Q1 2024 La-Z-Boy Incorporated Earnings Call

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similar footprint to what we have today, we see consumers that need served in another 50 markets. And then as you note, you know, there's additional opportunity there and we'll take things a step at a time, but that's why we're starting to test some alternate formats even with our couple of outlet stores.

and just start to look at, you know, where else do we help meet the consumer where he or she wants the shot? Okay, that's helpful. And then maybe another long-term focus one, but Bob, just on understanding that the double-digit margins, a long-term target, and I appreciate that it's out there to give something to kind of grade and build on.

Greetings, welcome to the Lazy Boy Fiscal 2024 First Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please do not use the

to kind of get there from a volume standpoint or pricing or anything else inside the model for help us think about that. There's three things, Bobby. First thing is retail, and that's growing that business to that 400 store level that we're talking about and getting ourselves into a consistent middle team's operating margin. The second one is the wholesale business and getting it back to a 10% operating margin. Pre-pandemic, we were...

please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mark Bex, Director of Investor Relations and Corporate Development. You may begin.

Thank you, Holly. Good morning, everyone, and thank you for joining us to discuss our fiscal 2024 first quarter.

operating at around 10% in that business for a number of years in a row. We're below that now. We expect over the next two to three years we'll be getting back to that 10% with a lot of work we're doing with our supply chain and how we're managing manufacturing throughout the company. The third piece is just getting Joybird back into the profit zone. A combination of those three things will get us squarely into consistent double digits. Okay. That's helpful. That's helpful. Then maybe more near term wise, there's been a lot of talk throughout the furniture industry. We're starting to see transportation costs obviously come down. We started to see some pricing reductions. Can you maybe talk about what you're seeing?

With us today are Melinda Whittington, Lazy Boy's President and Chief Executive Officer, and Bob Aleutian, Lazy Boy's CFO .

Melinda will open and close the call, and Bob will speak to segment performance in the financials midway through.

We will then open the call to questions.

Slides will accompany this presentation and you may view them through our webcast link, which will be available for one year. And the telephone replay of the call will be available for one week beginning this afternoon.

Before we begin the presentation, I would like to remind you that some statements made in today's call include forward-looking statements about La-Z-Boy's future performance and other matters.

competitively in terms of pricing? Is the industry holding on to some of the pricing that we've put through over the last 18 to 24 months? The industry continues to hold on to I would say the bulk of that pricing. There have been reductions that we've seen across a number of customers and a number of channels and a little bit more on the case good side of the business which was impacted more by those.

Although we believe these statements to be reasonable, our actual results could differ materially. The most significant risk factors that could affect our future results are described in our annual report on Form 10-K . We encourage you to review those risk factors as well as other key information detailed in our SEC filings. For more information, visit www.fema.gov

really high ocean freights. The overland freights in the US is not getting any better. The trucking business is still a little bit firm from a pricing perspective. We've mentioned this before in previous calls. We've taken some pricing on some of our opening price points.

Also, our earnings release is available under the News and Events tab on the Investor Relations page of our website, and it includes reconciliations of certain non-GAAP measures, which are also included as an appendix at the end of our conference call slides. With that, I will now turn the call over to Melinda Whittington.

products to make sure that we remain competitive in those areas and that we're protecting our floor space. But broadly speaking things are still the majority of that pricing has stuck.

Lazy Boy's President and Chief Executive Officer. Melinda? Thanks, Mark. Good morning, everyone. Yesterday, following the close of market, we reported results for our July-ended first quarter. We delivered solid operational performance consistent with the guidance range we issued last quarter, despite an uncertain macro environment and sluggish home furnishings market.

Okay, that's helpful. I appreciate it. I'll jump back in the queue, but best of luck here on the next floor.

Thank you, Bobby.

Your next question is coming from Brad Thomas with KeyBank Capital.

Highlights for the quarter included company-owned retail written same-store sales growth of 2% versus year ago.

Hey, good morning everybody. Thanks for taking my question and congrats on a nice quarter and some nice order graphs here.

Consolidated delivered sales growth up 16% versus our most recent pre-pandemic first quarter.

Thank you.

I guess the demand side of things is what I was hoping to maybe first ask about. Certainly some encouraging written trends that you're seeing. I believe, Bob, you mentioned the lower unit volume is a better mix. I was hoping you could just talk a little bit more about that.

Record first quarter consolidated operating margin driven by our retail segment when compared to non-pandemic affected historical first quarters non-GAAP EPS of 62 cents.

$18 million in capital returned to shareholders, including $10 million in share buybacks.

composition of what you're seeing in terms of sales, any nuances in terms of the kind of customers, demographics that you're seeing, because I do think it does stand out versus what we're seeing across the industry. And then maybe, Melinda, if you could also add on a little bit more about what you're hearing from your independent retail partners.

and continued progress against our Sentry Vision growth strategy, including the expansion of our retail business with the opening of two new stores, completing the acquisition of two independent La-Z-Boy furniture galleries, and opening one new retail location for Joybird. All in, we're pleased with our operating performance in the quarter against the challenging macro backdrop. Recent competitor results and business closures highlight the top-line challenges facing many of our peers in the industry. In light of the chorus of soft traffic trends being cited across retail furniture, I'm particularly pleased that both our company-owned retail and our entire La-Z-Boy furniture galleries network achieved positive, written same-store sales for the quarter compared to last year. Consolidated delivered sales were $482 million, down 20% versus the prior year, which benefited from delivering against the above-normal pandemic backlog. The delivered sales decline and operating expense deleveraged,

in terms of demand trends and inventory levels that they have in their stores and in their systems. Certainly. So, you know, a couple of things. As we all know here, you know, delivered numbers are going to look unusual this year because of the 300 million of backlog we were still delivering last year. It was all from all the pandemic disruption, right? So to your point, you know, we're really focusing on.

very pleased across all of our furniture galleries with the demand that we're seeing and that we are writing positive on a base that is significantly bigger than where we were pre-pandemic. And so, you know, exactly to that point, we're up 2% even versus a year ago for our company-owned retail.

led to non-GAAP operating margin of 7%, a 190 basis point decline versus fiscal 23 first quarter. non-GAAP earnings per share totaled 62 cents, a 32% decline from last year, but 48% greater than pre-pandemic fiscal 20s first quarter.

Importantly, our entire furniture gallery's network is also up 2%. And so I think that speaks to the strength of the brand and the strength of the execution. You know, our consumer is a more upper middle class consumer, so perhaps maybe a little less impacted by some of the...

Importantly, the investments we have made in building a more agile supply chain were evidenced in this quarter's wholesale results, with wholesale operating margin increasing year over year, even in spite of the delivered sales decline. Overall, this past quarter's performance was the best ever first quarter for La-Z-Boy sales and eat.

economic challenges that are out there and that may be part of what's playing there. But I think again we are unique in that we have the power of a brand and we should see

To your one other question there, that 2% growth for our company retail, there was a little bit of benefit there from, I'll call it pricing, but it's really mixed because there's been no significant pricing actions across our overall portfolio. But that's on stable units versus year ago, so we're pleased with that as well. That's great. Anne, let's see here, to follow up on one of Bobby's questions, just as we think about the margin outlook here.

Our team has been focused on controlling what we can by growing the Lazyboy brand presence, relentless business optimization, and investing in the future.

Additionally, I'm excited about the progress our retail store teams have made on accelerating market share gains by improving conversion levels and increasing design sales. Our employees have been and continue to be among our greatest assets and we are proud of the many wins we've had this quarter.

I was wondering if you all could maybe talk about some of those puts and takes as we think about the balance of the year for gross margin in particular. We don't, I'm generally, we're not giving specific guidance on the components of the P&L. We will continue to do the work that we've been focused against over the last couple of years on Sentry Vision. And that's improving our supply chain. Our margin going forward from a gross margin perspective will continue to improve as retail is a larger part of our business and that carries with it a higher gross margin.

Going a bit deeper on trends, total written sales for our company-owned retail segment were up 8% versus last year's first quarter.

This reflects an increase of 32% versus a pre-pandemic fiscal 2020 first quarter, a 7% CAGR over those four years. Written sales trends benefited from positive same-store sales, new store openings, and acquisitions of independent furniture galleries.

Same-store written sales for our company-owned retail segment on the first quarter increased 2% versus the prior year, reflecting the benefit of product mix on stable volume.

Same-source sales accelerated through the quarter with incremental improvements from May through July . And this reflects a slight acceleration from the 1% increase seen in the second half of fiscal 2023 and underscores the work our team is doing to outperform the market.

perspective than what we did in the prior year to support the long-lived lazy campaign. The work that went into getting the consumer insight and the segmentation work and the development of that campaign, we really want to leverage that because we think that's going to really benefit us, particularly from a written sales and a demand perspective going forward. So that will be, while we're going to be making improvements from a gross margin perspective,

despite the current cycle and operating environment. We're focused on driving outcomes we can control. This includes our commitment to strengthening in-store execution, delivering operational productivity, reducing lead times, and reinvigorating the La-Z-Boy brand with our new marketing campaign, which I'll speak more about in a moment.

While industry trends are tough to forecast in the near term, we remain confident in our ability to continuously drive share gains as a category leader. Our first quarter results compare quite favorably to the overall furniture and home furnishings industry which saw sales decline 6% over the same period.

Last one in just on Joybird, I know that driving better profitability there has been a big focal point for you all and it looks like the revenue is sequentially pretty similar to what you did last quarter. Can you talk a little more about the path to better profitability for Joybird?

First quarter written sales for the entire Lazy Boy furniture galleries network, including independently owned furniture galleries, also impressively increased 2% against the prior period.

and when you think you hit the point where you could maybe push a little more on driving and growth there again? Yeah, a couple of things on Joybird. The entire e-comm furniture industry, certainly last summer, kind of dramatically slowed down and it seems like maybe in general.

Currently, there are 351 Lazy Boy furniture galleries across North America, roughly half of which are company owned and half are independently owned. And we see potential for up to 400 in the intermediate term, or an additional 14% added to our total network.

furniture consumers sort of hit that saturation point of who's going to want to purchase online and who's going to want to purchase in store. And there's still, you know, the majority of consumers does more in store. So that is that is a known and what we're excited about with Joybird, first of all, is that it is an ecommerce brand so it can benefit from that market for that consumer that's interested.

As we grow our La-Z-Boy furniture galleries network, our vertically integrated supply chain will become an even more meaningful differentiator versus other competitors in the industry. We are leveraging the discipline of our team and strength of our balance sheet to drive continuous improvements in value for our consumers.

These competitive advantages position us to grow awareness amongst consumers and drive share gains well into the future.

Turning to Joybird, written sales for the first quarter were down 17% versus a year ago and improvement versus last quarter but still reflecting challenging consumer trends consistent across many online retailers. We expect near-term trends to remain under pressure but remain optimistic about the prospects for the brand over the long term.

invest across both of those channels and really create that true omni-channel presence where the consumer can start online and move into store or vice versa. The pure e-commerce players don't necessarily have that benefit. The second thing we have is a vertically integrated model where we're making that furniture and

On a more strategic front, I'll give an update on the progress we made against our SentryVision objectives during the quarter. Recall, SentryVision is our strategic framework for setting up Lazyboy Incorporated for the next 100 years, enabling our company to grow ahead of the industry.

you note to make sure, you know, it was early last summer when the majority of ECOM players really saw the slowdown. For Joybird, that didn't happen until Labor Day last year and so that will be behind us in our base by the time we finish our second quarter.

and deliver consistent double digit operating margins over the long term. First, we continue to grow and update our lazy boy furniture gallery stores through new stores, acquired stores, and remodels to provide an outstanding end-to-end consumer experience.

And, you know, with the progress we're making on bottom line, you know, we're excited to see that start to, you know, start to move into more of a growth mode here. You know, I'm not going to call it specifically, but I think we're getting closer.

This will deliver more profit to the enterprise as we increase the penetration of our company-owned retail business, leverage its fixed cost structure, and benefit from the higher margin integrated wholesale and retail model.

That's great. Thanks so much. I'll turn it over to others.

Thank you.

Your next question for today is coming from Anthony Libedinsky with Sidoti and Company.

Specifically, for our retail business in the quarter, we opened two new company-owned stores and acquired two independent furniture gallery stores in Colorado Springs, continuing our path to increasing our retail mix.

Good morning and thank you for taking the questions.

So, we'd like to hear your perspective on just the overall inventory levels at your wholesale customers. So, a year ago, there seemed to be a glut of inventory out there at the retail level.

And we continued to learn from our two new outlet by Lazy Boy stores in Columbus, Ohio, in Chicago, Illinois.

This is a great opportunity for us to explore new formats and broaden our reach to value-seeking consumers.

Just curious to get your thoughts as to like where our inventory levels now, or do you think they're more balanced than just overall what you'd like to hear your...

Additionally, we hosted a conference with our independent furniture galleries owners with a theme of win is one. It was great to connect with the many owners that have supported the brand over multiple generations.

are inventory levels now or do you think they're more balanced and just just overall would like to hear your thoughts on that.

Anthony, they're more balanced than they were last year for sure because last year there was just a lot of ordering that wasn't happening. At our, what we'll call our major accounts for our larger customers, they're pretty much back to where they expect to be.

It has been more than a decade since the entire network has all come together as a team over a multi-day event and the energy and enthusiasm was exciting to witness.

This was an opportunity to share best practices, build relationships with business leaders across the company, and most importantly, share our vision for the future with these important partners.

Our furniture galleries, our independent furniture galleries are also back to the inventory levels that they expect to be. Where we're still seeing some issues, if you will, with a little bit slower ordering due to inventory still being brought back down are with some of the smaller general dealers that we deal with.

Second, we're refining our brand channel strategy to expand the distribution and availability of La-Z-Boy products to meet our consumers with the right products wherever they prefer to shop.

All right, thank you for that. And then I thought the partnership that you talked about with Rooms to Go sounded interesting. Is this the first of its kind that you have out there or is it like you're just curious to get your perspective on how this came about and whether you'd be open to doing it?

With this strategy, we will achieve greater comfort studio, store within a store penetration, and an increase in La-Z-Boy branded space, as well as expand into new distribution markets with select product offerings.

We recently announced a new partnership with Rooms to Go, a top 10 furniture retailer in Southwest and Southeast U.S. markets, with a select assortment of La-Z-Boy recliners.

other similar type partnerships? You know, historically, half our sales are coming from general dealer types, right? You know, non-furniture galleries of what we're making, you know, it's selling to non-furniture gallery type customers.

This is an exciting new opportunity for us to expand reach with a new untapped market of consumers. The new product at Rooms to Go is beginning to show up on sales floors at many locations and we look forward to building this partnership over the coming quarters.

And so it's not new, right, to have a broad channel strategy. And what we know in a highly fragmented furniture market, there are, you know, we want to have as many consumers as we can come into our furniture galleries because that's where we believe we can give them the best full-brand experience.

Third, we are activating a new marketing strategy, leveraging the database consumer insights and our brand heritage of comfort and quality to connect with a broader consumer base.

But we also recognize that we have consumers that are never going to walk into a furniture gallery. And so we're looking, we have been always looking for the right partners that can attract a different consumer that might not ever walk in. What we love about, when we call out rooms to go, what is a bit unique about it is it's a larger account, larger than some we've opened.

As a result, we'll broaden La-Z-Boy from a brand steeped in nostalgia to an active, dynamic, and distinctive brand for modern audiences to increase our top-of-mind awareness and relevance.

As I mentioned, following extensive consumer research and segmentation work, we launched our new national brand campaign, Long Live the Lazy, on August 10th, National Lazy Day.

The launch has been supported by TV, radio, digital, streaming services, and social media, as well as mobile gaming.

looking at really going into that space and wanting to partner with us to have the best of the best in the recliner space and really focus on a consumer that otherwise wouldn't be in store. So we'll always look for you know that broader channel strategy and managing the conflict so that the right consumers are going into our furniture galleries but this is just a great example of catching a broader base.

Our new brand campaign targets a wider audience than we traditionally have in the past by combining a focus on the everyday consumer and embracing moments of laziness during our otherwise increasingly hectic lifestyles.

Our new creative vision combines our greatest product strengths, comfort and motion, with the emotional benefits of much deserved feed-up moments.

Got it. OK, thanks for that clarification. Melinda definitely appreciate it. Alright, well, I think that's all I had. Thank you very much and best of luck.

The new campaign was seeded in late July with teasers from a select group of influencers targeting families and everyday people.

Thank you. You're welcome. We have reached the end of the question and answer session, and I will now turn the call over to Mark for closing remarks.

Then, two weeks ago, on National Lazy Day, we were featured on NBC's The Today Show, where the hosts and fans were able to get in some early morning lazy moments in our Lazy Boy furniture as we took over the iconic Today Show Plaza in New York City, marking the official launch of our new campaign.

Thanks everyone. Moondabob and I will be in our office today to take any questions that we didn't get into on the call. Thanks and have a great day. Thanks.

One exciting launch is the Decliner, a custom limited edition recliner powered by AI to lean into the new JOMO or joy of missing out viral trend. By simply pulling the chair's iconic La-Z-Boy handle, the Decliner uses generative AI technology to create humorous text messages that can be used to decline a last minute invitation. If you haven't seen it yet, I highly encourage you to check it out.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

It's innovative and reflective of the new work the team is doing to strengthen relationships with existing consumers, build connectivity with new ones, and have a little fun with it.

And finally, as we continue to optimize Joybird to deliver a balance of sales growth and profitability, we view Joybird as an opportunity to increase our omnichannel presence for consumers. The brand continues to have significant opportunity to grow share, which will be the focus.

as we make prudent choices to return to profitability. And now let me turn the call over to Bob to review our financial results in more detail. Bob? Bob, thank you so much for being here.

Thank you, Melinda. Good morning, everyone.

We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business. non-GAAP results exclude items which are detailed in our press release and in the tables in the appendix section of our conference call slides. On a consolidated basis, fiscal 24 first quarter sales decreased 20% to $482 million versus the prior year quarter, reflecting lower delivered unit volume partially offset by favorable product mix.

Specifically, last year's first quarter was a first quarter historical record sales period due to this backlog supported production and delivery. Importantly, this first quarter was 16% higher than any previous non-pandemic first quarter. Consolidated GAAP operating income decreased to $35 million and non-GAAP operating income was $34 million, a decrease of 37% versus last year's first quarter. This year's first quarter result is the highest level of non-GAAP profit in any non-pandemic first quarter. Consolidated GAAP operating margin was 7.2% and non-GAAP operating margin was 7%, reflecting at 190 basis points. Whendisplay for final score

As I move to the segment discussion, my comments from here will focus on our non-GAAP reporting, unless specifically stated otherwise.

Starting with the retail segment for the quarter, delivered sales for $208 million, a 12% decrease over the prior year's first quarter, which benefited from high deliveries of backlog. Importantly, sales were 46% higher than our fiscal 21st quarter, a 10% CAGR improvement over the past four years.

Retail non-GAAP operating margin decreased to 14.1% versus 16.2% in the prior year quarter, driven primarily by fixed cost deleverage on the lower delivered sales volume.

Gross margin expansion was driven by favorable product mix and raw material cost reductions, partially offset by foreign exchange headwinds due to the strengthening Mexican peso. Given the recent strength in the peso, which is at its strongest level seen in over five years, it's costing us more to fund our Mexican operations, and this was a $2 million drag to margins in the quarter.

It's important to call out that our supply chain team delivered this gross margin improvement, even with the headwinds of significantly reduced volume post back lock delivery.

Joybird, which is reported in Corporate and Other, recorded delivered sales of $36 million, a 17% decrease versus the prior year quarter. The decline was driven by lower unit volume from more cautious online consumer demand.

Importantly, we begin to make progress on improving gross margin in the quarter, allowing us to narrow our losses versus the back half of last fiscal year as we work to balance my losses.

growth and profitability.

Pulling all this together for the quarter, consolidated non-GAAP gross margin improved by 430 basis points versus the prior year first quarter.

primarily due to one segment mix with a higher percentage of sales from retail, which carries a higher gross margin.

Two, a more profitable product mix, and three, lower material costs.

As a reminder, and included in our 10Q, we have reclassified distribution center expenses from SG&A into cost of sales to more appropriately align with peers in the industry and align with how management internally manages supply chain costs. This reclassification has no impact on consolidated and segment sales and operating margins.

A table summarizing the impact of this reclassification on previously disclosed results is included along with the Q1 earnings press release on Form 8K.

Total dollars spent on consolidated non-GAAP SG&A.

decreased versus a year ago, but non-GAAP SG&A as a percentage of sales for the first quarter increased by 620 basis points, primarily due to sales deleverage against last year's backlog-aided top-line results, as well as segment mix with a higher percentage of sales from retail, which carries higher fixed costs.

Our effective tax rate on a GAAP basis for the first quarter was 26.5%, the same as the prior year period.

Our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes.

We expect our effective tax rate to be in the range of 26 to 27% for fiscal 2024.

Turning to cash, for the quarter we generated $26 million in cash from operating activities.

Solid cash generation in the quarter was driven by profit performance, a decrease in receivables in line with the lower sales, and continued progress in reducing inventories.

This was partially offset by a decrease in liabilities due to lower customer deposits and paying out our annual incentive compensation awards in the quarter.

We ended the first quarter with $340 million in cash and no debt.

We spent $13 million in capital expenditures during the quarter, primarily related to retail store openings and remodels, and upgrades to our manufacturing and distribution facilities.

We also spent $4 million on the acquisition of two independent Lazy Boy furniture gallery stores in Colorado Springs, Colorado.

For the quarter, we returned $18 million to shareholders via dividends and share repurchases, including $8 million paid in dividends in the first quarter. We repurchased 357,000 shares in the quarter, which leaves 6.9 million shares available under our existing share repurchase authorization. We view share repurchases as an important way to return cash to shareholders.

Before I turn the call back to Melinda, let me highlight several important items for fiscal 2024 in our second quarter.

Consistent with our Sentry Vision strategy, we continue to target sales growth exceeding the industry growth rate and double-digit operating margins over the long term.

Given current consumer demands, we expect sales in Q2, fiscal 24 to be in the range of $490 to $510 million, and operating margin to be in the range of 6.5 to 7.5%.

Aligned with our long-lived lazy marketing launch, advertising expense will increase over the remainder of the year as we lean into and invest in this new campaign.

We anticipate non-GAAP adjustments for purchase accounting charges for the year to be in the range of 1 to 3 cents per share.

As one considers the cadence throughout Fiscal 24, we expect seasonality and a weaker near-term economic outlook will result in a stronger back half of our fiscal year versus the front half, consistent with historical furniture industry seasonality. We continue to expect capital expenditures to be in the range of $50 to $60 million for Fiscal 24 as we invest to strengthen the company for the future, consistent with our Sentry Vision strategy. Our capital allocation strategy over the long term is to invest approximately half of operating cash flow into the business and return the other half to shareholders through dividends and share repurchases. The 50-50 split may vary in any given year. In the near term, including Fiscal 24, we have numerous strategic investments to make as we execute Sentry Vision and anticipate capital allocation to be more skewed towards investments in the business, where our ROIs are two to three times our cost of capital.

That said, presuming no significant worsening in macroeconomic trends, we expect to continue share repurchases at dollar levels consistent with pre-COVID. And now I will turn the call back to Melinda. Thanks, Bob. With many initiatives coalescing in the quarter, including our new brand campaign launch, I'm more excited than ever about the future of La-Z-Boy Incorporated. We are engaging with an even broader consumer than we have in the past.

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

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One moment please while we poll for questions. Your first question for today is coming from Bobby Griffin at Raymond James.