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

Okay. Good morning, everyone. My name is Anthony Lebiedzinski, I'm the equity research analyst at Sidoti & Company that covers La-Z-Boy Incorporated. Thank you for joining us at the Sidoti Spring 2021 conference. We are very pleased to have with us today, Kurt Darrow, current Chairman and CEO; Melinda Whittington, CFO; Bob Lucian, VP of Finance; and Kathy Liebmann, Director of Investor Relations and Corporate Communications. So effective April 25, Kurt will retire as CEO, Melinda will become CEO and Bob will become CFO. So before we get started, I would like to, again, congratulate Kurt on his pending retirement, certainly well deserved. It's been great working with you for the last few years, and thank you for spending time with us today as part of your farewell tour. And congratulations, again, Melinda and Bob, on your well deserved promotions, certainly look forward to meeting and certainly working with you both. So the format of the call will be a virtual fireside chat. I will start with my own questions. And for those in the audience who would like to ask a question, feel free to type in your question into the Q&A box at the bottom of the Zoom screen or alternatively, you can also e-mail me a question, and I will read it out loud. So first, for those in the audience who may not be very familiar with the company, can you give us a high-level overview of La-Z-Boy and how you have been able to differentiate your company from many others in the fragmented furniture sector?

I'd be glad to, Anthony. So I think historically, La-Z-Boy was founded in 1927, and we're celebrating our 94th year here in business and -- been a lot of ups and downs over the time, but we seem to have found our sweet spot the last decade or so. But you can't talk about La-Z-Boy without first talking about the brand. And in an industry where the brands have kind of disappeared from a product standpoint and the real driver of brands are the retail brands because they can get product from all over the world, whether they're branded or not. I think the La-Z-Boy brand stands out of something that has met the test of time as great attributes for the consumer of quality, comfort, longevity. And so it allows us to do something, I believe that our competitors can't. And we continue to invest in the brand in the good times and the bad times, and that's the way you build a brand. So that's -- I think that's our real edge of difference. Now how do we leverage that? So we are still the largest -- the leading provider manufacturer of reclining chairs in the world. And we are the second largest provider of furniture in the United States or North America. And we are the second largest retailer of a single branded product line called La-Z-Boy. So we have both wholesale businesses, retail businesses, imported businesses, but they're specifically designed to get us into different channels with different consumers. So by far, our biggest segment is Upholstery. And I'm talking about the business, not necessarily the new segments we have with our disclosures. But our Upholstery businesses is our manufacturing of sofas and chairs is our biggest business. Two primary businesses there, La-Z-Boy in England and La-Z-Boy manufactures most everything domestically and -- or in North America. And our edge of difference there is mass customization with speed. We kind of don't talk about speed today because of the backlog and the supply chain channels, but that has played well with us with a lot of our competitors moving to Asia to get furniture, and the customer only having one choice of color or fabric on a sofa, where we have a multitude of covers. So -- but high-quality fashion-forward. And we -- our research says that our customers don't want their furniture to look like everybody else's. And certain stores, you have one choice of color and styling. So we -- in the furniture gallery business, we're pushing nearly 50% customization that they don't find at very many other places. So we do have a Casegoods business, which imports. The United States has had challenges being competitive in manufacturing case goods in this country. And the majority of case goods comes in from overseas, and we do the same. And so we sell case goods in the La-Z-Boy store network, where we have 351 stores in North America, and we sell it also to the trade. So it's a complementary business. And we've tried to stay in stock in normal times and offer quick delivery. We carry a little more inventory probably than most, but it's been a good business for us. And then we have our retail business, which has made a huge turnaround over the last 10 years and is growing and very profitable. And we're continuing to invest in our stores. We're continuing to update them. We're continuing to look at possible acquisitions of more stores. And our secret sauce there, in addition to the brand, is our in-home design program. And the fact that people are thrilled that they can have a designer come to their home for free and help them decorate their room. And it's unexpected and -- but it's a great program for the consumer. And for us, long term, it helps solidify us having a customer for life. Because if you do a really good job in their first room, the odds, they'll have you come back and do another room or 2 is pretty high. And the secret there is the average ticket if we get in the home is normally at least 3x as large as the ticket if we sell it just in the store. But we are agnostic about if all you need is a recliner, and that's what you love, we're ready to serve you. But if you want your whole room done, we can provide that as well. And we think there's still room to grow in our retail business, even though there's a combination of omni channel, brick-and-mortar, meeting the customer where she wants to be met, but we have that -- we're developing more and more of that capability. And finally, we have a business we bought 2.5 years ago, called Joybird, which we struggled in the beginning to get the results out of it that we wanted, but through a lot of hard work from everybody on the La-Z-Boy side and the Joybird side, we got it structurally right now. And the question is, how large can that business become over time. It gives us a different channel, B2C, and it gives us a different customer that's slightly younger than the core La-Z-Boy customer. So there's reasons why we have each of the businesses. They don't overlap a lot with the same dealer or consumer, there is some. But all told, La-Z-Boy itself has about 2,600 places where our product is sold in North America. And our other companies have about 1,600. Now some of those overlap. Some of our customers buy both La-Z-Boy and our case goods companies, but we have a lot of other dealers. So while we distributed, but carefully distributed so that our retailers have an opportunity to prosper with our lines. And so I think in general, that's the -- we talk a lot about proprietary distribution. So with the 351 stores in North America, and we have nearly 700 comfort studios. We have 1,000 places, 1,000 retail spaces in North America, where our product is displayed, merchandised, marketed as a stand-alone business. And that helps us have some commonality in the branding. It helps us have oasis in a store where we stand out compared to the other brands. And the 2 of those combined are probably pushing 65%, 70% of our business in those 1,000 dealerships. So that's a brief history, a lot of tangents with all that. I think the other thing I did not mention other than the mass customization with speed is that our supply chain is clearly world-class and how we offer all the SKU complexity that we have and still manage it, stay in stock, deliver it 97% on time, and it's taken a lot of time and effort to do that, but -- and continuing to find ways to stamp out costs. So our story wouldn't be complete without talking about the great work our supply chain has done.

Okay. That's a great overview, Kurt. I definitely appreciate that. So kind of switching gears. So with the pandemic, many people have been stuck at home and have been upgrading their home furniture. So have you seen strength across just all your major product categories? Or are there certain product categories that really stand out that you're particularly excited about?

So I think the one thing that everybody benefited from, and we did too, as soon as everybody started working from home, they needed desks. And we have sold a lot of desks this year in our case goods portfolio. But in terms of the broader La-Z-Boy product line, there hasn't been a huge shift going into the pandemic, the growing part of our business was sectionals, deep-seated, large seats. People are continuing to decorate around the TV, and they want the whole family, watching the movie together now. And so that is continuing to be a bigger piece of our business. And unfortunately, right now, our sales rate is not exactly the same as our manufacturing because all of our start-up capacity that we've added, we start by teaching people how to make recliners. And so we're a little bit out of balance of matching our demand exactly to our capacity production, that's going to start to change here as we go forward. But our dealers were so desperate for product. And we said what's -- what way can we get them the most product, the fastest, and that was making more recliners early on to get them some products. So -- but we haven't seen a huge change in our mix other than that real uptick in desks.

Got it. Okay. So actually, I just want to circle back to the comments that you made earlier about the average ticket increases with the in-home design. So with the pandemic, there has been -- obviously, that has complicated a little bit as far as having someone come into the story. I know you've done some virtual visits from your in-home designers. Can you talk about that? How technology has enabled you to sell -- pushed at the In-Home Design initiatives?

Well, I think it's all about our philosophy of meeting the customer where she wants, if she wants to do a digital design. We're prepared to do it. But I would tell you, that was all we were doing for 4 or 5 weeks there when the stores were shut down. But once they reopen, people were thrilled to have people come to their homes. And the same thing, even in the shutdown period, people still wanted their furniture delivered. And so we've done everything from safety protocols and our delivery people wearing mass and sending notices that they are on their way and all the kind of things you should do. So our in-home business today is as a percentage of our sales is increasing. And -- but today, it's mostly still going to the home. Now that's the customer choice, not our pushing it one way or the other. And we're fortunate to be able to do the digital stuff when the stores were open. But as soon as they got back open, it flipped back to getting into the home.

Okay. Great. Okay. And then can you talk about the addition of Kristen Bell as your spokesperson? How she has enabled you to capture more customers, especially younger customers and the kind of traditional La-Z-Boy customers?

So I can take that one. We -- the short answer is we're thrilled with the addition of Kristen Bell, and it's been, I guess, we're around 2 years now. And the last year, of course, has been unusual as we've even pulled back on some of our marketing spend simply because of either being in the early days of the pandemic being somewhat -- trying to be reverend to the situation. But also just looking at with demand at all-time highs, pulling back on some of our marketing spend until we catch up on supply. But that said, what we really like about Kristen Bell, what we know over time is the La-Z-Boy brand in a highly fragmented market. The La-Z-Boy brand is known. I mean, whenever you test across North America, it's known and there are positive attributes around the quality of our furniture, the comfort of our furniture, family, I mean all these positive attributes. But our core consumer for the La-Z-Boy brand would be in the mid-40s to mid-70-year old. So the first thing we always have to think about is we're always seeking up the new mid-40 person. And some of that is around the size and style of our furniture settles better with, in general, with more of a suburban consumer, right? As you move out and sort of settle into wanting to purchase quality and bigger home in a place you're going to be for a while. So it's always important that we're bringing in the next 45-year-old and taking them through the journey. But it's never made a lot of sense to focus on the 35-year-old because they knew about us and they weren't ready to buy us. What's amazing -- what's terrific about Kristen Bell is that she resonates with those 45 and up. But at the same time, she resonates with the 35 to 45. And so with the same messaging, with the same spokesperson, we're seeing -- and even with having pulled back marketing spend in the last year, we are seeing statistically significant upticks on the consumer actually now saying, wait, I knew about that La-Z-Boy brand positive attributes, but it resonates for me. I would actually -- I see this as a brand that could work for me now, even in my 30s and so positive purchase intent and willing to come in and move forward. So it's a long-term relationship, and we're still fairly early on, even in our messaging with Kristen, the first year was kind of just getting her connected with our brand. And then we're building on a journey with Kristen and the messaging to begin to build more of the attributes. So first, if Kristen like La-Z-Boy, then I might want to look at Lazyboy. Now let's talk about what La-Z-Boy brings. And since last spring, we've had the messages, for example, on free design services like Kurt was talking about, and really starting to bring out those positive attributes. So we're very pleased. The other thing that's great about Kristen is she's very active on social media, and that is part of her engagement with us. And again, you have to meet the consumer where they're paying attention now. And so it's far beyond the occasional TV ad with Kristen. So [ one new way ] of saying we're very pleased in our early-stage with her.

That's great to hear. So yes, obviously, the current demand remains high. You guys have talked about the increases in your written sales, mortgage rates are still historically low, more people are working from home. And there has been certainly a trend towards more people buying vacation homes and second homes. So -- but there's -- as far as now people getting vaccinated, and there's -- there could be a potential shift in consumer spending on travel and things like that. So how should we think about the sustainability of the elevated demand for LZB going forward?

So if we think about furniture in general, it has been a traditionally 2%, 3% growth kind of industry. And we've experienced -- we've had -- some quarters were up 30% versus a year ago. And year-to-date for our La-Z-Boy business, for our somewhat unusual fiscal year, through the end of our third quarter, we were up 18% on our La-Z-Boy furniture galleries, and that includes a month or 2 that we were completely closed out. So a ton of growth. And there's no doubt a portion of that has been -- you've seen it across in the Lowe's, the Home Depot, anyone involved in anything with the home as all of us have spent a lot more time there. That's where we've invested our money. But to your broader question, Anthony, I would say two things, well, maybe 3. The first one is we have a significant backlog because we are doing all the work to continue to have build capacity, but we're still struggling to keep up with demand that remains at all-time highs. And so we'll have some time just to weather that bubble as we continue to catch up. But more importantly, a lot of the factors that drive our business from consumer confidence, you mentioned, mortgage rates still historical lows, housing starts are still positive. The data on American saving rates are still very positive. And so while I do think -- certainly, I'm looking forward to eventually taking a vacation. And so while there will be more competition for dollars, for the consumer dollar over time, and I think it's unrealistic to expect furniture to be growing in the 20%, 30% long term. I do think there's a lot of positive trends for furniture broadly to continue to be a very successful industry. And importantly in that, I think our brand has resonated very well. Certainly, the data would indicate that consumers -- and we're more than only the La-Z-Boy brand, but a big chunk of our business is La-Z-boy, and that brand has been a familiar brand that's resonated well with the consumer in such a time of uncertainty. Our stores and our online presence across our brands. We're operating very well, so we think we're earning disproportionate amounts of written growth in this time. And then importantly, in the time where there's -- what do you make the most out of the crisis, the cash that we are building over time will give us choices on what we want to do next to invest in our own capabilities and invest elsewhere. So it's up to us to what -- we are in an enviable position that we can be making choices on how to grow out of this even when it maybe becomes a little more challenging than it has been to get the next written order in the near term.

All right. Thank you, Melinda. So yes, we do have a multipart question from someone from the audience. So can you talk about labor availability? Are you seeing any related inefficiencies with the new hires? Also, if you could provide us with an update on ocean freight costs and availability. Also, can you touch on the availability of foam? And also, can you talk about pricing moves to cover the higher input costs as well.

Okay. That was a very long question, but let's...

I said it was multipart question, yes.

Yes. They're all related. Let me see if I can go and deal with that. First thing, I think, was labor availability. And that has -- the furniture making process is an artisan process. It takes 6 -- it's very handmade furniture. And it takes 6 to 9 months to get somebody fully trained up to just a basic level of efficiency. And we're spending a lot of time hiring and training folks in our U.S. plants. We've opened up some manufacturing capacity down in Mexico, and we're hiring folks there and training folks there to be able to do that. So from a labor availability standpoint, we are struggling a little bit more in the U.S. but in Mexico, we've had more success. And we continue to increase our capacity month-over-month as we bring those folks up online -- up to the capacity to the efficiency that we want them to get to, to be able to make the furniture. So that's the labor piece of it. The cost piece that you mentioned, we're seeing increases across the board on a number of materials. And probably the biggest one that we're seeing both an impact on cost as well as availability is foam. It started back in September with the hurricanes and the COVID shortage -- the COVID-impacted shutdowns that hit the industry. And then we saw some problems in October as well as December and January getting foam. We were just coming out of that. We were stabilizing when the winter storms hit the Texas and Louisiana areas, which really had a big impact on the petrochemical facility operations down there. As a result, the furniture industry as well as the auto industry and the mattress industry, all the ones that are using foam, they're experiencing some major foam supply shortages, which are impacting production. We've been told that allocations eased by the end of April, and we're hopeful that our foam suppliers can get their operations and inventories back to steady state by early summer. Our world-class global procurement group has done a great job, working tirelessly to make sure that our plants keep running as well as increasing the capacity of those plants. If you think about a piece of furniture needing 100 parts to be able to be put together, if we're missing one, we can't make that sofa or that chair. Those are the folks that have been able to make sure that we're staying with all the parts that we need to and enable us to continue to service the very large backlog that we have right now. The other thing I think you mentioned was containers, where there's a storage of containers or an imbalance of containers in the world right now. And that's caused a number of issues with some of the components that we source from Asia, such as things like upholstery covers. More importantly, it's impacted our ability to import some of our finished goods, which we source in Asia. As Kurt mentioned, our U.S. Casegoods business, which is Kincaid, Hammary and the American Drew brands, we source those from Asia. And we've seen delays in receiving and then delivering those orders to the current -- due to the current global container imbalance, in addition, our resource and finished upholstery for our international business. And those delivered sales have been negatively impacted by those continuer shortages as well. Just in the news right now, there's a container stuck in the Suez Canal, and we have 5 containers. There's a freighter stuck in the Suez Canal. We have 5 containers on that ship.

Just when you think -- you couldn't come up with the next challenge.

So again, these are all issues that we've been working against and continue to work against and make sure that we're able to make inroads against the backlog and service the customers that are desiring our products.

Got it. Okay. So yes, so I apologize for the multipart question. But I guess the last part of that question was about the -- whether the recent pricing moves will cover the higher input costs? Or will you need to take additional price increases?

Well, the current pricing -- we took some pricing in October, and we most recently took some pricing last month. Due to the large backlog we have, it's taking a while for that pricing to work itself through the system. We're just now starting to see the pricing show up from the October price increase. And we'd expect by August, we'll be seeing the price increase show up in our delivered sales at that point in time. We chose not to take a pricing on our backlog some other supplier -- some other manufacturers did that. But given the fact that those -- our customers had sold the product to their consumer at a certain price, we wanted to honor the price that we gave them. Those -- that pricing will all start moving through the system. And then we continually will be monitoring what's going on right now from a pricing perspective across the markets with foam, wood and steel. As Kurt mentioned, you can't make furniture without foam, wood and steel. Everybody is seeing these increases. And generally speaking, the industry is able to pass on these increases. And we'll keep an eye on that and take actions as we need to.

Got it. Okay. Thank you, Bob, for that. So we have a couple more minutes here, so we'll try to kind of wrap it up here. So obviously, you guys have acquired, over the years, some dealer stores. You've also acquired the Joybird. Can you give us a sense as to what your appetite is for additional acquisitions? And would you be -- as far as how you evaluate the acquisitions, maybe just talk us through that as well.

Certainly. When we think about -- as I mentioned, one of the positives coming out of the current situation for us is certainly accumulating resources, primarily cash that provide opportunities for us. Think about acquisitions in 2 ways: one around La-Z-Boy furniture galleries. So of the 350-ish furniture galleries that are out there, we own about 160 of them today corporately. The rest are owned by independent licensees. Over time, we are interested in acquiring more of them, not necessarily all of them, but we have great partners that work together and help ideate on how to continue to move our execution ahead. But at the same time, we're getting pretty good at it and our company-owned stores as well. 10 years ago, we were buying and fixing, and now retail is a crown jewel for us. So we'll continue to look for the right opportunities to buy furniture galleries and create value there, where we see markets that will be productive over time. In addition to the right acquisitions, we look at where there are synergistic acquisitions, where we actually see value creation like Joybird. What was great about Joybird when we bought them, they were around $50 million. They've doubled in the 2 years we've had them on a sales standpoint in round numbers. What was great about Joybird is they had a unique offering, more e-commerce-based, brought a lot of skills on that commercial side and had a different style furniture and a different consumer, a younger consumer. But there are a lot of synergies around their manufacturing side. And that's something La-Z-Boy particularly good at. And so we could drive the synergy side of combined manufacturing distribution. And we really are still -- we're a little slower on that start-up than would have been ideal. This is true of many acquisitions but we really started to hit our pace there and still have opportunity really in learning both ways between Joybird and La-Z-Boy. And so those type of acquisitions over time, we're not really a company for a [ best ] of farm-type of acquisition per se, but finding those nice add-in acquisitions where we can create value and find synergy on what we bring to the table by putting them as an enterprise, we'll continue to look for those opportunities. And we certainly have the cash in the bank to being able to do that.

Yes. Absolutely. Do you guys have any final closing remarks that you want investors to know about the LZB story before we wrap up for this morning? I would just say, I think we've got a great story. We've got a rich history. We're close to rounding out a century here in '27. We have -- we're delivering strong results now and accumulating a bit of a war chest to grow for the future. And so definitely, every day in the trenches right now is challenging to manufacture furniture but demand is strong, and it gives us a lot of opportunity to continue to be strong in the future.

Anthony, I would add that one of the things that made my decision to retire very easy is we also have a very strong team. They've made me look good for a number of years, and they've done amazing things, and they're all committed, and we have the right leader in Melinda. So I'm very confident the company is in good hands with the leadership team and Melinda being at the helm and would not anticipate of what she can control, would not anticipate any hiccups or things that an investor ought to be worried about that La-Z-Boy is going to take the wrong fork on the road. So I have utmost confidence in them, and I think you're going to see great things from them in the future.

Okay. That's great to hear. And so thank you again, Kurt, Melinda, Bob and Kathy for doing the fireside chat with us, and thank you for everyone joining us at the Sidoti conference. So this concludes the fireside chat. Have a great day, and you can now disconnect. Thank you very much again.

Thank you for having us.

Thank you.

Take care. Thanks. Bye-bye.