La-Z-Boy Incorporated

Good morning, ladies and gentlemen, and welcome to your Lazy Boy Fiscal 2020 Full Year and Fourth Quarter Conference Call. All lines have been placed in a listen-only mode, and the floor will be open for questions following the presentation. At this time, it is my pleasure to turn the floor over to Kathy Liebman. Please go ahead.

Thank you, Christy, and good morning. Thank you for joining us to discuss our Fiscal 2020 Fourth Quarter and Full Year results. With us this morning are Curt Darrow, Lazy Boys Chairman, President and Chief Executive Officer, and Melinda Whittington CFO. Kurt will begin 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 one year. And a telephone replay of the call will be available for one week beginning this afternoon. Before we begin the presentation, I'd like to remind you that some statements made in today's call include forward-looking statements about Lazy 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'll now turn the call over to Curt Darrow, Lazy Boy's Chairman, President, and Chief Executive Officer. Curt?

Thank you, Kathy, and good morning, everyone. Following yesterday's close of market, we reported our fiscal 2020 fourth quarter and full year results. Fiscal 20 was indeed a tale of two cities. Our performance through the first 10 months of the year was one of the best in our company's history, with strong retail results, great product introductions, and supply chain excellence, all translating into solid sales and earnings growth. However, all of that changed in March when the COVID-19 pandemic and related retail closure forced us to cease production, close our own stores, and wait for the economy to reopen. Now, given our philosophy of fiscal conservatism, we entered the crisis with a strong balance sheet, which positioned us to successfully move through this uncertain period. With the health, safety, and well-being of our employees, customers, and communities our top priority, we responded quickly and rolled out an action plan on March 29th that included a series of elements essential to ensure Z-Boy not only weathers the unprecedented storm, but emerges with strength. In addition to temporary plant and store closes, our COVID-19 action plan included included temporary furloughing 70% of our workforce, eliminating all nonessential operating expenses, significantly reducing capital expenditures, suspending the June dividend and share repurchase program, and temporarily reducing pay by 50% for senior management and 25% for all other salaried employees, with our board of directors foregoing the cash portion of their compensation. We also proactively drew down $75 million on our credit facility to ensure liquidity through this period. As we continue to analyze and prepare for success in the new economic landscape, earlier this month, we took some additional actions to strengthen and align Lazy Boy to the new external environment. We were pleased to have brought back some 6,000 furloughed workers We made the decision to permanently close our Newton, Mississippi Lazy Boy branded manufacturing facility and reduce our global workforce by approximately 10%. All of these actions impacted our various stakeholders and everyone throughout the Lazy Boy organization was affected in some way. To level set where we are today, we started calendar 2020 with 9,800 employees and during the worst of the pandemic, temporarily furloughed about 6,800. In the end, about 10% became permanent reductions. We deeply regret the impact to those employees, but our decisions are in the long-term best interest of the company. However, as we now move forward, our manufacturing facilities and company-owned stores are open. The vast majority of our workforce will be back to work by the beginning of July. and our employees are back to full pay with the exception of the executive officers and board members. On the manufacturing side for the Lazy Boy branded business, we have been wrapping up production weekly. When we restarted our plants from a complete shutdown, we ramped up to about 50% in May versus May of 2019 and as we head into July, we expect to be operating at 80% of year-ago volumes. I'm so proud of how our team rapidly geared up once we restarted production to meet the demand we are experiencing. Before I begin a review of the quarter, I'd like to take a moment to thank our employees for the sacrifices they made through this difficult period and for their commitment to the company. With no notice, we announced difficult furloughs for a broad population, and when we restarted operations or brought people back, they returned with enthusiasm and hit the ground running without missing a beat. We have an amazing workforce that has my admiration. I'd also like to say how proud I am of the work we did throughout the pandemic to provide support to many organizations, including manufacturing and donating hundreds of thousands of masks for healthcare workers and tens of thousands for our suppliers. Additionally, we are donating $1 million of furniture to frontline healthcare workers throughout our One Million Thanks campaign, where we are harnessing the collective spirit and creativity of individuals across the internet to say thank you for those medical professionals who have worked tirelessly to ensure our safety. They certainly are our true heroes. Balancing the two very different chapters of the year, the company turned in solid financial performance. We closed fiscal 2020 with $1.7 billion in sales, generated $164 million in cash from operations, and returned $68 million to shareholders through dividends and share repurchases. Now turning to the results of the fourth quarter. As noted earlier, the company performed very well through February. However, the shutdown of North America from COVID-19 had a significant impact on our results for the fourth quarter, with many retailers across the country closed for the last four weeks of the period and for even longer during the quarter, as well as our manufacturing operations closed for the last four weeks of our year. To provide some perspective with respect to one component of our distribution, for the entire Lazy Boy Furniture Gallery network, Written same-store sales increased 10.5% in the third quarter and increased 20% in the month of February, only to drop 44% in March and 90% in April in concert with the pandemic. As a result, for the quarter, we experienced a 19% decline in consolidated company sales to $367 million, and a gap operating income for the period was $13 million, and non-gap operating income was $34 million. Even with this dramatic impact, for the quarter, we were still able to generate $44 million in cash and return $14 million to shareholders through dividends paid in share purchases made prior to the shutdown. The remainder of my remarks will detail our non-GAAP numbers, and Melinda will cover the non-GAAP adjustments in her presentation. Looking at our business by segment, we will start with retail, which has become a core competency for the organization and is greatly contributing to the value of the Lazy Boy enterprise. Throughout the year prior to COVID, the team executed at a very high level with increased conversion and design sales with improved engagement with our consumers. For the quarter, on an 8% sales decline to $140 million, the segment posted a double-digit operating margin driven primarily by prior period written sales delivered during the quarter and lower operating expenses related to the company's COVID-19 action plan. Let me give you some more context. For the first three quarters of fiscal 2020, written sales for our company-owned stores were up 8.1%. For that same period, delivered same-store sales were up 3.6%, with both metrics, written and delivered, driven by improved traffic trends, conversion, and strong execution at the store level. After an extremely strong February start, which delivered same-store sales for the company-owned stores, with delivered same-store sales for the company-owned stores increasing 15%, they were only up 2% in March and declined 52% in April, culminating in a fourth quarter delivered same-store sales decrease of 10%. As the majority of the stores were closed the last four weeks of the quarter, as state and local restrictions limited our ability to deliver product. After staggering reopenings due to local guidelines between the beginning of May and mid-June, well into Q1 of our new fiscal year, as of today, all our stores are thankfully open. However, many are working on reduced schedule in terms of hours open and number of employees depending on traffic. We have implemented a series of health and safety procedures to keep our employees and consumers safe. It is essential for our customers to feel comfortable in our store environment, and we are also offering private shopping appointments outside of regular store hours if they prefer to shop that way. As stores reopen, we manage our spend on marketing and overhead in more short-term iterations, remaining very nimble as we anticipate what would happen each week. In the meantime, our teams are rapidly adapting improved e-commerce sales through the shutdown and executed a virtual design program. Now for the broader store network includes both company-owned and dealer-owned stores, written same-store sales for the 354 Lazy Boy Furniture Gallery stores in North America decreased 35% in the fourth quarter. As we noted, even with a 20% increase for the month of February, it was hard to overcome the effect of store closures throughout the period with many stores closed for part of March and the majority of stores closed in April as per local guidelines. Driving written sales, same store sales, down in March and April 44 and 90% respectively. The challenging fourth quarter impacted the full 20 year with written same store sales down 3.6% even after a 6.4% increase for the first three quarters of the year. The Lazy Boy Furniture Gallery store system is the cornerstone of our distribution and we along with our dealer base are committed to investing in the stores to keep them updated and appealing to the consumer. We ended the year with 354 stores, including one net new and 166 in the new concept design. Presuming business trends continue to improve, we anticipate adding four net new stores over the course of fiscal 21, bringing the total store count to 358. Now on to our wholesale business. In the upholstery segment, on a sales decline of 22%, to 253 million, non-GAAP operating margin increased to 11.8%. Margins benefited from a one-time $16 million rebate of previously paid tariffs and favorable commodity costs, mostly offset by higher bad debt expense due to the art van furniture bankruptcy and a provision for potential credit losses in the COVID-19 environment in SG&A. Also, our SG&A dollars spent for the period were lower due to COVID-19 action plan, but higher as a percentage of sales due to the decline in volume related to the pandemic. Throughout this period, we have right-sized our marketing investment to balance fiscal responsibility with regaining sales volume in what appears to be increased interest in living room furniture as consumers spend more time at home and shift discretionary dollars to furniture. During uncertain and challenging times, consumers tend to return to brands they know and trust, and we are building on that momentum, on the momentum of our Live Life Comfortably campaign, featuring brand ambassador Kristen Bell, who continues to be a highly effective spokesperson for us. Before turning to case goods, I'd like to take a moment and talk about LazyBoy.com. As discussed in the past, our core consumer has consistently demonstrated a preference to shop in-store. Without that ability during the pandemic, we did see an uptick in traffic and an increase in sales on lazyboy.com and are happy to provide consumers this option as part of our omnichannel offering. During the year, we strengthened our digital presence and consumer experience, introducing a number of innovations that further simplify browsing, researching, and purchasing, including various selling tools that allow consumers to view products in their own home virtually. Such innovations facilitate easier virtual engagement and were particularly helpful while all the stores were closed. Turning to our case goods segment, with a 20% decline in sales, our non-GAAP operating margin decreased to 1.9%, primarily reflecting the impact of COVID-19 and related temporary manufacturing facility and retail closures and an increase in bad debt expense given the current economic environment. Although the segment faced a number of headwinds throughout fiscal 2020, we are better positioned now with more occasional tables sourced from countries other than China, freight rates starting to ease, and a series of new product introductions that have been well received. However, we do expect some disruption to continue in the import supply chain over the next several months as suppliers come back online following the COVID-19 shutdowns in Asia. I'll now spend a few moments on Joybird. For the quarter, Joybird sales reported in corporate and other declined 30% to $15.4 million as the business posted a larger operating loss in the prior year period. Operating performance impacted in the quarter by the temporary closure of the Joybird manufacturing facility and our inability to deliver product to consumers due to state and local restrictions related to the pandemic. On a more positive note, Joybird's written sales for the quarter were very strong and a higher order rate for first-time visitors to the site. With their Mexico-based manufacturing facility reopening in phases throughout May, and working its way up to previous production levels in June, Joybird will have a longer tail for deliveries versus the Lazy Boy branded business and expects to deliver these written orders at the end of the first quarter and some into the second quarter. We are continuing to make improvements across the Joybird business model with the objective to balance investments and growth with bottom line performance and expect Joybird to deliver value to the Lazy Boy Enterprise over the long term. I will now turn the call over to Melinda.