"The values of our casegoods businesses have been negatively impacted by the onslaught of import competition primarily from China and the severe downturn in the hospitality industry since September 11, 2001"
Kurt L. Darrow, La-Z-Boy President and CEO

La-Z-Boy Incorporated (LZB) today reported its operating results for the fourth fiscal quarter and full fiscal year ending April 24, 2004. Net sales for the quarter increased 0.7% from a year earlier, to $544 million.

For the full fiscal year, net sales totaled $2.0 billion, down 5.3% from fiscal 2003's $2.1 billion. Consolidated operating margin for the most recent quarter was (6.5%), down from 8.0% a year earlier.

La-Z-Boy Incorporated President and CEO Kurt L. Darrow said, "Sales were slightly below our expectations for the quarter, but prior to the write-down of intangibles, the adoption of FIN 46 and the final charge relating to our casegoods restructuring, we were at the upper-end of our earnings guidance range. Operating margins continue to be strained because of the weaker than anticipated sales results in certain of our divisions, increases in material costs and competitive pricing pressures. We are aggressively developing compelling new products and meaningful new customers across all divisions. These actions, coupled with the strength of our brands and our growing distribution network, position La-Z-Boy well to participate when the economy exhibits a sustained recovery."

Intangible Write-down
Darrow stated, "As we have previously noted, we annually test for impairment of goodwill and intangibles, in accordance with Financial Accounting Standard No. 142, which resulted in a non-cash pre-tax charge of $71.9 million, of which $60.6 million related to the casegoods group." He continued, "The values of our casegoods businesses have been negatively impacted by the onslaught of import competition primarily from China and the severe downturn in the hospitality industry since September 11, 2001." The remaining $11.3 million related to the upholstery group.

Upholstery Segment
Fiscal 2004's fourth quarter upholstery segment sales increased 4.6% from a year earlier and declined 2.7% for the year. Darrow noted, "Sales in our upholstery group met our expectations and we are focused on increasing our market share in our core business. Consumers have reacted positively to several new product lines introduced at the Fall furniture market which began to ship to our retailers during the 4th quarter. We are encouraged by the continually improving order trends we have seen in our upholstery business and have developed programs to maintain that momentum."

The upholstery segment operating margin was 7.2% compared to a reported 10.3% in the final quarter of fiscal 2003. This year's fourth quarter included a charge for intangibles which equaled 2.6% of the upholstery group's net sales. For fiscal 2004 as a whole, the upholstery segment's annual operating margin was 7.7% compared to a reported 9.7% last year. The impact on the 2004 fiscal year for the intangible charge was 0.7% of the upholstery group's net sales. Darrow said, "Our upholstery group is committed to enhancing margins through improved supply chain management, new product offerings and effective marketing programs."

Darrow continued, "During the past year, we continued to build and strengthen our proprietary distribution network and of particular note are the mostly independently owned New Generation La-Z-Boy Furniture Galleries(R) stores, which have experienced increased traffic levels, higher average sales per consumer and greater total sales volumes than the prior format stores. During fiscal 2004, 22 New Generation stores were opened bringing the total to 68. Plans are to open 40 plus of these updated format stores during the current fiscal year, with 20-25 of these being new stores and the remainder being store remodels or relocations. For fiscal 2005's first quarter, 11 New Generation stores are slated to open. Currently, there are 324 stand-alone stores, of which 36 are company-owned."

Casegoods Segment
Casegoods sales declined 11.5% from a year earlier for the April quarter and 13.3% for the full year. The casegoods segment's operating margin for the April 2004 quarter was (54.7%) compared to 4.8% for last year. This year's fourth quarter operating margin included charges equaling 54.1% and 0.8% of the casegoods segment's net sales for the write-down of intangibles and restructuring, respectively. For the full year, the segment's operating margin was (14.9%) compared to 6.1% in fiscal 2003. The impact on fiscal year 2004's operating margins as a percentage of net sales for the intangible charge was 13.3% and restructuring was 2.3%.

Darrow commented, "While fourth quarter casegoods sales continued to be challenging, the refocusing of our casegoods business is proceeding well and we are optimistic that we will reverse the downward trends in the core residential furniture portion of this business. Each of our residential casegoods businesses is developing innovative new product designs and collections that are competitively priced to meet the market demand. We were very pleased with the retail response to those new products at April's International Home Furnishings Market. In particular, Pennsylvania House's Summer Retreat(TM) was received exceptionally well by retailers and we will begin shipment of this collection during our second fiscal quarter."

He added, "Margins continue to be negatively impacted by capacity utilization running at lower than ideal levels, continued pricing pressure from imports, rising material prices, and aggressive competitor promotions. Also, the downward sales trends in the casegoods segment have been magnified in large part by the hospitality portion of the market where business was down significantly for the quarter and the year. While it does appear the indicators for the hospitality business are becoming more positive, the lead time for new business maturation is a longer cycle than for our residential business."

As previously reported, the reorganization of the La-Z-Boy Casegoods Group -- including a realignment of several key management responsibilities, the establishment of a new global sourcing organization and the closure of three casegoods manufacturing facilities -- resulted in total pre-tax charges of $10.4 million, or $0.12 per diluted share on an after-tax basis for fiscal 2004 and $0.01 per diluted share for the quarter.

Business Outlook
Commenting on the business outlook, Darrow said, "The recent employment numbers have been encouraging, although we now face record high energy costs, and the prospect of rising interest rates. Consumers still appear to be cautious in their view of the economy. With that said, we have seen our incoming order rate improve progressively since the beginning of the year and into May, particularly in our upholstery segment. We currently expect our July first quarter sales to be up in the low-single digit range compared to the prior year period, and we anticipate reported earnings for the first quarter to be in the range of $0.08 - $0.12 per diluted share, which includes up to a $0.02 potential loss from the consolidation of VIEs. This would compare to the $0.11 we earned per diluted share in fiscal 2004's first quarter, which included a $0.07 restructuring charge. In part, the comparative decline in margin on higher volume reflects increased material costs. In light of these rising costs we have recently announced selective wholesale price increases, however, we will not receive the benefit of these increases until our second fiscal quarter."