While it may have to wait until a meaningful recovery in the U.S. housing market takes hold before it sees any improvement in top line growth, furniture maker La-Z-Boy (NYSE:LZB) has managed to surprise both analysts and investors over the last two quarters by demonstrating an unexpected ability to take control of its costs to boost bottom line results well beyond expectations.
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Back To Back Positive Earnings Surprises
The maker of popular recliners saw its shares rise by 7% earlier this week as the company reported a profit of 5 cents per share for the fiscal first quarter ending July 31, compared to analyst expectations of a loss of 6 cents per share. It was the second quarter in a row that the company had managed to defy the pessimists and report much better bottom line results.
In June, the company reported a profit of 7 cents per share compared to consensus expectations of a loss of 11 cents, and saw its shares soar more than 30% during the trading session following the announcement.
Cutting Costs To The Bone
With sales down 18% in the latest quarter, the key to boosting profits has been to cut costs at a faster rate than the drop off in sales and so far the company appears to be achieving this. In the latest quarter, the cost of sales was slashed by 24% and an additional 15% was shaved off administrative costs. The exercise has not been entirely pain-free; it has involved job cuts, store closures and shifting some production from the U.S. to Mexico.
But tough times sometimes call for tough measures and such penny pinching has allowed the company to nearly double the operating margin in its key upholstery division to 8.3%, and to pay
down more than one-quarter of the $44 million it debt it had at the end of the year. It now appears certain that management will achieve its stated goal of $60 million in cost savings this year.
La-Z-Boy Ahead of the Curve On Cutting Costs
With furniture sales still suffering sizable collateral damage from the U.S. housing slump, cost cutting has been the order of the day throughout the furniture industry. La-Z-Boy rivals like Ethan Allen (NYSE:ETH) and Furniture Brands (NYSE:FBN) have all focused on cutting costs in an effort to stay profitable. But so far it looks like La-Z-Boy is ahead of the curve.
Furniture Brands continues to report losses and Ethan Allen, despite achieving some cost reductions, appears willing to put all that in jeopardy. The company recently announced plans to convert most of its manufacturing to a custom process where units will be individually manufactured; a move that hardly seems likely to be cheaper than manufacturing pieces via large scale production runs.
Dividend Cut Sets Stage For More Generous Restoration
All this emphasis on cutting costs and hoarding cash in the furniture business has also doled out its share of pain to shareholders as well in the form of dividend cuts. Last February, La-Z-Boy announced that it would be suspending its dividend in a move that echoes a broader industry trend. Shareholders of Stanley Furniture (Nasdaq:STLY), which also suspended its dividend and Knoll (NYSE:KNL) and Hermann Miller (Nasdaq:MLHR) which cut its dividend drastically, have all felt the impact.
If business conditions revive coming off a lower cost base, La-Z-Boy could easily find room to resume its dividend, perhaps at a more generous rate. (See Dividend Facts You May Not Know to discover issues that can complicate dividend payouts for investors.)
The Bottom Line
Hard times appears to have forced a much needed restructuring in the furniture industry, a move that is already generating positive results, despite depressed sales levels and promises to pay off even more once sales pick-up.
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