U.S. Markets close in 2 hrs 49 mins

Edited Transcript of LZB earnings conference call or presentation 21-Nov-19 1:30pm GMT

Q2 2020 La-Z-Boy Inc Earnings Call

MONROE Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of La-Z-Boy Inc earnings conference call or presentation Thursday, November 21, 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

* John Allen Baugh

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

* Robert Kenneth Griffin

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

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

Presentation

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

Operator [1]

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

Good day, ladies and gentlemen, and welcome to the La-Z-Boy Fiscal 2020 Second Quarter Results Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host for today, Ms. Kathy Liebmann. Ma'am, the floor is yours.

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

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

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

Thank you, Jesse. Good morning, and thank you for joining us to discuss our fiscal 2020 second quarter results. With us today are Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer; and Melinda Whittington, 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. 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. 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 Kurt Darrow, La-Z-Boy's Chairman, President and CEO. Kurt?

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

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

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

Thank you, Kathy, and good morning. Following yesterday's close of market, we released our second quarter results. We delivered $447 million in sales on a consolidated basis, with our largest 2 segments, Upholstery and Retail, turning in solid top and bottom line results. Written same-store sales across the entire La-Z-Boy Furniture Galleries network increased 3.5% for the quarter on top of second quarter increases in each of the prior 3 years. And delivered sales for of our company-owned Retail segment increased 5%, reflecting the strength and relevance of the La-Z-Boy brand in today's challenging home furnishings environment.

Fiscal year-to-date, consolidated sales are up 4.5%, written same-store sales for the La-Z-Boy Furniture Galleries system increased 4.1%, and delivered sales for of our company-owned Retail segment are up 4.3%.

Consolidated operating margins for the second quarter increased on both the GAAP and non-GAAP basis, led by double-digit profitability in the Upholstery segment.

Also during the quarter, we generated $34 million in cash from operating activities and returned $17 million to shareholders in dividends and share purchases.

And yesterday, our Board of Directors voted again to increase the quarterly dividend to shareholders, demonstrating its confidence in our various growth strategy and long-term prospects as we further solidify our position in the marketplace and continue to deliver strong returns to our shareholders.

Before getting into a discussion of each operating segment, I want to take a moment to talk about what our brand means in this environment. Macroeconomic indicators are generally positive for the consumer with interest rates low and consumer confidence remaining near all-time highs, both of which bode well for the home furnishing business. At the same time, however, tariffs and associated rhetoric in the marketplace continue to impact the home furnishing's industry.

But for the La-Z-Boy branded business, the 25% tariff on Chinese goods translates to just 4%, giving us a competitive advantage due to our flexible global supply chain and North American-centric manufacturing.

With the La-Z-Boy Furniture Galleries' network outperforming other channels in this environment, we believe it's a testament to the overall strength of the La-Z-Boy brand and how it resonates in the marketplace, coupled with our tariff positioning.

To that end, we are continuing to make investments in our strong brand equity for the long term. The relaunch of our Live Life Comfortably campaign, which included the introduction of Kristen Bell as our brand ambassador is tracking to expectations.

We recently completed the first phase of our launch, which focused on creating a strong connection between La-Z-Boy and Kristen and also showcase the range of furniture we offer.

Research shows our advertising is being recognized by consumers at a higher rate. We are appealing to a broader spectrum of consumers. And overall, there is a higher likelihood to consider La-Z-Boy. We are now moving into the second phase of the campaign that will run for the next year and will showcase our 3 design services and ability to perfectly meet any style or taste.

Now let's turn to our operating segments. First, our wholesale business. In the Upholstery segment on a sales increase of 1.2% to $321 million, GAAP operating margin was 10% and non-GAAP operating margin increased to 10.9%, up from 10.2%.

Non-GAAP margin primarily excludes some redundant and nonrecurring charges for our supply chain optimization initiative announced in August.

As part of that plan, we closed our Redlands, California plant and shifted production to our Neosho, Missouri and Siloam Spring, Arkansas facilities.

We were also transitioning our leather cut-and-sew operation from our Newton, Mississippi facility to our large cut-and-sew center in Mexico and believe these moves will allow us to further optimize operations and strengthen our competitive positionings in the marketplace over time.

While these moves have some short-term costs associated with them, we anticipate ongoing annual savings of $4 million to $6 million pretax beginning in fiscal 2021.

Double-digit operating margin in the Upholstery segment was driven primarily by lower raw material costs and our ability to offset other increased costs, including production inefficiencies as we ramp up staffing and training new hires in both Neosho and Siloam Springs to manufacture all the production move from Redlands, California. Due to the ongoing nature of these staffing and production costs, they are not part of the supply chain optimization costs excluded from our non-GAAP numbers.

And the merchandising side, we see continuous success with our wireless remote option. The attachment rate to our power recliner orders continue to escalate, and currently we are enjoying a 21% take rate, which we expect will continue to grow given its unique product features.

The wand is sleek and stylish with various memory positions, lock-out and find-me features and a self-storing magnetic cradle, which consumers love.

We are also seeing a significant increase in our sectional business. At last month's High Point Furniture Market, we expanded our offerings with 2 new supers groups, which provide for maximum dollars per square foot for the retailer.

As an example, with multiple SKUs and configurations, a dealer can floor 1 win yet, yet sell it in multiple ways, for example, as a sofa, sectional or sleeper. With these product offerings, we are addressing consumer wants and preferences while also addressing retailer needs.

And a quick callout to our Comfort Care or customer service team. In Newsweek's 2020 ranking of best customer service companies in America, La-Z-Boy placed second in the furniture Retail category.

With first place last year, La-Z-Boy is the only furniture brand to be included on the winners list 2 years in a row. We are proud of our Comfort Care team as well of our -- as our partnership with a vast array of dealers who take great care of the customer and have been recognized for their dedication and consistent focus on customer service.

Turning to our Casegoods segment. Sales declined 6.3% and operating margin was 7.5%. Although the majority of our Casegoods comes from Vietnam, including all of our bedroom and dining room, sales volumes and operating margins for the segment were impacted by higher tariff costs for certain of our occasional tables sold from China, and we are working to mitigate that issue by shifting sourcing locales.

Additionally, during the period, we experienced delay on some goods from one supplier, and have since shifted that business to one of our better and most reliable supplier. Increased ocean freight cost have also affected our operating margin.

Now moving on to our Retail segment. Our Retail segment continues to deliver excellent results, driven by improved traffic trends and continued strong execution at the store level. Sales for the segment increased 6.2% to $148 million, and delivered same-store sales increased 5%, the 6th consecutive increase, reflecting a 4.5% compounded annual growth rate.

On a GAAP basis, operating margin improved to 5.7% from 4.7% and non-GAAP operating margin increased to 5.8% from 5.4% in last year's second quarter.

Across the broader store network, which includes both company-owned and dealer-owned stores, written same-store sales for the 353 La-Z-Boy Furniture Galleries stores increased 3.5% in the second quarter.

The U.S. stores continue to deliver strong results quarter after quarter. However, full network results were negatively impacted by Canada, where written -- second quarter written same-store sales declined after a rebound in Q1.

Fiscal year-to-date, however, written same-store sales in Canada are slightly positive and showing marked improvement versus the prior 2 fiscal years. As we have said many times previously, investing in the La-Z-Boy's Furniture Galleries store system remains of paramount importance with our core consumer demonstrating a preference to shop in-store.

Additionally, the stores provide the best opportunity to showcase our entire product line, provide comprehensive service and an excellent shopping experience. For the quarter, across the network, 1 new store was opened, and 2 were remodeled. Projected activity for the full year includes about 20 projects, and we plan to end the year with 357 stores including 4 net new.

Now let me spend a few minutes on Joybird, the e-commerce business we acquired last fiscal August. Joybird continues to exhibit fast-paced topline growth, and for La-Z-Boy, it targets a new consumer through a new channel of distribution.

For the quarter, Joybird delivered $21 million in sales, up 11.9% versus the prior year. The business improved its gross margin sequentially and versus the prior year by realizing certain sustainable supply chain synergies during the quarter.

This translated to a reduced operating loss over Q1 but a larger operating loss than in last year second quarter as we continue to invest in customer acquisitions to drive sales growth.

We are optimistic about the long-term potential for Joybird, and we'll continue to focus on striking the right balance between profits and reinvesting in the business to drive growth. We expect Joybird to be profit positive in the fourth quarter of the fiscal year, excluding purchase accounting adjustments.

I will now turn the call over to Melinda to review our most recent financials.

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

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

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

Thank you, Kurt, and good morning, everyone. As always, let me remind you that we are presenting our results on both the GAAP and a non-GAAP basis. Non-GAAP results continue to exclude purchase accounting adjustments for our acquisitions, onetime charges related to our supply chain optimization initiative announced in August, and the impacts of our recent termination of the company's defined benefit pension plan.

We believe this non-GAAP presentation better reflects underlying operating trends and performance of the business. For fiscal '20 -- for the fiscal '20 second quarter, we recorded $1.6 million pretax or $0.03 per diluted share in purchase accounting charges. The majority of which related to the acquisition of Joybird, which is reflected in corporate and other.

We also recorded a $2.8 million pretax or $0.04 per diluted share charge related to our supply chain optimization initiative, which is reflected in our Upholstery segment. And in addition, this quarter, our non-GAAP results excluded a $1.9 million pretax income or $0.03 per share benefit related to the company's retirement -- termination of our defined benefit pension plan.

In last year's second quarter, we recognized $3.9 million pretax or $0.06 per share in purchase accounting charges.

And as always, a full reconciliation of GAAP to non-GAAP is included in our press release and in the Appendix section at the end of our conference call slides.

Moving to our consolidated second quarter results. Sales increased 1.8% to $447 million, led by our Retail segment. GAAP consolidated operating income was $29.6 million versus $28.5 million in the prior year quarter. Excluding purchase accounting charges and the charge for our supply chain optimization initiative, our non-GAAP consolidated operating income increased to $33.7 million from $32.2 million in last year's quarter. Consolidated operating margin on a GAAP basis was 6.6% versus 6.5% in last year's quarter and non-GAAP consolidated operating margin was 7.5% versus 7.3%, primarily driven by favorable raw material prices in the Upholstery segment and higher sales in the Retail segment.

Additionally, as noted earlier, Joybird's operating loss for the quarter was larger than in the prior year quarter.

GAAP earnings per diluted share for the fiscal 2020 second quarter were $0.48 versus $0.42 in the prior year period. Non-GAAP EPS was $0.52 per diluted share in the current year quarter versus $0.48 in last year's second quarter.

Non-GAAP results for the fiscal 2020 quarter excludes charges of $0.03 per share purchase accounting, $0.04 per share related to the company's supply chain optimization initiative and the benefit of $0.03 related to the fiscal 2019 termination of the company's defined benefit pension plan.

Digging a bit deeper, second quarter consolidated GAAP gross margin increased 110 basis points versus the prior year quarter, and non-GAAP gross margin increased 120 basis points. The non-GAAP adjustment for our supply chain initiative, in this year's quarter, roughly offset non-GAAP purchase accounting adjustments in the prior year quarter. Improved gross margin overall, was driven by changes in our consolidated business mix, due to growth in our Retail segment and the contribution from Joybird, both of which carry a higher gross margin than our wholesale businesses and drove an increase of 60 basis points.

Additionally, the Upholstery segment margin benefited due to raw material tailwinds and our ability to offset other increased costs. Our Retail segment margin improved slightly, and our Casegoods segment gross margin declined primarily due to higher ocean freight and the impact of higher tariff costs on certain occasional tables.

Moving on to SG&A, GAAP and non-GAAP SG&A, as a percent of sales, increased 100 basis points in the fiscal 2020 second quarter compared to the prior year quarter as non-GAAP adjustments in the comparative quarters roughly offset.

Increases in SG&A, as a percent of sales, were primarily driven from changes in our consolidated business mix, which increased SG&A, as a percent of sales, by 80 basis points in the quarter, reflecting the growth of Retail and the addition of Joybird.

Nonoperating income for the quarter was $1.4 million, due almost entirely to a onetime benefit from pensions, which we excluded from our non-GAAP results.

Recalling last year's fourth quarter, we terminated our defined benefit pension plan, settling all future obligations under the plan through a combination of some payments to eligible participants who elected to receive them, and a transfer of any remaining benefit obligations to a highly rated insurance company.

During the second quarter, the insurance company refunded $1.9 million, representing an overpayment of the expected benefit obligations that were settled at the time of the termination. The refund was recorded below the operating income line in our consolidated statement of income and was excluded from our non-GAAP results, consistent with the treatment of the Q4 impact of this event.

Our effective tax rate for the second quarter was 26.6% compared with 22.9% in the prior year period. Absent discrete adjustments, the effective tax rate in the fiscal '20 second quarter would have been 25.2% and 24.7% in the prior year period.

Our effective tax rate varies from the 21% federal statutory rate primarily due our state taxes, and we continue to estimate our effective tax rate will be in the range of 25% to 26% for the full fiscal year.

Turning to cash. We generated $34 million in cash from operating activities in the quarter. We ended the period with $120 million in cash, cash equivalents and restricted cash, and $33 million in investments to enhance returns to cash.

During the quarter, we invested $11 million in capital, primarily related to machinery and equipment, and upgrades to our Dayton, Tennessee manufacturing facility.

We also paid $6 million in dividends and spent $11 million purchasing 300,000 shares of stock in the open market under our existing authorized share repurchase program, which leaves 5.2 million shares of purchase availability under that authorization.

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 buyback.

We continue to expect capital expenditures for fiscal 2020 to be in the range of $50 million to $60 million, primarily related to plant upgrades and improvements to several of our Retail stores.

And finally, before turning the call back to Kurt, I want to again remind you of the several items for fiscal 2020, consistent with our callouts in the last quarterly call.

We will continue with our non-GAAP presentation, excluding purchase accounting adjustments as well as the changes related to our -- the charges related to our recently announced supply chain optimization initiative. For acquisitions to date, adjustments continue to be anticipated in the range of $0.08 to $0.10 per share for fiscal 2020, spread roughly evenly across the quarters, plus any effect from revaluation of the contingent consideration liability or for future earn-outs on Joybird, where the payout could range from 0 to $65 million as discussed in previous quarters.

Additionally, for our supply chain optimization initiative, we continue to expect charges to be in a range of $0.08 to $0.11 per diluted share, spread roughly evenly across the 4 quarters. As we work through the operational changes associated with this initiative, we do not anticipate any material operational benefits this fiscal, but expect to realize ongoing operational savings of $4 million to $6 million pretax annually beginning in fiscal 2021, a portion of which we would expect to invest back into the business. And we do not expect any further impacts from the pension termination.

Regarding mix, I would remind you that our change in consolidated sales mix may affect the seasonality of the consolidated results. With Joybird and the growth of our Retail segment, third quarter consolidated sales could outpace or be level with the fourth quarter, historically, our largest quarter.

Regarding SG&A cost trends, we would again note the impact of the changes on our consolidated business mix. With Retail growing and the acquisition of Joybird, the mix impact for the full year is expected to be an SG&A increase in the range of 100 to 150 basis points, the majority of which was realized in Q1, given the timing of the Arizona and Joybird acquisitions.

And finally, a reminder on the back half of the year. Fiscal 2019 included a onetime $0.04 per share net benefit for changes to employee benefits, the combination of a $0.07 benefit in Q3 and a $0.03 charge in Q4. These items have not been adjusted out of our non-GAAP numbers. And now back to Kurt for his concluding remarks.

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

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

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

Thank you, Melinda. We are encouraged about the results La-Z-Boy Incorporated continues to deliver. Our brand differentiates us in a competitive marketplace, supported by ongoing product innovation and excellent service to both dealers and the end consumer. As we head into the busiest selling season, I'm confident we are making the right strategic investments across the business to drive profitable growth and continue to provide returns to all stakeholders. We thank you for your interest in La-Z-Boy Incorporated. And I will turn the call over to Kathy to provide instructions for getting into the queue. Kathy?

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

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

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

Thank you, Kurt. Jesse, we'll begin the question-and-answer period now. Will you please review the instructions for getting into the queue to ask questions?

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) We'll go first to John Baugh at Stifel.

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

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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

Jumping right in. Could you comment, I see in the queue we have got a pretty good increase year-to-date in the stationary Upholstery business, and a meaningful decline around 3% to 3.5% decline, in motion, and there's commentary around Power and leather being soft. And if I recall correctly, your margins are pretty good on Power and leather. So could you maybe just discuss if that assumption is correct? And sort of what's going on there, do you think? And it is, I believe, even more pronounced in the Retail segment, where stationary is strong, which is good, but would love to see motion flat or up. I'm wondering what you see in the marketplace that's driving that?

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

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

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

That was all one question, John?

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

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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

One question. I got more.

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

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

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

Okay. I just wanted to be sure. So our mix over time changes back and forth. To have all categories have equal strength all the time is difficult to do.

Our sectional business in the Upholstery segment is being -- is very strong right now. People are seeming to want the big groups with the deep seating in their rooms or particularly they have TVs. And I think that's more in favor right now than motion sofas. And we also -- there is a little more competition on motion sofas from some international players. But there's nothing -- we don't see it right now as a long-term trend. What was lost this quarter in the motion business was gained in the Upholstery business dollar wise. So we're not alarmed at it. It's just one of these things that ebb and flow, and we're going to be doing some enhancements and some new ideas to our motion business in April to address this. But don't see that it is anything significant. And the leather business, in general, in the industry has been affected by the tariffs more than the Upholstery business because a lot of leather motion sofas and stationary sofas are coming in from China to most every customer in America with at least half, if not the full tariff.

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

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [6]

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

Great. And then maybe a question for Melinda. I know some of the costs from the supply chain changes are not being captured in the onetime restructuring type things. Is there -- does that mean, and I realized, not all of $4 million to $6 million next year will flow to the bottom line, because you'll reinvest it. But might the swing, if you didn't reinvest any of that, be even greater, in other words, those transition costs that are being incurred in regular operating earnings are drag in this number? Any sense of how much that is?

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

Melinda D. Whittington, La-Z-Boy Incorporated - Senior VP & CFO [7]

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

Yes. No, you're absolutely right. Now certainly the drag in the quarter of some inefficiency of transition is nothing in the -- to the order of magnitude of the, kind of, savings we expect over the longer term. But that certainly is a bit of a short-term headwind as we just work through the whole transition.

And we've called out throughout the year, even more broadly than the Redlands' transition, that while we've got a nice tailwind coming from raw material costs, a lot of our other input costs have continued to be a bit more challenging. And so I think we're doing a pretty good job of continuing to offset those, and then there's people costs, benefit costs, transportation costs that across our business are, kind of, daily focuses for us to be managing. And the Redlands' transition just added incrementally to that in the quarter.

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

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [8]

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

Okay. And my last question is -- yes, go ahead.

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [9]

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

John, just a second, I just like to make a callout that the work our team did to idle a plant in California, move all the orders, hire new people to build the furniture and give the majority of it to our consumers at their promised time was a yeoman's effort. And we didn't have much disruption, we didn't have long delays for our customers. And it was a real good work by everybody who got that done. And we're prepared now to sell the facility and move on.

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

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [10]

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

Great. And I realize that's a lot of work behind the scenes there. Congrats on that. Just finally, maybe on Joybird. You mentioned the customer acquisition costs that caused the higher year-over-year loss, and while revenues grew, they were at 12% rate.

I'm curious in your past to profit pre-accounting or acquisition accounting, what are the levers there? And I guess the concern would be do you have to cut the customer acquisition span? And if you do, does that slow that growth rate at all?

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [11]

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

Great question. We have taken last 6 to 9 months to put together our integration plan of joining the 2 companies and utilizing each other strengths. So we are now making the majority of their best sellers in our Dayton, Tennessee plant to provide quicker delivery and less transportation costs to the East Coast. We have those Joybird styles in all of our regional distribution centers that we used for Retail. So for the first time, Joybird customers can get product pretty quickly, that is not custom.

Number 3, getting all of our supply contracts that La-Z-Boy has on similar items integrated into Joybird, so they can enjoy the savings, getting them some equipment to cut poly and do all that. That has taken more time to get it integrated and to get the value of it by the time the product gets to the consumer. We think there's still a combination of some tightening up of SG&A and realizing the savings that we have and enjoyed yet. And the combination of those 2 things can get us profitable without cutting back on customer acquisitions.

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

Operator [12]

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

We'll move next to Bobby Griffin at Raymond James.

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

Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [13]

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

I first want to touch on the Upholstery segment, and particularly, the non-La-Z-Boy branded area of that wholesale business. It looks like the quarter was at, once again, where the La-Z-Boy branded stuff outperformed it. Maybe can you talk about what's going on at the other 50% of that segment? Was that performance relatively in line with how it was in the first quarter? And is there any expanded thoughts that you can share with us of what's going on there with the England subsidy in that area?

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [14]

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

Okay. So I'm a little confused. There's 2 paths there. Are you talking about our sales to -- our sales in one case here?

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

Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [15]

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

Yes. Let me just...

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [16]

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

Other dealers' non-store, and then what are other companies within the Upholstery segment are doing?

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

Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [17]

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

Yes. I mean, basically, I am trying to connect the dots within the strong written business that we're seeing across the whole La-Z-Boy Gallery network. Your company-owned stores as well as your independent licensees to the 1% just total Upholstery growth that we're seeing out of the wholesale segment itself. And I guess that's implying that the network in the La-Z-Boy branded galleries are performing better than some of your non-branded part of that business.

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [18]

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

Yes. Okay. I'll start with that. So we are pleased with the performance of our Retail, both the whole network and our company owned. The consistency for the last couple of years of their performance has been great to see. And I think they embody everything that the brand has to offer and sets them apart. It's hard to give you anything meaningful on the rest of our distribution. We have some 2,000 doors where our product is sold from small dealers to large dealers, and some of them have a full array of the La-Z-Boy brands in their stores, other have just a portion. So we don't see any pattern, but we do see the midsize and smaller dealers are struggling a little bit for growth these days with their inability to market like larger customers. Their inability to buy containers, things of that nature. But I can't really, Bobby, point to one item that would say, this is what we need to fix. I would also tell you that in most of our businesses in the second quarter, their written sales were above their delivered sales. And part of that was in the branded business with making the changeover with -- from Redlands to Neosho. But I think that's just the state of the industry. If you look at some of the other public companies that have been long-term players in the industry, a lot of their sales are not in the positive zone, which is, I think, just reflective of some of the sluggishness at various points in the home furnishing space.

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

Melinda D. Whittington, La-Z-Boy Incorporated - Senior VP & CFO [19]

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

Bobby, I would just add one clarification. You were referring to branded and non-branded. Within our Upholstery business, the vast majority of that business is La-Z-Boy branded. About half of that is going to Furniture Galleries, of which we own about 1/4 of them. So we have La-Z-Boy branded business per se, but going through the third parties, as Kurt was referring to. And then we also have -- we have some other smaller that are non-branded business, and they, kind of, are playing in that order. Our strongest is our Retail, then our Furniture Galleries, and then we're seeing a little more struggle as we go to our La-Z-Boy brand but on competitive floors and then out to the, kind of, non-branded business, I mean, that's more like the rest of the industry.

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

Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [20]

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

Okay. That's helpful. And I guess, what I was also trying to connect is the 2 areas that you're seeing a little bit of the weaker struggles in your galleries, your own galleries. Has that materially changed? Or is that about the same as it was in the first quarter, in the fourth quarter of last fiscal year?

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [21]

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

I don't think there's been a material change. This isn't the first quarter -- the fourth quarter phenomena. This has been truly ever since, kind of, the tariff thing came on the horizon. There's been a little dampening down of growth for certain portions of our distribution.

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

Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [22]

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

Okay. That's helpful. And then lastly for me on Joybird itself. Can you maybe talk about expectations for the year on full year sales? I think last time we spoke, that the end of the first quarter, we're looking at $95 million to $100 million or so. It was a number talked about on the call, I believe. And year-to-date, we're tracking about $38 million or so, so it implies a pretty big ramp. Can you talk about how sales came in for the quarter? Were they a little weaker or better than you expected for Joybird? And just the pathway for that business to continue to accelerate?

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [23]

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

So let's -- yes, I'll try to give you as many data points as I can. When we purchased Joybird a year ago, August, they were trending slightly above $50 million for a year. In our first 6 months, they did, I think, $38 million for the similar timeframe. And that is like a Retail business that we also own. That is in the weaker half of the 12-month period, given our fiscal year. So we would expect a sale's acceleration in the back half of the year and still are targeting that $90 million to $100 million range for this year, if everything goes to our expectations.

A lot could change, and it would be -- it wouldn't necessarily be Joybird-specific, it could be economy-specific or something like that. But we still think the back half is going to be better.

We've got a lot of our integration issues behind us. We've got product available in more places than the first half of the year. So we think that's still a good target of the $90 million to $100 million.

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

Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [24]

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

Okay. And then, did the integration aspect of that limit some of the sales in the first half? Or is it more just the seasonality of that business that you're referring to?

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [25]

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

I'm sure that the integration of everything has caused some disruption. You don't put 2 companies together that were run totally different for a long time and try to get the best out and make changes and relay out the plan and all of those things. That doesn't happen. But I don't think we can lay a major portion of the sales mix. They didn't have a very good written month in August, and never were quite able to catch up. But since September, and now all the way here through November, they've been on a stronger pace of written sales.

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

Melinda D. Whittington, La-Z-Boy Incorporated - Senior VP & CFO [26]

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

And I think seasonally, you have to expect that Q1 is always going to be pretty light, and they'll pace as you move through the year.

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

Operator [27]

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

(Operator Instructions) We'll go to Brad Thomas at KeyBanc Capital Markets.

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

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [28]

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

I wanted to follow up on the Upholstery segment and the strong margin performance you've had in that segment in the first half of the year. I was hoping you all could just talk about as we think about the next couple of quarters, any differences in the puts and takes as we think about profitability in Upholstery segment?

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [29]

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

My comment on that, Brad, would be that almost 11%, that one of the highest margins in the industry on manufacturing Upholstery. So we don't take that for granted, but an excellent job from our supply chain team to achieve that. And I think we have -- we said this before, our ability to improve above 11% is directly related to volume. If we can generate more volume and the capacity utilization is increased, so would be our profits.

So right now, we have some tailwind with the raw material situation. And once our plant in Missouri gets all their staff trained and running at a rate where they don't have to run as much overtime, that could improve the situation.

But if they make the same amount of units that they did the previous year, there's probably not a lot of extra juice in the margin. If we get 10% more units or anything above probably 5%, without any other extraordinary things happening, you could possibly see a little bit increase in the margin.

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

Melinda D. Whittington, La-Z-Boy Incorporated - Senior VP & CFO [30]

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

One other headwind, I spoke to some of the other cost trends we're looking at. But as we are investing in these plants, it's not a huge number, but we will pick up a little more depreciation as we go forward with our investment in our 2 largest plants. We're all on the tail end of all of our work in Dayton, Tennessee, on our largest plant and just kicking off the work in Neosho, which between those 2 are 70% of the volume, even a little bit more than that now of our total company, but we are making, as you know, significant capital investments there. So that would be a little bit of a noncash headwind going forward.

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

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [31]

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

That's helpful. And if I could ask a similar question on the Retail segment. And thinking about its profitability in the next couple of quarters, obviously, the trends have been good with the last 2, but you had the Arizona stores as a tailwind for you. If you can keep up this momentum in same-store sales, which, hopefully, you can against some easier comparisons, do you feel like you're in a position where we should continue to see profits in Retail going higher the next couple of quarters?

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [32]

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

So again, as we said earlier, it's all seasonal, Brad. They will do much better, historically, in the second half of our fiscal year than they do in the first, and that would be reflected in the comparables.

But we -- even this month so far in November, we haven't seen any differential in the pace of our Retail business. And while Arizona is a tremendous business for us, at the level of volume they are at, to keep pace with the same-store sales growth as the rest of the organization is kind of difficult. Because we've got more opportunities in some other markets, but we'll be probably adding another store to Arizona here in the near term and doing some other things. But Arizona has helped the profitability of the business and the size of the over business, but they are not the main driver of same-store sales growth.

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

Operator [33]

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

We'll go next to Anthony Lebiedzinski at Sidoti & Company.

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

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [34]

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

So just first, I just wanted to clarify with respect to Casegoods. So you noted the supplier issue that you had. So just wanted to make sure has that issue been totally resolved at this point?

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [35]

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

We believe it has, Anthony. We've changed suppliers and have

(technical difficulty)

if you look historically at our Casegoods business over the last 2 or 3 business, this is the first real hiccup they've had. They have normally been steady and slow growth and doing a little better and double-digit margins. And I think this is an unusual situation and not a trend line that we think will continue.

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

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [36]

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

Okay. That's good to hear. So as far as Retail, you noted that the traffic was up, which is unlike a lot of other retailers. So just wanted to get a sense as to the average ticket trend, plus also penetration for your in-home design program.

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [37]

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

I'll go in reverse order. The penetration in our in-home and custom business is hovering in that low 30%, and it hasn't had a meaningful change from that. We think, over time, we can build it. But right now, it's been fairly static at a really high number.

And our performance on all the metrics, traffic, conversion, average ticket, percentage of in-home, are all slightly trending up. It's the combination of all those that have made the consistency of the 3% to 5% growth. One's not out-shadowing the other. We're not getting so much more traffic that the other metrics have gone down. It's a combination of those 4 things, and the team is executing at a very high level.

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

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [38]

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

That's good to hear. And also as far as the back half of the year, just wondering, what's your outlook is from promotions? Whether it's for Black Friday or later, it's going to be Presidents' Day week and just overall, do you expect to do, kind of, more of the same types of promotions, or anything that you're looking to do differently? Certainly, it would be helpful to get some color on that.

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

Kurt L. Darrow, La-Z-Boy Incorporated - Chairman, President & CEO [39]

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

So the furniture industry is a highly promotional business. And different retailers take different tactics on how they connect with the customer. We think where we're positioned, our continued investment in our marketing campaign with Kristen, we think our local media that all of our dealers and our own stores do, we think putting some strong values out in our marketing proposition that draws customers into the stores is good. But I mean when you start running -- we don't do this but the comparison, when you start running 50% off in free TVs, and we pay the tax and all of that, I don't know how much farther the industry, in general, can go to try to attract more customers to come in. It's highly competitive, it's highly promotional. Everybody's got to the find the lane they want to swim in.

We think we found our niche, continuing to work. But we won't -- you won't see anything dramatically different on how we go to market.

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

Operator [40]

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

With no other questions holding, I'll turn the conference back to management for any additional or closing comments.

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

Kathy Liebmann, La-Z-Boy Incorporated - Director of IR & Corporate Communications [41]

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

Thank you, everyone, for your interest in La-Z-Boy Incorporated. We certainly appreciate your time this morning. Should you have further questions, please give me a call. And in the meantime, enjoy the Thanksgiving holiday. Bye-bye.

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

Operator [42]

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

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time, and have a great day.