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.

Thank you, Kurt, and good morning, everyone. As always, let me remind you that we present our results on both a GAAP and non-GAAP basis. We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business. As detailed in our press release and in the tables of the appendix section of our conference call slides, excluded from our fiscal 2021 second quarter non-GAAP reporting are pre-tax purchase accounting charges related to acquisitions totaling $3 million or $0.06 per diluted share, primarily due to a write-up of the Joybird Contingent Consideration liability based on an updated forecast of future performance, and a pre-tax charge of $300,000, or one cent per diluted share, related to the company's business realignment announced in June, which included a 10% reduction in our global workforce and the closure of our Newton, Mississippi manufacturing facility. Last year's second quarter non-GAAP results exclude a pre-tax charge of $2.8 million, or $0.04 per diluted share, related to the company's supply chain optimization initiative, which included the closure of our Redlands, California facility and relocation of our Newton, Mississippi leather cut-and-sew operation. A pre-tax purchase accounting charge of $1.6 million, or $0.03 per diluted share, primarily related to Joybird, and pre-tax income of $1.9 million or $0.03 per diluted share related to the 2019 termination of the company's defined benefit pension plan. Now on to our results. My comments from here will focus on our non-GAAP reporting unless specifically stated otherwise. On a consolidated basis, Fiscal 21 second quarter sales increased 2.7% to $459 million, reflecting record demand across all businesses. Consolidated non-GAAP operating income increased to $51 million versus $34 million in last year's quarter. And consolidated non-GAAP operating margin increased to 11.1% versus 7.5%. Non-GAAP EPS was 82 cents per diluted share in the current year quarter versus 52 cents in last year's second quarter. Consolidated gross margin for the second quarter increased 240 basis points. Changes in our consolidated sales mix due to growth in our retail segment and contribution from Joybird, both of which carry a higher gross margin than our wholesale businesses, drove the biggest change in margin. Additionally, Joybird experienced a significant improvement in gross margin, primarily resulting from supply chain synergies and improved plant performance. SG&A as a percent of sales decreased 120 basis points, reflecting ongoing expense management, a decrease in advertising spend given strong order rates, Reduced spending, including travel and limited furniture market events due to COVID-19-related restrictions, and a decline in salaries and wages related to our business realignment plan, including the 10% reduction in force announced in June. This was partially offset by changes in our consolidated mix due to the growth in our retail segment in Joybird, both of which carry higher SG&A costs than our wholesale business, as well as an increase in selling expenses, on strong written order trends. On a GAAP basis, our effective tax rate for fiscal 21 second quarter was 26% versus 26.6% in last year's second quarter. Our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes. For the full fiscal 2021, absent discrete items, We continue to estimate our effective tax rate on a GAAP basis will be in the range of 25% to 26%. Turning to cash, year-to-date we generated $196 million in cash from operating activities, reflecting strong operating performance and a $100 million increase in customer deposits from written orders for the company's retail segment and Joybird. Thank you for joining us. We repaid the $50 million remaining balance on our credit line drawn back in March in conjunction with our COVID-19 action plan. We ended the quarter with no borrowings outstanding. Year to date, we have invested $15 million in capital, primarily related to machinery and equipment, upgrades to our Dayton manufacturing facility, which have now been completed, and investments in our retail stores. We expect capital expenditures to be in the range of $40 to $45 million for fiscal 2021, although spending will be largely dependent on economic conditions, continued business recovery, and liquidity trends. Our spending for the year will include upgrades to upholstery manufacturing facilities and costs for the new production capacity in Mexico, technology upgrades, and improvements to several retail stores. Also during the quarter, given solid business trends and our strong cash position, we reinstated our 401k match for employees as well as full salaries for remaining senior management, thereby reinstating all ongoing cash uses for operations that were temporarily suspended as part of our COVID-19 action plan. Regarding cash returned to shareholders, yesterday our board declared a quarterly dividend of 14 cents per share Restoring the dividend to the full amount that was in place prior to the pandemic. Recall, as part of our COVID-19 action plan to preserve cash and provide for financial flexibility, we eliminated our expected June dividend and temporarily suspended opportunistic share repurchases. In August, our board of directors elected to reinstate a regular quarterly dividend to shareholders of $0.07 per share, 50% of the quarterly dividend amount paid prior to the pandemic, paying $3.2 million to shareholders in the second quarter. We are pleased to now reinstate the full dividend of 14 cents per share, which will be paid in December. And finally, going forward, we will continue to monitor and assess business conditions to determine when it may be appropriate to resume share repurchases. There are 4.5 million shares of purchase availability under our authorized program. Before turning the call back to Curt, let me highlight several important items for the remainder of fiscal 2021. First, a reminder that our expected non-GAAP adjustments will continue to include purchase accounting adjustments for acquisitions to date. which are estimated to be in the range of 9 to 11 cents per share for the full year. This excludes any further adjustments to the Joybird contingent consideration liability dependent on Joybird's ongoing business trajectory. On our non-GAAP results, let me provide a bit more perspective on what we anticipate for the back half of fiscal 21. While we do not intend to provide this level of forward-looking perspective regularly, we think it important to offer it in the near term, given the unusual business trends driven by the pandemic. We are optimistic about our business trajectory and confident we will deliver a strong second half based on the factors we can control. However, there is still extreme uncertainty with respect to COVID-19. including the risk of related shutdowns impacting our facilities and impacts of global supply chain volatility such as the recent industry-wide foam issues. What we do know is we have a significant backlog and we are working hard to ramp our production, shortening delivery times as we work to service our customers with high-quality products and quick delivery. With the initiatives undertaken to expand output, We will continue to significantly increase production capacity throughout the back half of the fiscal year. Further, to cover raw material cost increases that we are experiencing now, we have announced pricing on new Lazy Boy written orders beginning in October, which will be realized on orders delivered beginning in the fourth quarter, given our significant backlog. Considering all of these factors, accounting for our best current understanding of new foam availability issues, and provided there are no significant shutdowns of our facilities related to the pandemic, we expect to deliver consolidated sales growth in the third quarter of flat to 4% above last year's record high third quarter. For the fourth quarter of fiscal 21, accounting for continued growth in production capacity, Announced pricing and the effects of last year's April pandemic-related shutdown in the prior year's fourth quarter base period, we anticipate fiscal 21 fourth quarter sales growth of 40 to 45 percent versus last year's fourth quarter. On profit, we expect to continue to deliver historically high consolidated operating margins of approximately 9% to 11% for the balance of the year, providing the strong delivered sales volume is achieved. Included in these margin expectations is the anticipation that Joybird will sustain profitable operations even as we test investment effectiveness to optimize top-line growth. We do expect some volatility in margins quarter to quarter as we manage multiple factors, Thank you for joining us today. I would note that there will eventually come a time when we will have to once again invest more in marketing to drive demand, similar to pre-pandemic times. We've been a benefactor of the sector rotation that has taken place over the last several months, which play well for us. Although this has allowed us to keep our marketing spend at reduced levels, in time it will be necessary to increase it. There will be other costs that will resume over time as the pandemic is brought under control as well, including those for travel, furniture market, and spending for other discretionary projects that were canceled or postponed due to COVID-19. That said, we do anticipate being able to deliver strong margin performance over the long term as incremental investments related to bringing on new capacity are completed and we return to more stable operating patterns. And now I'll turn it back to Kurt for his concluding remarks.

Thank you, Melinda. As you can see, we are very pleased with the agility of our entire organization has demonstrated as it responds to the new operating environment. Our supply chain team is pulling out all stops to drive production. Our merchandising and marketing teams have pivoted to find new ways to showcase product. highlight the Lazy Boy brand and its attributes and target consumers in a manner that will drive growth for the long term. And our retail team is performing at a very high level, providing a great store experience for customers while keeping them safe. And all of our other operating companies, including Joybird, England, Case Goods, and our international business are also adapting to the landscape and performing very well. We believe the strength of the Lazy Boy brand carries great weight in this environment as consumers tend to gravitate to brands they know and trust during uncertain times. With our vast distribution, including the vibrant Lazy Boy furniture gallery stores and thousands of other distribution points, our world-class supply chain, successful marketing platform focused on expanding our omnichannel offering, and our strong balance sheet, We believe we are extremely well positioned to continue to navigate and thrive in this environment, capture market share, and return long-term value to our shareholders. We would like to thank all of you for your interest in Lazy Boy this morning, and I'll turn the call over to Kathy to provide instructions for getting into the queue. Kathy?

Thank you, Kurt. We'll begin the question and answer period now. Jim? Can you please review the instructions for getting into the queue to ask questions?

I'd be happy to. Thank you. Ladies and gentlemen, at this time, if you would like to ask a question, simply press star and 1 on your telephone keypad. Pressing star and 1 will place your line into a queue, and I will open your lines one at a time. Also, a friendly reminder that if you're joining us this morning on a speakerphone, please return to your handset prior to pressing star and 1 to be certain that your signal does reach our equipment. Once again, ladies and gentlemen, that is star and one. If you would like to ask a question, we'll hear first this morning from Bobby Griffin at Raymond James.

Good morning, Kurt, Melinda, Kathy. Thank you for taking my questions. Hope everybody's doing well and staying safe. Good morning, Bobby. The first thing I wanted to talk about was just the written growth. Impressive, clearly impressive, impressive numbers out of the Lazy Boy branded distribution. Can you maybe provide a little color on how the non-Lazy Boy branded distribution performed during the quarter from a written perspective? Was it close to the same or just as strong or anything to help us kind of sum up your whole entire distribution network?

So in a general sense, Bobby, all of our businesses have benefited from the sector rotation and what's been going on around the world. We've had a little more hiccups in Europe, in our business, particularly in Great Britain. And our case goods business comes and goes on a weekly basis based on inventory availability because we import all the case goods. But everybody in the whole organization this quarter contributed mightily to our to our success. Obviously, Lazy Boy and the Lazy Boy stores are the largest components of it, but everybody else exceeded our expectations for the quarter.

Okay, that's helpful. And just trying to understand kind of the quarterly progression here, given the big written number and then 3Q and then working its way into 4Q, when we look at the flat to up 4Q, and think about that. Is there any way to frame how big of a drag the foam and supply chain or kind of raw material side of the equation is? And understanding, I'm trying to look more just from the material side, understanding that the labor and getting things ramped up in the plant takes time, but the shortage of foam and all that, how much is that shifting sales from 3Q, delivered sales from 3Q into 4Q?

Yeah, I would think about it in terms, Bobby, of we continue to ramp up production. I mean, I think it's telling that if you look just on total sales from Q1 to Q2, our sales throughput was up like over 50%, right, on a consecutive quarter basis. And we'll continue to make some really solid progress in Q3 and again in Q4. The broad range of flat to 4% for Q3 really accounts for the broad range of where the outcomes could be around foam. We called out that there was almost a 2% impact of foam on the wholesale business in Q2. And it's not unlikely that it's in that same kind of range for Q3. But this is literally late-breaking news as of this past week where we thought this was pretty much under control for the industry and then have learned that it's not. So it really accounts for that breadth. And I would also call out that Q3, as I mentioned in my prepared comments, last year was an all-time record sales quarter for the Lazy Boy Enterprise. And so it's a pretty significant base that we're on top of as well.

Okay, and then I guess lastly for me, just wanted to quickly touch on capital allocation and Melinda Currie, you guys both kind of called it out a little bit in your prepared remarks, but the cash balance here is, you know, significantly above where it has been really throughout history here at Lazy Boy. Understanding some will have to work its way down as production ramps up, but With that size of a cash balance, can you maybe just talk about where your views are and what is the comfort level of cash in this uncertainty?

Great question. And the answer is a little bit like the phone issue. The honest answer is we don't know what the next few months we hear about how bad the pandemic is right now. And it's going to be a tough winter for everybody. So Given our conservative nature, we're looking at a lot of opportunities. We're going to deploy some of that capital. We would look to do an acquisition if it made sense. But we don't want to get ahead of ourselves because I'm not yet ready to declare victory over the pandemic and over the global supply disruptions. And how fast we've gone from I think you can be pre-assured, Bobby, that we're not going to sit and not utilize some cash to advantage our business going forward. But at the present time, I'm not able to give you specifics. Okay.

That's helpful. I tell you, Curt, I sure didn't predict that high of a cash balance in that quick turnaround to answer your question. So, but congrats on that.

And I would say the other, Bobby, the other thing about the fourth quarter is that's when we are hopeful that midway through that quarter that all of the things we've done, and I'm not sure there's, I'm not aware of many other furniture manufacturers that added this much extra capacity. for the long term. We're supposed to have a lot of that online by then, so it's the comparison to the previous year, which was a total shutdown, but it's also that the extra capacity that we worked so hard on to get comes into full support of the organization, so we will whittle down our backlog unless this extraordinary demand continues at this level, but that's a That's the big bubble we hope to get through in Q4.

Okay.

I appreciate the details. Congrats again on managing through a pretty challenging global environment.

Thank you. Our next question will come from Brad Thomas at KeyBank Capital Markets.

Thanks. Good morning, Kurt, Melinda, and Kathy. Congrats on a nice quarter here. I wanted to follow up on that last question. Thank you so much for having me. from where you were in the fourth quarter of two years ago. So I guess is that 530 million number kind of a good way for us to think about maybe what the upper limit of sales might be in a given quarter at this point with your capacity and maybe describe otherwise in percentage terms how much you think, Kurt, you will be raising the bar with some of the investments you're making right now on capacity. Thanks.

Yeah, I'll take that one. We tried to give a bit of a range and perspective that we don't normally do because we recognize it's such an unusual time. And so almost by definition, our ranges are showing the potential for outcome if absolutely everything goes right and our best estimate of things don't go as well but are still within reason both for the third and fourth quarter. As Kurt noted, The March to Add Capacity, and we called out four different items that are underway. Probably the most significant for the long term is our investment in SLRC, which is a part of an ongoing strategic plan we've had for a while on how to best service the West Coast. And each one of those, as we've called out before, each one of those takes some time. and so we've made a lot of progress in our existing facilities on hiring and training. We've called out before that training people take six to nine months to really get them up to sort of an average throughput. So SLRC coming online in the back half and really getting up to full speed in the fourth quarter will be a big chunk of that capacity expansion and that's all folded into that 40 to 45% uptick on sales that we have given perspective on for the fourth quarter. Again, that number obviously benefits from April a year ago being shut down. But even if you back that out, you'll see there's incremental growth even beyond what we're doing in the third quarter.

And just to add, Brad, we would have the capacity to manufacture that much Thank you for joining us. partners, supporters, which they've been great so far, and we haven't had any hiccups to date other than the poly issue, but there's still some uncertainty, and there could be something, so we just don't want to get over our skis here and assume everything is going to be perfect. That makes sense. That's helpful.

With respect to the Seattle acquisition, could you just talk a little bit more about How that's going so far, and as you talk to the independent dealers, what's your sense of the likelihood of additional transactions in the year ahead, if there's any part you could share?

Well, the first comment, the Seattle acquisition is going really good. It was a real smooth transition. We had a strong ownership in Seattle that had Things in good shape. I had a great team and we got things transferred and they've hit the ground running. So it's doing what we expected. We will be making some investments in that market soon to upgrade some stores and maybe some new ones. So we're very pleased with that. And I do believe as we've had a continuing cadence of this, there will be some other of our licensees that may consider retiring or selling their business. They would have perhaps this year a record year and maybe in that mode. But, yeah, we're always, given the right circumstances, willing to talk with our dealers and try to figure out what's best for both of us. So that's still a very active part of our longer-term growth strategy is to continue, when available and making sense that we can service it, continuing to add stores to our portfolios.

That's helpful. If I could squeeze one more in around margins, you know, I greatly appreciate all the financial commentary you've shared about how to think about the next two quarters. I think the comments are that you expect operating margin to be in the 9% to 11% range for the balance of the year. Any thoughts or anything we should keep in mind as we think about 3Q margin versus the 4Q margin? I mean, it would seem to me that in 4Q, you're looking at some very strong sales results, some benefits to the price increase going through and perhaps that 4Q margin then is higher than the 3Q margin. Is that a reasonable conclusion? Are there any other thoughts that we should keep in mind as we fine tune our models?

Yeah, I think as I caught on and prepared you, Mark, probably the biggest thing to think about is, you know, we're already starting to experience those higher input costs on poly, on lumber, on nonwoven, on ocean freight, and we've put pricing in place. But to be good partners to our customers, we did not put that pricing in place Thank you so much for joining us. Pulling back appropriately so, but on some of our ad spend right now, because we've got this significant backlog, and we don't want to drive even increasing demand that just frustrates the consumer in the near term. So we've kept our marketing out there to build brand equity across our brands, but we're not at an all-time high of demand-driving ad spending, which at some point we'll need to turn back on some of that. In the same way, you know, market was reduced, reduced travel, obviously reduced training. There's just a lot of things that businesses aren't doing today because of the pandemic that will eventually turn back on to some level. Probably not very likely from what I'm seeing that that happens in the balance of this fiscal, but it's something to keep in mind for the future.

Great. Thank you all so much. Thanks, Brad.

And once again, ladies and gentlemen in the audience, if you'd like to ask a question, that is star and one on your telephone keypad. We'll hear from Anthony Libudzinski at Sidodian Company. Please go ahead.

Yes, good morning, everyone, and thank you for taking the questions. I may have missed this, but did you guys quantify the record backlog? I think you said it was five times larger than a year ago, but I don't know if you guys gave a specific dollar amount.

We did not, but five times is very significant in why we've gone from delivery in four or five weeks to 20-plus. So it's unprecedented, and we're doing the best we can to deal with it. It's not a specific lazy boy problem. It is an industry problem. and our customers have been very patient and waiting a long time for products. But it's a big number, Anthony, and I think the magnitude with the five times and the fact that our orders are out into March gives you some magnitude of what it is. But we did not give a number.

As we've said in the past, any great problem to have, right, in backlog is the outcome of two things. It's the pace of demand coming in, and it's the pace of what we're manufacturing to take out of that backlog. We continue to exponentially increase our capacity and ability to make products, but at the same time, we continue to experience pretty amazing demand, and so... Again, as we said before, high-class problem to have, but there is no doubt five times, and that's for our Lazy Boy branded wholesale business, five times the backlog of this time last year is quite significant.

And add to that, Anthony, that we're going in traditionally. It could be different this year, but we're going now traditionally into the highest seasonality of the buying cycle for furniture between now and February, so... And it may be dampened a little bit with COVID and dampened a little bit by the extended lead times, but we are headed into what's typically a strong, and we could add to that backlog if everything goes the way it's been trending.

Got it. Okay. Thanks for that call. I definitely appreciate that. So as far as Joybird, so now that you have improved your supply chain efficiencies, what would you say would be kind of the minimum quarterly revenue run rate for Joybird to be profitable?

Okay. Well, I think we gave you what we expect for the year. We gave you the $90 to $100 million pace and expect it to be profitable for the whole year. There will be an ebb and flow a certain month depending on seasonality, depending on how much marketing investment we make. And we said from the beginning we wanted Joybird to grow at a rate above our core business's. But we wanted him to do it without being a drag on the company's earnings. I think we found that middle ground. And so we will be testing and watching how effective our marketing is for growth without giving up all the bottom line performance. So we need some more time to let this play out. But we think at a At a reasonable level of volume, which they've been doing, they can be profitable. The reason for their profitability this time was not exclusively volume. There are a lot of structural things. There are a lot of coordination between Lazy Boy Supply Chain and Joybird Supply Chain that have come full circle and come into fruition. The lower cost, efficiencies, get product to customers faster. all those things structurally the business is in a really good shape now and think it'll head that way in the future.

Okay, that's good to hear. And as far as the cost for the opening of the new facility in Mexico, did you guys quantify that or are you willing to quantify that?

No, that's built into all the numbers that we gave you both on capital and on the perspective for the balance of the year. It's a relatively asset-light investment with leased space, and so that's part of what we're excited about exploring.

And just so – it is primarily an assembly plant. It won't be stamping its mechanisms. It won't be cutting its old frames. They'll get those from our U.S. supply centers. So it's not as capital defensive if you build a full facility that handle all of the things that Dayton and Yosho do.

Got it. Okay, so thanks for that, Carla. So I just wanted to lastly follow up on the large cash position that you have. I understand that there's still uncertainty with the pandemic. I mean, would you say if you get better visibility with the pandemic next year, would you guys perhaps consider doing a special cash dividend or maybe a large repurchase? I just wanted to follow up about that and see what you guys think about it.

Just to recap a bit on what Kurt said, I think there's a couple things. No doubt. I mean, this is, you know, I think the highest cash positions we've probably ever held. And within the quarter, we've resumed all the normal kind of cash usages internally and externally that we had stopped during the pandemic. We're back to a full dividend. We've restarted any capital projects that we had delayed. And so, as Kurt said, there is still so much uncertainty. That we will definitely in the near term hold higher cash balances than we historically have. But as always, we're looking for those capital investment opportunities in our business as well as on the M&A front. Conservatively, given the unusual and unprecedented times that we're living in. But Our focus is to make sure we're investing in our business for growth even past the pandemic and evaluating opportunities there. And then as far as returns to shareholders, we resume the dividend. Comments on special dividends or increased buybacks and so forth. I want to first fully flesh out getting through this pandemic and looking at the opportunities that we can offer. identified to invest in our business and return value to shareholders through growth.

Got it. Okay. Well, thank you, and best of luck.

Thank you, Anthony. Thank you. And ladies and gentlemen, that does conclude today's Q&A session. I'll turn it back to the Lazy Boys leadership team for any additional or closing remarks.

Thank you, everyone, for participating in our call today. Have a great holiday season, and we'll talk to you next quarter. Bye bye.