Q1 2023 La-Z-Boy Inc Earnings Call MONROE Aug 24, 2022 (Thomson StreetEvents) -- Edited Transcript of La-Z-Boy Inc earnings conference call or presentation Wednesday, August 24, 2022 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Kathy Liebmann La-Z-Boy Incorporated - Director of IR & Corporate Communications * Melinda D. Whittington La-Z-Boy Incorporated - President, CEO & Director * Robert Gerard Lucian La-Z-Boy Incorporated - Senior VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Alessandra Lynn Jimenez Raymond James & Associates, Inc., Research Division - Senior Research Associate * Anthony Chester Lebiedzinski Sidoti & Company, LLC - Senior Equity Research Analyst * Bradley Bingham Thomas KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to the La-Z-Boy Fiscal 2023 First Quarter Conference Call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Kathy Liebmann, Director of Investor Relations and Corporate Communications. Kathy, over to you. -------------------------------------------------------------------------------- Kathy Liebmann, La-Z-Boy Incorporated - Director of IR & Corporate Communications [2] -------------------------------------------------------------------------------- Thank you, Jenny. Good morning, and thank you for joining us to discuss our fiscal 2023 first quarter results. With us today are Melinda Whittington, La-Z-Boy's President and Chief Executive Officer; and Bob Lucian, CFO. Melinda will open and close the call, and Bob will speak to segment performance and the financials midway through. We'll 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 1 year. And the telephone replay of the call will be available for 1 week beginning this afternoon. Before we begin the presentation, I'd 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. 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. 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 slide deck. With that, I will now turn the call over to Melinda Whittington, La-Z-Boy's President and Chief Executive Officer. Melinda? -------------------------------------------------------------------------------- Melinda D. Whittington, La-Z-Boy Incorporated - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Kathy, and good morning, everyone. Late yesterday afternoon, following the close of market, we reported record Q1 results. Highlights included record consolidated first quarter delivered sales and profits for the total company. Record delivered sales and profits for our company-owned Retail segment, not only for our first quarter, but an all-time record, strong delivered and written sales for Joybird. Record delivered sales in the first quarter for our Wholesale segment, a significant improvement in consolidated operating margin versus last year's first quarter and closing on the acquisition of 5 La-Z-Boy Furniture Galleries stores in the Denver market as we continue to build our Retail business. Opening 2 new retail locations for Joybird, one in San Francisco and one in Austin, and opening a second Joybird production facility in Tijuana. These initiatives represent the investments we're making to drive brand growth as part of our Century Vision strategy. All in, we delivered great Q1 results in what continues to be a volatile environment. We managed through a myriad of ongoing changes and challenges. And for the period, most everything came together well. While we are proud of this excellent performance, the pace of store traffic has slowed for our industry broadly, likely a reflection of both a return to historical seasonality and lower consumer sentiment due to macroeconomic and geopolitical concerns and uncertainty. For the quarter, this impacted written sales for our company-owned Retail segment with written same-store sales decreasing 15% for the fiscal '23 first quarter and written same-store sales across our entire La-Z-Boy Furniture Galleries network decreasing 14%. However, written same-store sales for our company-owned stores and total network were 12% and 9% higher, respectively, than our pre-pandemic fiscal 2020 first quarter. And we are excited to report that our Joybird business wrote 12% more this Q1 than last year's first quarter and more than doubled written sales versus our pre-pandemic fiscal 2020 first quarter. As we navigate this uncertain period, we remain focused on managing the business with resilience and agility to respond quickly to changing market conditions. We're continuing to work down our backlog to drive delivered sales and improve service to customers and consumers with shorter lead times. And we are increasing our marketing spend to pre-pandemic levels to increase traffic and conversion in this more challenging environment while building the equity of our brands to drive market share gains for the long term. On the production side, we're working to reduce start-up friction costs at our new plants in Mexico, and we'll continue to lower and we'll -- which will contribute to a lower cost manufacturing footprint, improve our capabilities to service the West Coast and ultimately improve gross margin as we move forward. We are building our agility to manage the near term, leveraging our 95-year-old foundation and investing for long-term success through our Century Vision strategy. Our strong financial position will enable us to make prudent investments to capitalize on the appeal of our brands and to strengthen our supply chain and broader capabilities to support growth objectives. History tells us that consumers turn to strong and well-loved brands during challenging times and through the moves we're making, we intend to deliver long-term market share gains. Beyond the numbers, I'd like to take a moment to highlight the publication of our inaugural ESG report, which outlines our progress on sustainability and our commitment to a healthy planet and values-based culture. As we build the La-Z-Boy Incorporated of tomorrow, our goal is to make the world a better place through the transformational power of comfort while delivering long-term returns to all stakeholders. I invite you to read our report, which can be found on our website. Now let me turn the call over to Bob to review our first quarter results in more detail. Bob? -------------------------------------------------------------------------------- Robert Gerard Lucian, La-Z-Boy Incorporated - Senior VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Melinda, and good morning, everyone. As a reminder, we present our results on both a GAAP and non-GAAP basis. 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. For the quarter, the $0.02 non-GAAP item reflects costs associated with the permanent closure of our Newton assembly operation. On a consolidated basis, fiscal '23 first quarter sales increased 15% to $604 million versus the prior year quarter, reflecting pricing and surcharge actions and the positive effect of product and channel mix. The first quarter included 12 production weeks due to our annual 1-week shutdown in July for maintenance. Consolidated GAAP operating income increased to $53 million and non-GAAP operating income increased to $54 million, a record for our first quarter and an increase of 55% versus last year's first quarter. Consolidated GAAP operating margin increased to 8.7% and non-GAAP operating margin increased to 8.9% versus 6.6% in last year's first quarter. GAAP diluted EPS increased to $0.89 for fiscal '23 first quarter versus $0.54 in the prior year quarter. And non-GAAP diluted EPS increased to $0.91 in the current year quarter versus $0.55 in last year's first quarter, a 65% increase. As I move to the segment discussion, my comments from here will focus on our non-GAAP operating and reporting results, unless specifically stated otherwise. Starting with our Retail segment. Delivered sales were an all-time record $236 million, a 30% increase over the prior year's first quarter, led by a 25% increase in delivered same-store sales versus the prior year. Retail posted record high non-GAAP operating profit dollars and non-GAAP operating margin improved to a best ever 16.2% versus 11.2% in the prior year quarter, driven primarily by fixed cost leverage on the higher delivered sales volume. Additionally, the Q1 operating margin disproportionately benefited from strong sales delivered out of the backlog and lower selling expenses on written business for that period. All in, these are outstanding results. Growing the La-Z-Boy Furniture Galleries network is a key element of Century Vision, and we look forward to the continued growth of our company-owned Retail segment and its contribution to our long-term success. For the quarter, delivered sales in our Wholesale segment grew to $442 million, a 12% improvement compared with the prior year period and a record for the first quarter. The growth was driven by pricing and surcharge actions coupled with favorable channel and product mix. This was partially offset by lower volume, primarily the result of external dealers delaying receipt of finished goods due to warehouse constraints. However, these short-term dealer constraints presented an opportunity in the quarter to disproportionately service our own retail backlog, further delayed our consumers and drive strong retail results. Non-GAAP operating margin for the Wholesale segment was 6.1% versus 4.7% in last year's first quarter, primarily reflecting pricing and surcharge actions as well as favorable channel and product mix which were partially offset by increased raw material and plant costs. I'll now spend a few moments on Joybird, which is reported in Corporate & Other. Joybird's delivered sales increased 10% versus the prior year first quarter to $43 million. During the year -- excuse me, during the quarter, the Joybird business grew written sales by 12% versus a year ago, an excellent result in the current environment. Joybird also exhibited multiple positive sales metrics, including web conversion, average order value and average sales price. However, due to increases in freight costs and friction costs associated with the opening of our second manufacturing facility in Tijuana and continued investments in marketing, Joybird posted a small loss for the period. Moving forward, we will continue to invest to drive brand awareness, customer acquisition and disproportionate growth of this relatively young brand. We expect Joybird to be profitable for the full fiscal year. For the full enterprise, consolidated non-GAAP gross margin for the quarter increased 160 basis points versus the prior year period and increased 50 basis points sequentially from Q4. The improvement in gross margin versus a year ago was driven primarily by the change to our consolidated business mix with Retail becoming a larger portion and carrying a higher gross margin than our Wholesale business. Higher raw material and plant costs were partially offset by pricing and surcharge actions as well as product and channel mix. Consolidated non-GAAP SG&A as a percentage of sales decreased 70 basis points versus last year's first quarter, primarily reflecting fixed cost leverage on the higher sales volume across all our businesses, which more than offset the impact of investments in marketing to drive written sales. Our effective tax rate on a GAAP basis for the fiscal '23 first quarter was 26.5% versus 25.9% in last year's first quarter. 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 25.5% to 26.5% for fiscal 2023. Turning to cash. For the quarter, we generated $33 million in cash from operating activities versus $6 million in the prior year first quarter. We ended the period with $241 million in cash and no debt and held $25 million in investments to enhance returns on cash. We spent $21 million in capital primarily related to retail store upgrades and new stores and upgrades to our manufacturing and distribution facilities. In Q1, we returned $7 million to shareholders through dividends. We also spent $5 million repurchasing more than 200,000 shares of stock in the open market leaving 7.3 million shares in our existing authorized share repurchase program. Now before turning the call back to Melinda, let me highlight several important items for the second quarter and full fiscal year. Please keep in mind that fiscal '23 will be a 52-week year and comparisons will be against the 53-week fiscal '22. While we maintain our long-term commitment to steady sales and margin progress, we anticipate results may vary significantly throughout fiscal '23 as macroeconomic factors and geopolitical events continue to impact consumer confidence and furniture demand. Despite these challenges, we remain focused on driving demand to outperform the industry. With the height of the pandemic behind us and what seems to be a return to normal seasonality for the furniture industry, we will likely continue to experience lower than year ago written sales for Q2 for our direct-to-consumer businesses as well as our wholesale customers as they manage fluctuating consumer demand and adjust their inventories accordingly. We still have a number of larger customers who have temporarily delayed receiving product due to warehouse constraints, and this will continue to impact delivered sales in our Wholesale segment in Q2. We expect these delays to be resolved in the back half of the year. We will continue to maintain investments in marketing to drive demand and long-term brand equity, as Melinda noted earlier. Taking all known factors into consideration, we expect delivered sales for the fiscal '23 second quarter to be up 2% to 5% versus the second quarter of fiscal 2022, in a range of about $590 million to $605 million, and consolidated non-GAAP operating margin to be in the range of about 8% to 8.5%. We expect non-GAAP adjustment of purchase accounting charges for the year to be in the range of $0.01 to $0.03 per share. Finally, we continue to expect capital expenditures to be in the range of $85 million to $95 million for fiscal '23 as we invest to strengthen the company for the future, consistent with our Century Vision strategy. And now I will turn the call back to Melinda. -------------------------------------------------------------------------------- Melinda D. Whittington, La-Z-Boy Incorporated - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Bob. While the macroeconomic environment remains volatile, I'm proud of this organization and our ability to overcome many of the challenges faced throughout the period and deliver yet another quarter of record-breaking results. We are navigating near-term challenges while focusing on the long term, controlling what we can, driving agility throughout the organization and building our capabilities. I'm confident that as we capitalize on our brand strength, vast distribution, a talented team, our 95-year heritage and our Century Vision strategy, we have the tools in place to compete and win moving forward. I'd like to thank our team for delivering phenomenal results in the quarter. I truly believe the best is yet to come for La-Z-Boy Incorporated, and I thank you for your time this morning. I'll now turn the call back to Kathy. -------------------------------------------------------------------------------- Kathy Liebmann, La-Z-Boy Incorporated - Director of IR & Corporate Communications [6] -------------------------------------------------------------------------------- Thank you, Melinda. We'll begin the question-and-answer period now. Jenny, please review the instructions for getting in the queue to ask questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question is coming from Anthony Lebiedzinski from Sidoti & Company. -------------------------------------------------------------------------------- Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [2] -------------------------------------------------------------------------------- Certainly, a very solid start to the fiscal year for La-Z-Boy. So just looking at the -- first of all, the operating margin guidance for Q2, it's a little bit lower than what you just reported in Q1. Is that just a function of mix changes that you would expect? Or like what's driving the slight sequential step down in the operating margin guidance? -------------------------------------------------------------------------------- Melinda D. Whittington, La-Z-Boy Incorporated - President, CEO & Director [3] -------------------------------------------------------------------------------- I would say, first of all, Anthony, good to hear from you. But I would just tell you that there are a lot of -- there are a lot of -- there are a lot of volatilities and uncertainties out there right now, and everything came together particularly well in Q1. We noted in Bob's comments that even with some of the delays in our wholesale customers being able to take products, we are able to pivot over and even disproportionately service our retail backlog -- so that's just one example of some things that went particularly well. And I think in this volatile environment, counting on everything going right each quarter is at presumptuous. So our range of outcomes for next quarter, we expect to be reasonably similar to what we've seen this quarter. -------------------------------------------------------------------------------- Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [4] -------------------------------------------------------------------------------- Got it. Yes. And then -- so we're hearing more from others in the industry about overall inventory levels at the retail level being higher than normal. Are you -- just curious, are you seeing any competitive pricing pressures? Or do you expect any of that? How should we think about that? -------------------------------------------------------------------------------- Robert Gerard Lucian, La-Z-Boy Incorporated - Senior VP & CFO [5] -------------------------------------------------------------------------------- Anthony, we haven't seen that in any large amount yet. We're keeping our eyes very close on to market right now over Labor Day. It's clearly a big promotional period, and we're taking a look and trying to understand what folks are doing out there as it relates to promotions. If we see promotions increase at Labor Day, and we've talked about this in the past. We're not going to lead crazy promotions, but we will protect our share, and we'll respond accordingly if and when we see those. -------------------------------------------------------------------------------- Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [6] -------------------------------------------------------------------------------- Got you. Okay. And then in terms of the written sales, just wondering as far as that 15% that you saw for the quarter, was that fairly consistent throughout the quarter? Or did you see any big variations and any sort of early read on how Q2 as far as written comps are trending? -------------------------------------------------------------------------------- Melinda D. Whittington, La-Z-Boy Incorporated - President, CEO & Director [7] -------------------------------------------------------------------------------- Yes. if you think about our quarter, that's May, June and July. And so it was pretty consistent across the 3 months, and that's where we believe some of that is certainly consumer sentiment and the realities of our world right now, but we believe a chunk of that is seasonality as well. So we really -- being that we're sitting here middle of August right now, we haven't really turned the corner on that -- on what we believe is the summer season. As Bob said, we'll see what starts to happen out of Labor Day. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question is coming from Brad Thomas of KeyBanc Capital. -------------------------------------------------------------------------------- Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [9] -------------------------------------------------------------------------------- First of all, congrats on the strong results here for the quarter and wanted to drill in a little bit more to what's going on at Joybird. I think that's really a nice bright spot, not just for the company, but for the industry. Melinda, can you talk a little bit more about what's driving the growth in the written sales at the time that the industry has been seeing some challenges? -------------------------------------------------------------------------------- Melinda D. Whittington, La-Z-Boy Incorporated - President, CEO & Director [10] -------------------------------------------------------------------------------- Yes. We are -- thank you for the kind words on the quarter. We see a lot of power in both of our brands, both the La-Z-Boy brand and the Joybird brand that are both still writing ahead of kind of pre-pandemic levels. Joybird has the benefit of being a younger brand that is still earlier in its growth trajectory, certainly. But as we've said for a while, we believe in the power of how it is resonating with consumers. It's got a -- I just spent the last week in a bunch of our Joybird stores, and there is certainly a vibe to the brand. Maybe I'm too old to say it that way, but there is energy to the brand that is really resonating with consumers both in-store and online. And so we're marketing behind that to ensure that we're getting enough share of voice that, that brand can continue to grow. So we're really just pleased with the execution and how that's resonating with our consumers. -------------------------------------------------------------------------------- Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [11] -------------------------------------------------------------------------------- That's helpful, Melinda. And just as we think about the -- if I switch over to the Wholesale segment and think about the inventory issues that you referenced, can you give us a little more color from a quantification standpoint about how much that's affecting either written sales or the reported sales here for fiscal 1Q or how you're guiding 2Q. -------------------------------------------------------------------------------- Robert Gerard Lucian, La-Z-Boy Incorporated - Senior VP & CFO [12] -------------------------------------------------------------------------------- The inventory itself didn't have an effect on written sales, if I understand your question correctly. The increase you saw in our inventory from a balance sheet perspective was primarily due to a lot of Casegoods that were received during the quarter, particularly in our Wholesale Casegoods business as well as Joybird receiving a number of their Casegoods and it seemed like there was almost an unlock of what was coming out of Asia and the orders that we had been placed all kind of came in and got delivered at one time. So that drove the -- those are the 2 biggest impacts of the inventory increase that we've seen on our side for what we're carrying in our books. We don't have a big increase on the Wholesale -- on our -- what I'll call our upholstery inventory that we have on our balance sheet. The amount of inventory that our customers are holding. So think about it as our Wholesale customers, that's what's impacting our ability, not so much from a written order standpoint, it's more along the lines of customers' warehouses are full, they just can't accept what they've already ordered. So we've been continuing to work with customers on that through Q1. We'll continue to do that in Q2, but it's going to take a while for that inventory that seems to be throughout the entire industry for that to get worked through so we can get back to a normal written to deliver type of cadence. -------------------------------------------------------------------------------- Melinda D. Whittington, La-Z-Boy Incorporated - President, CEO & Director [13] -------------------------------------------------------------------------------- And just one more clarification. Obviously, when we describe the written results for our Retail business, within our stores, there is no inventory issue. In fact, we're still working to build to the levels of in-stock that we'd like to have, so that when consumers don't choose to customize and want something now, they have the breadth of portfolio that they had pre-pandemic. -------------------------------------------------------------------------------- Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [14] -------------------------------------------------------------------------------- That's helpful. So -- and so just to follow up on -- as you think about your sales in the quarter you just reported, I mean would it have been higher if your customers said wanted to take more inventory? Or are you really just delivered to different customers because there's only so much capacity you can do? Just trying to understand sort of some of the puts and takes here given that there were some factors that kept you potentially can do in a better quarter. -------------------------------------------------------------------------------- Melinda D. Whittington, La-Z-Boy Incorporated - President, CEO & Director [15] -------------------------------------------------------------------------------- Maybe if your point for our Wholesale business, certainly, deliveries were impeded by customers saying, wait until I burn through my inventory. And so to your point, is there a level of customers not Wholesale customers not writing as much right now across like our Furniture Galleries while they work through their inventories. That's -- yes, that's probably fair. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Your next question is coming from Bobby Griffin of Raymond James. -------------------------------------------------------------------------------- Alessandra Lynn Jimenez, Raymond James & Associates, Inc., Research Division - Senior Research Associate [17] -------------------------------------------------------------------------------- This is Alessandra Jimenez on for Bobby Griffin. First, I just wanted to start on kind of where we are in terms of excess backlog. You had a very solid first quarter, and you kind of noted some of that was working through some of the backlog. So could you maybe talk about where we are today and your expectations kind of working through that backlog back to normal lead times. -------------------------------------------------------------------------------- Melinda D. Whittington, La-Z-Boy Incorporated - President, CEO & Director [18] -------------------------------------------------------------------------------- Yes. And yes, our goal is, as much as that backlog provides a bit of a security net. It's also an indication that our consumers are having to wait. And so as you noted, our goal is to get that backlog down, and that's why we've invested as we have in recent quarters, really to expand our production footprint with what we're looking at right now, I think last quarter, we said that we thought the backlog would be -- again, depends on -- depends how the consumer continues to respond and keeps writing orders. As much as anything else. But we kind of said that backlog would, for the most part, run out over the first half of the fiscal year, maybe into the third quarter, and I think we're still pretty much on track for that. -------------------------------------------------------------------------------- Alessandra Lynn Jimenez, Raymond James & Associates, Inc., Research Division - Senior Research Associate [19] -------------------------------------------------------------------------------- Okay. That's very helpful. And then have you guys seen any relief in transportation expense to date? -------------------------------------------------------------------------------- Robert Gerard Lucian, La-Z-Boy Incorporated - Senior VP & CFO [20] -------------------------------------------------------------------------------- We've seen a little bit of relief on inbound like ocean containers, more from Asia, less from containers that come on the East Coast. The -- we're not seeing any help what I'll call overland or the trucking within the U.S. as well as final mile delivery costs. Those costs continue to be elevated just due to a combination of higher freight costs, but also just the higher costs associated with hiring and retaining drivers. That's -- we're getting much higher quoted rates than what we would have hoped to have seen by this time. So ocean freight rates are coming down slightly. And again, it depends on where we are receiving the product, but everything over the road in the U.S. is still at elevated levels. -------------------------------------------------------------------------------- Alessandra Lynn Jimenez, Raymond James & Associates, Inc., Research Division - Senior Research Associate [21] -------------------------------------------------------------------------------- Okay. That was very helpful. And then lastly for me. Congratulations on regarding the 5 stores in Denver. Could you provide any color on those contributions of those stores? Are they in line with the network average or above or below? -------------------------------------------------------------------------------- Robert Gerard Lucian, La-Z-Boy Incorporated - Senior VP & CFO [22] -------------------------------------------------------------------------------- Yes. They're in line with the network average, and we're really excited about the operations that we just acquired and getting them fully folded into the La-Z-Boy system. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- (Operator Instructions) We have no further questions in the queue. I will now hand back over to management for any closing remarks. -------------------------------------------------------------------------------- Melinda D. Whittington, La-Z-Boy Incorporated - President, CEO & Director [24] -------------------------------------------------------------------------------- Thank you very much, everyone, for participating in our call this morning. Should you have additional questions, please contact me, and we'll set up some time to speak. Thank you, and have a great day. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

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