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

Here to introduce La-Z-Boy Incorporated with us today is Melinda Whittington, our Board Chair, President and CEO; and Taylor Luebke, our newly promoted CFO. So with that, I will leave it to Melinda.

Thank you all. It sounds like we're on. So we're all good. I'd like to say, first of all, I appreciate you all spending time with us, realizing that I think we are the only activity in the 4:30 slot that does not involve alcohol. So thank you for spending these 30 minutes with us here. We'll spend some time today just take you through La-Z-Boy Incorporated and try to leave a few minutes here at the end for questions. And I'll just add my congratulations to Taylor, who is an internal promote into the role. He was our VP of Finance and he is replacing Bob Lucian, our retiring CFO, who has spent the last 4 years with me in this role. So exciting to have Taylor up here with me today. So before we get started too far, I'll just remind you of the usual forward-looking statements of what we have here. I think we all know that drill. I won't spend any more time there, and we'll go ahead and head to the next slide. So La-Z-Boy Incorporated, we are -- coming up in 2027, we will be a 100-year-old company, mainly U.S.-based in our history. We are one of the largest players in furniture. And our history is as a manufacturer that believes in the transformational power of comfort, beginning with the iconic La-Z-Boy recliner. Our core values are really around -- and we looked at this and refreshed this as I stepped into the role 4 years ago. I'm 7 years with the company myself, but 4 years in the CEO role. And we really looked at courage, curiosity and compassion. And that's around the courage to reinvent ourselves as we finish our first 100 years and prepare for the next. The curiosity to make sure we understand the consumer. It's important that we think not just of ourselves as a manufacturer trying to somehow get somebody to buy our product, but to really have the curiosity to understand what people want out of their furnitures and what they want out of that entire experience and make sure we're bringing that to them. And then the compassion to still work with all of our stakeholders in mind, consistent with what has brought us here through our first 100 years and sort of our family atmosphere.

So furniture has been a pretty wild ride over the last 4 years through and out of the pandemic, but we were incredibly pleased on our performance and where we sit today. So La-Z-Boy Incorporated trailing 12 months is about $2.1 billion in sales, which is 20% greater than we were prepandemic, along with EPS growth of 40%. And that's largely been driven by our -- increasing our expansion into our Retail segment, which is up 50% where we were in 2019. While still honoring our heritage as a manufacturer in wholesale, which we continue to foster and grow, we've increasingly transitioned La-Z-Boy to about 50% mix direct-to-consumer with our Retail segment as well as our Joybird brand. And lastly, even through all of it, incredibly strong balance sheet, over $300 million of cash on hand, no external debt.

So we're going to spend a little bit of time kind of covering 6 compelling reasons on why to invest in La-Z-Boy Incorporated. I think it's important to note that we have tried to be out much more sharing our message in recent years because we do believe we have a compelling strategy in an industry that is on the verge of an inflection point and present a compelling interest. The first one is our leadership team, this leadership team. We have, across the group, as I said, I've been with the company 7 years, in this role 4 years, and we have a team, most of them in the 5 to 10 years with La-Z-Boy, but they come from some of the best of the blue chips of strategic leadership of companies. For myself, my foundational 20 years were at Procter & Gamble as was true for Taylor as well. Our newest member on the team is Taylor in the newly promoted role. And I would also call out that Rebecca Reeder joined our company about 2 years ago, and this is a pivot as we continue to grow our retail portion, our D2C portion of the business, Rebecca comes from Chico's where she was Head of Stores across Chico's, Williams-Sonoma and White House Black Market. And she brings that idea of the fashion retail and how do you inspire the consumer. And so we believe she will help take us to that next level on our retail experience as well.

Since our founding in 1927, La-Z-Boy has been a leader -- market share leader in furniture, particularly the reclining category. And over time, we've expanded our assortment so you can furnish your whole home. It's a beloved brand in the mind of consumers. You can see some of our peer set up there. And as one of the top brands that consumers consider, we're looking to make a new furniture purchase. What's special about La-Z-Boy in a true asset is that we're a brand that is a beloved product line, but also a retailer, which is very abnormal in the industry, which gives us an incredible amount of optionality as we go to market to best meet him or her where they decide to shop whether at a La-Z-Boy Furniture Gallery or at a multi-branded retailer. And as much as I just talked about how we're happy with our progress to date through the volatile, call it, pandemic and what has been last year, 2 years of a furniture recession, with the year-over-year declines across the total industry, even more prevalent on the, call it, the core furniture is the outlook forward. So we know existing home sales, new home starts are at decade lows. We know interest rates, while a couple of cuts in the last 6 months, have not relayed into mortgage reductions as the 10-year yield has gone up. There is a pent-up demand for just natural housing migration that exists out there that we believe there will be an inflection point. The when and the where is kind of pick your flavor of the day, but it's coming. That, combined with just a general housing shortage in the U.S., makes us feel incredibly confident on the outlook for: a, housing, but more importantly, furniture to follow. And in La-Z-Boy's specific case, even in the tougher market where now we continue to win posting sales growth for the last 2 quarters, while some of our peers are in the minus 2s to minus 20s, so us winning even when the market is tougher gives us confidence that as we get some tailwinds behind us from industry growth, we'll disproportionately benefit.

And we do know that the single biggest driver of furniture is having housing transactions. So we look forward to getting a little bit of tailwind and not just being in a share battle. So how are we going to do that? So La-Z-Boy has a history of growing at about double the market already, and we intend to continue that. Four years ago, we created the Century Vision, which was around -- it was our strategy after a lot of detailed work with Bayne and within our core company to really look at as we were going to finish our first 100 years and begin the next 100, what do we need to do? Do we need to do some really dramatic pivots, or how did we think about the future? And what we really came down to is, we had 2 incredible assets in our company, the iconic La-Z-Boy brand and our retail business that was somewhat underleveraged and had really been strengthening over recent years. And so with that came the Century Vision strategy to drive 2x the industry growth at the top line and get ourselves to a sustainable double-digit operating margin. The biggest pillars of that are around expanding the La-Z-Boy brand reach. With that, we brought consumer insights in-house for the first time ever, which are now giving us that -- again, that consumer look at what does the consumer want out of their furniture, and then how do we meet that need at every level? It's been messaging. It's been product innovation. It's been how to shop both in retail stores and an omnichannel and a digital presence. Each one of those has work underway. We've made real progress in the last 4 years, but we still have plenty of runway of where we go from here. The other one I would call out is we bought Joybird, a native -- digital native brand about 6.5 years ago. That was as our industry was pivoting to the first time to seeing more e-commerce growth. And that has been an interesting learning experience for us that we'd be happy to spend time on, but we feel good about that as another D2C vertically integrated brand, focused on customization that has legs for the future, and we're beginning to expand it again now. And last, but not least, it's around foundational capabilities. While we are outperforming the market today and delivering growth even in a market that is still down 3 years running. We are also investing in building our capabilities, the brand, the retail, but also creating a more agile supply chain to continue to deliver that customized furniture to our consumer as well as modernizing our technology and really investing in our people so that we get the best out of our employees and all of our stakeholders.

So as Melinda had mentioned, our Century Vision objectives are to grow 2x the market, which we have proof points to show we've been doing, but also to expand our operating margins to double digits sustainably over the long term. And that's driven by 2 key pillars. One is getting our Retail segment back to mid-teens, which we've shown to do as recent as fiscal '23, and to get our Wholesale back to double digit. On Retail, that will be accomplished through continued balanced growth on same-store sales, store productivity as well as new stores, of which we're targeting 12 to 15 new this year as well as continued acquisition of independent licensees. And on Wholesale, which we had a track record of sustained double-digit prepandemic, saw significant disruption through unmet consumer demand through the pandemic and then the furniture recession after. It's back to getting our muscles of continuous improvement across our supply chain, from procurement through assembly, all the way through distribution. Through all this, it does require some level of industry tailwind as volume is still down from prepandemic, but as noted earlier, correlation to housing. We know there's pent-up demand. We believe there's an inflection point coming over the medium term, which makes us bullish on ourselves, but also this margin a high level of confidence in achieving.

So as we think about expanding that brand reach, a big piece of that is how we're speaking to consumers. We went back and we looked at what does the La-Z-Boy brand mean to consumers. And we found that consumers trust the La-Z-Boy brand. They have a very positive emotional experience with La-Z-Boy. They didn't necessarily have La-Z-Boy top of mind when they want to make a furniture purchase, and they didn't necessarily think about La-Z-Boy as having a product that was right for them. So that began a journey around product innovation, how to shop, but also importantly, the brand. About 1.5 years ago, we launched the Long Live the Lazy campaign. We are super happy with that campaign. It is very ownable. It is sticky and it relates to the consumer, particularly post-pandemic that is looking at being fatigued, wanting to come back and have some well-earned relaxation. And it very much connects with what our consumer and what our values really are that we can bring to the consumer. Importantly, it's not just a different slogan, but it's how we go to market across all of our different channels. And we're actually attacking a psychographic around a confidently comfortable consumer that wants a terrific product, that they're going to invest in the quality, they're going to bring that into their home, it needs to be functional furniture, but it also needs to look good. That psychographic is much broader than what we had been targeting historically. And we've actually seen our average consumer age in just 1.5 years we've had with this campaign begin to age down, which is important to us. We want to be able to hit a broad base of consumers, not ostracizing that somewhat older consumer that has been more of our traditional consumer, but at the same time, starting to age that down and meet just a broader away of consumers. I'd also call out that a big piece of what we're doing with Long Live the Lazy is expanding the different ways that we connect with the consumer and becoming more socially relevant. As just one simple example. We've mobilized our ability to -- when the Kelce Brothers mentioned us in their podcast, whether you like them from footwall or you like them from music and Tailor Swift, they were able -- when they just mentioned the fact of a La-Z-Boy and sort of their memories with this iconic brand, we were able to mobilize, invest with them, get them chairs, get into the discussion and actually even sponsor some of those podcasts. So it's just one tiny example of how to become more socially relevant and take advantage of some of the natural attributes of our near 100-year brand. The next piece, so that's the brand. And it's very important that we back that up with our product offerings as well. It's also super important that we back that up with how we go to market. In today's age, the consumer expects to engage with you digitally and be able to sort of do some of their initial legwork online. But the vast majority of consumers purchasing furniture, particularly higher ticket items, are going to ultimately want to come into the store, and particularly, our consumer who's looking for that comfortable experience. They want to experience that before they pull the trigger. And so we are very focused on expanding our own retail. And that's right for the consumer because we can control that entire experience for the consumer. It's also right for our financials because we hit the entire sale out of that, the retail sale as well as the integrated margin all the way through the manufacturing process. And so as we look at expanding our own retail, and we've made very, very significant strides in that and still have quite a better runway, it's really around 3 things. The first is execution in store and driving same-store sales. We've been about holding our own on same-store sales in a market that's been down mid-single digits to worse over the last several years, and that's really around still having challenged traffic, but being able to really execute well. We're at all-time highs in conversion in our average ticket and continuing to drive our 3 in-home design services, which dramatically increased the relationship and the average ticket with the consumer. And that's the biggest one that with a little more tailwind from the industry, we'll see drive even further beyond the operational metrics that we are doing every day. It's also supported by an incredible supply chain that can deliver this customized furniture. Half of our sales roughly are customized, and we can have it in your home in 4 to 6 weeks, which is compelling to the consumer as well. The second thing we can do to grow our own retail is to open more stores. Today, we're at about 360 stores across our entire network. We see a path for the current format to go to about 400 stores where we have the modeling to see the markets that can support that. And then we continue to experiment with potential new formats over the longer term. And then last, but not least, of those retail stores that we have today, of the 360, we own 54% of those as our own company, and we have been slowly buying those back. When Furniture Galleries were created decades ago, they were primarily independently owned. And we worked very closely with those independent owners to make sure as a consumer, you don't know which you're walking into. We want a very consistent consumer experience. But as we get better at managing our own retail and as the world becomes more national, more global and more digitized, we like owning those stores ourselves. And so we've been working to buy those stores back, and we've been doing about a transaction, about a DMA a quarter here for a couple of years now and see the path to continue to find those opportunities. I don't want to downplay though, the importance of our Wholesale business. Our foundation as a brand and manufacturer was to sell through multi-branded retailers. And we still -- about 1/3 of our business is going through wholesale channels. This sort of breaks down of the La-Z-Boy how we go to market there and about where that revenue mix is. What we get out of strategic wholesale partners is to reach consumers in an incredibly fragmented market that we otherwise aren't going to reach. There are consumers that are never going to walk into a Furniture Gallery. And so what we can do with key strategic partners like Slumberland and Rooms To Go and Furniture Row that are big, noisy, significant players in the marketplace is they're good compatible partners with us. They advertise a lot. They give us more share of voice, and we actually see traffic into our own Furniture Galleries increase as well while reaching a consumer with a transactional purchase that we otherwise would not have reached. So we really see that as continuing to be an important growth trajectory as well. I would call out that of that, just a little over 1/3 of our business that is still in the multi-branded wholesalers -- our multi-branded retailers that a significant portion of that light blue pie on the chart -- the slice of pie on the chart are actually store within store branded space. So we really go to market still, and that continues to give that continuous reminder to the consumer of the La-Z-Boy brand by having branded space even on those competitive retail floors. And so all of that, when we really look at what is the La-Z-Boy of today, not your father's Oldsmobile, we really see ourselves as a very competitive player in this market as a D2C offering a retailer with vertical integration and more.

On capital allocation, we have a very disciplined strategy, about 50% back into the business via CapEx or independent acquisitions, as Melinda had mentioned, and 50% back to shareholders via dividends, which we increased 10% in December, as well as share repurchases. Any given year could potentially deviate depending on the opportunities we have ahead of us. But over time, as you can see from the metrics, generally evens out. Overall, continue to have an incredibly strong balance sheet, over $300 million in cash on hand, no external debt. Over the last, call it, 4 years, with the amount of volatility and choppiness in the market and the industry, we've leaned towards more conservative on the cash on hand. We would expect looking forward, as the industry begins to rebound, a little bit more uncertainty ahead of us, we'll look to deploy a little bit more of that capital. In overall financial performance, we hit it at the front, been a tough wild market the last 4 years. We're incredibly proud of our performance. We've continued to outperform the industry. La-Z-Boy, Inc. is 20% bigger than we were prepandemic. EPS is 40% ahead of where we were as well, all while continuing to invest in Century Vision, capabilities for the long-term growth in the next 100 years of La-Z-Boy and continued outperformance against the market.

Last but not least, I would just make the point that we have always taken very seriously serving all of our stakeholders. We recently published our latest social impact report. It's available online. And so I would point you to that to the extent that you have interest in that space. Beyond that, I would simply thank you for your time. I think we have a few minutes here that we can open it up to questions. We've had several breakouts today, but happy to go wherever it would be helpful for folks to the extent that we can see you out there. And appreciate your time late in the day on a Monday.

And I'll walk around with the mic if anyone's brave enough to kick off the Q&A.

Yes, sir.

Are your products primarily made in the U.S.?

Yes. So the question was, are our products primarily made in the U.S.? Yes. So of our sales, 90% of our sales -- broad numbers, 90% of our sales are U.S., call it, 5% Canada and 5% rest of world, U.K. being the next biggest country from there. Virtually all of our final assembly of our products are U.S.-based. We do have some operations for cut and sew in Mexico and a little bit of final assembly there, but that's what enables us to be able to deliver customized products in 4 to 6 weeks. Yes, sir.