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Rising costs and a challenging economic environment are making things a little uncomfortable for La-Z-Boy (NYSE: LZB ) . The recliner maker posted higher revenues for the fourth quarter, but its profits plunged 25%, to $10.3 million, as write-downs and those escalating costs ate into profit margins. Shares were off 11% on the earnings news.
Decoding the numbers
Same-store written sales, indicating sales accepted but not yet delivered, rose 12% from a year ago. Store traffic and conversion improved as well. La-Z-Boy's total revenues increased by 9%, to $338.9 million, with all but one segment clocking increased revenues. Unfortunately, a significant portion (7 percentage points) of the increase was due to an additional week of sales in the quarter.
Bottom-line profitability, however, fell from $0.26 per share in the year-ago quarter to $0.19. Excluding retail-related write-downs, earnings came in at $0.24 per share, below last year's adjusted $0.27. Operating margins fell to 4.9%, from 5.3% in the year-earlier quarter, all indicating cost pressures.
Rising costs, though, are not unique to the company. Leggett & Platt's (NYSE: LEG ) earnings were also hit by rising raw-material costs in the first quarter. Apart from steel, leather, and wood, high cotton and yarn prices that the company uses in upholstery fabrics had an impact. Most retailers -- from apparel companies such as Guess? (NYSE: GES ) to retail bigwigs like Target (NYSE: TGT ) -- have dealt with the same challenges recently.
Not so aggressive
Challenging economic situations call for increased promotional activities to boost sales. Rival Ethan Allen Interiors (NYSE: ETH ) reinstated its plans to spend on advertisements this year, while La-Z-Boy launched a promotional Brooke Shields campaign, which is resulting in increased upholstery sales.
The Michigan-based company is looking to revamp its stores in California. Capital expenditures are expected to be around $15 million to $20 million for fiscal 2012 -- a significant climb from the $10.5 million in the past four quarters. But otherwise, aggressive expansion plans aren't in the plans yet.
With cash increasing from $108.4 million in the year-ago period to $115.3 million this quarter, and the debt-to-capital ratio in the single digits, La-Z-Boy doesn't look to be in a bad position to take on debt for expansion, if it had to. Nevertheless, for home-furnishings companies, a lot of things -- including expansion -- hinge on housing demand. And the housing situation isn't looking very bright.
The Foolish bottom line
La-Z-Boy raised prices in May. That, coupled with higher volumes, can help offset rising costs to a certain extent. But with the company expecting costs to rise in fiscal 2012 and anticipating the upcoming months to be seasonally weak, I'd stay on the sidelines with this stock for now.