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La-Z-Boy Reports Net Sales Decline Of 13% For Second Quarter

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La-Z-Boy Incorporated reported its operating results for the second fiscal quarter ended October 29, 2005. Net sales for the quarter were $454.6 million, down $66.2 million, or 13%, compared with the prior-year period. The company posted a per share loss of $0.12, which includes an after-tax restructuring charge of $0.10 per share related to the closure of its Waterloo, Ontario, Canada upholstery facility. In last year's second quarter, the company earned $0.15 per share from continuing operations, which included after-tax restructuring charges of $0.01 per share. For the six months ended October 29, 2005, net sales were $906.1 million, a decrease of $69.8 million, or 7%, compared with sales of $975.9 million in the prior-year period. The company posted a per share loss of $0.06 for the six-month period, including restructuring charges, compared with earnings of $0.08 per share from continuing operations in last year's first half, which included restructuring charges of $0.13 per share on an after-tax basis. Both the quarter and six months include the results of VIEs (Variable Interest Entities). The operating margin for the second quarter was (1.6%) compared with 2.9% in the prior-year period. This year's fiscal second quarter included restructuring charges amounting to 1.7% of net sales versus 0.1% last year. The operating margin for the first half of fiscal 2006 was 0.1% compared with 1.2% for the prior-year period. La-Z-Boy Incorporated President and CEO Kurt Darrow said, "Our results for the second quarter were impacted by a number of factors, most notably the supply chain issues resulting from Hurricanes Katrina and Rita, the restructuring charge and a softer-than-expected retail environment. On the supply side, our Newton, Mississippi facilities were impacted by both storms. First, when Katrina hit Mississippi, because of power outages, our facilities were not operational for a few days, and then our Newton plywood facility sustained serious damage from a tornado spawned from Rita. The hurricanes also caused an unprecedented industry-wide shortage of polyurethane foam and, from an operating perspective, the shortage during the entire month of October impacted our results significantly as it hampered our production and our ability to operate efficiently while greatly increasing a key raw material cost. In order to remain cost neutral on foam, we passed through price increases in the form of a surcharge and, as of this week, we are able to obtain 100% of our foam requirements. "As we continue to examine and rationalize our business, we announced the planned December 16, 2005 closure of our Waterloo, Ontario upholstery facility and incurred associated restructuring charges. The plant, which employed 413 people, represents approximately five percent of the La-Z-Boy branded business total upholstery manufacturing capacity, and produces recliners and reclining sofas. Production will shift to U.S.-based facilities in Neosho, Missouri and Dayton, Tennessee, and those facilities, along with plants in California and Utah, will service the entire product needs of the company's Canadian dealers. This action will enable La-Z-Boy to be more productive in less square footage and will improve our overall capacity utilization. We will take the remainder of the restructuring charge, equating to approximately $500,000 pre-tax, over the next several quarters." Darrow continued, "With respect to the retail environment, we believe the unusual softness this quarter relates to declining consumer confidence resulting from the continuation of interest rate increases, escalating oil prices, and the hurricanes. From an operating standpoint, given the significant decrease in volume this quarter, our operating results were essentially at a break even level, which is the direct result of the significant changes we have made to our cost structure over the past two years. Additionally, we reduced selling, general and administrative expense by 0.6% of net sales in the quarter reflecting lower incentive plan accruals." Upholstery Segment For the fiscal second quarter, sales in the company's upholstery group decreased $60.4 million, or 15.9%, compared with the prior-year period, and the operating margin decreased to 3.9% from 7.2% in the prior-year quarter. The company attributes approximately 40% of the sales decline to the foam issue. Darrow commented, "With foam supply back at 100% of our needs, we will increase our production to work off the additional backlog built up during the month of October and into the beginning of November. Given normal conditions in the second half of our fiscal year, we would expect to see a significant increase in operating margins, compared to the first half, as we have worked diligently to improve our operating efficiencies. We are continuing to re- engineer various products, import more leather and fabric cut and sewn kits and are constantly evaluating our capacity utilization as we did with the closure of our Waterloo facility. We are confident that our leaner manufacturing structure and improved value proposition to our customers, combined with the power of the La-Z-Boy(R) brand, positions us to achieve our operating margin objective." La-Z-Boy continues to develop and grow its Furniture Galleries(R) store system, which includes both company-owned and independent licensed stores. In the second quarter, the system opened one additional store, remodeled and/or relocated ten stores and closed eight, bringing the total store count to 329, of which 61 are company owned, and 127 are in the new format. Darrow explained, "Our plan is to open 25 New Generation stores in the third quarter -- 15 brand new with 10 relocations or remodels. Our New Generation stores have proven to enjoy greater total sales volumes and higher average sales per square foot due to an increase in floor traffic. We are on track to open 45 to 50 new format stores this year, with approximately 20 of those being new stores and the remainder being relocations or remodels." System-wide, for the third calendar quarter, including company-owned and independent licensee stores, same-store written sales, which the company tracks as an indicator of retail activity, were down 3.0%, and total sales, which includes new stores, increased 0.1%. During the quarter, the company sold its Englander sleep products name and trademarks, a business it purchased in 2002 which resulted in a gain that reduced selling, general and administrative expense by 0.4% of consolidated net sales. Darrow noted, "Englander is a good brand, but was a very small part of our business and we were pleased to sell it to a group of licensees whose sole focus is on bedding. We were satisfied over the past three years with the growth we achieved, but bedding is not a core strategic focus." Casegoods Segment In the second quarter, casegoods sales were down 9.0% compared with the prior-year period while the operating margin improved to 2.0% versus 0.1% last year. Darrow said, "We have transitioned our casegoods model successfully to be primarily an importer and distributor and are beginning to see improved results in most of our companies. We are still in the process of turning around Pennsylvania House, which will take until the end of the calendar year to completely transition its business model. We are pleased that our American of Martinsville operation is improving its performance as the hospitality sector enjoys a rebound after several down years. As with our upholstery operation, both our value proposition and cost structure are more competitive today and, with additional volume, we are well positioned to achieve our operating margin objective for this segment of 4% to 6%." Retail Segment For the quarter, retail sales were $49.2 million, up $8.3 million, or 20.2%, versus last year's second quarter. The increase was primarily due to the 21 stores acquired in the fourth quarter of last year, which included two unprofitable VIEs. On an operating basis, the segment incurred a loss, primarily due to weak retail sales and continued transition costs associated with the acquired stores. Darrow noted, "Proprietary retailing is a very important part of our ongoing three-part strategy and will continue to become more meaningful to our overall business as we build out our store program in the larger urban markets and capitalize on greater share of voice, market penetration and efficiencies of distribution, administration and advertising. Overall, the 329 total store system is healthy and growing, but because it was necessary for us to acquire a number of underperforming stores in larger metropolitan markets, our company-owned store portfolio as a whole is not producing acceptable results. However, we have a core group of markets that are profitable and will continue to address the issues at the stores that need to be turned around. We will also focus on aggressively opening new stores and refurbishing or moving others. Experience suggests that once a market achieves critical mass, our stores will generate the kind of returns that are in keeping with our objectives. Most importantly, the strong La-Z-Boy(R) brand and network of stores differentiates us, and we are confident our retail business is a strategy that will take us into the future." Balance Sheet For the quarter, cash flow used for operations was $1.0 million. Total debt for the quarter was $227 million. The debt-to-capitalization ratio was 31.1% at quarter end, up slightly from last quarter. Darrow noted, "While our target for debt to total capital is in the mid twenties, we were opportunistic during the quarter given our share price and repurchased 260,000 shares. We have 5.9 million shares remaining in our program. Going forward, we will use a blended strategy to pay down debt and buy back stock, as appropriate." Business Outlook Commenting on the third quarter, Darrow said, "Although we continue to make steady progress with our cost structure and are confident we have a solid and relevant business model in place in each of our three segments, we remain concerned about the macro economic environment as well as consumer confidence and expect sales to be flat against last year's third quarter of $507 million. Reported earnings for the fiscal 2006 third quarter are forecasted to be in the range of $0.13 - $0.17 per share, which includes up to $0.01 in restructuring charges." Background Information: With annual sales of over $2 billion, La-Z-Boy Incorporated is one of the world's leading residential furniture producers, marketing furniture for every room of the home, as well as for the hospitality, health care and assisted- living industries. The La-Z-Boy Upholstery Group companies are Bauhaus, Centurion, Clayton Marcus, England, La-Z-Boy, and Sam Moore. The La-Z-Boy Casegoods Group companies are American Drew, American of Martinsville, Hammary, Kincaid, Lea and Pennsylvania House. The corporation's vast proprietary distribution network is dedicated exclusively to selling La-Z-Boy Incorporated products and brands, and includes 329 stand-alone La-Z-Boy Furniture Galleries(R) stores and 338 La-Z-Boy In- Store Galleries, in addition to in-store gallery programs at the company's Kincaid, Pennsylvania House, Clayton Marcus, 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/ .

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