1. Summary
- For the first quarter of FY 2024, La-Z-Boy performed as expected; consolidated sales decreased 20% to $482 million, mainly due to the backlog driven which boosted sales for the FY 2023, and also due to a steep decrease in the wholesale segment.
- The consolidated GAAP operating margin decreased 150 basis points to 7.2% vs. 8.7% in the first quarter of FY 2023. The profit margin could continue to decrease in the short term and perhaps even fall slightly lower than its pre-pandemic levels.
- La-Z-Boy maintains a solid financial position with low debt on its balance sheet, which allows it to invest in its Century Vision strategy for achieving double-digit profitability in the long term. LZB opened two new company-owned stores and acquired two independent LZB stores.
- However, LZB will likely continue to feel the pressure from higher operating costs and the reduction in discretionary spending as consumers remain cautious in a tightening economy.
2. Consolidated Results: Q1 2024 vs Q1 2023
For the first quarter of FY 2024, La-Z-Boy performed as expected; consolidated sales decreased 20% to $482 million compared to Q1 2023, in line with the previously provided guidance of $470 to $490 million. This was largely driven by lower delivered unit volume compared to last year due to the spike in backlog-driven sales experienced in FY 2022. The consolidated GAAP operating margin was 7.2% vs. 8.7%. Our expectation is for the operating margin to decrease in the short term to pre-pandemic levels of 4%–5% as Lazy Boy continues with its retail expansion strategy.
3. Retail Segment
Sales from the retail segment, which includes sales for La-Z-Boy’s owned furniture galleries, decreased 12% to $208 million compared to Q1 FY 2023. Total written sales increased 8%, mostly due to the opening of new stores and the acquisition of independently owned stores, which is a key component of the La-Z-Boy “Century Vision” strategy for increasing its direct-to-customer services and operating margins over the long term. However, written same-store sales increased only by 2%, which is still relatively resilient as other retailers are experiencing declines in their retail segment.
Non-GAAP operating margin decreased 23% to $29 million, mostly driven by a fixed cost deleverage. The non-GAAP operating margin excludes a $1 million pre-tax, or $0.02 per diluted share gain, related to the closure of the Torreon, MX facility, as well as the purchase accounting charges related to the acquisition of new stores and independently owned stores.
4. Wholesale Segment
Sales decreased 25% to $333 million due to a lower delivered volume versus Q1 2023, which was increased sustainably from an elevated backlog. This segment includes La-Z-Boy, England Furniture, American Drew, Hammary, Kincaid and the company’s international wholesale and manufacturing businesses, which distributed its products mainly through independent retailers. What is concerning is the decline of La-Z-Boy wholesale, as it represents approximately 69% of the company’s sales and about 44% of the operating income excluding the loss from the Corporate and Other segment.
Non-GAAP operating margin increased by 70 basis points to 6.8%. Over the upcoming quarters, this segment is likely to experience further pressure on its sales and profit margins as the general dealers and non-furniture gallery-type customers, who drive almost half of the wholesale sales, may experience significant pressure to maintain their profitability and operations due to the elevated interest rates and a challenging macroeconomic environment, which tends to impact significantly discretionary spending. However, further pressure on independently owned LZB stores could represent a long-term value opportunity for La-Z-Boy to acquire those struggling stores and continue executing its retail expansion strategy.
5. Corporate & Other
In this segment, Joybird‘s written and delivered sales declined 17% to $36 million. The Joybird brand was acquired in 2018 to reinforce La-Z-Boy’s presence in the digital channels, but it is currently unprofitable and has experienced further pressure on its digital sales, for which La-Z-Boy has started to extend its physical presence and deliver a more flexible omnichannel experience to the customers.
6. Cash flow and Net Income
The cash flow from operating activities decreased 21% to $26 million compared to $33 million in the first quarter of FY 2023. La-Z-Boy invested $13 million in capital expenditures, mainly related to the opening of two new company-owned stores and the acquisition of two independent La-Z-Boy stores. Additionally, LZB returned $18 million to shareholders, including $10 million in share repurchases and $8 million in dividends.
Net income decreased 28% to $27.9 million compared to the $38.9 million generated in the first quarter of FY 2023. This reflects the continuing pressure that LZB is facing, even though the company is pointing to the record pandemic-related backlog sales from FY 2023 as one of the key factors for the decrease in its recent performance.
Additionally, for the quarter ended, LZB cash remained relatively flat at $336,434 compared to $343,374 in the previous quarter. This puts LZB in a stable position, as the company doesn’t carry significant debt on its balance sheet and can continue with its retail expansion strategy. Moreover, on the recent conference Call for Q1 FY 2024 results, LZB CEO Melinda Whittington mentioned that the company is aiming to reach 400 retail stores (including company-owned and independently operated stores) in the medium term.
7. Outlook for Q2 FY 2024
LZB’s guidance for consolidated sales is to be in the range of $490–$510 million, and the operating margin is expected to be between 6.5% and 7.5%. This would represent a decrease of approximately 16.5%–20% compared to Q2 FY 2023.
We consider La-Z-Boy’s fundamentals to be strong, and the company is well-positioned in the market. LZB is the world’s largest maker of reclining chairs, and its long-term focus on strengthening the vertical integration of the company to provide an end-to-end service to the customers will increase its brand image and its overall profitability as the company-owned retail stores yield higher operating margins.
However, we think there is still further pressure to be felt on the company’s sales and overall profitability in the short term as the operating costs will increase due to the opening and acquisition of stores, and the sales from the wholesale segment could continue to decline due to the tightening of the economy and the reduction in discretionary spending.
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