"Now that the preliminary antidumping tariffs have been determined, it is clear that the near-term competitive landscape of domestic casegoods manufacturing is at risk."
CEO Kurt L. Darrow

La-Z-Boy Incorporated (LZB) today reported Net sales for the quarter ended July 24, 2004 were $466 million up 3.3% compared to a year earlier, with a loss of $0.07 per fully-diluted share.

Operating margin for the most recent quarter was (0.8%), down from 2.5% a year earlier. This year's fiscal first quarter included restructuring charges amounting to 2.2% of net sales. Last year's fiscal first quarter also included restructuring charges amounting to 1.4% of net sales.

La-Z-Boy Incorporated President and CEO Kurt L. Darrow said, "Our focus on improving our top line performance is beginning to have an impact, even in the face of challenging industry conditions. Though our overall sales were slightly below our expectations, we had solid growth in our core upholstery business. Operating margins continued to be pressured primarily from less than optimal capacity utilization in our casegoods segment and increased raw material costs experienced during the quarter." He added, "During our upcoming second fiscal quarter these increased material costs, including steel and wood, will be partially offset by previously announced price increases to our customers."

Upholstery Segment

Fiscal 2005's first quarter upholstery segment sales increased 3.8% from a year earlier. Darrow noted, "Our core La-Z-Boy Residential branded business experienced strong growth as we continue to be focused on increasing our market share through new product offerings and strong marketing programs. Additionally, we are encouraged by the improving order trends we saw during our first quarter in our upholstery business as we head into the traditionally strong autumn furniture selling season." The upholstery segment operating margin for the quarter was 4.0% compared to a reported 6.8% for last year's first quarter.

Darrow continued, "This quarter we continued to build and strengthen our proprietary distribution network of mostly independently operated La-Z-Boy Furniture Galleries(R) stores. In 2001 we introduced a 'New Generation' La-Z- Boy Furniture Galleries(R) store concept. These stores are generating increased traffic levels, higher average sales per square foot and greater total sales volumes than the previous format stores. During our first quarter in fiscal 2005, four New Generation stores were opened and five were remodeled bringing the total to 77 in this format. Plans are to open 40 plus of these updated format stores during the current fiscal year, with over 20 of these being new stores and the remainder being store remodels or relocations. Currently, there are 325 stand-alone stores, of which 36 are company-owned."

System-wide, La-Z-Boy Furniture Galleries(R) stores' same store sales dollars were up 4.1% in the first six months of calendar 2004, while total sales were up 8.2%. In the first two months of this fiscal quarter, May and June, same store sales dollars are up 3.9% while total sales were up 7.0% in the same period.

Casegoods Segment

Casegoods sales declined 9.3% from a year earlier for the July quarter. The casegoods segment's operating margin for the July 2005 quarter was 0.5% compared to 0.9% for last year. Darrow commented, "Casegoods sales continued to be challenging this quarter as retailers remained cautious and worked off inventories built prior to the mid-June antidumping decision. Several new product groups will begin shipping in our second quarter and we expect to see positive trends in the core residential furniture portion of this segment. The contract portion of this segment, serving primarily the hospitality industry, continues to negatively impact the casegoods group accounting for about 43% of the quarter's sales decrease. We believe the hospitality industry is in the beginning stages of recovering from a prolonged severe downturn, but a major domestic terrorist event could quickly extinguish this prospect."

He added, "The relatively low levels of preliminary antidumping tariffs imposed on bedroom furniture were not sufficient to significantly alter current or future domestic capacity utilization resulting in lower margins. In fact, all of our major Chinese import bedroom suppliers received the preliminary 10.92% or lower tariff rate, and we do not anticipate any material effect on our import programs. Margins also were strained by continued pricing pressure from imports, rising material prices, and aggressive competitor promotions."

Restructuring charge

Darrow noted, "Now that the preliminary antidumping tariffs have been determined, it is clear that the near-term competitive landscape of domestic casegoods manufacturing is at risk. Consequently, we are in the process of executing previously planned strategies which will enable us to accelerate our transition to a greater mix of imported versus domestically produced product within each of our residential casegoods companies. While we are intensifying our focus on casegoods merchandising, sales, marketing, and product development, we must take the appropriate actions to ensure we can provide competitively priced products to our retail partners. Though we remain committed to limited domestic production where design and price points allow us to be competitive, we are intensifying our effort to be a cost competitive global manufacturer and sourcing company."

As a result, during the third quarter, Pennsylvania House will cease manufacturing at the almost 100 year-old Lewisburg, PA plant and the nearby White Deer, PA dining room chair assembly facility. Separately, the Lewisburg area warehouses will close at an appropriate time in the future to minimize any disruption of service to our customers. This will result in the loss of approximately 425 jobs, or 15.4% of the casegoods group's current employee base. Production will be phased out at these facilities during the third fiscal quarter. A portion of that production will be relocated to our other solid wood casegoods manufacturing facility and a significant portion will be sourced globally. Additionally, a Kincaid plant in Hudson, NC, will be closed by mid September 2004, with a temporary layoff of about 120 employees until our consolidated casegoods solid wood domestic production demand is determined.

In the upholstery group, a small satellite upholstery manufacturing facility of our England subsidiary in Booneville, MS will be closed, resulting in the loss of approximately 100 jobs. Production will be phased out of this facility in the second quarter and its production absorbed into England's New Tazewell, TN facilities as a result of production efficiencies gained there. Additionally, a former Clayton Marcus manufacturing facility, currently being used as a warehouse will be closed.

"We are disheartened by these additional plant closures and the disruption to the lives of our employees at the affected locations," Darrow commented, "but we strongly believe these actions are necessary for the company to remain competitive on a long-term basis. We plan to provide transition assistance to these employees during this difficult period."

As a result of these actions, during the first fiscal quarter, a non-cash charge of $10.4 million or $0.12 per diluted share was taken to write-down certain fixed assets and inventories. These actions will result in total pre- tax charges of approximately $13 million, or $0.16 per diluted share on an after-tax basis for the full year. The majority of the balance of the charge representing severance and relocation costs will be incurred throughout the remainder of our fiscal year.

Darrow concluded, "These actions will take several months to implement and we will do our best to make them seamless, smooth, and transparent to our customers."

FIN 46

FIN 46 requires us to consolidate certain independent dealers beginning April 2004. See the attached schedule for impact and further explanation. Darrow mentioned, "The operating results of a portion of these VIEs is less than desirable and we are working diligently with these dealers to improve their operating performance."

Balance sheet

Cash flows from working capital during the quarter amounted to $13.7 million largely as a result of accounts receivable decreasing $49.1 million from the prior quarter primarily due to seasonality and quicker collections, which was offset by a planned increase in inventories of $27.3 million during the July quarter in preparation for the fall selling season. Compared to a year ago, accounts receivable declined $47.3 million of which $20.1 million was reflective of the elimination of receivables from VIEs. Inventories climbed $33.8 million over last year's July quarter of which $12.3 million was attributable to the consolidation of VIE inventories and the balance reflected our anticipation of improving business conditions.

During fiscal 2005's first quarter, the company repurchased an additional 120,000 shares of its outstanding common stock for $2.5 million. At quarter- end, 6.7 million shares remained available under the company's existing stock repurchase authorization.

Total debt increased modestly during the first quarter, to $240.7 million, and the company's first quarter debt-to-capitalization ratio of 32.0% was up from 30.0% at the start of the quarter primarily because of the restructuring charge. Consolidating VIEs increased this ratio by 120 basis points. Darrow stated, "This ratio continues to be above our targeted range because of the largely non-cash charges taken this quarter and in the fourth quarter of fiscal 2004. This ratio is expected to decrease in the coming quarters. Although management is opportunistic in execution of its stock repurchases it is unlikely to be active in the market during the second quarter."

Business Outlook

Commenting on the business outlook, Darrow said, "Although we continue to face record high energy costs and rising interest rates, consumer confidence has risen in recent months. As we move into one of the industry's better seasonal selling periods we also think that the 'underfurnished' demographic of consumers who spent so much on their new houses will begin the decorating process. In our second quarter we expect a mid-single digit increase in sales compared to the prior year period, and we anticipate reported earnings for the second quarter to be in the range of $0.29 - $0.33 per diluted share, which includes a restructuring charge of $0.01 and up to a $0.02 potential loss from the consolidation of VIEs. This would compare to the $0.28 we earned per diluted share in fiscal 2004's second quarter, which included a $0.02 restructuring charge."