La-Z-Boy Incorporated (LZB) Earnings Call Transcript & Summary

Thank you. Well, good morning, everybody. Thank you for joining us virtually at Raymond James 42nd Annual Institutional Investor Conference. For those who do not know me, I am Bobby Griffin, I cover consumer hardlines and retail here at Raymond James. This morning, I am pleased to introduce La-Z-Boy. With us virtually from the company are Kurt Darrow, Chairman and Chief Executive Officer; Melinda Whittington, current CFO and incoming CEO in April; Bob Lucian, VP of Finance and incoming CFO in April; and Kathy Liebmann, Director of Investor Relations and Corporate Communications. Today's format is going to be a fireside chat between the La-Z-Boy team and myself. [Operator Instructions] So I guess before we get started, I would like to just take a second and congratulate Kurt again on your retirement and all your accomplishments here at La-Z-Boy. It's really been a pleasure to, a, get to know you; and b, get to work with you over the last 6, 7 years since I started covering the stock. So congrats again, and you will be missed, Kurt.

Thank you, Bobby. It's -- we've enjoyed a great relationship with Raymond James. Even your curmudgeon boss came to like us over time, and he hadn't followed us for the previous decade. So it's been great. The company is in good shape. The team is ready, Melinda is ready, and I'm going to help any way I can. But I'm looking forward to being a pain in the a** shareholder.

There you go. There you go. Well, we'll go ahead and get started here. But Kurt, maybe just for some of the generalist investors in the room, can you give a little bit of an overview of La-Z-Boy? You're a little bit different company in the space, you're both a manufacturer and a retailer, you have some brick-and-mortar stores, but you also have a fast-growing e-commerce business with Joybird. So maybe just talk about the portfolio of companies and some of the end markets that you compete in.

I think you just did a really good job. So I think the one thing, obviously, that differentiates us from a lot of our other folks, not only our business model, but we have this wonderful brand called La-Z-boy, and it allows us probably to do some things the way we thought about our business maturation over time that a lot of folks can't do. So La-Z-boy, both the wholesale brand, the international brand and our retail business is the lion's share of our business, but we do have some other companies as well. So we manufacture most -- all of the La-Z-Boy Furniture in the U.S. and we'll manufacture all of it into North America over time. We have like 2,000 retail customers made up of people who own the La-Z-Boy stores, independent dealers, major accounts, and it's widely distributed. We think that, that flexibility of dual distribution gives us some advantage to finding the right partner in each market that's going to maximize our market share. We do have a retail entity that we started really about 10 years ago, 12 years ago, we call it our integrated retail strategy. The company owns 160 of the La-Z-Boy stores and our independent dealers own 200. So we have 360-ish, Kathy will correct me if the La-Z-Boy stores are out in North America. And of the La-Z-Boy branded business, the La-Z-Boy stores are about half of our wholesale volume. Maybe they're trending closer to 55% now and all of our independent dealers are the balance. It's been a great learning experience for us to run retail. And it's gone from a real challenge to real benefit for the company, and we're going to continue to lean in on owning more stores. We have a second upholstery company that's in the portfolio brands called England. They are a low-cost manufacturer with a great transportation story. They service a customer and a dealer that doesn't overlap much with La-Z-Boy, and they can get you furniture in their prime service area, which is the eastern part of the United States in 2 to 3 weeks, which is a pretty quick turnaround for home furnishings. The other company in our portfolio of brands is our Casegoods division, which is made up of three brands: Kincaid, American Drew and Hammary, and we sell a lot of that product through the La-Z-Boy store network, and then we sell the other proportion to independent dealers that don't buy direct from Asia and other places, and it's a good complement to our overall portfolio of companies. Lastly, we bought 2.5 years ago, a company called Joybird, which is direct-to-consumer brand. And after 1.5 years or so of struggles with integration, which, I guess, most acquisitions have, we finally got to a point where it's growing, it's profitable. It's starting to reach the kind of numbers we anticipated that it would do, and it gives us an insight into a different customer, a different channel. And so what we've tried to do is we've built our portfolio of businesses, La-Z-Boy has always been the mainstay. La-Z-Boy is between retail, international and domestically and here in North America is a lion's share, but we branched off to try to catch other customers, other channels that the La-Z-Boy brand doesn't service. So the accumulation of that gives us insight to a lot of different customers, a lot of different ways to do business and does make us a little bit different. A lot of people in the industry, either are retail only, manufacture only or if they own their own stores, that's all they sell to. Our, call it, hybrid approach gives us, I think, a lot more agility, a lot more functionality into other areas, which is, I think, beneficial. We are the second largest provider of home furnishings in America. And I think we would be in the top 10 retailers if you used our whole network of stores, not just the ones we own. So that's a brief overview.

That's a great place-- yes, that's a great place to get it started. I mean, maybe talking a little bit about current -- the current demand in the side of La-Z-Boy, let's talk a little bit about the new Kristen Bell partnership. And any interesting learnings that you've been able to gather from that partnership from an age of customer, type of customer purchase patterns? And when you launched Brooke Shields years ago and I was first learning this company, it was a very nice successful kind of buildup, where the new demand built as the advertising budget got behind it and stuff. COVID obviously likely impacted some of that this year, but how do we think about that on a go-forward basis under the new Kristen Bell partnership?

Yes. So we're a couple of years in now to our relationship with Kristen Bell and very pleased with the early results. What we really like about Kristen Bell is that she has our traditional La-Z-Boy consumer is in that mid- 40s and up age range. With Kristen Bell, there's an appeal to that core consumer, but there's also an appeal to a 10-year younger population as well. So part of our recognizing where our price points are and the type of furnitures we sell -- type of furniture that we sell, it's important that we're always bringing in the next consumer, the next generation. And then as you're going to maybe larger homes and more high-quality furniture were relevant. So Kristen from day 1 has shown up very well with, again, that younger group as well as our core. For the younger group, there is a measurable change in relevance, brand relevance and purchase consideration coming out of Kristen. And certainly, her digital presence helps as well. And that is part of our relationship with her is to leverage her digital presence. As you mentioned, our marketing spend has been a little bumpy over the last year. Initially, we shut down majority of our KB ads during the April time frame just to be respectful to the situation that the nation was in at the time. But then even as we turned our marketing back on, we've certainly rightsized that. Initially, for not showing what -- not being sure what the future is going to look like. But then even just realizing our focus has been very much on brand equity, but not so much urgency of near-term purchasing, simply because the demand has been so high kind of organically already. But even with sort of some of that choppy spending, we continue to see significant improvement in, again, the relevance of the La-Z-Boy name and the relationship with Kristen and people attributing her to La-Z-Boy and their interest in interacting with the brand further.

Great. It's great to hear about the younger customers as well. I mean, maybe building off of that a little bit. Can you talk about some of the work you've done on new product development? And as a second part of that, has the COVID cycle delayed product introductions. You guys have seen record level demand. Right now, it seems like the big focus is just trying to get everything you can make out of the factory, and there's been limited high point market. So how has that come into the typical introduction cycle that we see for new products in this industry?

Well, we had a big introduction last October because there was not an April market. I'm a little bit concerned about this year, Bobby, they're trying to have 12 markets to make up for what they missed last year. But we introduced a whole new leather sofa program. We introduced some emphasis on sectionals and some other great keys. And that's just starting to hit the floors now. But our offerings will be more targeted here in April because the -- introducing a lot of new product into your plans would slow them down. And our customers, they want to think about new product, but they really want to get delivered on all the things they have sold. So we'll cut back a little bit, we'll be targeted, but we've done a lot of work on our power, on our power units, the flexibility, the new hand one that gives you all kinds of options. We're going to come out with a second-generation of Duo Furniture that we introduced a couple of years ago. So there's a lot of things, but it won't be quite as broad and as many SKUs that I would be in a normal market, just out of respect for the challenges that brings and trying to get everybody caught up on their backlogs.

Yes. Maybe talking about that demand. I mean, demand has been one of the bright spots here for the industry as well as you guys outperforming it double digits since really -- double-digit written growth really since the peak COVID impact there in April, early May. So can you talk about what's driving, kind of what are you seeing from the customers? Is it ticket? Is it uptick of home design services? Is it broadening out their purchase pattern, you're winning more of the customer's wallet? What are some of the trends and what you're hearing from your store associates on your success?

There's no doubt that the entire furniture industry, all things home, are benefiting from the fact that we're all stuck there. But to your point, we believe both of our brands, branded product and all of our products, but speaking very specifically to La-Z-Boy is disproportionately winning. You start with, first of all, the -- there is a lot of data that indicates that in a very uncertain time, the consumer is going to what feels safe and comfortable. And the La-Z-Boy brand is a known name for a long time. We've been in business 94 years. We stand for quality and comfort and the type of attributes that the consumer is looking for. And then, of course, you add our additional awareness with Kristen Bell. Once we have someone in a La-Z-Boy furniture gallery, that's where our brand proposition is strongest. And to your point, it's safe shopping. It is a very walk along with you a sales associate, not a pressure, but actually help me understand what your needs are. We have In-Home Design services for free. We can do that. We will come to your home, but if the consumer is not comfortable, a lot of that work can be done actually in our stores as well. We offer a wide variety of customization, both in fabric styles and so forth. And so what we're actually finding is the consumer essentially on all the metrics that you track, we are seeing our written orders exceed previous records from a average ticket design sales really across the board, we're seeing just strength as the consumers coming in and very interested in making their home a beautiful, comfortable spot.

Okay. And pivoting off of that a little bit, the record growth has been driven by probably a little bit different mix of the business with e-commerce and everything in retail mixing up. So I mean, maybe looking at your business as e-commerce continues to mix higher, what opportunities does that create on kind of the retail side of the business and potential different ways to do business there?

Well, I think, Bobby, there's a little bit difference in the customer that buys La-Z-Boy than buys a Joybird. And so that's where you start. But I go back to my thesis that anybody that's been strictly brick-and-mortar is trying to get more direct to the consumer to more omnichannel because the real winners are going to be who can do it best both ways and let the customer choose. And the online business for La-Z-Boy hasn't been as big of an emphasis as the design services and everything we've done at the stores. But we're moving down that path to be sure that we can have as robust of an online business as the consumer demands. Now I don't -- I still think with the demographics of our customer and the fact that one of the things that we sell is comfort, our customers are going to want to still come into the stores and sit in product, see the fabric, work with the designer. So I'm not saying that we'll ever perhaps be at 50-50, but that will be the consumer choice, not ours. We will give them every capability to order online, have the same seamless service and do all that than we would in store. Conversely, you've seen with Casper and other folks, if you've been all direct-to-consumer, now you want to have stores. And so that's kind of our position with Joybird. We have 3 stores now and are looking at a fourth, and we will never have the the size or breadth of the stores that we have at La-Z-Boy. But the 2 work hand-in-hand, and we've seen a lift in the markets where we put stores, the store itself doing well and profitable, but the overall market gets more saturation. So I think you'll see us lean in investment wise on making our digital process and our omnichannel more ease for the customer with a lot of other special features, and you'll see a few more stores at Joybird over time. But again, our belief is the winner is going to be able to do both. And then, frankly, as the manufacturer, we're not biased any one way or the other. We're biased to making sure the customer gets what she wants.

All right. Let's switch -- maybe switch over to supply chain side of things, been obviously a very challenging environment here with COVID, first, shutdowns and then record level of demand. So maybe first, can we touch on what you're seeing from customers around cancellation rates and kind of just any feedback from customers on the extended backlog times and extended lead times that you guys are running at right now as well as the rest of the industry really.

We're happy to say right now, we haven't seen any kind of increase in cancellations. Consumers are walking in, our associates are explaining to them what they can get and what type of timing and a lot of customers are continuing to purchase. As you can see from some of the comp retail sales that we're able to post month-over-month.

That's good news. So maybe then let's talk about some of the changes you're making in the supply chain, trying to catch up on this demand. Maybe first, just kind of where the bottlenecks are, if it's on the raw material side, the labor side? And then there's been some interesting new developments here about how you guys are increasing capacity and when that capacity is coming online in calendar year 2021.

The bottlenecks are caused by this demand. So really, the biggest bottleneck right now is increasing our capacity. We're not a very capital-intensive business. We're much more labor intensive. It's a seasonal process of putting furniture together by hand. So hiring and training people are -- is the biggest challenge that we've been facing and that we've been working on doing. We're increasing the number of ships that we have at our existing plants. We're running more over time. We're working weekends. We reactivated a plant we had shut down during COVID in our Mississippi plant where we reactivated a portion of that, so we're making product out there as well. In addition, we've added manufacturing assembly cells in our cut-and-sew facility down in Saltillo, and we're starting to -- we started about 6 months ago and making product out of there and shipping into the U.S. from there. And we most recently opened up a lease facility in San Luis Rio Colorado, which is just south of Yuma, Arizona. And that was part of a longer-term plan we have from a supply chain network design perspective of servicing the West Coast. And so that was something we were planning on doing. We accelerated that. We put some cells in there. They've started up. We're adding more cells. And we've just recently approved an expansion to that, that will allow us to continue to increase our output. We keep on chasing the demand. We don't know when it's going to stop. But we do know that when we've got the backlog that we've got, we really have to get that consumer -- that product from that furniture sooner. We're going to continue to go after that.

Okay. And then following up on those new facilities, what -- when we kind of get more in a normal environment and anybody can predict when that is. But looking out, whenever that comes, what is the changes in the manufacturing footprint kind of offers? Is there going to be better flow through, a little bit higher potential for gross margin with the new facility down in Mexico that can service the West Coast as well as some of the cells you stood up in the cut-and-sew facility in Mexico?

I'd expect all of that. I'd expect a better ability to be able to manage ebbs and flows of demand. We'll be able to -- we're not overinvesting in any of this. We'll be able to dial back and ensure that we maintain or improve our gross margins. As we -- as the capacity or as I should say, the demand in the industry starts to revert back to where the new normal will be in the future, we will do that by reducing overtime shifts, reducing weekend production and even you can even back off a little bit on the number of ships you've got working in those plants. But long term, we'll be with a facility setup where we'll have our Dayton big -- big Dayton facility managing the East Coast. Neosho was our center of the country facility and in SLRC will manage the West Coast. And that will really set us up to be able to service customers better and ensure that we're maintaining or improving our gross margins.

Okay and looking -- go ahead, Kurt, I'm sorry.

Those 3 big facilities will make all the various product lines. So we'll have -- and if one gets behind on one or some, we'll have the ability to move product around as necessary. But the big change in that is the move from a very small expensive plant in California to the project we're doing in Mexico.

Okay. And when you look at the raw material side of things, inflation is obviously a very hot topic right now across multiple industries. So maybe quickly touch on what products or what materials you're seeing inflationary pressure on? And then secondly, is there issue getting raw materials? Is home availability starting to get a little bit better? Any type of aspects like that, that we got to keep in mind here for early calendar year 2021.

A couple of things. I guess, on what products are we seeing cost pressures on? The answer is yes. Pretty much everything that it takes to make furniture, a simple matter of supply and demand. So certainly, from steel to foam to wood. Now the good news is the industry has always been pretty able to price. We took our first round of pricing in -- recent round of pricing in October. The challenging part of that is, of course, we did not do that on backlog. We took that on new written orders. So it really will be this quarter until we're starting to see some of that pricing actually come through in our delivered sales. And like the rest of the industry, we continue to monitor what those input costs look like, to our best projections and then price as needed, and we have had another round of pricing since that October when, again, very similar to the rest of the industry. So the good news is it does give us the opportunity. And the industry, in general, is pretty rational as far as that pricing. From an outage standpoint, there's been a lot of different short items. First, in the Q2 into Q3, it was form, and that is looking like that could be an issue again relative to TDI manufacturing and the impacts of weather and foam. And so that is an industry-wide challenge that everyone's dealing with. Chips, just like the auto industry, those impact our product with electronic components. And it's varied. And any individual one has not been like a completely dramatic in its own right, just like labor, honestly. And with folks being sick over the holidays or being exposed to the virus and needing to stay home so that we can keep our people safe. Any individual one of those is not dramatic in and of itself. It's just that when, as Bob said, we have people making furniture at all shifts at all over time in all locations. If you're slowed down for a short amount of time for an outage on any individual item, it's not like you can work a ship -- an extra shift a week later to make those up. And so it just sort of pushes that backlog out a little bit further. But in general, you don't lose that sale. It's just taking time to get them built.

Okay. That's helpful. And I guess maybe you get about 10, 15 minutes left. So maybe 2 final topics here: one, capital allocation, and then maybe we'll go to end on the future growth opportunities for La-Z-Boy. So from the capital allocation side, balance sheet is in probably the best condition it's been in, at least in my history, $400 million plus of cash, no debt. So can you maybe talk about priorities for cash? You made a successful acquisition in the DTC space. Does that remain a target? Anything there for investors to think about?

Sure. And really, capital allocation dovetails very well into growth opportunities. As you said, we are seeing the benefit of this pandemic is not only growth of the company, but the cash chests that we're building up to be able to grow into the future. And that is a lot of what we're spending our time thinking about is even as the consumer starts to think about other things beyond their home as we get the virus under control, how do we continue to grow. And so within that, I would say, at the highest level, our capital allocation is unchanged from what it was pre pandemic. And best first in our business where we believe it will strengthen our company and our ability to grow and then also give back to the shareholder, both through dividend and share repurchase. I'll address dividend and share repurchase just briefly, both of those were suspended temporarily when we really didn't know what the virus was going to do and what the impact on the economy would be. Happy to say they're both turned back on now, we've actually increased our dividend. And just in December, turned on share repurchase again, and we believe those will be important parts of our overall shareholder return going forward. Relative to investing in the business, the first half of our year, again, we were very conservative on cash with a lot of unknowns. We've now turned on all of our normal capital investment, again, including the update of our final second largest plant in Missouri. And of course, as Bob alluded to, some of the expansion of our manufacturing. We also are investing more in our stores, picking up the pace of the updates of our stores, picking up the pace of technological upgrades to be even more consumer-friendly in-store as well as on our website and technology upgrades across the company so that we're better positioned for the future. On the M&A side of things, we have, over time, as Kurt said, well over half of our La-Z-Boy Furniture Galleries are still owned by independent licensees. And while we like that model, we would be happy to own more of those, particularly where it can help us really evolve the brand with the consumer and ensure that there's a very consistent offering of the La-Z-Boy brand. So we'll continue to look for opportunities to own more of those Furniture Gallery networks where they are in the right locations, and we really believe there's growth. And then the last one is looking for the right next M&A opportunity, and we continue to keep our eyes open. What we really liked about Joybird a couple of years ago is that there was a true synergy from owning that company within the La-Z-Boy Incorporated entity. Joybird has appeal to a new consumer in a different channel, but we could bring our La-Z-Boy manufacturing capability and really create a synergy there. So we look at a variety of opportunities from international to different product lines to different brands. And really the key is what makes sense to really create value by making an acquisition.

And what about from the working capital side of things, as we start to catch up on this demand, I'm sure that will bleed some of the cash down. But even with CapEx, working capital, dividends and stuff, it's still very high. Is there a targeted cash balance? I know we have a history of burning conservative given that the furniture industry can go through different cycles. But is there a targeted cash balance that you and Bob and the team have in mind or anything like that?

We certainly, as you said, are on the conservative side of how we manage our balance sheet. But it's really more about what are the opportunities to invest. And certainly, we've got a lot of dry powder there for the right opportunities.

Okay. What about...

So in a lot of ways, Bobby, our philosophy hasn't changed. There will be some different degrees, but it's always been first invest in the business. Then the buyback shares and by -- and then...

The dividend.

The dividend -- I'm sorry, the dividend is second and then buyback shares. It's just that we have more dry powder than we've ever had. So we can lean in, in various areas differently and if this wave of volume continues and the way the company turns out cash, there'll be even more. So it's a great time to invest for the future and be ready for when things will slow down at some time in the future.

Yes. I guess, lastly here, maybe pivot a little bit to international. It's been a -- La-Z-Boy has been a great growth story here in the U.S. over the last decade plus. What is the -- how you look at the international opportunities? Kind of what is your current setup right now internationally? And maybe where do you see that going over the next 3 and five years?

So beyond North America, about 5% of our business in rough numbers, that varies a little bit from time to time, but about 5% of our business is outside of North America, with our largest markets being U.K. number one. We also have operations in Australia. And then through a variety of partnerships and structures, we are in 70 countries. I think is about the number currently. And so we continue to look at international as an important part of our business. Again, there's -- given how fragmented the market is in North America, there's growth opportunities still within North America as well. But our international business is strong and growing very consistently with what we're seeing with its own set of challenges as well, shipping being one of the bigger ones for the international business in the near term. But we continue to see that as a very vital part of our business and assess growth opportunities and acquisition opportunities offshore as well.

Great. Great. Well, I'm looking to see if we got any more coming in from the audience, but see -- no, I think we covered all the key points. I appreciate everybody joining us virtually. I will at least go out myself and say, I hope we're back in Orlando next year. And everybody -- we can see everybody in person. So thank you again for joining us here at the 42nd Annual Raymond James Institutional Conference. La-Z-Boy. Thank you for joining us as well, and I really appreciate the support.

Thank you, Bobby.

Thank you, Bobby.

Thank you, Bobby. Well done.