U.S. Markets closed

Edited Transcript of LZB earnings conference call or presentation 20-Feb-19 1:30pm GMT

Q3 2019 La-Z-Boy Inc Earnings Call

MONROE Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of La-Z-Boy Inc earnings conference call or presentation Wednesday, February 20, 2019 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kathy Liebmann

La-Z-Boy Incorporated - Director of IR & Corporate Communications

* Kurt L. Darrow

La-Z-Boy Incorporated - Chairman, President & CEO

* Melinda D. Whittington

La-Z-Boy Incorporated - Senior VP & CFO

================================================================================

Conference Call Participants

================================================================================

* Anthony Chester Lebiedzinski

Sidoti & Company, LLC - Senior Equity Research Analyst

* Bradley Bingham Thomas

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* Dillard Watt

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Robert Kenneth Griffin

Raymond James & Associates, Inc., Research Division - Senior Research Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to your La-Z-Boy Fiscal 2019 Third Quarter Results Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, Kathy Liebmann. Ma'am, the floor is yours.

--------------------------------------------------------------------------------

Kathy Liebmann, La-Z-Boy Incorporated - Director of IR & Corporate Communications [2]

--------------------------------------------------------------------------------

Thank you, Christie. Good morning, and thank you for joining us to discuss our fiscal 2019 third quarter results. With us today are Kurt Darrow, La-Z-Boy's Chairman, President and CEO; and Melinda Whittington, Senior Vice President and CFO. Kurt will open and close the call, and Melinda will speak to 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 a telephone replay of the call will be available for 1 week, beginning this afternoon.

These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles to communicate with investors about the company's current operations and future prospects. We will make forward-looking statements during this call, so I will repeat our usual safe harbor remarks. While these statements reflect the best judgment of management at the present time, they are subject to numerous future risks and uncertainties as detailed in our regular SEC filings, and they may differ materially from actual results due to a wide range of factors. We undertake no obligation to update any forward-looking statements made during this call.

And with that, let me turn the call over to Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer. Kurt?

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

Thank you, Kathy, and good morning, everyone. Yesterday afternoon, we reported over fiscal 2019 third quarter results. Consolidated sales increased 13%, reflecting solid growth across the entire enterprise, including the base businesses and those recently acquired. We also grew consolidated operating income on a GAAP and non-GAAP basis, with all 3 segments posting improved performance. EPS for the quarter was the highest in any third quarter in more than a decade. And the company-owned Retail segment turn in a delivered same-store increase of plus 6.7% and doubled its operating income. Additionally, we generated strong operating cash during the period, which provides us with the ability to continue to make strategic investments in the business to drive growth. A good quarter overall, highlighting our strong portfolio of brands, our vast distribution network, our global supply chain and a very solid balance sheet. I'll now take a few minutes to review each business. First, Upholstery. Sales in the segment increased 4.2% from last year's third quarter, driven by improvements in mix, selling prices and the surcharge pass-throughs for tariffs, which I'll discuss in more detail in a few minutes. Operating margin was 10.3% on a GAAP basis and non-GAAP basis, up from last year's third quarter the GAAP operating margin of 9.9 and non-GAAP of 9.7. While there were a number of puts and takes that impacted operating margins for the quarter, we continued to turn in top quartile operating margins in our industry. During the period, inflationary pressures throughout our supply chain and a shift in product mix were offset by higher selling prices and a onetime impact of a redesign of our employee benefit programs, which Melinda will discuss in her remarks. As a reminder, last year's third quarter also included a charge for a legal settlement.

On the product side, Duo, our unique power collection, maintained its popularity with consumers and are selling well. Additionally, the reimagined Urban Attitudes collection, which features a curated collection of coordinated iClean fabrics, is continuing to gain momentum. We will launch our second commercial for the Urban Attitudes collection this month and look forward to kicking off a new marketing campaign featuring Kristen Bell as our new brand ambassador. We have produced a library of work, and it will be activated across all La-Z-Boy consumer touch points beginning in the spring. We also have the upcoming April High Point Market, where we will have some exciting new product introductions to unveil.

Now moving on to retail. Our company-owned Retail segment turned in an outstanding quarter, with our team executing at a high level and consumers responding favorably to our product and service offerings. In what is typically the strongest quarter for our retail business, sales increased 26.7%, delivered same-store sales increased 6.7% and the operating income doubled versus the prior year.

On a GAAP basis, operating margin improved to 8.9% from 5.6%. And on a non-GAAP basis, operating margin increased to 9.1% from 5.7%. We are very pleased with the performance of the retail business and will note that excluding all the Arizona results, which includes purchase accounting and its operating profit, the core retail business sales and operating margin increased, driven by higher design sales, custom orders and the fixed cost leverage stemming from group volume. Performance for the period was also driven by sales of $24 million from the 10 acquired stores in the third quarter, 9 of which are in Arizona. The Arizona stores have higher volume, experience a higher operating margin and have lower SG&A as a percent of sales than the average of our remaining Retail portfolio.

Written same-store sales for the 352 La-Z-Boy Furniture Galleries was down by less than 1% for the quarter. And importantly, for calendar year 2018, written same-store sales across the network increased 3.2%. While we were disappointed that the network did not post a positive written same-store comp for the quarter, we do not see a general trend indicating a business slowdown. Calendar 2019 has started with disruptions from weather, most notably the polar vortex as well as all the storms and rains in the West Coast. We were pleased, however, with the performance of the company-owned stores over this recent Presidents' Day weekend. At this time, that is the only data point we have as information from our independent dealers comes in after months' end. We will continue to invest in our Furniture Galleries stores system as that is where we have the best opportunity to showcase the full array of our product offerings while providing the consumer with an excellent shopping experience. The stores also afford us the opportunity to sell full room groups and design services, which expand the average ticket. Across the network for fiscal 2019, we expect to execute 20 projects, including new stores, remodels and relocations. We plan to end the year with 3 net new stores, bringing the total to 353.

Now let me turn to our Casegoods business. Sales for fiscal 2019 third quarter was $28 million, up 3% from the prior year period. Operating margin increased to 11.9% versus 10.3% last year with operating margins for the segment averaging double digits year-to-date and for fiscal '18. High-level performance for the Casegoods segment is being driven by great product collections that are resonating with today's customer. Additionally, our team is providing excellent service to retailers through high in-stock positions and quick shipping times, which has allowed us to expand our space in various Retail floors.

Now let's turn to Joybird, the e-commerce business we acquired this past summer. For those of you who may be new to our story, Joybird is a direct-to-consumer manufacturer of upholstered furniture that sells exclusively online. Joybird's mid-century modern furniture appeals primarily to millennials in Gen X-ers, providing us with a demographic not typically reached with the La-Z-Boy brand. We are pleased with the rapid growth that Joybird continue to exhibit, and we see great potential for this business. With sales of $19 million for the third quarter, Joybird is trending to be on an annual run rate of $75 million to $80 million, up from a $55 million annual run rate when we acquired the business. Additionally, we are beginning to leverage the La-Z-Boy supply chain in multiple ways. First, our team has recommended product flow and equipment changes in the Joybird Tijuana plant and, as a result, it is on pace to almost doubling its production capacity. Second, we're leveraging enterprise-wide La-Z-Boy buying power to procure raw materials at a more competitive rate. Thirdly, we had piloted production for Joybird's most popular styles at our Dayton, Tennessee facility, and we'll begin to complement Joybird's production capabilities in the fourth quarter. And fourth, we will lower Joybird's shipping costs by utilizing our national distribution capabilities. Net on a non-GAAP basis, we expect Joybird to begin contributing to our bottom line profits next fiscal year. As we noted last quarter, we believe Joybird can be a several-hundred-million-dollar revenue business, and we're willing to invest in this brand as well as the Joybird leadership team to drive growth for the La-Z-Boy enterprise.

And finally, before turning the call up over to Melinda, I'll take a few minutes to address tariffs. As we noted last quarter for La-Z-Boy, we believe we have a strategic advantage in the marketplace based on our U.S. upholstery manufacturing footprint and the structure of our global supply chain with respect to procurement. In September, a 10% tariff was implemented on goods coming from China, which impacted several items we sourced for our manufacturing operations, including cover for our upholstered product. However, for La-Z-Boy, 2/3 of our cut-and-sew kits come from our Mexico base facility and are not subject to the tariff. This leaves just 1/3 of the kits subject to the tariffs, along with actuators, which is a component part used in our power products for which a tariff was implemented last June. We are passing on the

combined tariffs through a surcharge on our wholesale business that increased our prices roughly 2% on our upholstered business and about 3% on our upholstered units with [Houzz]. Thus far, with the initial tariff pass-through, we have not seen much change in consumer buying habits. However, should the tariffs on goods from China go up to 25% in March, this would translate to a roughly 6% to 7% increase in pricing. And combined with other several price increases over the past 18 months to offset raw material costs, it does remain a question as to whether or not we will see an impact to demand elasticity. We do believe we are more competitively positioned than many, if not most, in the industry, due to our domestic footprint and our supply chain structure.

Turning to Canada, where we have a retaliatory care of 10% being fully pass-through on full finished good prices, we're seeing some volume erosion. On top of the tariff, previous raw material increases over the past year and with the Canadian currency not in their favor, consumers are looking at furniture that could be as much as 15% to 20% more expensive than the previous year. I will now turn our call over to Melinda to review our financials in detail.

--------------------------------------------------------------------------------

Melinda D. Whittington, La-Z-Boy Incorporated - Senior VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, Kurt, and good morning, everyone. To start, let me remind you all that last quarter, we began presenting our results on both a GAAP and the non-GAAP basis, which excludes the purchase accounting adjustments required by GAAP for our acquisitions. We believe this will better help you understand business trends and performance of the core underlying businesses. In fiscal 2019, we acquired Joybird, which is reflected in corporate and other, and 10 La-Z-Boy Furniture Galleries stores, 9 in Arizona and 1 in Massachusetts, reflected in our Retail segment. These make up the majority of our current year purchase accounting adjustments. For consistency, we have adjusted prior periods similarly for the impact of prior acquisitions. For this year's third quarter, we recorded $1.5 million or $0.02 per share in purchase accounting charges, slightly below our previous estimate of $0.03 to $0.04 per share. As a reminder, the current year purchase currency adjustment are primarily composed of 4 items: the amortization of $7.5 million of the initial payment for Joybird, which for accounting purposes is considered compensation expense and is amortized over 2 years; the amortization of the fair value of the Joybird trade name, which will be amortized over an 8-year useful life; minor interest expense over a 5-year period on the $25 million of future guaranteed payments; and the incremental expense recognized upon the sale of inventory acquired at fair value, which we recognize over several quarters as it sells through. We expect purchase accounting adjustments for Q4 to be in the range of $0.03 to $0.04 per share, bringing total impact on the year to $0.11 to $0.12. Going forward, in addition to these items, we may also have impacts to our GAAP earnings for changes in the fair value of the Joybird contingent consideration liability. Recall, there are 2 future earnout opportunities based on Joybird's financial performance, in fiscal 2021 and 2023. The range of contingent consideration is 0 to $65 million. And therefore, the quarterly valuation of this obligation can vary widely depend on Joybird's financial success over the next 5 years. Finally, a reminder that all of our purchase are preliminary and subject to change within the first 12 months of the acquisition under U.S. GAAP. A full reconciliation of GAAP to non-GAAP is included at the back of our press release. The tables are also included in the Appendix section at the end of our conference call slides. As Kurt noted earlier, we are pleased with the operating performance of both Joybird and the Arizona stores, and they're on track to meet our internal expectations for the balance of the year. And we continue to expect the combined entities to be slightly accretive to non-GAAP earnings by the end of this fiscal.

And now I'll review our consolidated operating results for the third quarter. Sales increased 13% versus the prior quarter to $468 million. GAAP consolidated income increased to $41 million. Excluding purchase accounting charges, non-GAAP consolidated operating income was $42 million versus $33 million in last year's quarter. Consolidated operating margin, on a GAAP basis, was 8.7% versus 8% last year, and non-GAAP consolidated margin was 9% versus 7.9% last year. GAAP earnings per diluted share for the fiscal 2019 third quarter was $0.61 versus $0.25 in the prior year period. Non-GAAP EPS was $0.63 per diluted share in the current year quarter versus $0.25 in last year's third quarter.

Affecting comparability, this year's third quarter includes higher incentive compensation cost of $0.10 per share, which we have discussed in the past. This is partially offset by $0.07 per share onetime benefit for a redesign of our employee benefits program, which I'll discuss further in just a moment. And as a reminder, the fiscal 2018 third quarter included a $0.20 per share net charge related to tax reform and a $0.06 per share charge for a legal settlement.

On a consolidated GAAP gross margin -- our consolidated GAAP gross margin increased 130 basis points on the third quarter of fiscal 2019 versus last year's third quarter, and non-GAAP gross margin increased 140 basis points. The majority of the gross margin increase was due to changes in our consolidated business mix, driven by the growth of our retail segment and the contribution from Joybird, both of which carry a higher gross margin than our wholesale businesses. However, this benefit is more than offset with higher SG&A levels for these businesses.

Looking at gross margin by segment. We experienced a decline in upholstery due to inflationary pressures on our supply chain and changes to our product mix, which were offset somewhat by higher selling prices. Gross margin improved in our Casegoods segment, primarily driven by increased volume and a shift in product mix. And our Retail segment's gross margin increase for the period, primarily did the acquired stores that have a slightly higher margin then our average stores as well as increased design and custom order sales in our core businesses.

Moving on to SG&A. GAAP SG&A as a percent of sales, increased 60 basis points in the third quarter fiscal 2019 compared with the prior year period. Non-GAAP SG&A increased 30 basis points, adjusted for acquisition-related costs for Joybird that are classified as compensation expense.

Changes to our consolidated business mix increased SG&A by 270 basis points. This reflects the growth of our retail business and the acquisition of Joybird, both of which carry a higher level of SG&A as a percent of sales versus our wholesale business. And it is, therefore, also indicative of future SG&A run rates.

In addition, incentive compensation costs as a percentage of sales were 120 basis points higher than the prior year quarter due to our improved financial performance against targets and a change in the vesting provisions of certain equity awards, as we've discussed in prior quarters. We had previously estimated incentive compensation charges to be roughly $0.08 per share higher per quarter against last year. For this quarter, these costs were $0.10 per share higher than last year, slightly more than our previous estimate, primarily due to our improved performance against targets during the third quarter.

Offsetting the higher SG&A expenses this quarter was a onetime benefit of 80 basis points that relates to employee benefits programs. During the quarter, we announced the redesign of several of our employee benefits to better align with the market in which we compete for talent. This resulted in a onetime 80 basis point or $0.07 per share benefit in the current quarter. As we complete this transaction, we expect to incur a $0.03 per share charge related to these changes in Q4, which will then settle out so our run rate in fiscal 2020, more consistent with our historical expense levels. Additionally, SG&A, as a percent of sales in the current quarter benefited from the leverage of fixed costs on higher sales volume, particularly in our retail segment, which delivered a record high operating margin for the quarter on record high sales.

And finally, a reminder that last year's third quarter SG&A was impacted by 100 basis points resulting from a legal settlement.

In summary, GAAP operating margin increased 70 basis points from the above items impacting gross margin and SG&A, which included the net 110-basis point negative impact of consolidated mix on operating margin, reflecting the growth of our Retail segment in additions of Joybird.

Our effective tax rate for the third quarter of fiscal 2019 was 26.9% compared with 62% in the third quarter of fiscal 2018, with both periods reflecting the impact of tax reform. The effective tax rate was much higher in last year's third quarter due to the phasing in of the lower corporate income tax rate, resulting in a blended federal rate of 30.4% as compared with 21% for fiscal 2019, and the one-time revaluation of deferred taxes on a lower corporate income tax rate in fiscal 2018. Our effective tax rate varies from the 21% statutory rate, primarily due to state taxes. Absent discrete adjustments, the effective tax rate in the third quarter of fiscal 2019 would have been 26.7%. This quarter's rate was up slightly from last quarter due to certain nondeductible expenses related to compensation. For the year, we continued to estimate our tax rate to be in the 25% to 26% range, excluding discrete items.

Turning to the balance sheet. During the quarter, we generated $45 million in cash from operating activities. We ended the third quarter of fiscal 2019 with $102 million in cash and cash equivalents, $32 million in investments to enhance returns on our cash and $2 million in restricted cash. During the quarter, we invested $9 million in capital, primarily related to our new innovation center in Dayton, Tennessee; upgrades to our Dayton manufacturing facility; and the expansion of the England plant and the construction of its new corporate office building. For the full fiscal year, we continue to expect capital expenditures to be in the range of $45 million to $50 million.

During the year, we paid $6 million in dividends -- during the quarter, I'm sorry, we paid $6 million in dividends and spent $5 million purchasing 200,000 shares of stock in the open market under our existing authorized share repurchase program, which leaves 6.1 million shares of purchase availability under that authorization. We also repaid $50 million in borrowings under our revolving line of credit, leaving $20 million outstanding. Our capital allocation priorities remain to invest in the business to drive growth, and then provide returns to shareholders with our dividends and discretionary share buybacks. Finally, as we look to the fourth quarter, I'd like to recap for modeling purposes the items affecting comparability. Last year's fourth quarter included a $0.06 per share benefit related to tax reform. For the upcoming fourth quarter, we continue to anticipate purchase accounting charges to be between $0.03 to $0.04 per share. And these items will be adjusted in our non-GAAP numbers. We also expect approximately $0.08 per share and higher incentive compensation costs, consistent with our discussion in the prior 2 quarters. Within SG&A, changes to our consolidated business mix, with Retail growing and the acquisition of Joybird, will drive an approximate 250 to 300 basis point increase against last year's fourth quarter, consistent with what we've seen in this third quarter.

Related to the redesign of our employee benefits, as I noted a few moments ago, we expect to incur a charge of $0.03 per share. In addition, as part of this employee benefits redesign, we plan to terminate our defined-benefit pension plan for eligible factory hourly employees in Q4. We expect to settle any future obligations under the plan through a combination of lump-sum payments to eligible participants who elect to receive them and to the purchase of annuity contracts.

In connection with this, we expect to make between $9 million and $11 million in additional cash contributions to the plan, using operating cash on hand. And we estimate that we will record approximately $33 million to $38 million of total non-GAAP cash charges, net of tax or $0.70 to $0.81 per share related to the plant termination. We plan to adjust for these pension termination charges in our non-GAAP reporting. And now, I'll turn the call back to Kurt for his concluding remarks.

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [5]

--------------------------------------------------------------------------------

Thank you, Melinda. Overall, we are pleased with the strategic direction of our business and the opportunity for long-term success. Looking at Q4, record-breaking weather trends have driven a slower start and questions remain with respect to a potential increase in tariffs. However, we have a very solid foundation in place to grow our business. With the strongest brand in the industry, a world-class supply chain, a vast distribution network and the addition of Joybird with a strong financial position, we have all the components effectively to canvass the marketplace and increase our share in the growing consumer segments.

We thank you for your interest in La-Z-Boy Incorporated, and I'll turn the call over to Kathy to provide the instructions for getting into the queue. Kathy?

--------------------------------------------------------------------------------

Kathy Liebmann, La-Z-Boy Incorporated - Director of IR & Corporate Communications [6]

--------------------------------------------------------------------------------

Thank you, Kurt. We will begin the question-and-answer period now. Christie, please review the instructions for getting into the queue to ask questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll take our first question from Bobby Griffin with Raymond James.

--------------------------------------------------------------------------------

Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2]

--------------------------------------------------------------------------------

First, I wanted to talk about the delivery comps in the quarter in the company-owned retail segment. It's been a nice shift in trends there over the last couple of quarters, with greater than 4% comps. Kurt, can you maybe just expand upon some of the initiatives that are going on in the stores to drive the improved performance?

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

Well, I will tell you that our team is -- I'm so proud of them, and they are executing at a very high level. There is not a lot of secrets at Retail when the salespeople greet the customer and move forward with the purchase pathway, it's all about gaining trust, then listening and our ability to do more in-home design work, our ability to sell higher tickets, our ability to sell rooms, all of that is playing in our favor. And in addition, the conversion that we have in that -- of the number of people we're closing versus who walks in is slightly improving. So there was no one-time silver bullet. There is no secrets here other than number of years of putting together a plan that would lead to this kind of result, getting leadership in all of our regions and all of our stores. And we're very pleased, and obviously, we can't ignore the impact that Arizona has made. But I want to be clear that the base business performed at a very high level. And given the report that have been out in the industry from a lot of our competitors in the last 30 or 45 days, a nearly 7% comp is a pretty stellar achievement.

--------------------------------------------------------------------------------

Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [4]

--------------------------------------------------------------------------------

Absolutely. I appreciate that detail. Has there been any notable change in traffic trends or is it more just better conversion and a better mix of the design services? And then maybe can you just refresh us now for the company-owned stores what percentage of sales are in design and custom sales?

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [5]

--------------------------------------------------------------------------------

So I would say that our traffic is still slightly down but not nearly as down as much as it was a couple of years ago. So hopefully, we reached a plateau and traffic will -- I think encouragingly, though, our traffic particularly in the big holidays, has been positive. And that's where we've been able to capitalize on that. But our design business in the home is above 30% and much higher than that in Arizona. And our custom business, I think if you would add the 2, Bobby, it would probably be pushing 50% now. The custom business, just to be clear, could be a different color on a recliner and it doesn't really quantitate a room purchase and all. But the fact that we have domestic manufacturing and we can get product to the customer fast, we do a lot of custom business on other colors of a pattern that the customer likes.

--------------------------------------------------------------------------------

Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [6]

--------------------------------------------------------------------------------

All right. And then lastly for me. Could you just maybe help us from a modeling standpoint understand, I guess, the future timing and impact from the ongoing price increases for raw materials and then the tariff aspect? Is the 2% benefit that was so called out in the 10-Q from tariffs this quarter is something that we should assume going forward in the next couple of quarters? And kind of the same type of question for the raw material type pricing benefit.

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [7]

--------------------------------------------------------------------------------

Well, you have to tell us what's going to happen with tariffs so I can answer that question. So, Bob, I don't have the exact numbers. In each of these in isolation is not, in our opinion, that hard to overcome. But you had 18 months of raw materials going up. And at one point, steel, poly, lumber were all at all-time highs. We see that plateauing and maybe starting to come down a little bit. But if there's -- I read last night, there could be another delay before a decision is made on tariffs. So if that -- there's a stay for 90 to 120 days would get us to disarm her, that same 2% and 3% would be going -- would be on our pricing going forward. And in reverse, the same tariffs will stay in place from Canada from product going into Canada until some resolution of this is come to.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And our next question comes from Brad Thomas with KeyBanc Capital.

--------------------------------------------------------------------------------

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [9]

--------------------------------------------------------------------------------

I wanted to follow up on the comments about the recent trends. If I heard you right, I think you said that the written same-store sales was up -- sorry, was down 3.2%. And I was wondering if you had any more color around the trends by month just so we got a better sense as to how much that might've been that difficult weather in January. And then I guess as you think about written same-store sales, would the anticipation of tariffs have affected the orders and pull forward in the orders in earlier periods? I guess, how should we think about that?

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [10]

--------------------------------------------------------------------------------

Well, the easy one is the tariffs. I don't think there was any pull forward. It's not significant enough to hedge and the fact that they could stay in effect for who knows how long. We did not really see any of that. As far as the same-store sales, Brad, just to be clear, we were down -- the system was down a little less than 1%, by 0.6%, in written from November, December, January. And the only month that was negative was January. So given the weather, given some other things -- I'm not using weather as an excuse because we have it all the time, but that did affect January. You mentioned that number of 3.2%. That was our same-store sales increase for the network in calendar year '18. So our same-store sales were slightly up in November, December and down a few points in January. So there was a deceleration at the end of the quarter but we don't think it's systemic, and we're glad the bad weather is coming today across the U.S. instead of the Presidents weekend.

--------------------------------------------------------------------------------

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [11]

--------------------------------------------------------------------------------

Got you. Okay. And then just follow-up on the new marketing campaigns with Kristen Bell. From a cost perspective, anything we should be aware of as we think about lumpiness of expenses associated with that new advertising? And then from a benefit perspective, when would you expect to hopefully, see a lift from this campaign?

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [12]

--------------------------------------------------------------------------------

Very good question, Brad. Look, what we are planning to do is similar to what we did when we launched our first spokesperson, with Brooke. In the initial launch, both ourselves and with our dealer participation, we will spend somewhat more money on the launch than we would do in a normal. But it will average out as we go through a 12- or 18-month period. But we do put some additional media weight behind the launch to get that message out. And our hope for this is, is that Kristen speaks to a little bit different audience than Brooke, and is a fresh face and a different point of view. And we think that the brand can use that. We had a very long and prosperous run with Brooke and we were grateful for that but felt it was time for a change and think she is going to bring a new perspective to the brand.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

And our next question comes from Anthony Lebiedzinski from Sidoti.

--------------------------------------------------------------------------------

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [14]

--------------------------------------------------------------------------------

So I just wanted to follow-up on the previous question in regards to the design program and custom orders. Can you give us a sense as to how that was about 1 year ago? So just that we can know how that's growing so far.

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [15]

--------------------------------------------------------------------------------

And I cannot add at the top of my head. When you have your follow-up conversations with the team, they can provide that detail. But it has steadily grown, I can tell you that. And the size of the tickets that were doing is also increasing. But what I want everybody to be focused on, that the economics behind all of this is great, but when we do an In-Home Design room for the customer, the odds of being a much more satisfied customer and coming back and purchasing from us again and doing another room, that's the greatest benefit for this, building this customer for life. The economics come with it, but we're trying to build a long-term business here and having that connection with the consumer is fantastic.

--------------------------------------------------------------------------------

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [16]

--------------------------------------------------------------------------------

That's very good. And you mentioned Arizona is doing very well for you, which is a continuation from where that business was trending when you acquired it. Can you give us a sense as to whether there are any notable regional differences in the performance for your stores?

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [17]

--------------------------------------------------------------------------------

The only comment I'd make on that, Anthony, is I mentioned in my prepared remarks about the impact the tariffs are having in Canada. And so our Canadian stores, which for years, outperformed the U.S. stores for a number of years. Our Canadian stores are not doing as well as the U.S. stores right now through -- I don't want to -- through no fault of their own. But the price of their product and the consumer's understanding of that has had some challenge. Now, again, Canada, in the Retail side, is about 10% of our business. So it isn't a devastating number yet. But it does leave some credence if tariffs for us got up to 25%. They may have some impact on demand. So we're watching that very closely. But other than that, we don't see a huge differential in the U.S. about sales growth.

--------------------------------------------------------------------------------

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [18]

--------------------------------------------------------------------------------

Got it. Okay. And as far as your new innovation center in Dayton, Tennessee, what do you expect -- what should we expect would be the biggest benefits of having that up and running?

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [19]

--------------------------------------------------------------------------------

I think the first benefit is our ability to attract a lot of new talent and smart people, different points of view. We've given them a great place to work and all the tools that they need. So that's step 1. Without the great people, nothing's going to happen. Number two, we should be able to put out a longer and a more robust pipeline of things we do in an innovation side to keep us at the forefront of things changing in the industry. So we've always prided ourselves. And the original start of this company was the innovation of the recliner mechanism. So lots of things with cushioning, with power, with all kinds of remotes and all, we are investing heavily in that, and we want to build a leader in trying to forge our own pathway.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

And our last question comes from Dillard Watt with [Odfjell].

--------------------------------------------------------------------------------

Dillard Watt, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [21]

--------------------------------------------------------------------------------

To clarify, Dillard Watt from Stifel, for the crowd. Maybe let's talk a little bit about Joybird. You spent a good amount of time saying some things about what you brought over to Joybird from the La-Z-Boy side on the manufacturing and operations. Is there anything you've learned from Joybird that you're bringing in, either technology, e-commerce, tools, anything like that you're starting to use on the integration into the legacy company?

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [22]

--------------------------------------------------------------------------------

That's a great question, Dillard. When 2 companies that are sort of polar opposites about the way they think about certain things, the first couple of quarters has all been about let's keep the business going, let's do all the behind-the-scenes things. And we are learning from each other. But we -- frankly, most of the things that La-Z-Boy has brought to the table are not really in place yet. So most of all their growth and all your production that they've had since we were able to help them expand their Tijuana capacity, most of that would be on the Joybird side. So we still have more benefit coming from using our distribution systems and our own manufacturing on the eastern side of the U.S. But there are learnings, and our 2 teams are communicating and we have people going back and forth to Canada to California and Michigan, collaborating. And there's a lot more to come. But to call out something specific right now, it's probably a little premature. But that is one of the reasons we bought them and one of the reasons they do some things differently and probably better than we do, and we have the same. We do a lot of things better than them just for the fact that we've been making furniture for 90-plus years and they've been furniture for less than 5, so there should be some synergies. But the pace of going -- we bought them, their run rate was about $55 million. Now in the last 2 quarters, it indicates the run rate would be closer to $80 million. That's a good first 6 to 9 months’ worth of work by everybody. And as we get more and more of these things in place, we see this for the next couple of years. As a percentage, probably our highest growth business.

--------------------------------------------------------------------------------

Dillard Watt, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [23]

--------------------------------------------------------------------------------

Absolutely. And maybe on the consumer-demand side, is there anything you can glean either from web traffic at Joybird or La-Z-Boy that gives you a little bit of comfort that perhaps we are just in a bit of a pause or a weather issue with actual traffic into the stores?

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [24]

--------------------------------------------------------------------------------

Well, there is a correlation between our web traffic in our actual results and our store traffic. And -- but our web traffic has been pretty stellar. The consumer, when she's looking for things, isn't anticipating the weather not going to be very good in a couple of days. So I think most of it, if I had to gauge right now, is weather related. And even after some days -- we had some days the end of January and so far in February where maybe as many as 30% of our stores were closed for a couple days across the Midwest and the East Coast. But 2 days after the weather, the business bounced back. It bounces back. So the consumer really wants something and weather comes, she still needs to do something with their house or with their room. And so we don't see that being a long-term problem. So right now and, again, based on what our own retail did for Presidents' Day weekend, there is a degree of optimism. However, you never really make up the days that you were closed. So that does have some effect on the run rate of the business in the short term.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

(Operator Instructions) And there appears to be no further questions at this time.

--------------------------------------------------------------------------------

Kathy Liebmann, La-Z-Boy Incorporated - Director of IR & Corporate Communications [26]

--------------------------------------------------------------------------------

Okay. Thank you very much, everyone, for participating in this morning's call. If you have any follow-up questions, please get in touch with me. Have a great day.

--------------------------------------------------------------------------------

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [27]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.