La-Z-Boy(US:LZB)2023-02-20 16:00markdown PART I - FINANCIAL INFORMATION (UNAUDITED) [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements of La-Z-Boy Incorporated, including the Statement of Income, Comprehensive Income, Balance Sheet, Cash Flows, and Changes in Equity, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial line items [Consolidated Statement of Income](index=3&type=section&id=Consolidated%20Statement%20of%20Income) Consolidated Statement of Income (Unaudited, amounts in thousands, except per share data): | Metric | Quarter Ended 1/28/2023 | Quarter Ended 1/22/2022 | Nine Months Ended 1/28/2023 | Nine Months Ended 1/22/2022 | | :--------------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Sales | $572,723 | $571,573 | $1,788,146 | $1,672,245 | | Gross profit | $246,427 | $219,365 | $748,623 | $644,742 | | Operating income | $42,840 | $39,487 | $157,366 | $127,971 | | Net income attributable to La-Z-Boy Inc. | $31,726 | $28,467 | $116,291 | $92,549 | | Basic EPS | $0.74 | $0.65 | $2.70 | $2.09 | | Diluted EPS | $0.74 | $0.65 | $2.70 | $2.07 | - For the quarter ended January 28, 2023, sales increased by **$1.2 million** (**0.2%**) YoY, while for the nine months ended January 28, 2023, sales increased by **$115.9 million** (**6.9%**) YoY[7](index=7&type=chunk) - Net income attributable to La-Z-Boy Incorporated increased by **$3.2 million** (**11.4%**) for the quarter and **$23.7 million** (**25.7%**) for the nine months ended January 28, 2023, compared to the prior year periods[7](index=7&type=chunk) [Consolidated Statement of Comprehensive Income](index=4&type=section&id=Consolidated%20Statement%20of%20Comprehensive%20Income) Consolidated Statement of Comprehensive Income (Unaudited, amounts in thousands): | Metric | Quarter Ended 1/28/2023 | Quarter Ended 1/22/2022 | Nine Months Ended 1/28/2023 | Nine Months Ended 1/22/2022 | | :------------------------------------------------ | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Net income | $31,577 | $29,082 | $117,296 | $94,706 | | Total other comprehensive income (loss) | $5,764 | $(735) | $121 | $(1,917) | | Total comprehensive income attributable to La-Z-Boy Inc. | $36,063 | $27,631 | $115,908 | $91,081 | - Total other comprehensive income (loss) significantly improved from a loss of **$(735) thousand** in Q3 FY2022 to an income of **$5,764 thousand** in Q3 FY2023, primarily due to a positive currency translation adjustment[12](index=12&type=chunk) [Consolidated Balance Sheet](index=5&type=section&id=Consolidated%20Balance%20Sheet) Consolidated Balance Sheet (Unaudited, amounts in thousands): | Metric | 1/28/2023 | 4/30/2022 | | :-------------------------------- | :-------- | :-------- | | Total current assets | $848,994 | $951,776 | | Total assets | $1,846,355 | $1,932,089 | | Total current liabilities | $509,384 | $675,689 | | Total equity | $916,504 | $819,622 | - Total current assets decreased by **$102.8 million** from April 30, 2022, to January 28, 2023, primarily due to decreases in receivables and other current assets[15](index=15&type=chunk) - Total current liabilities decreased by **$166.3 million**, driven by reductions in accounts payable, accrued expenses, and deferred revenue[15](index=15&type=chunk) - Total equity increased by **$96.9 million**, reflecting an increase in retained earnings[15](index=15&type=chunk) [Consolidated Statement of Cash Flows](index=6&type=section&id=Consolidated%20Statement%20of%20Cash%20Flows) Consolidated Statement of Cash Flows (Unaudited, amounts in thousands, Nine Months Ended): | Cash Flow Activity | 1/28/2023 | 1/22/2022 | | :-------------------------------- | :-------- | :-------- | | Net cash provided by operating activities | $127,052 | $45,192 | | Net cash used for investing activities | $(57,965) | $(77,036) | | Net cash used for financing activities | $(33,894) | $(122,288) | | Change in cash, cash equivalents and restricted cash | $35,189 | $(154,725) | - Net cash provided by operating activities significantly increased to **$127.1 million** for the nine months ended January 28, 2023, from **$45.2 million** in the prior year, primarily due to net income and a decrease in receivables[18](index=18&type=chunk)[123](index=123&type=chunk) - Net cash used for investing activities decreased to **$58.0 million**, down from **$77.0 million** in the prior year, mainly due to lower capital expenditures and acquisitions[18](index=18&type=chunk)[124](index=124&type=chunk) - Net cash used for financing activities decreased to **$33.9 million**, from **$122.3 million** in the prior year, largely due to reduced common stock repurchases[18](index=18&type=chunk)[131](index=131&type=chunk) [Consolidated Statement of Changes in Equity](index=7&type=section&id=Consolidated%20Statement%20of%20Changes%20in%20Equity) Consolidated Statement of Changes in Equity (Unaudited, amounts in thousands): | Metric | At April 30, 2022 | At January 28, 2023 | | :-------------------------------- | :---------------- | :---------------- | | Common Shares | $43,089 | $43,140 | | Capital in Excess of Par Value | $342,252 | $350,406 | | Retained Earnings | $431,181 | $518,732 | | Accumulated Other Comprehensive Loss | $(5,797) | $(6,180) | | Noncontrolling Interests | $8,897 | $10,406 | | Total Equity | $819,622 | $916,504 | - Retained earnings increased by **$87.5 million** from April 30, 2022, to January 28, 2023, primarily driven by net income, partially offset by dividends paid and stock repurchases[21](index=21&type=chunk) - Accumulated other comprehensive loss slightly increased from **$(5,797) thousand** to **$(6,180) thousand**[21](index=21&type=chunk) [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) [Note 1. Basis of Presentation](index=9&type=section&id=Note%201.%20Basis%20of%20Presentation) The financial statements are unaudited and prepared in conformity with GAAP, consistent with the fiscal 2022 10-K. The company decided to close its Torreón, Mexico manufacturing facility in Q3 FY2023, resulting in $9.2 million in SG&A impairment charges and $0.9 million in cost of sales for severance - The company closed its Torreón, Mexico manufacturing facility in Q3 FY2023, leading to **$9.2 million** in SG&A expense for asset impairment and **$0.9 million** in cost of sales for severance[31](index=31&type=chunk) - The Torreón facility accounted for approximately **3%** of La-Z-Boy branded production[31](index=31&type=chunk) [Note 2. Acquisitions](index=9&type=section&id=Note%202.%20Acquisitions) The company completed several retail acquisitions in fiscal 2023 and 2022, including Barboursville, Spokane, and Denver, to grow its company-owned retail business. These acquisitions involved reacquiring exclusive operating rights and recognizing goodwill in the Retail segment, reflecting expected synergies - Acquired Barboursville, West Virginia (December 2022), Spokane, Washington (September 2022 for **$4.7 million**), and Denver, Colorado (July 2022 for **$10.1 million**) retail businesses[35](index=35&type=chunk)[36](index=36&type=chunk) - Recognized **$3.0 million** and **$7.6 million** in goodwill for the Spokane and Denver acquisitions, respectively, in the Retail segment, primarily for expected integration synergies[35](index=35&type=chunk)[36](index=36&type=chunk) - Acquired Furnico Furniture Ltd in the U.K. (October 2021 for **$13.3 million**) to realize production synergies, cost savings, and increased capacity for the La-Z-Boy U.K. business, recognizing **$9.2 million** in goodwill in the Wholesale segment[38](index=38&type=chunk)[39](index=39&type=chunk) [Note 3. Cash and Restricted Cash](index=12&type=section&id=Note%203.%20Cash%20and%20Restricted%20Cash) The company holds cash and cash equivalents, along with restricted cash serving as collateral for letters of credit Cash and Restricted Cash (Unaudited, amounts in thousands): | Metric | 1/28/2023 | 1/22/2022 | | :--------------------------------------- | :-------- | :-------- | | Cash and cash equivalents | $280,763 | $236,712 | | Restricted cash | $3,282 | $3,266 | | Total cash, cash equivalents and restricted cash | $284,045 | $239,978 | [Note 4. Inventories](index=12&type=section&id=Note%204.%20Inventories) A summary of the company's inventories, categorized by raw materials, work in process, and finished goods, is provided, showing a slight increase in total inventories Inventories (Unaudited, amounts in thousands): | Category | 1/28/2023 | 4/30/2022 | | :---------------- | :-------- | :-------- | | Raw materials | $137,042 | $146,896 | | Work in process | $25,119 | $36,834 | | Finished goods | $198,680 | $185,870 | | Total inventories | $303,553 | $303,191 | - Total inventories remained relatively stable, increasing slightly from **$303.19 million** at April 30, 2022, to **$303.55 million** at January 28, 2023[43](index=43&type=chunk) [Note 5. Goodwill and Other Intangible Assets](index=13&type=section&id=Note%205.%20Goodwill%20and%20Other%20Intangible%20Assets) Goodwill increased to $204.8 million at January 28, 2023, primarily due to acquisitions in the Retail segment. Intangible assets also increased, mainly from reacquired rights related to retail store acquisitions Goodwill by Reportable Segment (Unaudited, amounts in thousands): | Segment | Balance at April 30, 2022 | Acquisitions | Translation Adjustment | Balance at January 28, 2023 | | :---------------- | :------------------------ | :----------- | :--------------------- | :-------------------------- | | Wholesale Segment | $20,207 | — | $(295) | $19,912 | | Retail Segment | $118,951 | $10,598 | $(126) | $129,423 | | Corporate and Other | $55,446 | — | — | $55,446 | | Total Goodwill | $194,604 | $10,598 | $(421) | $204,781 | Changes in Intangible Assets (Unaudited, amounts in thousands): | Category | Balance at April 30, 2022 | Acquisitions | Amortization | Translation Adjustment | Balance at January 28, 2023 | | :-------------------- | :------------------------ | :----------- | :----------- | :--------------------- | :-------------------------- | | Indefinite Lived Trade Names | $1,155 | — | — | — | $1,155 | | Finite-Lived Trade Name | $3,392 | — | $(599) | — | $2,793 | | Indefinite Lived Reacquired Rights | $27,319 | $6,093 | — | $(95) | $33,317 | | Other Intangible Assets | $2,105 | — | $(155) | $(35) | $1,915 | | Total Intangible Assets | $33,971 | $6,093 | $(754) | $(130) | $39,180 | - Goodwill increased by **$10.2 million** to **$204.8 million**, primarily from **$10.6 million** in acquisitions within the Retail segment[44](index=44&type=chunk) - Total intangible assets increased by **$5.2 million** to **$39.2 million**, mainly due to **$6.1 million** in reacquired rights from acquisitions[45](index=45&type=chunk) [Note 6. Investments](index=13&type=section&id=Note%206.%20Investments) The company holds various short-term and long-term investments, including marketable securities, held-to-maturity investments, and cost basis investments, used to enhance cash returns and fund compensation plans Total Investments (Unaudited, amounts in thousands): | Category | 1/28/2023 | 4/30/2022 | | :-------------------------------- | :-------- | :-------- | | Short-term investments | $12,315 | $17,359 | | Long-term investments | $27,335 | $34,178 | | Total investments | $39,650 | $51,537 | | Investments to enhance returns on cash | $15,793 | $27,239 | | Investments to fund compensation/retirement plans | $13,542 | $14,219 | | Other investments | $10,315 | $10,079 | - Total investments decreased by **$11.9 million** from April 30, 2022, to January 28, 2023, with reductions in both short-term and long-term marketable securities[47](index=47&type=chunk) Sales of Marketable Securities (Unaudited, amounts in thousands): | Metric | Quarter Ended 1/28/2023 | Quarter Ended 1/22/2022 | Nine Months Ended 1/28/2023 | Nine Months Ended 1/22/2022 | | :---------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Proceeds from sales | $5,514 | $7,784 | $18,178 | $29,437 | | Gross realized gains | $3 | $142 | $52 | $696 | | Gross realized losses | $(81) | $(20) | $(207) | $(356) | [Note 7. Accrued Expenses and Other Current Liabilities](index=15&type=section&id=Note%207.%20Accrued%20Expenses%20and%20Other%20Current%20Liabilities) Accrued expenses and other current liabilities decreased significantly, primarily driven by a reduction in customer deposits and deferred revenue as the company worked through its backlog Accrued Expenses and Other Current Liabilities (Unaudited, amounts in thousands): | Category | 1/28/2023 | 4/30/2022 | | :--------------------------------------- | :-------- | :-------- | | Payroll and other compensation | $59,534 | $62,373 | | Accrued product warranty, current portion | $18,517 | $16,436 | | Customer deposits | $129,019 | $183,233 | | Deferred revenue | $60,986 | $139,006 | | Other current liabilities | $77,304 | $95,345 | | Total accrued expenses and other current liabilities | $345,360 | $496,393 | - Customer deposits decreased by **$54.2 million** and deferred revenue decreased by **$78.0 million**, reflecting the reduction of backlog to pre-pandemic levels[48](index=48&type=chunk) [Note 8. Product Warranties](index=15&type=section&id=Note%208.%20Product%20Warranties) The company accrues estimated product warranty liabilities upon revenue recognition, based on historical claims experience. The majority of the warranty liability relates to the Wholesale segment Product Warranty Liability Reconciliation (Unaudited, amounts in thousands): | Metric | Quarter Ended 1/28/2023 | Quarter Ended 1/22/2022 | Nine Months Ended 1/28/2023 | Nine Months Ended 1/22/2022 | | :-------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Balance as of the beginning of the period | $28,357 | $25,068 | $27,036 | $23,636 | | Accruals during the period | $8,663 | $7,271 | $24,942 | $21,158 | | Settlements during the period | $(7,722) | $(6,612) | $(22,680) | $(19,067) | | Balance as of the end of the period | $29,298 | $26,361 | $29,298 | $26,361 | - The product warranty liability increased to **$29.3 million** at January 28, 2023, from **$27.0 million** at the beginning of the nine-month period, reflecting accruals for new warranties[50](index=50&type=chunk) [Note 9. Stock-Based Compensation](index=15&type=section&id=Note%209.%20Stock-Based%20Compensation) The company recognized stock-based compensation expense for equity-based awards (stock options, restricted stock, performance shares) and liability-based awards. Key assumptions for valuing stock options and performance shares are provided Total Stock-Based Compensation Expense (Unaudited, amounts in thousands): | Metric | Quarter Ended 1/28/2023 | Quarter Ended 1/22/2022 | Nine Months Ended 1/28/2023 | Nine Months Ended 1/22/2022 | | :-------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Equity-based awards expense | $3,377 | $2,533 | $8,456 | $8,887 | | Liability-based awards expense | $(54) | $(73) | $92 | $(696) | | Total stock-based compensation expense | $3,323 | $2,460 | $8,548 | $8,191 | - Total stock-based compensation expense increased to **$3.3 million** in Q3 FY2023 from **$2.5 million** in Q3 FY2022, and to **$8.5 million** for the nine months ended January 28, 2023, from **$8.2 million** in the prior year[52](index=52&type=chunk) - The fair value of stock options granted in fiscal 2023 was estimated at **$7.90** per option using the Black-Scholes model, with a risk-free interest rate of **2.87%** and stock price volatility of **42.78%**[54](index=54&type=chunk) [Note 10. Accumulated Other Comprehensive Income (Loss)](index=17&type=section&id=Note%2010.%20Accumulated%20Other%20Comprehensive%20Income%20%28Loss%29) Accumulated other comprehensive income (loss) includes currency translation adjustments, unrealized gains/losses on marketable securities, and net pension amortization. The balance shifted from a loss of $(10.5) million at October 29, 2022, to a loss of $(6.2) million at January 28, 2023, primarily due to positive translation adjustments Accumulated Other Comprehensive Income (Loss) (Unaudited, amounts in thousands): | Component | Balance at October 29, 2022 | Changes before reclassifications | Amounts reclassified to net income | Tax effect | Balance at January 28, 2023 | | :-------------------------------- | :-------------------------- | :------------------------------- | :------------------------------- | :--------- | :-------------------------- | | Translation adjustment | $(6,551) | $4,014 | — | — | $(2,537) | | Unrealized gain (loss) on marketable securities | $(501) | $303 | $78 | $(94) | $(214) | | Net pension amortization and net actuarial loss | $(3,465) | — | $49 | $(13) | $(3,429) | | Total | $(10,517) | $4,317 | $127 | $(107) | $(6,180) | - The balance of accumulated other comprehensive loss improved from **$(10.5) million** at October 29, 2022, to **$(6.2) million** at January 28, 2023, largely driven by a **$4.0 million** positive currency translation adjustment[59](index=59&type=chunk) [Note 11. Revenue Recognition](index=18&type=section&id=Note%2011.%20Revenue%20Recognition) Revenue is primarily derived from product sales, recognized when control transfers to the customer. The company applies practical expedients for shipping/handling, sales tax, and significant financing components. Detailed revenue disaggregation by product category and segment is provided Consolidated Net Sales by Segment (Unaudited, amounts in thousands): | Segment | Quarter Ended 1/28/2023 | Quarter Ended 1/22/2022 | Nine Months Ended 1/28/2023 | Nine Months Ended 1/22/2022 | | :---------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Wholesale | $407,603 | $423,281 | $1,295,652 | $1,255,872 | | Retail | $251,157 | $197,052 | $739,330 | $571,319 | | Corporate and Other | $33,510 | $49,979 | $125,877 | $138,626 | | Eliminations | $(119,547) | $(98,739) | $(372,713) | $(293,572) | | Consolidated Net Sales | $572,723 | $571,573 | $1,788,146 | $1,672,245 | Contract Assets and Liabilities (Unaudited, amounts in thousands): | Category | 1/28/2023 | 4/30/2022 | | :-------------------- | :-------- | :-------- | | Contract assets | $60,986 | $139,006 | | Customer deposits | $129,019 | $183,233 | | Deferred revenue | $60,986 | $139,006 | | Total contract liabilities | $190,005 | $322,239 | - During the nine months ended January 28, 2023, the company recognized **$292.7 million** in revenue related to its contract liability balance at April 30, 2022[69](index=69&type=chunk) [Note 12. Segment Information](index=21&type=section&id=Note%2012.%20Segment%20Information) The company operates through two reportable segments: Wholesale (manufacturing and importing upholstered and casegoods furniture) and Retail (company-owned La-Z-Boy Furniture Galleries stores). Corporate & Other includes shared corporate costs and other insignificant operating segments like Joybird - Wholesale segment manufactures and imports upholstered and casegoods furniture, selling to various retailers and distributors[71](index=71&type=chunk) - Retail segment consists of **167** company-owned La-Z-Boy Furniture Galleries stores, selling primarily upholstered furniture to end consumers[71](index=71&type=chunk) - Corporate & Other includes corporate functions, royalty revenue, and Joybird, an e-commerce retailer[71](index=71&type=chunk) Sales and Operating Income (Loss) by Segment (Unaudited, amounts in thousands): | Segment | Quarter Ended 1/28/2023 Sales | Quarter Ended 1/22/2022 Sales | Nine Months Ended 1/28/2023 Sales | Nine Months Ended 1/22/2022 Sales | Quarter Ended 1/28/2023 Operating Income (Loss) | Quarter Ended 1/22/2022 Operating Income (Loss) | Nine Months Ended 1/28/2023 Operating Income (Loss) | Nine Months Ended 1/22/2022 Operating Income (Loss) | | :-------------------- | :---------------------------- | :---------------------------- | :------- | :------------------------------ | :------------------------------ | :-------------------------------------- | :-------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Wholesale segment | $407,603 | $423,281 | (3.7)% | $1,295,652 | $1,255,872 | 3.2% | $16,940 | $27,639 | $81,558 | $89,098 | | Retail segment | $251,157 | $197,052 | 27.5% | $739,330 | $571,319 | 29.4% | $44,203 | $24,102 | $123,855 | $68,502 | | Corporate and Other | $33,510 | $49,979 | (33.0)% | $125,877 | $138,626 | (9.2)% | $(18,303) | $(12,254) | $(48,047) | $(29,629) | | Consolidated | $572,723 | $571,573 | 0.2% | $1,788,146 | $1,672,245 | 6.9% | $42,840 | $39,487 | $157,366 | $127,971 | [Note 13. Income Taxes](index=22&type=section&id=Note%2013.%20Income%20Taxes) The effective tax rate for Q3 FY2023 was 27.7% and 26.6% for the nine months, higher than the prior year periods, primarily due to non-taxable gains on corporate-owned life insurance and state taxes in the prior year Effective Tax Rate: | Period | 1/28/2023 | 1/22/2022 | | :-------------------- | :-------- | :-------- | | Third Quarter | 27.7% | 24.8% | | Nine Months Ended | 26.6% | 25.9% | - The effective tax rate increased in Q3 FY2023 and the nine months ended January 28, 2023, compared to the prior year, mainly due to non-taxable gains on corporate-owned life insurance and state taxes in fiscal 2022[73](index=73&type=chunk) [Note 14. Earnings per Share](index=23&type=section&id=Note%2014.%20Earnings%20per%20Share) Basic and diluted earnings per share increased for both the third quarter and nine months ended January 28, 2023, compared to the prior year, reflecting higher net income attributable to La-Z-Boy Incorporated Earnings per Share (Unaudited, except per share data): | Metric | Quarter Ended 1/28/2023 | Quarter Ended 1/22/2022 | Nine Months Ended 1/28/2023 | Nine Months Ended 1/22/2022 | | :-------------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Net income available to common Shareholders | $31,726 | $28,467 | $116,291 | $92,543 | | Basic weighted average common shares outstanding | 43,137 | 43,701 | 43,111 | 44,342 | | Diluted weighted average common shares outstanding | 43,137 | 43,968 | 43,111 | 44,640 | | Basic EPS | $0.74 | $0.65 | $2.70 | $2.09 | | Diluted EPS | $0.74 | $0.65 | $2.70 | $2.07 | - Basic and diluted EPS increased from **$0.65** to **$0.74** for the quarter and from **$2.09** to **$2.70** for the nine months ended January 28, 2023[74](index=74&type=chunk) - Options to purchase **1.5 million shares** were excluded from the diluted share calculation for the third quarter and nine months ended January 28, 2023, as their effect would be anti-dilutive[76](index=76&type=chunk) [Note 15. Fair Value Measurements](index=23&type=section&id=Note%2015.%20Fair%20Value%20Measurements) The company categorizes financial assets and liabilities into Level 1, 2, or 3 based on valuation inputs. Level 3 assets include investments in privately-held companies, while the Level 3 liability for contingent consideration from the Joybird acquisition was reduced to zero due to updated financial projections Fair Value Hierarchy of Assets (Unaudited, amounts in thousands) at January 28, 2023: | Category | Level 1 | Level 2 | Level 3 | NAV(1) | Total | | :---------------------- | :------ | :------ | :------ | :----- | :------ | | Marketable securities | $— | $21,044 | $2,737 | $6,886 | $30,667 | | Held-to-maturity investments | $1,404 | $— | $— | $— | $1,404 | | Cost basis investments | $— | $— | $7,579 | $— | $7,579 | | Total assets | $1,404 | $21,044 | $10,316 | $6,886 | $39,650 | - The fair value of the contingent consideration liability from the Joybird acquisition was reduced by its full carrying value of **$0.8 million** during Q2 FY2023, recorded as a favorable impact to SG&A expense, as no additional consideration is expected[86](index=86&type=chunk) - Level 3 assets include investments in two privately-held companies (non-marketable preferred shares, warrants, convertible notes), with an additional **$0.2 million** invested in convertible notes during Q3 FY2023[84](index=84&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance, condition, and future outlook, including a cautionary note on forward-looking statements, business introduction, strategic initiatives, detailed analysis of results by segment, and discussion of liquidity and capital resources [Cautionary Note Regarding Forward-Looking Statements](index=25&type=section&id=Cautionary%20Note%20Regarding%20Forward-Looking%20Statements) - Forward-looking statements relate to expectations, projections, or trends concerning results of operations, financial condition, strategic initiatives, and future economic performance[88](index=88&type=chunk) - These statements are subject to various unforeseeable risks and uncertainties, and actual future results may differ materially from those anticipated[89](index=89&type=chunk)[90](index=90&type=chunk) [Introduction](index=25&type=section&id=Introduction) [Our Business](index=25&type=section&id=Our%20Business) La-Z-Boy Incorporated is a leading global producer of reclining chairs and the second-largest residential furniture manufacturer/distributor in the U.S. The company operates a diverse supply chain and sells products through multiple channels, including its proprietary retail network and e-commerce - La-Z-Boy is the leading global producer of reclining chairs and the second-largest manufacturer/distributor of residential furniture in the U.S[91](index=91&type=chunk) - The company's supply chain includes five major manufacturing locations and ten regional distribution centers in the U.S., four facilities in Mexico, a logistics company, a U.K. upholstery manufacturing business, and a global trading company in Hong Kong[91](index=91&type=chunk) - Products are sold through furniture retailers/distributors in **55+** countries, company-owned retail stores, and websites (la-z-boy.com, joybird.com)[95](index=95&type=chunk) [Strategic Initiatives](index=27&type=section&id=Strategic%20Initiatives) The company's strategic initiatives focus on driving profitable sales growth by leveraging its proprietary retail network, reinvigorating the La-Z-Boy brand with an omni-channel presence, expanding company-owned retail, accelerating the Joybird brand, and enhancing enterprise capabilities - Key initiatives include leveraging the proprietary network of **346** La-Z-Boy Furniture Galleries stores and **519** La-Z-Boy Comfort Studio locations, totaling **7.6 million** square feet in North America[97](index=97&type=chunk) - Reinvigorating the La-Z-Boy brand through a renewed focus on comfort, accelerating omni-channel offerings, and targeting a younger consumer base with marketing campaigns featuring Kristen Bell[97](index=97&type=chunk) - Growing company-owned retail business by increasing same-store sales and opportunistically acquiring/opening new La-Z-Boy Furniture Galleries stores[100](index=100&type=chunk) - Accelerating Joybird brand growth through increased digital marketing, technology investments, product assortment expansion, and small-format stores[100](index=100&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) [Fiscal 2023 Third Quarter Compared with Fiscal 2022 Third Quarter](index=29&type=section&id=Fiscal%202023%20Third%20Quarter%20Compared%20with%20Fiscal%202022%20Third%20Quarter) [La-Z-Boy Incorporated (Consolidated)](index=29&type=section&id=La-Z-Boy%20Incorporated%20%28Consolidated%29) Consolidated sales increased slightly by 0.2% in Q3 FY2023 and 7% for the nine months, driven by pricing actions and favorable product/channel mix, offsetting a decline in delivered unit volume. Operating margin improved by 60 basis points in Q3 and 110 basis points for the nine months Consolidated Financial Performance (Unaudited, amounts in thousands, except percentages): | Metric | Quarter Ended 1/28/2023 | Quarter Ended 1/22/2022 | % Change | Nine Months Ended 1/28/2023 | Nine Months Ended 1/22/2022 | % Change | | :---------------- | :---------------------- | :---------------------- | :------- | :-------------------------- | :-------------------------- | :------- | | Sales | $572,723 | $571,573 | 0.2% | $1,788,146 | $1,672,245 | 6.9% | | Operating income | $42,840 | $39,487 | 8.5% | $157,366 | $127,971 | 23.0% | | Operating margin | 7.5% | 6.9% | 60 bps | 8.8% | 7.7% | 110 bps | - Gross margin increased by **460 basis points** in Q3 and **330 basis points** for the nine months, benefiting from retail segment growth, pricing actions, and declining freight/raw material costs in Q3[104](index=104&type=chunk) - SG&A expenses as a percentage of sales increased by **400 basis points** in Q3 and **220 basis points** for the nine months, due to retail segment growth, Torreón closure charges (**$9.2 million** in Q3), and increased marketing investments[31](index=31&type=chunk)[104](index=104&type=chunk) [Retail Segment](index=30&type=section&id=Retail%20Segment) The Retail segment experienced significant sales growth, with a 27% increase in Q3 and 29% for the nine months, driven by strong delivered same-store sales and contributions from recent acquisitions. Operating margin improved substantially due to higher sales and lower SG&A as a percentage of sales Retail Segment Financial Performance (Unaudited, amounts in thousands, except percentages): | Metric | Quarter Ended 1/28/2023 | Quarter Ended 1/22/2022 | % Change | Nine Months Ended 1/28/2023 | Nine Months Ended 1/22/2022 | % Change | | :---------------- | :---------------------- | :---------------------- | :------- | :-------------------------- | :-------------------------- | :------- | | Sales | $251,157 | $197,052 | 27.5% | $739,330 | $571,319 | 29.4% | | Operating income | $44,203 | $24,102 | 83.4% | $123,855 | $68,502 | 80.8% | | Operating margin | 17.6% | 12.2% | 540 bps | 16.8% | 12.0% | 480 bps | - Delivered same-store sales increased by **23%** in Q3 and **24%** for the nine months[106](index=106&type=chunk) - Written same-store sales increased **3%** in Q3 but decreased **8%** for the nine months, reflecting softer industry demand and economic uncertainty, partially offset by pricing actions and improved conversion[107](index=107&type=chunk) - SG&A expense as a percentage of sales decreased by **430 basis points** in Q3 and **440 basis points** for the nine months, primarily due to higher delivered sales relative to selling expenses and fixed costs[111](index=111&type=chunk) [Wholesale Segment](index=30&type=section&id=Wholesale%20Segment) The Wholesale segment's sales decreased by 4% in Q3 but increased by 3% for the nine months. Operating margin decreased by 230 basis points in Q3 and 80 basis points for the nine months, impacted by reduced fixed cost leverage and increased marketing expenses, along with charges from the Torreón facility closure Wholesale Segment Financial Performance (Unaudited, amounts in thousands, except percentages): | Metric | Quarter Ended 1/28/2023 Sales | Quarter Ended 1/22/2022 Sales | % Change | Nine Months Ended 1/28/2023 Sales | Nine Months Ended 1/22/2022 Sales | % Change | | :-------------------- | :---------------------------- | :---------------------------- | :------- | :------------------------------ | :------------------------------ | :------- | | Total Sales | $407,603 | $423,281 | (3.7)% | $1,295,652 | $1,255,872 | 3.2% | | Operating income | $16,940 | $27,639 | (38.7)% | $81,558 | $89,098 | (8.5)% | | Operating margin | 4.2% | 6.5% | (230 bps) | 6.3% | 7.1% | (80 bps) | - Intercompany sales from Wholesale to Retail segment increased by **23%** in Q3 and **28%** for the nine months[111](index=111&type=chunk) - Gross margin increased by **300 basis points** in Q3 and **200 basis points** for the nine months, driven by pricing actions and declining freight costs, partially offset by higher raw material costs and plant inefficiencies in the nine-month period[117](index=117&type=chunk) - SG&A expense as a percentage of sales increased by **530 basis points** in Q3 and **280 basis points** for the nine months, due to reduced fixed cost leverage, increased marketing, and Torreón closure charges (**230 bps** in Q3)[117](index=117&type=chunk) [Corporate and Other](index=32&type=section&id=Corporate%20and%20Other) Corporate and Other sales decreased by 33% in Q3 and 9.2% for the nine months, primarily due to a 35% decline in Joybird sales in Q3. The operating loss increased significantly due to lower sales volume, higher input costs for Joybird, and increased marketing investments Corporate and Other Financial Performance (Unaudited, amounts in thousands, except percentages): | Metric | Quarter Ended 1/28/2023 Sales | Quarter Ended 1/22/2022 Sales | % Change | Nine Months Ended 1/28/2023 Sales | Nine Months Ended 1/22/2022 Sales | % Change | | :-------------------- | :---------------------------- | :---------------------------- | :------- | :------------------------------ | :------------------------------ | :------- | | Sales | $33,510 | $49,979 | (33.0)% | $125,877 | $138,626 | (9.2)% | | Operating loss | $(18,303) | $(12,254) | (49.4)% | $(48,047) | $(29,629) | (62.2)% | - Joybird sales decreased **35%** to **$28.9 million** in Q3 and **11%** to **$109.7 million** for the nine months, driven by slowing online traffic and demand challenges[115](index=115&type=chunk) - Written sales for Joybird were down **21%** in Q3 and **14%** for the nine months[115](index=115&type=chunk) - Operating loss increased by **$6.0 million** in Q3 and **$18.4 million** for the nine months, primarily due to Joybird's performance and increased marketing investments[117](index=117&type=chunk) [Non-Operating Income (Expense)](index=33&type=section&id=Non-Operating%20Income%20%28Expense%29) Interest income increased due to higher interest rates. Other income (expense), net, primarily reflected exchange rate losses in both periods. The effective tax rate increased in Q3 FY2023 compared to the prior year - Interest income increased by **$1.2 million** in Q3 and **$2.6 million** for the nine months ended January 28, 2023, driven by higher interest rates[118](index=118&type=chunk) - Other income (expense), net, was an expense of **$1.1 million** in Q3 FY2023 and **$0.8 million** for the nine months, primarily due to exchange rate losses[119](index=119&type=chunk) - The effective tax rate was **27.7%** for Q3 FY2023 (vs. **24.8%** in Q3 FY2022) and **26.6%** for the nine months (vs. **25.9%** in prior year), primarily due to state taxes and non-taxable gains in the prior year[120](index=120&type=chunk) [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity sources include cash, investments, cash from operations, and a $200 million unsecured revolving credit facility with no outstanding borrowings. Net cash provided by operating activities significantly increased, while cash used for investing and financing activities decreased - Cash, cash equivalents, and restricted cash totaled **$284.0 million** at January 28, 2023, up from **$248.9 million** at April 30, 2022[121](index=121&type=chunk) - Net cash provided by operating activities was **$127.1 million** for the nine months ended January 28, 2023, primarily from net income and a decrease in receivables[123](index=123&type=chunk) - Net cash used for investing activities was **$58.0 million**, including **$57.4 million** for capital expenditures and **$11.9 million** for acquisitions[124](index=124&type=chunk)[130](index=130&type=chunk) - Net cash used for financing activities was **$33.9 million**, including **$22.0 million** for dividends paid and **$5.0 million** for common stock repurchases[131](index=131&type=chunk) - The company has a **$200.0 million** unsecured revolving credit facility, with no outstanding borrowings as of January 28, 2023, and was in compliance with all financial covenants[125](index=125&type=chunk)[126](index=126&type=chunk) [Critical Accounting Policies](index=35&type=section&id=Critical%20Accounting%20Policies) There were no material changes to the company's critical accounting policies or estimates during the nine months ended January 28, 2023 - No material changes to critical accounting policies or estimates during the first nine months of fiscal 2023[129](index=129&type=chunk) [Recent Accounting Pronouncements](index=35&type=section&id=Recent%20Accounting%20Pronouncements) Refer to Note 1, Basis of Presentation, for a discussion of recently adopted and new accounting standards - No Accounting Standards Updates (ASUs) were adopted in the first nine months of fiscal 2023[28](index=28&type=chunk) - ASU 2021-08 (Business Combinations) is not yet adopted but is not expected to have a material impact[29](index=29&type=chunk)[30](index=30&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) There were no material changes to the information regarding quantitative and qualitative disclosures about market risk during the first nine months of fiscal 2023, as previously reported in the Annual Report on Form 10-K - No material changes to market risk disclosures during the first nine months of fiscal 2023[132](index=132&type=chunk) [Item 4. Controls and Procedures](index=36&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of January 28, 2023. There were no material changes in internal control over financial reporting during the third quarter of fiscal 2023 - Disclosure controls and procedures were evaluated and deemed effective as of January 28, 2023[133](index=133&type=chunk) - No material changes in internal control over financial reporting occurred during the third quarter of fiscal 2023[134](index=134&type=chunk) PART II - OTHER INFORMATION [Item 1A. Risk Factors](index=37&type=page&id=Item%201A.%20Risk%20Factors) There have been no material changes to the company's risk factors during the first nine months of fiscal 2023, as previously disclosed in the Annual Report on Form 10-K - No material changes to risk factors during the first nine months of fiscal 2023[136](index=136&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=37&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The board of directors has authorized a stock repurchase plan, with 7.3 million shares remaining available. No shares were repurchased under the publicly announced plan during Q3 FY2023, though a small number were repurchased from employees for tax obligations - As of January 28, 2023, **7.3 million shares** remained available for repurchase under the board authorization[137](index=137&type=chunk) - No shares were repurchased under the publicly announced plan during the third quarter of fiscal 2023[138](index=138&type=chunk) - **2,204 shares** were repurchased from employees to satisfy withholding tax obligations upon vesting of restricted shares, at an average price of **$26.86**[138](index=138&type=chunk) [Item 6. Exhibits](index=37&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including amendments to the credit agreement, CEO/CFO certifications, and XBRL-related documents - Exhibits include the First Amendment to Credit Agreement, Certifications of Chief Executive Officer and Chief Financial Officer, and various Inline XBRL documents[140](index=140&type=chunk) Signature Page - The report was signed on behalf of La-Z-Boy Incorporated by Jennifer L. McCurry, Vice President, Corporate Controller and Chief Accounting Officer, on February 21, 2023[142](index=142&type=chunk)