Why Shares of La-Z-Boy Inc. Plunged Today

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What happened

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Shares of furniture company La-Z-Boy (NYSE: LZB) tumbled on Wednesday following a lackluster fiscal first-quarter report. The company missed analyst estimates for both revenue and earnings, with higher costs knocking down margins, and disappointing investors. This comes after a relatively strong fourth-quarter report in June. At noon, the stock was down about 17.8%.

So what

La-Z-Boy reported first-quarter revenue of $357.1 million, up 4.8% year over year, but about $2 million below the average analyst estimate. Sales in the upholstery segment rose 2.6%, to $274.4 million, sales in the case-goods segment rose 1.9%, to $25.5 million, and sales in the retail segment rose 15.5%, to $110.5 million. Same-store written sales for the La-Z-Boy Furniture Galleries network increased by 0.7%, while delivered-comparable sales sank 1.1%.

Earnings per share came in at $0.24, down from $0.28 in the prior-year period. Excluding a one-time investment gain, La-Z-Boy missed analyst expectations by $0.08. CEO Kurt Darrow explained that much of the company's sales increase did not add volume to the upholstery-manufacturing operation, which is the company's most profitable segment.

Lower manufacturing volume, a seasonal slowdown, and investments in the business led to lower margins. Total operating margin was 4.6%, down from 6.6% in the same period last year, while upholstery operating margin was 8.5%, down from 11.4%.

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Despite the poor results, Darrow is optimistic that the rest of the year will be better: "We remain optimistic about our business for the remainder of the fiscal year, particularly as we capitalize on a dual strategy to reach core La-Z-Boy consumers through our vibrant store program and our independent dealer network while attracting a new and younger consumer through our multi-faceted e-commerce approach."

Now what

La-Z-Boy's manufacturing operations can be extremely profitable with enough volume, but the downside is that it doesn't take much of a volume decline to knock down profits severely. The company ran up against this problem during the first quarter, and it's unclear whether it will continue throughout the rest of the year.

La-Z-Boy plans to open new stores this year, bringing its total to an estimated 355, including both company-owned and dealer-owned locations. In a tough retail environment, that might not be the right strategy, although it may help drive more volume through its factories. Investors were focused mainly on the margin decline, and the company will need to shore up its manufacturing business to avoid a repeat next quarter.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.