La-Z-Boy Incorporated

Good day, ladies and gentlemen, and thank you all for joining us for this Lazy Boy fiscal 2021 second quarter conference call. As a reminder, all phone lines are in a listen-only mode. And for opening remarks and introductions, I'm pleased to yield the floor to Kathy Liebman with Investor Relations. Good morning, Ms. Liebman.

Good morning, and thank you, Jim. Thank you, everyone, for joining us to discuss our fiscal 2021 second quarter results. With us today are Kurt Garrow, Lazy 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 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 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 FCC 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 over the call to Kurt Garrow, Lazy Boy's Chairman, President, and Chief Executive Officer. Kurt?

Thank you, Kathy, and good morning, everyone. Following yesterday's close of market, we reported strong operating results for our fiscal 2021 second quarter, reflecting record demand trends and strong execution across all of our businesses. But before I begin discussing the quarter, I would first like to acknowledge and thank our almost 9,000 employees who have demonstrated resiliency, a commitment to safety, and a dedication to La-Z-Boy throughout the pandemic with a focus on serving our customers. I cannot be prouder of the team and every member has my respect and admiration. Now onto the results. During the quarter, we experienced strong written orders as consumers continued to allocate more discretionary dollars to their homes rather than on travel and other leisure-related activities. The company delivered increases in sales and operating income with a double-digit consolidated operating margin, reflecting excellent performance across all companies. Also contributing this quarter was Joybird, which turned profitable for the first time since acquisition, feeling an increase in earnings per share. Additionally, we generated $196 million in cash from operations for the year-to-date period, increased our company-owned store footprint with an acquisition, paid a dividend, and ended the quarter with no borrowings outstanding on our credit line. All in all, for the quarter, these are outstanding results. particularly as our supply chain had to turn on a dime last spring to restart production after the COVID-19 related shutdown and continues to ramp up capacity to satisfy unprecedented demand levels. While we are increasing production weekly, demand acceleration continues to outpace capacity acceleration creating a record backlog and extended lead times. Across the Lazy Boy Furniture Gallery network, written same-store sales increased 34%, demonstrating the strength of our brand and its appeal to consumers during uncertain times, as well as the ability of our store teams across the network to provide a safe shopping experience for consumers. As I turn to a discussion of our segments, my remarks will detail our non-GAAP numbers, which we believe reflect underlying operating trends, and Melinda will cover the non-GAAP adjustments. I'll start with our wholesale segment, which as a reminder, now includes both upholstery and case good companies, as well as our international businesses. For the quarter, our backlog grew to record levels, but delivered sales declined 2% to 343 million. This was primarily the result of lower delivery unit volume as our ongoing efforts to significantly increase our production capacity to meet demand were offset by a temporary supply shortage of foam, which reduced sales by more than 2%. However, even with a decline in sales, non-gap operating margin increased to 12.2%, reflecting tight cost controls with ongoing cost savings Projects, roughly offsetting investments in our startup capacity ramping. Operating margin in the period also benefited as we pulled back on our marketing spend given the strong demand environment and had lower expenses such as travel costs due to cohort-related restrictions and lower salary and wages due to the business realignment plan and reduction enforced announced last quarter. With a surge in product demand, our challenge has been to ramp up capacity at all plants and expand our overall production capacity. Our current backlog for the Lazy Boy branded business is five times what it was at the end of Q2 last year. And we are quoting lead times of 16 to 26 weeks, depending on product category, which also include an estimate of the delivery time to the ultimate customer. Our supply chain has done an excellent job to increase weekly production while identifying new opportunities for both short and long term. We have added production cells at our three U.S.-based upholstery manufacturing facilities as well as additional weekend shifts. Secondly, we have temporarily reactivated a portion of our Newton, Mississippi assembly plant to service select Geographics. We have also added manufacturing cells in available floor space at our cut and sew center in Mexico, allowing us to tap into a new labor pool. And finally, we signed a lease on a 200,000 square foot facility in Mexico, just south of Yuma, Arizona, in San Luis Rio, Colorado. Production is expected to start in December. with full ramp-up extending over the first half of the new calendar year. As part of our longer-term strategic plan, we were looking to expand our manufacturing footprint to more efficiently service the western portion of North America, and we are excited to take this first step with a new facility in Mexico, which we will be calling FLRC. Once all of these operations are producing at expected capacity likely later in our fiscal year, these moves will significantly increase our capabilities and capacity to support long-term growth. However, during our second quarter, the industry experienced temporary supply shortages of foam due to disruption in TDI production, a key component of this product. As a result, we were limited in our ability to fully utilize our existing capacity for almost two weeks during the quarter. We have recently learned of new issues with foam supply in November, which will again temporarily limit our ability to maximize output in the third quarter. While we believe these disruptions are temporary in nature, they affect the entire industry and other industries that use foam, and they highlight the volatility of the global supply chain in these unusual times. Now let me pivot to the commercial side of the Lazy Boy branded business. During the pandemic-related shutdown, as you would imagine, we saw a significant increase in our online business. While it peaked during that time, today our written e-com business remains up some 300% versus pre-pandemic levels concurrent with an increase in store traffic and sales. I would note that our e-commerce business is still a very small percentage of our overall business, but we recognize it's critical to have a robust online presence in today's environment. While the core Lazy Boy customer continues to demonstrate a preference to shop in-store, she typically starts by spending time on our site to research products, and our goal is to facilitate a seamless cross-channel experience. For example, if the consumer wants to come into the store for a higher level of service, wants to touch and feel the product and possibly work with a designer, but prefers to make the final purchase from the comfort of her own home, we are working to make that entire process as seamless as possible. We are also making a series of ongoing enhancements to the omni-channel experience. From internal process improvements to enable scale to customer-facing enhancement that simplify and broaden the online experience. As an example, we are working to simplify the ability to customize online, ensure all products sold in store are available on our website, enhance consumer visibility to available inventory and order progress, and drive better pricing consistency between online and in-store. This will be a journey, and we are excited about growing with the changes in consumer behaviors in the omnichannel space. On the marketing side, we continue to be very pleased with Kristen Bell as our brand ambassador. One of our objectives is to increase consideration among a new generation of consumers, 35 to 44-year-olds, which we view as our opportunity customers. At the same time, we want to ensure our marketing campaign continues to resonate with our core 45 to 65-year-old customers who have more disposable income and tend to purchase furniture at higher price points. Kristin is equally appealing to both consumer groups. In particular, younger consumers view her as having a great sense of style and being relatable to them. This makes our marketing dollars work harder and be more efficient. Now turning to the product side, last month was the High Point Furniture Market. While we did have some customers visit our showrooms, both during pre-market and regular market, our merchandising and marketing teams did a fantastic job putting together an interactive Thank you for joining us today. anti-microbial fabric collection as part of our expansive iClean line. Now let me turn to the retail segment. For the quarter, delivered sales increased 9% to $162 million, and written same-store sales for the company-owned Lazy Boy Furniture Gallery stores increased 36%, reflecting strong traffic trends and demand as well as stellar execution at store level, including an increase in conversion, an average ticket driven by increased units and more design sales. For the period, deliver same-store sales for the core base of 150 stores increased 6.3%. Non-GAAP operating margin for the segment improved at 9.4% from 5.8% in last year's comparable quarter, resulting from fixed cost leverage on a higher delivered sales volume Lower spending on marketing due to the already strong demand environment and reduced expenses, including travel-related spending due to COVID. Also during the quarter in September, we completed the acquisition of six Seattle-based Lazy Boy Furniture Gallery stores, which had approximately $30 million in annual retail sales in calendar 19 and one distribution center. As the company is already recording a portion of the Seattle-based store volume in its wholesale segment, the acquisition of these six stores is suspected to contribute approximately $15 million of additional sales annually to the company on a consolidated basis based on their calendar year 2019 sales. For the current second quarter, they added $3.5 million of sales to our retail volume segment. The Seattle stores have historically performed above the network average, and we believe there are great prospects for the company in this dynamic market. Over time, we plan to make investments in the operation with store remodels and potential new stores so that the business can continue to grow and expand its potential. I now want to spend a few minutes on Joybird, which delivered its first profitable quarter. Since purchasing Joybird, we have been on a journey to build and strengthen the Joybird business and integrate systems to take advantage of the synergies between Joybird and Lazy Boy. On the front end, Joybird gives us a new customer and channel, and on the back end, our supply chain has delivered value through our regional distribution centers, manufacturing Joybird product at our Dayton facility, and Combined Purchase Power. While these synergies took longer than anticipated, they now have come to fruition and were very evident in the results for the period. Sales for the second quarter, which are reported in corporate and other, increased 42% to $29 million. For the period, Joybird improved its growth margin significantly and lowered SG&A costs driven primarily by a lower marketing spend and other expense reductions. Written sales increased 25% in the quarter, reflecting the ongoing strong demand trends that we are seeing across all of our businesses. We are encouraged by Joinsburg's performance for the quarter and optimistic about its trajectory for accelerated growth as we move through the year. We believe Joybird is on a run rate to be a $90 to $100 million business this fiscal year and expect it will be profitable for the full year. Moving forward, we will continue to balance investments and top-line growth while watching bottom-line performance. I will now turn the call over to Melinda.