Furniture manufacturer La-Z-Boy (LZB 37.25, +4.15) sprung to all-time highs this morning after the company’s first quarter sales and comps impressed the Street.
On the whole, consolidated first quarter sales growth of
7.7% to $384.7 mln was enough to beat Street expectations. First quarter
earnings per share (EPS) also outperformed at $0.39 on written same-store sales
for the entire La-Z-Boy Furniture Galleries network of 3.1%. Company-owned
retail segment same-store sales increased 4.6%.
The company’s Upholstery segment posted a 6.9% sales increase over the prior year, driven by a higher price mix, increased unit volume, and the benefit of the company’s first round of price increases. Operating margins were 8.1%, down slightly from last year, primarily due to raw material cost. The company would expect to see the segment realize the full benefit of its most recent round of selling price increases by the end of the second quarter.
Sales in the Casegoods business for the first quarter were $28.4 mln, up 11.3% from the prior year, and the operating margin increased to 10% versus 10.7% last year. Casegoods continues to deliver across all aspects of the business.
Last August, the company outlined a three-prong e-commerce strategy aimed to increase its presence with online consumers. Components of the strategy included selling more of the company's products online through la-z-boy.com, Wayfair, and Amazon. Another component is leveraging the strength of the company’s supply chain to support other e-commerce brands. And the third is to invest in early-stage furniture brands and companies that have strong business models and a focus on selling directly to consumers online, which is the fastest-growing segment of the furniture industry.
Lastly, in the Retail segment, the company delivered a same-store sales increase of 4.6%. Sales for the segment increased 7.9% to $119 mln and the operating margin more than doubled to 3.7% from 1.6% in last year's first quarter. With new analytics, data driven changes translated to increase conversion in sales while design services and custom orders drove improvement in the average ticket. Also, in mid-August LZB closed the acquisition of the nine La-Z-Boy Furniture Galleries stores from its Arizona-based independent dealer for about $40 mln in cash. These stores will be included in the company’s Retail segment going forward.
Management also spoke to a potentially significant headwind -- retaliatory duties and tariffs. The team is keeping a watchful eye on the developments and is working with an industry association, the American Home Furnishing Alliance, in lobbying efforts. The Association's position mirrors LZB’s in that it believes these duties are not good for the consumer, nor are they good for the majority of LZB’s industry. The retaliatory surtax went into effect on LZB’s product going into Canada in July, and the company is watching to see the impact that additional duty will have on its Canadian volumes.
The company also commented on the recently completed acquisitions of Joybird and the aforementioned La-Z-Boy Furniture Galleries stores. The company believes that with ownership of both acquisitions for roughly nine months, it would expect to add approximately $80 mln of incremental sales to the company for the fiscal year. Excluding purchase accounting adjustments, LZB expects the combined entities to begin to be slightly accretive to profit by the end of this year. Separately, the purchase accounting for these transactions is in process. The company estimates these charges to be about $0.12 to $0.14 per diluted share for 2019 and 2020, respectively.
In terms of the second quarter, the company reminds investors that last year's second quarter included a benefit of $0.02 per share for an insurance gain recorded in SG&A, and the benefit of $0.03 per share for a discreet tax item. For this year's second quarter, the company expects to incur a charge of $0.04 to $0.06 per share for the purchase accounting adjustments plus approximately $0.08 per share for the higher incentive compensation costs, offset somewhat by a $0.05 per share benefit from the lower tax rate when compared to last year's second quarter.
The company also stated that it expects capital expenditures for the full fiscal 2019 year to be in the range of $50-60 mln, down from the previously guided $55-65 mln, yet still higher than last year due also to the construction of a new corporate office building and plant expansion for England upholstery subsidiary; upgrades to its Dayton, Tennessee manufacturing facility; and the relocation of one of its regional distribution centers.
Shares of LZB have come off their best levels of the day, now up “only” 12.5% vs 18.3% at today’s highs. After initially selling off a bit at the open (trimming gains to “just” 7.6%) the stock has begun to carve out a trading range between 37 and 38. Shares of furniture peers BSET +2.31%, HOFT +1.04%, HVT -0.22%, ETH -0.64% trade mixed.