La-Z-Boy Sales Decline 9.6% For Quarter

Furniture World Magazine

La-Z-Boy Incorporated reported its operating results for its fiscal 2007 third quarter ended January 27, 2007. Net sales for the quarter were $403.9 million, down 9.6%, compared with the prior-year period. The company posted a per-share loss of $0.15, which included an after-tax $0.28 per-share loss from discontinued operations, most of which was attributable to the non-cash write- down of intangible assets of businesses held for sale. Income from continuing operations was $0.13 per share. The per-share amounts also included an after- tax restructuring charge of $0.03 per share relating to the company-owned retail operation, non-cash stock option expense of $0.01 per share after tax and income per share of $0.04 after tax related to anti-dumping duties received on bedroom furniture imported from China. In last year's third quarter, the company reported earnings per share from continuing operations of $0.19, which included an after-tax per share restructuring charge of $0.01. For the nine months ended January 27, 2007, net sales were $1.2 billion, a decrease of 2.8% compared with the prior-year period. The company posted a per-share loss of $0.07 for the nine-month period, including an after-tax loss of $0.28 per share for discontinued operations, most of which is attributable to the write-down of intangible assets of businesses held for sale. Income from continuing operations was $0.21 per share. The per-share amounts also included an after-tax restructuring charge of $0.06 relating to the company- owned retail operation, non-cash stock option expense of $0.02 per share after tax, and income per share of $0.04 after tax related to anti-dumping duties. These results compare with last year's earnings per share from continuing operations of $0.13 per share, which included after-tax restructuring charges of $0.10 per share. Kurt L. Darrow, President and CEO, said, "Despite the challenging sales environment pervasive throughout our industry, we were able to improve margins in our wholesale businesses while doing an excellent job managing our inventory, reducing our debt and generating cash. In our company-owned retail segment, we continued to execute against our strategy to strengthen our performance and, therefore, expect meaningful improvement in our next fiscal year. We also took a number of steps to strategically align our portfolio of companies for the future and will strive diligently towards a smooth transition for both our customers and employees of Sam Moore, Pennsylvania House and Clayton Marcus. We appreciate their dedication to the brands and their continued support as we go through this process and are in discussions with potential buyers who would be suitable long-term partners for those businesses." Upholstery: For the fiscal 2007 third quarter, the company achieved an operating margin of 7.6% on a year-over-year sales decrease of 11.8%. Darrow stated, "On significantly lower volume, we were able to hold our margin against last year's third quarter and increase it sequentially from our fiscal 2007 second quarter. This performance continues to demonstrate the success of our cost- containment initiatives, which are focused on increased global sourcing as well as the conversion of our La-Z-Boy branded facilities to the cellular production process, which will improve our speed to market and quality while lowering costs." During the quarter, the company signed a letter of intent to sell its Sam Moore upholstered chair operations to Hooker Furniture and results from Sam Moore are included in discontinued operations. A separate press release announcing the pending transaction was distributed simultaneously with this news release. Darrow continued, "We are also working to broaden our distribution and further strengthen the La-Z-Boy Furniture Galleries® store system." For the quarter, the La-Z-Boy Furniture Galleries® store system, which includes both company-owned and independent- licensed stores, opened eight new stores, relocated and/or remodeled eight and closed three, bringing the total store count to 340, of which 187 are in the New Generation format. Darrow noted, "We are on track to open, relocate or remodel approximately 45 New Generation stores in the overall network in fiscal 2007 and plan in the fiscal fourth quarter to add four new stores to the system, relocate or convert four and close eight." System-wide, for the fourth 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 8.3% and total sales, which includes new stores, decreased 5.1%. Casegoods: In the third quarter, casegoods sales were $63.1 million, down 14.6% from last year's third quarter. The segment's operating margin was 9.1%, versus last year's third-quarter margin of 7.9%. Darrow stated, "As a result of transitioning our business to primarily an import model with a heavily variable cost structure, we posted solid operating margins." Darrow added, "During the quarter we continued to evaluate the various companies within our portfolio and our Board approved a plan to sell our Pennsylvania House/Clayton Marcus operation and their results are included in discontinued operations. Pennsylvania House has very strong consumer brand recognition and, together with Clayton Marcus, we will explore alternatives to maximize returns to our shareholders. Looking ahead in our casegoods business, we will maintain our focus on competitive new product introductions, with superior design and quality, while improving our service levels to our customers." During the quarter, our petitioning casegoods companies collectively received $3.4 million in Continued Dumping and Subsidy Offset Act of 2000 (CDSOA) payments, net of legal expenses, in duties collected in connection with the dumping of wooden bedroom furniture imported from China and is not included in the segment's operating income. Retail: For the quarter, retail sales were $61.1 million compared with $57.4 million in last year's third quarter. On an operating basis, the segment incurred a loss, primarily as a result of the difficult retail environment, transition costs and its high fixed-cost structure relative to current volume. Darrow commented, "We continued to make significant changes to our company-owned retail operation this quarter. We opened four new company-owned stores, relocated one and converted two stores into the New Generation format. Our strategy for company-owned stores remains focused on the top 25 markets in North America where we can have a large enough store system in the right locations to further leverage our retail fixed cost structure. After evaluating our company-owned network of stores, we made the decision to exit the Pittsburgh, Pennsylvania market in order to focus on the larger markets with greater potential. We are in the process of closing four stores and a warehouse which will be completed at the end of our fourth quarter." Darrow added, "La-Z-Boy Incorporated owns 72 stores, including 44 in the New Generation format. For the fourth quarter, the company plans to add four New Generation stores to its retail segment: two new stores and two relocations/conversions, and will close six. This would bring the total number of company-owned stores opened, remodeled and/or relocated during fiscal 2007 to 19, with the total number of stores in the new format to 48, representing 71% of the 68 stores anticipated at fiscal year end. Our retail group continues to make progress in three key areas. We are increasing sales by adding stores, converting and relocating existing stores to the new format and achieving economies of scale through better penetration in our markets. Second, we are reducing redundancies and costs by consolidating individual market operations and have already implemented a new operating system in our Northeast region which will be rolled out to our other markets with completion expected this Fall. Third, we are improving gross margins as we re-merchandise the operations acquired over the past two years. Restructuring: During the quarter, a pre-tax restructuring charge of $2.9 million, or $0.03 after-tax per share, was recorded and principally relates to the store closings in the Pittsburgh, Pennsylvania market and related contract termination costs for leases, severance and benefits, the write-down of certain leasehold improvements and other restructuring costs. Balance Sheet: For the quarter, the company's debt-to-capitalization ratio stood at 25.4%, a decrease from fiscal 2006 year end's ratio of 26.5%. The company did not repurchase any shares in the third quarter and has approximately 5.4 million shares remaining in its 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 challenging retail environment persists and we believe the industry, overall, will continue to go through a difficult period. For the fiscal 2007 fourth quarter, we expect sales to be down 8% to 10% compared with last year's fourth quarter and expect earnings per share to be in the range of $0.03 to $0.07, including up to a $0.01 per share charge for stock option expense. In last year's fourth-quarter, we reported a loss per share of $0.20, which included a $0.44 write-down of intangibles." 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 and La-Z-Boy. The La-Z-Boy Casegoods Group companies are American Drew, Hammary, Kincaid and Lea. The corporation's proprietary distribution network is dedicated exclusively to selling La-Z-Boy Incorporated products and brands, and includes 340 stand-alone La-Z-Boy Furniture Galleries® stores and 307 La-Z-Boy In- Store Galleries, in addition to in-store gallery programs at the company's Kincaid, 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/.