fiscal 2024, but did not have a material impact on our accounting policies or our consolidated financial statements and related disclosures.
ASU
Description
Adoption Date
ASU 2021-08
Business
Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
Fiscal 2024
Accounting Pronouncements not yet Adopted
The following table summarizes additional accounting pronouncements which we have not yet adopted, but we believe will not have a material impact on our accounting policies or our consolidated financial statements and related disclosures.
ASU
Description
Adoption Date
ASU
2023-05
Business Combinations - Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement
Fiscal 2025
ASU 2023-02
Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method
Fiscal 2025
/
Change in Accounting Policy - Distribution
Center Costs
In the first quarter of fiscal 2024, we made a voluntary change to the presentation of costs directly attributable to our distribution activities conducted through our distribution centers in the United States. Our policy has changed from presenting these costs within selling, general and administrative ("SG&A") expense to presenting them as cost of sales. We believe this presentation is preferable because it will enhance the comparability of our financial statements with those of our industry peers and align with how we internally manage supply chain costs and margin.
i
In
accordance with US GAAP, the period presented below has been retrospectively adjusted to reflect the change to cost of sales and SG&A expense. This change had no impact to sales, income from operations, net income, earnings per share, retained earnings or other components of equity or net assets.
None of the below acquisitions were significant to our consolidated financial statements, and, therefore, pro-forma financial information is not presented. All of our provisional purchase accounting estimates for the acquisitions completed in fiscal 2024 are based on the information and data available to us as of the time of the issuance of these financial statements, and in accordance with Accounting Standard Codification Topic 805-10-25-15, are subject to change within the first 12 months following the acquisition as we gain additional data.
Each
of the following Retail acquisitions completed in fiscal 2024 and 2023 reflect a core component of our strategic priorities, which is to grow our company-owned retail business and leverage our integrated retail model (where we earn a combined profit on both the wholesale and retail sales) in suitable geographic markets, alongside the existing La-Z-Boy Furniture Galleries® network.
Prior to each Retail acquisition completed in fiscal 2024 and 2023, we licensed to the counterparty the exclusive right to own and operate the La-Z-Boy Furniture Galleries® stores (and to use the associated trademarks and trade name) in each of their respective markets, and we reacquired these rights when we consummated the transaction. These required rights
are indefinite-lived because our retailer agreements are perpetual agreements that have no specific expiration date and no renewal options. The effective settlement date of these arrangements resulted in no settlement gain or loss as the contractual terms were at market. For federal income tax purposes, we amortize and deduct these indefinite-lived intangible assets and goodwill, if any, over i15 years.
Lafayette, Louisiana Acquisition
On October
23, 2023, we completed our acquisition of the Lafayette Louisiana business that operates ione independently owned La-Z-Boy Furniture Galleries® store and ione distribution center for $i2.8 million,
inclusive of and subject to further customary adjustments. We paid total cash of $i1.8 million during the second quarter of fiscal 2024 and the remaining consideration included forgiveness of accounts receivable and payments based on working capital adjustments. As part of the acquisition, we recorded an indefinite-lived intangible asset of $i0.7 million
related to the reacquired rights described above. We also recognized $i2.1 million of goodwill in our Retail segment related primarily to synergies we expect from the integration of the acquired store and future benefits of these synergies.
Colorado Springs, Colorado Acquisition
On July 17, 2023, we completed our acquisition of the Colorado Springs, Colorado business that operates itwo
independently owned La-Z-Boy Furniture Galleries® stores and ione distribution center for $i6.0 million, inclusive of and subject to further to customary adjustments.
We paid total cash of $i5.6 million during the first and second quarters of fiscal 2024 and the remaining consideration included forgiveness of accounts receivable and payments based on working capital adjustments. As part of the acquisition, we recorded an indefinite-lived intangible asset of $i2.1 million
related to the reacquired rights described above. We also recognized $i2.2 million of goodwill in our Retail segment related primarily to synergies we expect from the integration of the acquired stores and future benefits of these synergies.
Prior Year Acquisitions
Spokane, Washington Acquisition
On September 26, 2022, we completed our acquisition of the Spokane, Washington business that operates ione
independently owned La-Z-Boy Furniture Galleries® store and ione distribution center for $i4.7 million, inclusive of customary adjustments. We paid total cash of
$i4.0 million during the second quarter of fiscal 2023 and the remaining consideration included forgiveness of accounts receivable and payments based on working capital adjustments. As part of the acquisition, we recorded an indefinite-lived intangible asset of $i1.2 million
related to the reacquired rights described above. We also recognized
$i3.0 million of goodwill in our Retail segment related primarily to synergies we expect from the integration of the acquired store and future benefits of these synergies.
Denver, Colorado Acquisition
On
July 18, 2022, we completed our acquisition of the Denver, Colorado business that operates ifive independently owned La-Z-Boy Furniture Galleries® stores and ione
distribution center for $i10.1 million, inclusive of customary adjustments. We paid total cash of $i7.7 million during the first and second quarters of fiscal 2023 and the remaining consideration included forgiveness
of accounts receivable and payments based on working capital adjustments. As part of the acquisition, we recorded an indefinite-lived intangible asset of $i4.3 million related to the reacquired rights described above. We also recognized $i7.6 million of goodwill in our Retail segment related primarily to synergies
we expect from the integration of the acquired stores and future benefits of these synergies.
Note 3: iCash and Restricted Cash
ii
We
have restricted cash on deposit with a bank as collateral for certain letters of credit. All our letters of credit have maturity dates within the next twelve months, but we expect to renew some of these letters of credit when they mature.
(Unaudited, amounts in thousands)
10/28/2023
10/29/2022
Cash and cash equivalents
$
i329,632
$
i204,626
Restricted
cash
i3,835
i3,268
Total
cash, cash equivalents and restricted cash
$
i333,467
$
i207,894
//
Note
4: iInventories
i
A summary of inventories is as follows:
(Unaudited,
amounts in thousands)
10/28/2023
4/29/2023
Raw materials
$
i125,211
$
i116,440
Work
in process
i20,607
i24,328
Finished
goods
i168,574
i181,401
FIFO
inventories
i314,392
i322,169
Excess of FIFO
over LIFO
(i45,912)
(i45,912)
Total
inventories
$
i268,480
$
i276,257
/
Note
5: iGoodwill and Other Intangible Assets
i
We have goodwill on our consolidated balance sheet as follows:
Reportable
Segment/Unit
Reporting Unit
Related Acquisition
Wholesale Segment
United Kingdom
Wholesale business in the United Kingdom and Ireland
We
test indefinite-lived intangibles and goodwill for impairment on an annual basis in the fourth quarter of each fiscal year, and more frequently if events or changes in circumstances indicate that an asset might be impaired. We test amortizable intangible assets for impairment if events or changes in circumstances indicate that the assets might be impaired.
Note 6: iInvestments
We
have current and long-term investments intended to enhance returns on our cash as well as to fund future obligations of our non-qualified defined benefit retirement plan, our executive deferred compensation plan, and our performance compensation retirement plan.
Our short-term investments are included in other current assets and our long-term investments are included in other long-term assets on our consolidated balance sheet.
The
following is a summary of the unrealized gains, unrealized losses, and fair value by investment type:
10/28/2023
4/29/2023
(Unaudited,
amounts in thousands)
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Equity securities
$
i—
$
(i138)
$
i3,805
$
i1,338
$
(i103)
$
i6,853
Fixed
income
i—
(i400)
i13,714
i42
(i620)
i14,039
Other
i1,165
i—
i3,822
i1,171
i—
i4,011
Total
securities
$
i1,165
$
(i538)
$
i21,341
$
i2,551
$
(i723)
$
i24,903
/
i
The
following table summarizes sales of marketable securities:
Quarter Ended
Six Months Ended
(Unaudited, amounts in thousands)
10/28/2023
10/29/2022
10/28/2023
10/29/2022
Proceeds
from sales
$
i8,064
$
i8,418
$
i20,468
$
i12,664
Gross
realized gains
i1,715
i22
i1,876
i49
Gross
realized losses
(i272)
(i70)
(i740)
(i126)
/
i
The
following is a summary of the fair value of fixed income marketable securities, classified as available-for-sale securities, by contractual maturity:
(Unaudited, amounts in thousands)
10/28/2023
Within one year
$
i6,405
Within
two to five years
i961
Securities not due at a single maturity date
i6,348
Total
$
i13,714
/
Note 7: iProduct
Warranties
We accrue an estimated liability for product warranties when we recognize revenue on the sale of warrantied products. We estimate future warranty claims on product sales based on our historical claims experience and periodically adjust the provision to reflect changes in actual experience. We incorporate repair costs into our liability estimates, including materials, labor and overhead amounts necessary to perform repairs, and any costs associated with delivering repaired product to our customers. Over i90% of our warranty
liability relates to our Wholesale reportable segment, as we generally warrant our products against defects for one to ithree years on fabric and leather, from one to iten years on cushions and padding, and provide a limited lifetime warranty on certain mechanisms and frames, unless otherwise noted in the warranty. Additionally, our Wholesale segment warranties cover labor costs relating to our
parts for ione year. We provide a limited lifetime warranty against defects on a majority of Joybird products, which are a part of our Corporate and Other results. For all our manufacturer warranties, the
warranty period begins when the consumer receives our product. We use considerable judgment in making our estimates, and we record differences between our actual and estimated costs when the differences
are known.
i
A reconciliation of the changes in our product warranty liability is as follows:
Quarter
Ended
Six Months Ended
(Unaudited, amounts in thousands)
10/28/2023
10/29/2022
10/28/2023 (1)
10/29/2022
Balance as of the beginning of the period
$
i30,794
$
i27,516
$
i30,984
$
i27,036
Accruals
during the period
i6,957
i8,453
i13,622
i16,279
Settlements
during the period
(i6,624)
(i7,612)
(i13,479)
(i14,958)
Balance
as of the end of the period
$
i31,127
$
i28,357
$
i31,127
$
i28,357
(1)$i20.1
million and $i19.9 million is recorded in accrued expenses and other current liabilities as of October 28, 2023, and April 29, 2023, respectively, while the remainder is included in other long-term liabilities.
/
We recorded accruals during the periods presented in the table above,
primarily to reflect charges that relate to warranties issued during the respective periods.
Note 8: iStock-Based Compensation
i
The
table below summarizes the total stock-based compensation expense we recognized for all outstanding grants in our consolidated statement of income:
Quarter Ended
Six Months Ended
(Unaudited,
amounts in thousands)
10/28/2023
10/29/2022
10/28/2023
10/29/2022
Equity-based awards expense
$
i4,811
$
i3,662
$
i7,337
$
i5,079
Liability-based
awards expense (1)
(i35)
i18
i53
i146
Total
stock-based compensation expense
$
i4,776
$
i3,680
$
i7,390
$
i5,225
/
(1)Includes
stock appreciation rights, deferred stock units issued to Directors, restricted stock units, and performance-based units. Compensation expense for these awards is based on the market price of our common stock on the grant date and is remeasured each reporting period based on the market value of our common shares on the last day of the reported period.
Restricted Stock. During the first quarter of fiscal 2024, we granted i330,140
shares of restricted stock units to employees and we also have restricted stock awards outstanding from previous grants. We issue restricted stock at no cost to the employees and account for restricted stock awards as equity-based awards because when they vest, they will be settled in common shares. We recognize compensation expense for restricted stock over the vesting period equal to the fair value on the date our Compensation and Talent Oversight Committee of our board of directors approved the awards. Restricted stock awards vest at i25%
per year, beginning ione year from the grant date for a term of ifour years, with continued vesting upon retirement with respect to the fiscal 2023
and fiscal 2024 grants. We accelerate the expense for restricted stock granted to retirement-eligible employees over the vesting period, with expense recognized from the grant date through their retirement eligibility date or over the iten months following the grant date, whichever period is longer. We have elected to recognize forfeitures as an adjustment to compensation expense in the same period as the forfeitures occur. The weighted-average fair value of the restricted stock that was awarded in the first six months of fiscal 2024 was $i27.66
per share, the market value of our common shares on the date of grant.
Restricted Stock Units Issued to Directors. During the first six months of fiscal 2024, we granted i35,736 restricted stock units to our non-employee directors. Restricted stock units granted to our non-employee directors are offered at no cost to the directors and restricted
stock units granted following August 2022 vest on the earlier of the date a director ceases to be a member of the board (for any reason other than the termination of service for cause) or the-one year anniversary of the grant date. We account for these restricted stock units as equity-based awards because when they vest, they will be settled in shares of our common stock. We measure and recognize compensation expense for these awards based on the market price of our common shares on the date of grant. The weighted-average fair value of the restricted stock units granted to our non-employee directors in the first six months of fiscal 2024 was $i30.80
per share.
Performance Shares. During the first quarter of fiscal 2024, we granted i219,154 performance-based shares, and we also have performance-based share awards outstanding from previous grants. Payouts of these grants depend on our financial performance (i50%)
and a market-based condition based on the total return our shareholders receive on their investment in our stock relative to returns earned through investments in other public companies (i50%). The performance share opportunity ranges from i50% of the employee’s
target award if minimum performance requirements are met to a maximum of i200% of the
target award based on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally three fiscal years.
We account
for performance-based shares as equity-based awards because when they vest, they will be settled in common shares. In the event of an employee's termination during the vesting period, the potential right to earn shares under this program is generally forfeited and we have elected to recognize forfeitures as an adjustment to compensation expense in the same period in which the forfeitures occur. For shares that vest based on our results relative to the performance goals, we expense as compensation cost the fair value of the shares as of the day we granted the awards recognized over the performance period, taking into account the probability that we will satisfy the performance goals. The fair value of each share of the awards we granted in fiscal 2024 that vest based on attaining performance goals was $i25.48,
the market value of our common shares on the date we granted the awards less the dividends we expect to pay before the shares vest. For shares that vest based on market conditions, we use a Monte Carlo valuation model to estimate each share’s fair value as of the date of grant. The Monte Carlo valuation model uses multiple simulations to evaluate our probability of achieving various stock price levels to determine our expected performance ranking relative to our peer group. For shares that vest based on market conditions, we expense compensation cost over the vesting period regardless of whether the market condition is ultimately satisfied. Based on the Monte Carlo model, the fair value as of the grant date of the fiscal 2024 grant of shares that vest based on market conditions was $i34.15.
Stock
Options. We did not grant stock options to employees during fiscal 2024, but we have stock options outstanding from grants from prior years. We account for stock options as equity-based awards because when they are exercised, they will be settled in common shares. We recognize compensation expense for stock options over the vesting period equal to the fair value on the date our Compensation and Talent Oversight Committee of our board of directors approved the awards. The vesting period for our stock options ranges from one to ifour
years, with accelerated vesting upon retirement. The vesting date for retirement-eligible employees is the later of the date they meet the criteria for retirement or ten months after the grant date. We accelerate the expense for options granted to retirement eligible employees over the vesting period, with expense recognized from the grant date through their retirement eligibility date or over the iten months following the grant date, whichever period is longer. We have elected to recognize forfeitures as an adjustment to compensation expense in the same period as the forfeitures occur.
Granted options outstanding under the former long-term equity award plan remain in effect and have a term of i10 years. We estimated the fair value of the employee stock options granted in prior years at their respective grant date using the Black-Scholes option-pricing model, which requires management to make certain assumptions.
Note 9: iAccumulated
Other Comprehensive Income (Loss)
i
Activity in accumulated other comprehensive income (loss) for the quarters ended October 28, 2023, and October 29, 2022, is as follows:
We
reclassified both the unrealized gain (loss) on marketable securities and the net pension amortization from accumulated other comprehensive loss to net income through other income (expense), net.
i
The components of noncontrolling interest were as follows:
Quarter
Ended
Six Months Ended
(Unaudited, amounts in thousands)
10/28/2023
10/29/2022
10/28/2023
10/29/2022
Balance as of the beginning of the period
$
i10,668
$
i8,830
$
i10,261
$
i8,897
Net
income
i495
i702
i942
i1,154
Other
comprehensive loss
(i484)
(i404)
(i524)
(i923)
Dividends
distributed to joint venture minority partners
(i1,172)
i—
(i1,172)
i—
Balance
as of the end of the period
$
i9,507
$
i9,128
$
i9,507
$
i9,128
/
Note
10: iRevenue Recognition
Our revenue is primarily derived from product sales. We report product sales net of discounts and recognize them when control (rights and obligations associated with the product) passes to the customer. For sales to furniture retailers or distributors, control typically transfers when we ship the product. In cases where we sell directly to the end consumer, control of the product is generally transferred upon delivery.
For shipping and handling activities, we have elected to apply the
accounting policy election permitted in ASC 606-10-25-18B, which allows an entity to account for shipping and handling activities as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred. We expense shipping and handling costs at the time we recognize revenue in accordance with this election.
For sales tax, we have elected to apply the accounting policy election permitted in ASC 606-10-32-2A, which allows an entity to exclude from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). This allows us to present revenue net of these certain types of taxes.
We
have elected the practical expedient permitted in ASC 606-10-32-18, which allows an entity to recognize the promised amount of consideration without adjusting for the effects of a significant financing component if the contract has a duration of one year or less. As our contracts typically are less than one year in length and do not have significant financing components, we have not adjusted consideration.
(1)Primarily
includes discounts and allowances, revenue for advertising, royalties, parts, accessories, after-treatment products, surcharges, rebates and other sales incentives. In fiscal 2024, certain amounts that were previously charged as surcharges in fiscal 2023 are now included in the base product pricing and reflected in the amounts by product category.
/
Upholstered Furniture - Includes gross revenue for upholstered furniture, such as recliners, sofas, loveseats, chairs, sectionals, modulars, and ottomans. This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores (including company-owned stores), operators of La-Z-Boy Comfort Studio® locations,
England Custom Comfort Center locations, other major dealers, independent retailers, and the end consumer.
Casegoods Furniture - Includes gross revenue for casegoods furniture typically found in a bedroom, such as beds, chests, dressers, nightstands and benches; furniture typically found in the dining room, such as dining tables, storage units, and stools; and furniture typically found throughout the home, such as cocktail tables, chairsides, sofa tables, end tables, and entertainment centers. This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores (including company-owned stores), independent retailers, and the end consumer.
Contract Assets and Liabilities. We receive
customer deposits from end consumers before we recognize revenue and in some cases, we have the unconditional right to collect the remaining portion of the order price before we fulfill our performance obligation, resulting in a contract asset and a corresponding deferred revenue liability. In our consolidated balance sheet, customer deposits and deferred revenue (collectively, the "contract liabilities") are reported in accrued expenses and other current liabilities while contract assets are reported as other current assets.
i
The
following table presents our contract assets and liabilities:
Our reportable operating segments include the Wholesale segment and the Retail segment.
Wholesale Segment. Our Wholesale segment consists primarily of ithree
operating segments: La-Z-Boy, our largest operating segment, our England subsidiary, and our casegoods operating segment that sells furniture under ithree brands: American Drew®, Hammary® and Kincaid®. The Wholesale segment also includes our international wholesale and manufacturing businesses. We aggregate these operating segments into ione
reportable segment because they are economically similar and meet the other aggregation criteria for determining reportable segments. Our Wholesale segment manufactures and imports upholstered furniture, such as recliners and motion furniture, sofas, loveseats, chairs, sectionals, modulars, ottomans and sleeper sofas and imports casegoods (wood) furniture, such as bedroom sets, dining room sets, entertainment centers and occasional pieces. The Wholesale segment sells directly to La-Z-Boy Furniture Galleries® stores, operators of La-Z-Boy Comfort Studio® locations, England Custom Comfort Center locations, major dealers, and a wide cross-section of other independent retailers.
Retail Segment. Our Retail segment consists of ione
operating segment comprised of our i177 company-owned La-Z-Boy Furniture Galleries® stores. The Retail segment sells primarily upholstered furniture, in addition to some casegoods and other accessories, to end consumers through these stores.
Corporate and Other. Corporate and Other includes the shared costs for corporate functions, including human resources, information technology, finance and legal, in addition to revenue generated through royalty agreements with companies licensed to use the La-Z-Boy®
brand name on various products. We consider our corporate functions to be other business activities and have aggregated them with our other insignificant operating segments, including our global trading company in Hong Kong and Joybird, an e-commerce retailer that manufactures upholstered furniture, such as sofas, loveseats, chairs, ottomans, sleeper sofas and beds, and also imports casegoods (wood) furniture, such as occasional tables and other accessories. Joybird sells to the end consumer primarily online through its website, www.joybird.com. None of the operating segments included in Corporate and Other meet the requirements of reportable segments.
The following table presents sales and operating income (loss) by segment:
Quarter
Ended
Six Months Ended
(Unaudited, amounts in thousands)
10/28/2023
10/29/2022
10/28/2023
10/29/2022
Sales
Wholesale segment:
Sales
to external customers
$
i263,738
$
i319,613
$
i499,989
$
i643,341
Intersegment
sales
i101,229
i126,618
i198,453
i244,708
Wholesale
segment sales
i364,967
i446,231
i698,442
i888,049
Retail
segment sales
i214,309
i252,152
i422,552
i488,173
Corporate
and Other:
Sales to external customers
i33,388
i39,567
i70,545
i83,909
Intersegment
sales
i2,844
i4,070
i5,748
i8,458
Corporate
and Other sales
i36,232
i43,637
i76,293
i92,367
Eliminations
(i104,073)
(i130,688)
(i204,201)
(i253,166)
Consolidated
sales
$
i511,435
$
i611,332
$
i993,086
$
i1,215,423
Operating
Income (Loss)
Wholesale segment
$
i21,450
$
i38,476
$
i44,953
$
i64,618
Retail
segment
i27,935
i41,500
i57,199
i79,652
Corporate
and Other
(i15,773)
(i18,093)
(i34,014)
(i29,744)
Consolidated
operating income
i33,612
i61,883
i68,138
i114,526
Interest
expense
(i101)
(i119)
(i223)
(i278)
Interest
income
i4,042
i1,138
i7,098
i1,612
Other
income (expense), net
i104
i183
i660
i228
Income
before income taxes
$
i37,657
$
i63,085
$
i75,673
$
i116,088
/
Note
12: iIncome Taxes
Our effective tax rate was ii26.5/%
for both the second quarter and first six months ended October 28, 2023 compared with i25.8% and i26.2% for the second quarter and first six months ended October 29,
2022, respectively. Our effective tax rate varies from the i21% federal statutory rate primarily due to state taxes.
The following is a reconciliation of the numerators and denominators we used in our computations of basic and diluted earnings per share:
Quarter
Ended
Six Months Ended
(Unaudited, amounts in thousands, except per share data)
10/28/2023
10/29/2022
10/28/2023
10/29/2022
Numerator (basic and diluted):
Net
income available to common Shareholders
$
i27,199
$
i46,077
$
i54,678
$
i84,565
Denominator:
Basic
weighted average common shares outstanding
i43,008
i43,104
i43,123
i43,098
Contingent
common shares
i296
i78
i289
i76
Stock
option dilution
i97
i—
i67
i—
Diluted
weighted average common shares outstanding (1)
i43,401
i43,182
i43,479
i43,174
Earnings
per Share:
Basic
$
i0.63
$
i1.07
$
i1.27
$
i1.96
Diluted
$
i0.63
$
i1.07
$
i1.26
$
i1.96
(1)Diluted
earnings per share was computed using the treasury stock method.
/
The values for contingent common shares set forth above reflect the dilutive effect of common shares that we would have issued to employees under the terms of performance-based share awards if the relevant performance period for the award had been the reporting period.
We exclude the effect of options from our diluted share calculation when the weighted average exercise price of the options is higher than the average market price, since including the options' effect would be anti-dilutive. For the second quarter and six months ended October 28, 2023, we excluded
options to purchase i0.5 million shares and i0.7 million
shares, respectively, from the diluted share calculation. For the second quarter and six months ended October 29, 2022, we excluded options to purchase ii1.5/
million shares from the diluted share calculation.
Note 14: iFair Value Measurements
Accounting standards require that we put financial assets and liabilities into one of three categories based on the inputs we use to value them:
•Level 1 — Financial assets and liabilities, the values of which are based on unadjusted quoted
market prices for identical assets and liabilities in an active market that we have the ability to access.
•Level 2 — Financial assets and liabilities, the values of which are based on quoted prices in markets that are not active or on model inputs that are observable for substantially the full term of the asset or liability.
•Level 3 — Financial assets and liabilities, the values of which are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
Accounting standards require that in making fair value measurements, we use observable market data when available. When inputs used to measure fair value fall within different levels of
the hierarchy, we categorize the fair value measurement as being in the lowest level that is significant to the measurement. We recognize transfers between levels of the fair value hierarchy at the end of the reporting period in which they occur.
In addition to assets and liabilities that we record at fair value on a recurring basis, we are required to record assets and liabilities at fair value on a non-recurring basis. We measure non-financial assets such as other intangible assets, goodwill, and other long-lived assets at fair value when there is an indicator of impairment, and we record them at fair value only when we recognize an impairment loss.
The following table presents the fair value hierarchy for those assets and liabilities we measured at fair value on a recurring basis at October 28, 2023 and April 29, 2023. There were no transfers into or out of Level 1, Level 2, or Level 3 for any of the periods presented.
(1)Certain
marketable securities investments are measured at fair value using net asset value per share under the practical expedient methodology.
At October 28, 2023 and April 29, 2023, we held marketable securities intended to enhance returns on our cash and to fund future obligations of our non-qualified defined benefit retirement plan, our executive deferred compensation plan and our performance compensation retirement plan.
The fair value measurements for our Level 1 and Level 2 securities are based on quoted prices in active markets, as well as through broker quotes and independent valuation providers, multiplied by the number of shares owned exclusive of any transaction costs.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS
We have prepared this Management’s Discussion and Analysis as an aid to understanding our financial results. It should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. After a cautionary note regarding forward-looking statements, we begin with an introduction to our key businesses and then provide discussions of our results of operations, liquidity and capital resources, and critical accounting policies.
La-Z-Boy
Incorporated and its subsidiaries (individually and collectively, "we,""our,""us,""La-Z-Boy" or the "Company") make "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, forward-looking statements include information concerning expectations, projections or trends relating to our results of operations, financial results, financial condition, strategic initiatives and plans, expenses, dividends, share repurchases, liquidity, use of cash and cash requirements, borrowing capacity, investments, future economic performance, and our business and industry.
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements may include words
such as "aim,""anticipates,""believes,""continues,""estimates,""expects,""feels,""forecasts,""hopes,""intends,""plans,""projects,""likely,""seeks,""short-term,""non-recurring,""one-time,""outlook,""target,""unusual," or words of similar meaning, or future or conditional verbs, such as "will,""should,""could," or "may." A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak to our views only as of the date of this report. These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties, many of which
are unforeseeable and beyond our control. Additional risks and uncertainties that we do not presently know about or that we currently consider to be immaterial may also affect our business operations and financial performance.
Our actual future results and trends may differ materially from those we anticipate depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed in our Annual Report for the fiscal year ended April 29, 2023, under Item 1A, "Risk Factors" and Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and in our other filings with the Securities and Exchange Commission ("SEC"). Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements
contained in our Annual Report for the fiscal year ended April 29, 2023 or any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or for any other reason.
Introduction
Our Business
We are the leading global producer of reclining chairs and the second largest
manufacturer/distributor of residential furniture in the United States. The La-Z-Boy Furniture Galleries® stores retail network is the third largest retailer of single-branded furniture in the United States. We manufacture, market, import, export, distribute and retail upholstery furniture products under the La-Z-Boy®, England, Kincaid®, and Joybird® tradenames. In addition, we import, distribute and retail accessories and casegoods (wood) furniture productsunder the Kincaid®, American Drew®, Hammary®, and
Joybird® tradenames.
As of October 28, 2023, our supply chain operations included the following:
•Five major manufacturing locations and 14 distribution centers in the United States and four facilities in Mexico to support our speed-to-market and customization strategy
•A logistics company that distributes a portion of our products in the United States
•A wholesale sales office that is responsible for distribution of our product in the United Kingdom and Ireland
•An upholstery manufacturing business in the United
Kingdom
•A global trading company in Hong Kong which helps us manage our Asian supply chain by establishing and maintaining relationships with our Asian suppliers, as well as identifying efficiencies and savings opportunities
During the third quarter of fiscal 2023, we made the decision to close our manufacturing facility in Torreón, Mexico as part of our initiative to drive improved efficiencies through optimized staffing levels within our plants. As a result of this action, charges were recorded within the Wholesale segment in the third and fourth quarters of fiscal 2023,
totaling $9.2 million in selling, general and administrative ("SG&A") expense for the impairment of various assets, primarily long-lived assets, and $1.6 million in cost of sales, primarily related to severance. During the first quarter of fiscal 2024, we terminated our lease on the Torreón facility and recognized a $1.2 million gain in SG&A expense within the Wholesale segment related to the settlement of our lease obligation on the previously impaired long-lived assets.
During the second quarter of fiscal 2024, we announced further actions intended to drive efficiencies and optimize our manufacturing capacity in our global supply chain operations. As part of this initiative, we made the decision to shift upholstery production from our Ramos, Mexico operations to our other upholstery plants and relocate our cut and sew operations back to Ramos, Mexico, resulting in the permanent closure of
our leased cut and sew facility in Parras, Mexico. As a result of these actions, charges were recorded within the Wholesale segment in the second quarter of fiscal 2024, totaling $3.6 million in cost of sales, primarily related to severance, and $3.0 million in SG&A expense for the accelerated depreciation of fixed assets.
We also participate in two consolidated joint ventures in Thailand that support our international businesses: one that operates a manufacturing facility and another that operates a wholesale sales office. Additionally, we have contracts with several suppliers in Asia to produce products that support our pure import model for casegoods.
We sell our products through multiple channels: to furniture retailers or distributors in the United
States, Canada, and approximately 50 other countries, including the United Kingdom, China, Australia, South Korea and New Zealand, directly to consumers through retail stores that we own and operate, and through our websites, www.la-z-boy.com and www.joybird.com.
•The centerpiece of our retail distribution strategy is our network of 353 La-Z-Boy Furniture Galleries® stores and 521 La-Z-Boy Comfort Studio® locations, each dedicated to
marketing our La-Z-Boy branded products. We consider this dedicated space to be “proprietary.”
◦La-Z-Boy Furniture Galleries® stores help consumers furnish their homes by combining the style, comfort, and quality of La-Z-Boy furniture with our available design services. We own 177 of the La-Z-Boy Furniture Galleries® stores, while the remainder are independently owned and operated.
◦La-Z-Boy Comfort Studio® locations are defined spaces within larger independent retailers that are dedicated to displaying and selling La-Z-Boy branded products. All 521 La-Z-Boy Comfort Studio® locations are independently
owned and operated.
◦In total, we have approximately 7.6 million square feet of proprietary floor space dedicated to selling La-Z-Boy branded products in North America.
◦We also have approximately 2.6 million square feet of floor space outside of the United States and Canada dedicated to selling La-Z-Boy branded products.
•Our other brands, England, American Drew, Hammary, and Kincaid enjoy distribution through many of the same outlets, with slightly over half of Hammary’s sales originating through the La-Z-Boy Furniture Galleries® store network.
◦Kincaid and England
have their own dedicated proprietary in-store programs with 623 outlets and approximately 1.8 million square feet of proprietary floor space.
•In total, our proprietary floor space includes approximately 12.0 million square feet worldwide.
•Joybird sells product primarily online and also has limited retail showroom floor space through 11 small-format stores in key urban markets.
Century Vision Strategy
Our goal is to deliver value to our shareholders over the long term by executing our Century Vision, our strategic plan for growth to our centennial year in 2027, in which we aim to grow sales and market share and strengthen our operating margins.
The foundation of our strategic plan is to drive disproportionate growth of our two consumer brands, La-Z-Boy and Joybird, by delivering the transformational power of comfort with a consumer-first approach. We plan to drive growth in the following ways:
•Leveraging our connection to comfort and reinvigorating our brand with a consumer focus and expanded omni-channel presence. Our strategic initiatives to leverage and reinvigorate our iconic La-Z-Boy brand center on a renewed focus on leveraging
the compelling La-Z-Boy comfort message, accelerating our omni-channel offering, and identifying additional consumer-base growth opportunities. We launched our new brand campaign and marketing platform in fiscal 2024, Long Live the Lazy, with compelling messaging designed to increase recognition and consideration of the brand. We expect this new messaging will enhance the appeal of our brand with a broader consumer base. Further, our goal is to connect with consumers along their purchase journey through multiple means, whether online or in person. We are driving change throughout our digital platforms to improve the user experience, with a specific focus on the ease with which customers browse through our broad product assortment, customize products to their liking, find stores to make a purchase, or purchase at www.la-z-boy.com.
•Growing
our La-Z-Boy Furniture Galleries® store network. We expect our strategic initiatives in this area to generate growth in our Retail segment through an increased company-owned store count and in our Wholesale segment as our proprietary distribution network expands. We are not only focused on growing the number of locations, but also on upgrading existing store locations to our new concept designs. We are prioritizing growth of our company-owned Retail business by opportunistically acquiring existing La-Z-Boy Furniture Galleries® stores and opening new La-Z-Boy Furniture Galleries® stores, primarily in markets that can be serviced through our distribution centers, where we see opportunity for growth, or where we believe we
have opportunities for further market penetration. Additionally, we are testing potential store formats to expand our reach to value-seeking consumers and currently operate two Outlet by La-Z-Boy stores.
•Expanding the reach of our wholesale distribution channels. Consumers experience the La-Z-Boy brand in many channels including the La-Z-Boy Furniture Galleries® store network and the La-Z-Boy Comfort Studio® locations, our store-within-a-store format. While consumers increasingly interact with the brand digitally, our consumers also demonstrate an affinity for visiting our stores to shop, allowing us to frequently deliver the flagship La-Z-Boy Furniture Galleries® store, or La-Z-Boy Comfort Studio®,
experience and provide design services. In addition to our branded distribution channels, approximately 2,200 other dealers sell La-Z-Boy products, providing us the benefit of multi-channel distribution. These outlets include some of the best-known names in the industry, including Slumberland, Nebraska Furniture Mart, Mathis Brothers and Raymour & Flanagan. We believe there is significant growth potential for our consumer brands through these retail channels.
Profitably growing the Joybird brand
•Profitably growing the Joybird brand with a digital-first consumer experience. During fiscal 2019, we purchased Joybird, a leading e-commerce retailer and manufacturer of upholstered furniture with a direct-to-consumer model. We believe that Joybird is a brand with significant potential and
our strategic initiatives in this area focus on fueling profitable growth through an increase in digital marketing spend to drive awareness and customer acquisition, ongoing investments in technology, an expansion of product assortment, and providing additional small-format stores in key urban markets to enhance our consumers' omni-channel experience.
Enhancing our enterprise capabilities
•Enhancing our enterprise capabilities to support the growth of our consumer brands and enable potential acquisitions for growth. Key to successful growth is ensuring we have the capabilities to support that growth, including an agile supply chain, modern technology for consumers and employees, and by delivering a human-centered employee experience. Through our Century Vision strategic plan, we have several
initiatives focused on enhancing these capabilities with a consumer-first focus.
Reportable Segments
Our reportable operating segments include the Retail segment and the Wholesale segment.
•Retail Segment. Our Retail segment consists of one operating segment comprised of our 177 company-owned La-Z-Boy Furniture Galleries® stores. The Retail segment sells primarily upholstered furniture, in addition to some casegoods and other accessories, to end consumers through these stores.
•Wholesale Segment. Our Wholesale segment consists primarily of three operating segments:
La-Z-Boy, our largest operating segment, our England subsidiary, and our casegoods operating segment that sells furniture under three
brands: American Drew®, Hammary® and Kincaid®. The Wholesale segment also includes our international wholesale and manufacturing businesses. We aggregate these operating segments into one reportable segment because they are economically similar and meet the other aggregation criteria for determining reportable segments. Our Wholesale segment manufactures and imports upholstered furniture,
such as recliners and motion furniture, sofas, loveseats, chairs, sectionals, modulars, ottomans and sleeper sofas and imports casegoods (wood) furniture, such as bedroom sets, dining room sets, entertainment centers and occasional pieces. The Wholesale segment sells directly to La-Z-Boy Furniture Galleries® stores, operators of La-Z-Boy Comfort Studio® locations, England Custom Comfort Center locations, major dealers, and a wide cross-section of other independent retailers.
•Corporate and Other. Corporate and Other includes the shared costs for corporate functions, including human resources, information technology, finance and legal, in addition to revenue generated through royalty agreements with companies licensed to use the La-Z-Boy®
brand name on various products. We consider our corporate functions to be other business activities and have aggregated them with our other insignificant operating segments, including our global trading company in Hong Kong and Joybird, an e-commerce retailer that manufactures upholstered furniture, such as sofas, loveseats, chairs, ottomans, sleeper sofas and beds, and also imports casegoods (wood) furniture, such as occasional tables and other accessories. Joybird sells to the end consumer primarily online through its website, www.joybird.com. None of the operating segments included in Corporate and Other meet the requirements of reportable segments.
Results
of Operations
Fiscal 2024 Second Quarter Compared with Fiscal 2023 Second Quarter
La-Z-Boy Incorporated
Quarter
Ended
Six Months Ended
(Unaudited, amounts in thousands, except percentages)
10/28/2023
10/29/2022
% Change
10/28/2023
10/29/2022
% Change
Sales
$
511,435
$
611,332
(16.3)%
$
993,086
$
1,215,423
(18.3)
%
Operating
income
33,612
61,883
(45.7)%
68,138
114,526
(40.5)
%
Operating margin
6.6%
10.1%
6.9%
9.4%
Sales
Consolidated
sales decreased $99.9 million, or 16%, and $222.3 million, or 18%, in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago. Sales in the first six months of fiscal 2023 were fueled by the delivery of a significant backlog resulting from heightened demand in prior periods. As a result, the decrease in sales during the second quarter and first six months of fiscal 2024 reflects a return to industry-wide seasonal trends relative to a historically high comparative period. To a lesser extent, sales also decreased in the second quarter and first six months of fiscal 2024 as a result of selective pricing and promotional actions taken to maintain competitiveness.
Operating Margin
Operating margin, which is calculated as operating income as a percentage of sales, decreased 350 basis points and
250 basis points in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago.
•Gross margin, which is calculated as gross profit as a percentage of sales, increased 270 basis points and 360 basis points in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago.
◦Changes in our consolidated mix improved gross margin by 70 basis points in the first six months of fiscal 2024 compared with the same period a year ago, driven by relative growth of our Retail segment, which has a higher gross margin than our Wholesale segment.
◦Lower input costs, led by declining raw material costs and favorable
duty expense, improved gross margin in the second quarter and first six months of fiscal 2024, compared with the same periods a year ago. As input costs continued to decline, we took selective pricing and promotional actions to maintain competitiveness, which partially offset these benefits.
◦Compared with the same period a year ago, gross margin in the first six months of fiscal 2024 further benefited from a favorable shift in product mix toward higher priced products.
◦During the second quarter of fiscal 2024 we recognized $3.6 million in severance-related
charges as part of our global supply chain optimization initiative, resulting in a 70 basis point and 40 basis point decrease in gross margin in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago.
•SG&A expenses as a percentage of sales increased 620 basis points and 610 basis points in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago.
◦Changes in our consolidated mix increased SG&A expense as a percentage of sales by 60 basis points in the first six months of fiscal 2024 compared with the same period a year ago, driven by relative growth of our Retail segment, which has a higher SG&A expense as a percentage of sales than our
Wholesale segment.
◦As a part of our global supply chain optimization initiatives, during the first quarter of fiscal 2024 we recognized a $1.2 million gain related to the settlement of our Torreón, Mexico lease obligation on previously impaired long-lived assets and during the second quarter of fiscal 2024, we recognized $3.0 million in accelerated depreciation related to long-lived assets at our Ramos, Mexico facility. Together, these items resulted in a 60 basis point and 20 basis point increase in SG&A expense as a percentage of sales in the second quarter and first six months of fiscal 2024, respectively.
◦The remaining increase in SG&A expense as a percentage of sales was primarily driven by lower delivered sales relative to selling expenses and fixed costs as total SG&A expenses were up $1.4 million and
down $5.8 million in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago.
We discuss each segment’s results in the following section.
Retail Segment
Quarter
Ended
Six Months Ended
(Unaudited, amounts in thousands, except percentages)
10/28/2023
10/29/2022
% Change
10/28/2023
10/29/2022
% Change
Sales
$
214,309
$
252,152
(15.0)%
$
422,552
$
488,173
(13.4)
%
Operating
income
27,935
41,500
(32.7)%
57,199
79,652
(28.2)
%
Operating margin
13.0%
16.5%
13.5%
16.3%
Sales
The
Retail segment’s sales decreased $37.8 million, or 15%, and $65.6 million, or 13%, in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago, primarily due to a decline in delivered same-store sales resulting from the adverse comparison to historic sales levels in the prior year, which were fueled by the delivery of previously built backlog. The decrease in delivered same-store sales was partially offset by a $5.7 million and $13.7 million increase in sales during the second quarter and first six months of fiscal 2024, respectively, from our retail store acquisitions that occurred in fiscal 2023 and fiscal 2024.
While delivered sales were down relative to the same periods last year, written sales were up 3% and 5% in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago. The increases were driven
by relatively flat and a 1% increase in written same-store sales for the second quarter and first six months of fiscal 2024, respectively, with the remainder primarily attributable to acquired retail stores. Same-store sales include the sales of all currently active stores which have been open and company-owned for each comparable period.
Operating Margin
The Retail segment's operating margin decreased 350 basis points and 280 basis points in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago.
•Gross margin increased 90 basis points and 120 basis points in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago, primarily due to prior
period pricing actions taken by the Retail business which were realized as products were delivered to consumers.
•SG&A expense as a percentage of sales increased 440 basis points and 400 basis points in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago, primarily due to lower delivered sales relative to selling expenses and fixed costs, mainly occupancy expenses.
(Unaudited, amounts in thousands, except percentages)
10/28/2023
10/29/2022
% Change
10/28/2023
10/29/2022
% Change
Sales to external customers
$
263,738
$
319,613
$
499,989
$
643,341
Intersegment
sales
101,229
126,618
198,453
244,708
Total Sales
364,967
446,231
(18.2)%
698,442
888,049
(21.4)
%
Operating
income
21,450
38,476
(44.3)%
44,953
64,618
(30.4)
%
Operating margin
5.9%
8.6%
6.4%
7.3%
Sales
The
Wholesale segment’s sales decreased $81.3 million, or 18%, and $189.6 million, or 21%, in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago. Over the same periods, intercompany sales from our Wholesale segment to our Retail segment decreased 20% and 19%, respectively. The decrease in sales primarily reflects a decline in delivered unit volume as the significant backlog built up in prior periods returns to pre-pandemic levels and the industry returns to typical seasonality. To a lesser extent, sales also decreased in the second quarter and first six months of fiscal 2024, as a result of selective pricing and promotional actions taken to maintain competitiveness.
Operating Margin
The Wholesale segment's operating margin decreased 270 basis points and 90 basis points in the second quarter
and first six months of fiscal 2024, respectively, compared with the same periods a year ago.
•Gross margin increased 250 basis points and 360 basis points in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago.
◦Favorable input costs, including declining raw material costs and duty expense, drove a 610 basis point and 490 basis point increase in gross margin during the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago. With the continued decline in input costs, we took selective pricing and promotional actions to maintain competitiveness, resulting in a 250 basis point and 150 basis point decrease in gross margin, compared with the same respective periods
of the prior year.
◦Gross margin in the first six months of fiscal 2024 also benefited 60 basis points from a favorable shift in product mix towards higher priced products.
◦During the second quarter of fiscal 2024 we recognized $3.6 million in severance-related charges as part of our global supply chain optimization initiative, resulting in a 100 basis point and 50 basis point decrease in gross margin in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago.
•SG&A expense as a percentage of sales increased 520 basis points and 450 basis points in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year
ago.
◦Reduced fixed cost leverage contributed to higher SG&A expense as a percentage of sales in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago.
◦Higher marketing expense in support of our Long Live the Lazy campaign launch drove a 230 basis point and 160 basis point increase in SG&A expense as a percentage of sales in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago. Investments in this campaign support all La-Z-Boy branded products, including those sold through our Retail segment.
◦As a part of our global supply chain optimization initiatives,
during the first quarter of fiscal 2024 we recognized a $1.2 million gain related to the settlement of our Torreón, Mexico lease obligation on previously impaired long-lived assets and during the second quarter of fiscal 2024, we recognized $3.0 million in accelerated depreciation related to long-lived assets at our Ramos, Mexico facility. Together, these items resulted in an 80 basis point and 30 basis point increase in SG&A expense as a percentage of sales in the second quarter and first six months of fiscal 2024, respectively.
(Unaudited, amounts in thousands, except percentages)
10/28/2023
10/29/2022
% Change
10/28/2023
10/29/2022
% Change
Sales
$
36,232
$
43,637
(17.0)%
$
76,293
$
92,367
(17.4)
%
Intercompany
eliminations
(104,073)
(130,688)
20.4%
(204,201)
(253,166)
19.3
%
Operating loss
(15,773)
(18,093)
12.8%
(34,014)
(29,744)
(14.4)
%
Sales
Corporate
and Other sales decreased $7.4 million and $16.1 million in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago. The change in sales was primarily led by Joybird sales which decreased $5.8 million to $32.3 million and $12.9 million to $67.9 million in the second quarter and first six months of fiscal 2024, respectively, largely due to lower delivered volume resulting from continued demand challenges. Compared with the respective periods a year ago, written sales for Joybird were up 5% in the second quarter of fiscal 2024, resulting from effective marketing investments driving higher website traffic, but down 8% in the first six months of fiscal 2024.
Intercompany eliminations decreased in the second quarter and first six months of
fiscal 2024 compared with the same periods a year ago due to lower sales from our Wholesale segment to our Retail segment.
Operating Loss
Our Corporate and Other operating loss decreased $2.3 million in the second quarter of fiscal 2024, but increased $4.3 million in the first six months of fiscal 2024, compared with the same periods a year ago. The second quarter of fiscal 2024 benefited from improved Joybird operating performance while the first six months of fiscal 2024 experienced lower operating profit from our global trading company in Hong Kong. Additionally, Corporate and Other's operating loss includes intercompany inventory profit elimination adjustments which were favorable in the second quarter but unfavorable during the first six months of fiscal 2024, compared with the same periods a year ago.
Non-Operating
Income (Expense)
Interest Income
Interest income was $2.9 million and $5.5 million higher in the second quarter and first six months of fiscal 2024, respectively, compared with the same periods a year ago, primarily driven by higher interest rates on higher cash balances.
Income Taxes
Our effective tax rate was 26.5% for both the second quarter and first six months of fiscal 2024 compared with 25.8% and 26.2% for the second quarter and first six months of fiscal 2023. Our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes.
Liquidity
and Capital Resources
Our sources of liquidity include cash and cash equivalents, short-term and long-term investments, cash from operations, and amounts available under our credit facility. We believe these sources remain adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, and fulfill other cash requirements for day-to-day operations and capital expenditures, including fiscal 2024 contractual obligations.
We had cash, cash equivalents and restricted cash of $333.5 million at October 28, 2023, compared with $346.7 million at April 29, 2023. In addition, we had investments to enhance our returns on cash of $8.7 million at October 28, 2023, compared
with $11.6 million at April 29, 2023.
The following table illustrates the main components of our cash flows:
Six Months Ended
(Unaudited,
amounts in thousands)
10/28/2023
10/29/2022
Cash Flows Provided By (Used For)
Net cash provided by operating activities
$
56,876
$
30,954
Net cash used for investing activities
(25,304)
(44,138)
Net
cash used for financing activities
(43,883)
(25,937)
Exchange rate changes
(900)
(1,841)
Change in cash, cash equivalents and restricted cash
$
(13,211)
$
(40,962)
Operating
Activities
During the first six months of fiscal 2024, net cash provided by operating activities was $56.9 million, an increase of $25.9 million compared with the prior year, mainly due to a smaller reduction in customer deposits, reflecting a reduced backlog, partially offset by lower net income. Our cash provided by operating activities in fiscal 2024 was primarily attributable to net income, adjusted for non-cash items, partially offset by a $22.8 million decrease in other liabilities, mainly due to the payout of our fiscal 2023 incentive compensation awards during the first quarter of fiscal 2024, along with a $13.8 million decrease in customer deposits reflecting the reduced backlog.
Investing Activities
During the first six months of fiscal 2024, net cash used for investing activities
was $25.3 million, a decrease of $18.8 million compared with the prior year primarily due to lower capital expenditures and higher proceeds from asset sales. Cash used for investing activities in fiscal 2024 included the following:
•Cash used for capital expenditures in the period was $26.5 million compared with $40.4 million during the first six months of fiscal 2023, which is primarily related to La-Z-Boy Furniture Galleries® (new stores and remodels) and upgrades at our manufacturing and distribution facilities. We anticipate that spending on these items will continue in fiscal 2024 with full year fiscal 2024 capital expenditures expected to be in the range of $60 to $70 million. We have no material contractual commitments outstanding for future capital expenditures.
•Cash
used for acquisitions was $7.3 million, primarily related to the acquisition of the Colorado Springs, Colorado and Lafayette, Louisiana retail businesses.
•Proceeds from the sale of investments, net of investment purchases was $4.5 million.
Financing Activities
On October 15, 2021, we entered into a five-year $200 million unsecured revolving credit facility (as amended, the “Credit Facility”). Borrowings under the Credit Facility may be used by the Company for general corporate purposes. We may increase the size of the facility, either in the form of additional revolving commitments or new term loans, subject to the discretion of each lender
to participate in such an increase, up to an additional amount of $100 million. The Credit Facility will mature on October 15, 2026 and provides us the ability to extend the maturity date for two additional one-year periods, subject to the satisfaction of customary conditions. As of October 28, 2023, we have no borrowings outstanding under the Credit Facility.
The Credit Facility contains certain restrictive loan covenants, including, among others, financial covenants requiring a maximum consolidated net lease adjusted leverage ratio and a minimum consolidated fixed charge coverage ratio, as well as customary covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of certain assets. As of October 28,
2023, we were in compliance with our financial covenants under the Credit Facility. We believe our cash and cash equivalents, short-term investments, and cash from operations, in addition to our available Credit Facility, will provide adequate liquidity for our business operations over the next 12 months.
During the first six months of fiscal 2024, net cash used for financing activities was $43.9 million, an increase of $17.9 million compared with the prior year, primarily due to higher share repurchases. Cash used for financing activities in fiscal 2024 included the following:
•Our board of directors has authorized the repurchase of company stock and we spent $20.0 million in the first six months of fiscal 2024 to repurchase 0.7 million shares. As of October 28,
2023, 6.6 million shares remained available
for repurchase pursuant to this authorization. With the operating cash flows we anticipate generating in fiscal 2024, we expect to continue repurchasing Company stock.
•Cash paid to our shareholders in quarterly dividends was $15.6 million. Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. We expect the board to continue declaring regular quarterly cash dividends for the foreseeable future, but it may discontinue doing so at any time.
•Cash
paid for holdback payments made on prior-period acquisitions was $5.0 million for a guaranteed payment related to the acquisition of Joybird.
Exchange Rate Changes
Due to changes in exchange rates, our cash, cash equivalents, and restricted cash decreased by $0.9 million for the six months ended October 28, 2023. These changes impacted our cash balances held in Canada, Thailand, and the United Kingdom.
Other
During the second quarter of fiscal 2024, there were no material changes to the information about our contractual obligations and commitments disclosed in our Annual Report on Form 10-K for the fiscal year ended April 29, 2023.
We do not expect our continuing compliance with existing federal, state and local statutes dealing with protection of the environment to have a material effect on our capital expenditures, earnings, competitive position or liquidity.
Critical Accounting Policies
We disclosed our critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended April 29, 2023. There were no material changes to our critical accounting policies or estimates during the six months ended October 28, 2023.
Recent
Accounting Pronouncements
See Note 1, Basis of Presentation, to the consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently adopted accounting standards and other new accounting standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first six months of fiscal 2024, there were no material changes from the information
contained in Item 7A of our Annual Report on Form 10-K for the fiscal year ended April 29, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that such disclosure controls and
procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There were no changes in our internal controls over financial reporting that occurred during the second quarter of fiscal 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We disclosed our risk factors in our Annual Report on Form 10-K for the fiscal year ended April 29, 2023. There have been no material changes to our risk factors during the first six months of fiscal 2024.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our board of directors
has authorized the repurchase of Company stock. With respect to the second quarter of fiscal 2024, pursuant to the existing board authorization, we adopted a plan to repurchase company stock pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934. The plan was effective July 31, 2023. Under this plan, our broker had the authority to repurchase Company shares on our behalf, subject to SEC regulations and the price, market volume and timing constraints specified in the plan. The plan expired at the close of business on October 27, 2023. We spent $10.0 million in the second quarter of fiscal 2024 to repurchase 0.3 million shares, pursuant to the plan and as discretionary purchases. As of October 28, 2023, 6.6 million shares remained available for repurchase pursuant to the board authorization. With the operating cash
flows we anticipate generating in fiscal 2024, we expect to continue repurchasing Company stock, subject to market conditions and other factors as deemed relevant by our board of directors.
The following table summarizes our repurchases of Company stock during the quarter ended October 28, 2023 and includes shares purchased from employees to satisfy their withholding tax obligations upon vesting of restricted shares:
(Unaudited, amounts in thousands, except per share data)
Total
number of shares repurchased (1)
Average price paid per share
Total number of shares repurchased as part of publicly announced plan (2)
Maximum number of shares that may yet be repurchased under the plan
(1) In addition to the 326,284 shares we repurchased during the quarter as part of our publicly announced, board-authorized plan described above, this column includes 138 shares we repurchased from employees to satisfy their withholding tax obligations upon vesting of restricted shares.
(2) On October 28, 1987, our board of directors announced the authorization of the plan to repurchase Company stock. The plan originally authorized 1.0 million
shares, and since October 1987, 33.5 million shares have been added to the plan for repurchase. The authorization has no expiration date.
ITEM 5. OTHER INFORMATION
Securities Trading Plans of Directors and Officers
During the quarter ended October 28, 2023, none of our directors or officers iadopted or iterminated
a Rule 10b5-1 trading plan or iadopted or iterminated a non-Rule 10b5-1 trading arrangement (as each term is defined in Item 408(a) of Regulation S-K).
The cover page from the Company’s Quarterly Report on Form 10-Q
for the quarter ended October 28, 2023, formatted in Inline XBRL (included in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
