La-Z-Boy Incorporated (NYSE:LZB) Q2 2024 Earnings Call Transcript
La-Z-Boy Incorporated (NYSE:LZB) Q2 2024 Earnings Call Transcript November 30, 2023
Operator: Greetings, and Welcome to the La-Z-Boy Fiscal 2024 Second Quarter Conference Call. At this time, all participants have been placed in a listen-only mode. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Mark Becks, Director of Investor Relations and Corporate Development. You may begin.
Mark Becks: Thank you, Genie. Good morning, everyone, and thanks for joining us to discuss our fiscal 2024 second quarter. With us today are Melinda Whittington, La-Z-Boy's President and Chief Executive Officer; and Bob Lucian, La-Z-Boy's SVP and CFO. Melinda will open and close the call and Bob will speak to segment performance and the financials midway through. We will then open the call to questions. Slides will accompany this presentation and you may view them through our webcast link, which will be available for one year, and a telephone replay of the call will be available for one week beginning this afternoon. Before we begin the presentation, I would like to remind you that some statements made in today's call include forward-looking statements about La-Z-Boy's future performance and other matters.
Although we believe these statements to be reasonable, our actual results could differ materially. The most significant risk factors that could affect our future results are described in our annual report on Form 10-K. We encourage you to review those risk factors, as well as other key information detailed in our SEC filings. Also, our earnings release is available under the News and Events tab, on the Investor Relations page of our website, and it includes reconciliations of certain non-GAAP measures, which are also included as an appendix at the end of our conference call slide deck. With that, I will now turn the call over to Melinda Whittington, La-Z-Boy's President and Chief Executive Officer. Melinda?
Melinda Whittington: Thanks, Mark, and good morning, everyone. Yesterday, following the close of market, we reported results for our October ended second quarter. We delivered sales in line with the high-end of our guidance and non-GAAP operating margins exceeded guidance ranges issued last quarter, despite an increasingly challenging macro environment and continued soft home furnishings industry. These results were achieved via strong execution in both our retail stores and across our manufacturing supply chain, which has led to continued market share gains. Highlights for the quarter included: consolidated delivered sales of $511 million, up 14% versus our most recent pre-pandemic second quarter, but down 16% versus the prior year as expected, which benefited from delivering the above normal pandemic backlog.
Total La-Z-Boy Furniture Galleries network written same-store sales growth of 1% positive, and flat written same-store sales for our company-owned retail stores. Non-GAAP gross margin improvement in both our retail and wholesale segments and total consolidated non-GAAP gross margin improvement of 340 basis points year-on-year. Non-GAAP operating margin of 7.9% above our guidance range, but down from a year ago, given deleverage on the delivered sales decline. Non-GAAP EPS of $0.74, a 30% decline from the same period last year, but 42% greater than pre-pandemic fiscal '20, and above our expectations. The launch of our new brand campaign, Long Live the Lazy, that has had early success with our expanded target consumer and is contributing to strong conversion levels.
And finally, continued progress against our Century Vision growth strategy, including the expansion of our retail business with the opening of two new stores, and the acquisition of one independent La-Z-Boy Furniture Gallery store. Our company-owned retail store base now represents just over 50% of the entire La-Z-Boy Furniture Galleries network. The overall home furnishings industry is in a continued slowdown with year-over-year declines in category spending. Consumers continue to de-emphasize discretionary spending on durables, as they adjust to higher interest rates, and housing turnover continues decline on a year-over-year basis. Despite these challenging consumer traffic trends, our La-Z-Boy Furniture Galleries network grew written same-store sales 1%, and company-owned stores held same-store sales flat versus year ago.
With our ongoing efforts to build a more agile supply chain, along with disproportionately growing our retail business, where we have greater control over the end-to-end brand variance, we are positioning our business to continue driving profitable growth over the long-term. La-Z-Boy has been a trusted brand throughout our nearly 100-year history and we are encouraged with our progress, particularly given the challenges across the broader furniture industry. We continue to take a long-term approach to investing in our business, and remain confident in our ability to drive performance that outpaces the industry. Additionally, should sales and traffic headwinds persist longer-than-anticipated, we have the proven ability to manage our cost structure.
And finally, our vertically-integrated model and the disproportionate growth of our direct-to-consumer business, which now contributes nearly half of our total company sales, comes with a structurally higher margin and will support continued investment into the business, as well as improvements in profitability. Highlighting our ongoing top-line trends, total written sales for our company-owned retail segment were up 3% versus last year's second quarter. This growth in written sales was attributed mainly to acquisitions of independent furniture gallery dealers in the quarter. Written same-store sales for our company-owned retail segment, in the second quarter, held essentially flat versus the prior year, even in the challenging consumer environment.
Our Long Live the Lazy brand campaign has produced strong early results, in driving more productive traffic to stores, and in store execution remains solid with strong conversion and higher design sales. And we have sharpened some of our opening price points as raw materials and freight expenses normalize. Our written same-store sales were buoyed in August with strong Labor Day performance, but weakened during the balance of the quarter, as traffic trends slowed, particularly in October, consistent with our industry. That said, we have had a solid start to the holiday season in November. Against the backdrop of a 9% industry contraction during the second quarter, our 3% increase in total written sales indicate continued market share gains. As noted, across our entire La-Z-Boy Furniture Galleries network of 353 stores, written same-store sales grew 1% for the quarter, even against this challenging backdrop.
Turning to Joybird. Written sales turned positive in the second quarter, up 5% versus year ago, as we lapped year ago Labor Day when Joybird trends fell significantly, consistent with most e-commerce furniture businesses and exacerbated by short-term marketing execution issues. Our renewed marketing execution is now efficient and resonating with consumers to build brand awareness. And while Joybird posted a small loss for the quarter as expected, the focus on managing both sales and profitability has led to a notable improvement in operating performance, and we remain optimistic about the prospects for the brand returning to both top and bottom-line growth over the medium-term. I also want to take some time to discuss the long-term focus we have for our business, and give an update on the progress we made against our Century Vision objectives during the quarter.
Recall, Century Vision is our strategic framework for setting up La-Z-Boy Incorporated for our next 100 years, as we celebrate our first century in 2027. This is measured by our intention to grow top-line at a pace double the market, and deliver consistent double-digit operating margins over the long-term. First, we continue to grow and update our La-Z-Boy Furniture Galleries network, and our company-owned retail portion of that network through new stores, acquired stores and remodels to provide an outstanding end-to-end consumer experience. Company-owned stores now total 177, and for the first time in our history, represent just over half of our entire network, reflecting the impressive journey our retail business has been on over the last decade.
We continue to see potential for up to 400 stores across the entire network in the intermediate term, a potential incremental 13% to our total network. During the quarter, we opened two new stores and we completed the acquisition of one independent La-Z-Boy Furniture Gallery store in Lafayette, Louisiana. And in October, we signed an agreement to acquire an additional six store network from an independent La-Z-Boy Furniture Galleries dealer in the Midwest, scheduled to close in our third quarter. As a reminder, these store acquisitions are immediately accretive to our profitability, and allow the company to benefit from the integrated wholesale retail margin. As we grow our company owned retail, our vertically integrated supply chain will become a more meaningful differentiator versus competitors in the industry.
As we are uniquely able to understand the consumer and then deliver custom furniture with strong speed to market. We are actively leveraging the discipline of our team and the strength of our balance sheet to drive continuous improvements in offering greater value for our customers. These competitive advantages position us to continue to grow our business over the long-term. Second on Century Vision, we are refining our brand channel strategy to expand the distribution and availability of La-Z-Boy products in additional compatible outlets to meet our consumers with the right products wherever they prefer to shop. As one example, last quarter, we announced a new partnership with Rooms To Go, a top-10 furniture retailer with a focus on Southwest and Southeast US markets, with a selected assortment of La-Z-Boy Recliners.
While early, this partnership is off to a good start and we look forward to reaching more consumers through strategic partnerships. Third, we're excited about the potential of our new Long Live the Lazy brand campaign. In the quarter, we activated a new marketing strategy, leveraging database consumer insights and our brand heritage of comfort and quality to connect with a broader consumer base. Our goal is to build top of mind awareness, relevance, and updated perceptions of the brand. What makes us excited about our Long Live the Lazy brand campaign? It connects to cultural conversations and momentum, celebrating the value of earned rest and relaxation in our busy lifestyles. It reflects real-life lived-in rooms and well-loved homes across a variety of situations, life stages and home styles in which people can see themselves.
We leverage knowledge of consumers rest and relaxation habits to connect, such as listening to music or a podcast, gaming, watching the news or the big game, and we will show up consistently across all touchpoints on the consumer journey to build familiarity and trust. And next, Joybird. We continue to optimize Joybird to deliver a balance of sales growth and profitability. We view Joybird as an opportunity to increase our omnichannel presence for consumers. The brand continues to have significant opportunity to grow share, which will be our focus as we make prudent choices to return to profitability. Joybird currently operates 12 stores with the recent opening of a new store in Portland, Oregon, and we have identified a total of 25 potential locations over the intermediate term with our expansion pace depending on opportunities in real estate and the overall business environment.
And finally, on Century Vision, we continue our progress on building a more agile business model. Now that we have been able to successfully lower our unprecedented backlog to a more normalized level and are meaningfully improving plant productivity. We recently made decisions to further optimize our global supply chain. As part of this initiative, we are shifting upholstery production from our Ramos, Mexico operations to our other existing upholstery plants, and then relocating a portion of our cut and sew operations back to Ramos, Mexico. Resulting in the permanent closure of our leased cut and sew facility in Paris, Mexico. Action taken to realign Mexico operations will be completed by the end of the fiscal with benefits accruing in fiscal 25.
The strategic decision is made possible through continued productivity improvements achieved across our remaining plant network. Now, let me turn the call over to Bob to review the financial results in more detail. Bob?
Bob Lucian: Thank you, Melinda, and good morning, everyone. As a reminder, we present our results on both a GAAP and non-GAAP basis. We believe non-GAAP presentation better reflects underlying operating trends and performance of the business. Non-GAAP results exclude items which are detailed in our press release and in the tables in the appendix section of our conference call slides. On a consolidated basis, fiscal '24 second quarter sales decreased 16% to $511 million versus the prior year quarter, primarily reflecting lower delivered unit volume versus last year's backlog shipments. This quarter sales results, represent a 14% increase versus the most recent non-pandemic second quarter. As a reminder, we previously called out that last fiscal year benefited by an approximately $300 million increase in delivered sales, due to the delivery of backlog of COVID-related furniture orders, which will not repeat this year.
While we did not call out backlog explicitly across the quarters, the first half saw a more pronounced impact against backlog sales. As such, we expect year-over-year delivered sales comparisons to improve over the back half of the fiscal year. Consolidated GAAP operating income decreased to $34 million and non-GAAP operating income was $41 million, a decrease of 34% versus last year's second quarter. Consolidated GAAP operating margin was 6.6% and non-GAAP operating margin was 7.9%, reflecting a 210 basis point decline versus last year due to fixed cost deleverage on lower delivered sales. GAAP diluted EPS was $0.63 for the second quarter versus $1.07 in the prior year quarter. Non-GAAP diluted EPS was $0.74 in the current year quarter versus $1.05 last year.
As I move to the segment discussion, my comments from here will focus on our non-GAAP reporting unless specifically stated otherwise. Starting with the Retail segment, for the quarter, delivered sales were $214 million, a 15% decrease over the prior year's second quarter, which benefited from higher deliveries of backlog. Importantly, sales were 44% higher than our fiscal 2020 second quarter, a 10% compound annual growth rate improvement over the four years. Retail non-GAAP operating margin decreased to 13% versus 16.5% in the prior year quarter. Gross margin improvements from prior period pricing actions were more than offset by higher SG&A as a percentage of sales, with fixed cost deleverage on the lower delivered sales volume. This non-GAAP operating margin result was 720 basis higher than fiscal 2020 second quarter pre-pandemic result, reflecting significant sustainable improvement in store execution and fixed cost leverage, due to the overall growth of the Retail business.
For our Wholesale segment, delivered sales for the quarter declined to $365 million, an 18% decrease versus the prior year period, which benefited from pandemic backlog production and deliveries. Non-GAAP operating margin for the Wholesale segment was 7.7% versus 8.6% in last year's second quarter, reflecting strong gross margin improvement, more than offset by SG&A deleverage on lower sales. Gross margin improved with benefits from lower raw material pricing and duty expense. This was more than offset by fixed cost deleverage and increased marketing investments to support the launch of our Long Live the Lazy brand campaign. Joybird reported in corporate and other recorded delivered sales of $32 million, a 15% decrease versus the prior year quarter.
The decline was driven by lower unit volume from more cautious consumer demand compared to earlier in the prior year. Additionally, we recently opened our 12th Joybird store in Portland, Oregon in November. We remain committed to growing the brand over the longer term and will continue to maintain our discipline approach as we work to balance growth and profitability. Pulling all this together for the quarter, consolidated non-GAAP gross margin improved across all businesses and for the entire company, improved by 340 basis points versus the prior year second quarter, primarily due to lower raw material and duty costs, partially offset by selective pricing and promotional actions. While SG&A non-GAAP expense dollars decreased year over year, non-GAAP SG&A as a percentage of sales for the second quarter increased by 550 basis points compared with the same period last year, primarily due to sales de-leverage against last year's backlog driven top line results.
Our effective tax rate on a GAAP basis for the second quarter was 26.5% compared to the 25.8% for the prior year period. Our effective tax rate varies from the 21% federal statutory rate, primarily due to state taxes. We expect our effective tax rate to be in the range of 26% to 27% for fiscal ‘24. Turning to cash for the quarter, we generated $31 million in cash from operating activities. Solid cash generation on the quarter was primarily driven by profit performance. Through the first two quarters, cash flow from operations was $57 million, 84% higher than last year's comparable period. We ended the quarter with $333 million in cash and no externally funded debt. We spent $13 million in capital expenditures during the quarter, primarily related to retail store openings and remodels, as well as upgrades at our manufacturing and distribution facilities.
We also spent $2 million on the acquisition of one independent La-Z-Boy Furniture Gallery store in Lafayette, Louisiana. In the second quarter, we returned $18 million to shareholders, including $8 million paid in dividends. We repurchased 326,000 shares in the quarter, which leaves 6.6 million shares available under our existing share repurchase authorization. Subsequent to quarter end, reflecting the confidence in the company's long-term growth prospects, the Board of Directors increased the regular quarterly dividend by 10%. This takes our quarterly dividend to $0.20 per share. We view share repurchases and our dividend as an attractive use of our cash and positive return to shareholders. Recall our capital allocation strategy is to invest approximately 50% of operating cash flow back into the business with the balanced return to shareholders.
In the near term, we have numerous strategic investments to make as we execute Century Vision and anticipate capital allocation to be more heavily weighted to investments in the business, where our ROIs are two times our cost of capital. Before turning the call back to Melinda, let me highlight several important items for fiscal 2024 and our third quarter. Consistent with our Century Vision Strategy, we continue to target sales growth double the industry growth rate and double-digit operating margins over the long term. We expect sales in the third quarter of fiscal ‘24 to be in the range of $515 million to $535 million and non-GAAP operating margin to be in the range of 7% to 8%. We anticipate non-GAAP adjustments for purchase accounting charges for the year to be in the range of $0.01 to $0.03 per share.
We expect capital expenditures to be in the range of $60 million to $70 million for fiscal ‘24 as we invest to strengthen the company for the future, consistent with our Century Vision strategy. And finally, presuming no significant worsening in macroeconomic trends, we expect to continue share repurchases at dollar levels consistent with pre-COVID repurchase activity. And now I will turn the call back to Melinda.
Melinda Whittington: Thanks, Bob. We delivered on our objectives in the quarter with many wins, including a new brand campaign launch, positive written same-store sales, sequential improvement in our delivered sales results, and growth in our company-owned retail store base, which is now just over 50% of our total network. We are engaging with an even brighter consumer than we have in the past. And although the macroeconomic environment remains challenging, we will continue to focus on driving our business, focusing on the consumer and continuously improving our execution. We have every intention of growing from our post-COVID base gaining share and believe the best is yet to come as we deliver long-term profitable growth and returns to all stakeholders.
I want to thank the entire La-Z-Boy Incorporated team for their ongoing dedication and for yet another quarter of strong results, even in a challenging environment. I wish you all a happy and healthy holiday season. Thank you for your time this morning. And with that, I will turn it back to Mark.
Mark Becks: Thank you, Melinda. We will begin the question-and-answer period now. Jenny, please review the instructions for getting in the queue to ask questions.
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