Leon's Furniture Limited ($LNF)

Good morning, everyone, and welcome to the LFL Group's First Quarter 2026 Conference Call. [Operator Instructions] I would now like to turn the conference over to Jonathan Ross, Investor Relations for LFL Group. Please go ahead.

Thank you. Good day, everyone, and welcome to LFL Group's First Quarter 2026 Conference Call and Webcast. LFL's First Quarter 2026 financial results were released earlier. The press release, financial statements and management's discussion and analysis are available on SEDAR+ and on our website at lflgroup.ca. Joining me on the call today are Mike Walsh, President and Chief Executive Officer; and Victor Diab, Chief Financial Officer. Today's discussion includes forward-looking statements. These statements are based on management's current assumptions and beliefs and are subject to risks, uncertainties and other factors that could cause actual results to differ materially from these assumptions and beliefs. We encourage listeners to refer to the risk factors outlined in our management's discussion and analysis and annual information form, which provide additional detail on the risks and uncertainties that could affect future results. This call also includes non-IFRS financial measures. Definitions, reconciliations and related disclosures for these measures can be found in the management's discussion and analysis and press release issued earlier. Forward-looking statements made during this call are current as of today, and LFL Group disclaims any intention or obligation to update or revise them, except as required by applicable law. All financial figures discussed today are in Canadian dollars, unless otherwise noted. With that, I'll turn the call over to Mike Walsh. Mike?

Good morning, everyone, and thank you for joining us. The first quarter played out largely as we described on our February call. The consumer remained cautious and value focused with continued pressure market-wide on larger discretionary purchases, and we faced a particularly demanding prior year comparables we had flagged coming into the year. In this environment, our team executed with discipline, and we continue to outperform the market and gain share across our categories, which remains our priority through the cycle. System-wide sales were down 3.5% with same-store sales down 4.2%. Victor will walk you through the drivers in more detail. Furniture sales were lower against an exceptionally strong Q1 of last year, but the underlying story is a strong one. On a 3-year compound annual growth basis, our furniture business is up nearly 7% in Q1, meaningful outperformance against an industry that's been under real pressure for some time. We continue to gain share in the category in the first quarter. Our priority in environments like this is not just any absolute sales, it's strengthening our position through the cycle. We stay disciplined on assortment, deeper on our best-performing SKUs and continue to be surgical in how and where we promote. Mattresses were a real standout this quarter, delivering mid-single-digit growth in a highly promotional category, reflecting the same focused assortment playbook that drove our furniture performance last year. The dynamic underneath is one we've been talking about for several quarters. Our digital platform is increasingly a research and qualification destination, drawing customers in the store with clear purchase intent. Our salespeople are well positioned to convert that intent into the right product, the right add-ons and a healthier total ticket. This dynamic, along with our targeted approach to promotional activity is also showing up in our gross margin, which expanded year-over-year on a consolidated basis. Category performance was mixed, but that's consistent with our portfolio approach to the overall business. Our warranty, insurance and service businesses continue to perform well. These are profitable platforms that support the core business, deepen our relationship with the customer and contribute to earnings. In the commercial channel, trends in Q1 were broadly in line with what we outlined last quarter with some near-term variability. While we expected moderation heading into 2026, winter weather delayed builder activity and shifted project completions, which we expect will support volumes in the second quarter. We also saw a competitor in the channel file for creditor protection following quarter end, which we believe creates an incremental share opportunity for us. Taken together, while the commercial business is still expected to moderate through 2026 as builder inventories clear, we now see that moderation occurring at a slower pace than originally anticipated. We continue to make progress on the replacement side, which has been a deliberate focus over the past 12 to 18 months and remains an important priority going forward. We're also taking a selective approach to growing our store network. In the second quarter, we expect to add 4 franchise locations. Looking ahead, we expect the consumer to remain cautious in the near term with some of the Q1 headwinds carrying into Q2. That said, comparisons ease as we move through the year, and we continue to look for gradual improvement in the back half. The fundamentals that drive this business haven't changed, trusted banners coast to coast, the scale to source directly and secure advantaged pricing, one of the largest final mile delivery networks in the country and a balance sheet that gives us flexibility through the cycle. These are durable advantages and they matter most in environments like this. Our focus is unchanged, delivering value to our customers, executing with discipline and continuing to make the right investments in the business. Before I turn it over to Victor, I want to thank our associates across the country, our teams in the store, our drivers and warehouse teams and our customer service teams. Environments like this are where their experience and commitment really show. Victor, over to you.

Thanks, Mike, and good morning, everyone. I'll start with the first quarter walk-through, then move to capital allocation and a few considerations as we look to the second quarter and the balance of the year. Revenue for the quarter was $557.2 million, down 3.8% year-over-year. To put some shape around the drivers Mike just walked through, the majority of the decline reflects the expected furniture normalization following last year's timing benefit, compounded by a more challenging macro backdrop and unfavorable weather, which impacted traffic to the stores. The appliance and electronics categories were impacted by the same factors, while mattresses were a bright spot during the quarter, reflecting the team's ability to translate strategic merchandising initiatives into market share gains. Gross margin expanded 21 basis points year-over-year to 44.8%. The improvement was driven primarily by favorable category mix, reflecting strength in the higher-margin mattress category, along with improved appliance rate performance. These gains reflect disciplined pricing and promotional execution during the quarter, supported by the sourcing and vendor initiatives we've been working on. SG&A as a percentage of revenue increased to 39.48%, reflecting fixed cost leverage and a lower revenue environment, along with higher commission expense tied to sales mix and property-related costs, partially offset by lower retail financing fees. On a dollar basis, we maintained strict cost discipline through the quarter, which is particularly meaningful given the broader inflationary backdrop. Adjusted net income was $20.1 million, down from $24.1 million in the prior year, reflecting the sales and cost dynamics I just described. Earnings remain meaningfully above pre-normalization levels. For context, adjusted net income in the first quarter of 2023 was $13 million, which speaks to the structurally higher earnings base the business operates from today. So we have gained share and kept that share. Adjusted diluted EPS was $0.29 compared to $0.35 last year. On the commercial side, as Mike noted, builder activity slowed more than initially expected in Q1 due to weather-related delays, shifting a portion of volume into Q2. While we continue to expect moderation in the segment through 2026, the competitive dynamics we're seeing, including the exit of a competitor, support our view that this will unfold more gradually than originally anticipated. As always, we'll continue to manage the business with the same discipline and selectivity that has served us well. Turning to the balance sheet. We ended the quarter with $560.8 million in unrestricted liquidity, including cash, marketable securities and our undrawn revolving credit facility. That liquidity continues to be a strategic asset in this environment. It provides the flexibility to invest in the business, navigate volatility and act opportunistically. Our approach to capital allocation remains disciplined and consistent. We prioritize reinvestment in the business where we see attractive returns, maintain a strong balance sheet and return capital to shareholders over time, primarily through our regular dividend. We're also attuned to returning more to shareholders when it makes sense. The $0.50 special dividend declared in February and paid in April reflects that approach. As we outlined coming into the year, we expect to expand our footprint in a measured and strategic way. We currently anticipate 4 franchise openings in the second quarter. On operational efficiency, centralized distribution remains a multiyear priority with Ontario the most significant opportunity. As with Mississauga, we're approaching this deliberately using a phased test-and-learn approach with a clear focus on maintaining service levels while driving longer-term efficiency and working capital benefits. We will provide updates as we make progress through the year. On our REIT initiative, this remains an important strategic priority. Timing continues to be guided by market conditions and regulatory approvals, and we'll share updates when appropriate. A couple of cost items worth flagging. On fuel and freight, fuel impacts not only our delivery fleet, but our entire value chain. It's a challenging cost driver because it's largely indexed and shows up broadly across the ecosystem. On tariffs, the impact of the recently implemented steel-related tariffs remains narrow and manageable, and any cost pass-through will be targeted and measured. Both are industry-wide pressures and few in the sectors are better equipped to manage them. We'll balance the customer and profitability the way we always have. Looking ahead, the near-term environment remains dynamic with retailers across the sector navigating a more selective consumer. We've never been better positioned to compete and take share. Our track record of delivering profitability driven by sustained progress on our merchandising and sourcing initiatives is what gives us the room to invest tactically when conditions warrant. Any near-term margin investment is always tested against a return inside a 12-month period. We expect comparisons to ease as the year progresses with some commercial activity shifting into Q2, as I previously outlined. Our scale, disciplined sourcing and strong balance sheet provide the foundation to continue driving profitable growth and shareholder value. With that, I'll turn it back to Mike.

Thanks, Victor. To wrap up, the first quarter was a difficult one for the industry, and our top line performance partly reflected that. But the quality of execution underneath it was strong. We leaned into the categories where we were positioned to win, expanded gross margin, kept tight cost controls and continued to gain share through the quarter. We're navigating this environment from a position of strength, and we're confident in our ability to keep building long-term value for our shareholders. Thank you again to our associates for their continued execution and to our shareholders for their continued support. With that, we'll be happy to take your questions.

[Operator Instructions] And today's first question will come from Ahmed Abdullah with National Bank of Canada.

Can you give us some more color on how sales and perhaps same-store sales and traffic has trended through the quarter and kind of what your exit rate is looking like exiting March post all the noise of weather and into April?

Yes. Thanks for the question. We're seeing similar things that we've talked about in the past, which is we're still seeing the consumer coming to our website, doing their shopping and doing their review of different products, but we're seeing less customers still coming to our store. They're still more qualified. Our salespeople are being able to spend more time with them to sell them the value-added services. As we transition from March into April, we see that continuing. The other dynamic that plays into this is the fuel inflation. And so you're still continuing to see the consumer pullback going into Q2. And that affects not just us, but the consumer. So their wallet remains still challenged, and they're still spending money. So we're still seeing our big events. We're still hitting it out of the park, but there is still consumer pullback sentiment out there in the market.

Okay. And touching on the kind of what you alluded to around promotional intensity and some of the fuel dynamics, how are you balancing your pricing versus your promo levers in order to maintain some traction here?

And what I would say is that we've signaled it for the past number of quarters that we're still in a value environment. And so we have to be very selective where we want to increase cost, and it's more of a surgical thing than across the board. We continue to put our foot down on financing because we believe that plays into the value proposition with the consumer.

Okay. And just one last one for me. If industry demand kind of stays weak throughout this quarter and into the rest of the year, what structurally would allow Leon's to kind of grow earnings going forward? What kind of cost levers do you have to still play around with?

Yes, Ahmed, I can jump in here. Yes. Look, I think, obviously, we have a very disciplined framework around gross margin management, working very closely with our vendors, continuing to work very closely with our vendors to make sure we're getting really good pricing so that we can remain value focused with the consumer. So how we manage margin rate. And then on the SG&A front, look, I mean, we got to balance a couple of things, right? One is rate will largely depend, as we said at the beginning of the year on how sales play out. We are investing in our business. We're not slowing that down. We've invested in our org. We've invested in our stores. We continue to do that. We're prioritizing that. So we're not backing off some of those strategic priorities. But at the same time, we got to be mindful of sort of where we sit today and how we view the world. At the beginning of -- in February, we thought that the first half of the year was going to be more challenging for a couple of reasons. We saw a more cautious consumer. We have tougher comps. A layer on the inflationary impact of a fuel increase, which we hadn't anticipated at the time. Now in the back half of the year, we think we're hopeful that there's going to be an easier macro environment, easier comps from our perspective. There's going to be unit growth. Like we said, there's 4 franchise stores opening in the quarter and more corporate stores opening as the year progresses. And I think the commercial side of the business, right, like Mike done on his opening comments, with the competitor exiting, that opens up a share play for us. We're very well positioned to pick up some of that share. We already are picking up some of that share. So that should ease the moderation we expected in that commercial channel. And all those things combined will help us, I think, still deliver growth in the back half of the year.

And our next question comes from Nevan Yochim with BMO Capital Markets.

I wanted to talk about the strength that you delivered in the Mattress category. Can you help unpack what's driving this? Is it all share gains? Or do you believe the overall category is also seeing some improvement as well?

Thanks for the question. No, we believe we're getting share gain. Last year was a focus of a smaller assortment going deeper on the inventory in furniture, and we were successful doing that. And the same thing has played out with mattress. We're really focused on the mattress category, top of bed, bottom of bed, and we truly think we're gaining share. So it's a similar focus that we did with Furniture last year. We're just applying that to Mattress this year.

Got it. And then maybe just on the comps, you talked about the comps being easing to some extent. If we look back at 2025, Q2 and Q3 were also notably strong as well. Is there something within those numbers that varies relative to the Q1 comp?

Well, I think the difference with the Q1 comp is you had a 2-year stack of about 12% entering into Q1. And we had a lot of visibility going into Q1 around the normalization with Furniture. Now we're mindful. Obviously, Furniture was up 6% for the year last year, so with strong comps throughout. But we do feel better, again, with the dynamic around the consumer environment hopefully easing in the back half with unit store growth. And then Q4 is a big opportunity for us. There was a lot of noise in Q4 last year. So we're pretty optimistic about our ability to bounce back in Q4, again, assuming no other macro challenges emerge. So I think it's really about that, Nevan, than anything in particular there, but we are feeling better about the back half than the first half. But to your point, like furniture was strong throughout the year, but we obviously have -- we feel good about our plans going forward, especially in Q4.

And the next question is from Martin Landry with Stifel.

I just want to go back to the rising fuel costs. Just -- I'm not sure if I understood exactly your strategy. Do you intend to pass fuel surcharges to customers or absorb it?

Yes, Martin, we haven't. We're -- as Mike said, we're being very thoughtful just given the environment. We haven't passed any surcharges -- fuel surcharges to customers. It's going to depend on how long this environment and fuel prices remain elevated because it doesn't just impact us from a last mile perspective directly. It does impact our value chain. And if input costs from a supplier perspective start to increase, then obviously, we're going to challenge and push back on that. But it really will depend on how prolonged it is. And if we decide to take price action, it's going to be very, very surgical and strategic in terms of how we approach that as we always do. We want to remain the leaders from a pricing standpoint. We're very focused on providing value, and that's our #1 priority. So our -- again, from a if you think about a margin rate perspective, we still feel good about stabilizing that over a full year basis relative to last year, holding stable. But there's going to be ebbs and flows, and we have to react to what we're seeing in the environment. And those are real-time conversations that happen on a daily basis. So that's -- I guess that's the extent of color that we can provide at this time. Mike, anything you want to add there?

I think you covered it well. I think if you look at our sourcing, our capabilities and our balance sheet, we're really positioned well to endure these types of cycles. And we'll be very methodical and surgical as we look at where we need to increase prices. But again, the consumer is still in that value mode. And as the leader in our space, we have to play in the value proposition and continue to do that.

Okay. That's helpful. Now I understand it's very dynamic and not easy to deal with. Can you talk a little bit about your new franchise stores, where they will be located?

Sure. We had one open up in April. That was in Goose Bay, Newfoundland. We have 3 more opening up on May 28, Bridgewater, Liverpool and Barrington Passage in Nova Scotia.

Okay. So Atlantic Canada, cool. And then I think you -- did you see you have a corporate store coming up later on?

We have a couple of things happening. We've got the reopening of our Welland store. It's going to be the Leon's store. It's also going to have some commercial pad developments that we're doing there. And then we've got a few other stores in the mix. We'll be in a better position at the end of Q2 to give you timing because there's some shifting from potentially Q4 of 2026 and 2027. So the exact numbers, I think we signaled that we have 4 to 5 franchises opened this year and a couple of new corporate stores.

Yes, somewhere in -- as Mike said, 4 franchise stores. We are expecting one corporate store to open in Q3. The Welland grand reopening, which is not net incremental. That's really -- we have a Welland in store right now, but will just be the grand reopening of a brand-new store. And then a couple of other renovations hitting this year in Q3, Q4 and then potentially one other new store. But to Mike's point, there's some timing considerations around developments that are happening in real time right now, but that's kind of where we stand today.

Okay. And then last question. I understand the consumer is soft right now. But how is your Industrial and builders division? And is that still going fine or you're seeing weakness there as well?

Well, I think we signaled last year that we were seeing some challenges that are going to happen in '26 and '27 in the builder segment. And 18 months ago, we signaled that we were going to really focus on the replacement business with the development and we've been winning in that segment. The company that is going out of business, we're going to hopefully reap some of the benefits of that organically. So we're actually cautiously optimistic on the development in the builder side for 2026.

The next question is from Ty Collin with CBIC.

Maybe just to start, I want to unpack your comments around the consumer a little bit more. So you mentioned that you're seeing some softness carrying into Q2. I'm wondering if you've seen any kind of incremental weakening or trade down activity compared to what you've seen over the last couple of quarters or whether that's kind of stable? And then, Victor, I think you also mentioned that you're expecting or hoping for some macro improvement, a bit of an easier environment in the second half of the year. Can you just unpack that comment a little bit? What's the basis of that hope?

I'll kick it off and then Victor can jump in. We're still seeing the same thing, Ty. We're still seeing the consumer trading down, so from mid to more of the opening price point. So you're seeing more unit growth, which translates into higher unit growth, but it's more challenging sales. Still seeing that. We're still seeing the customers at the top end still continuing to buy there. But definitely, the trend that we've seen for the past number of quarters is still continuing.

Yes. And Ty, like I think it's a really important point that Mike just mentioned. So -- when we think about written units in the quarter, it's actually up, but we are seeing pressure on average basket because customers are trading down. It's a dynamic that I don't think is just specific to us or our segment. We're hearing that across retail. So -- and I think it's just fair given the affordability challenges and inflation -- recent inflation with fuel. So on my speculative comments with respect to hoping that the environment eases, I think peace deal from a geopolitical standpoint that pulls back fuel prices and oil prices takes pressure off our suppliers and their input costs. I think we're hoping that's a factor that plays out, more trade certainty in Canada. I think more housing activity, which was really slow in Q1, I think all of those factors obviously impact our business from an ancillary driver perspective. So that's what my comments allude to. Do I believe that -- do I have a crystal ball? No, but that's what we're hoping for.

Okay. I join you in hoping that all of those things come to pass in the second half of this year. And maybe just for my last question, I appreciate your comments around the promotional environment and the industry and the consumer remaining value conscious. I guess, can you maybe just give a little more color on how you've actually seen the promotional environment evolve over the last couple of quarters from the holiday season through Q1 and now entering into Q2. Has that remained stable or any changes to call out?

I think the promotional thing, I think all retailers, not just in our space, but all retailers are -- there's more intensity from a promotional offering because sales are challenging. We've been bullish on the fact that we're seeing unit growth. So that tells us we're winning share in a very challenging marketplace. But yes, definitely, the promotional activity has intensified.

And the next question comes from Ryland Conrad with RBC Capital Markets.

Just to start on the 3-year furniture sales CAGR of almost 7%, at a high level, do you have any sense as to maybe how the category performed over that same period?

Sorry, can you clarify that question again?

Yes. Just -- I'm curious about your performance in Furniture at a 3-year sales CAGR of 7% and how that might have compared to the market overall?

Yes. No, fair question. I think, look, tough to get exact data on furniture. If you tend to look at StatCan over that period, it's probably in the 2% range is what I've seen. So again, I think that points to us gaining significant share over that period of time. I think if you talk anecdotally, we also talk to our vendor base, and I think they would agree with the statement that collectively as LFL, we've gained a good amount of share in Furniture over that period of time. So we're pretty confident on the share gains, can't give you a very specific number, but I think around that 2% range. And again, if you kind of just zoom out a little bit and think about the North American backdrop in home furnishings, then there's a ton of public -- Furniture public companies in the U.S. that we can point to, but it's been a really challenging environment for those folks. And the folks in Canada that they might not be public, but they've put out numbers. Those numbers have been down the last couple of years. So I think just collectively, we feel good about that statement that we have gained share.

Okay. Great. That's super helpful. And then just on the distribution consolidation opportunity in Ontario. I know you guys have a more medium-sized test ongoing there. But with that, what are the key milestones you're looking to hit? And assuming those are met, is this going to be the final test prior to potentially putting shovels in the ground on a DC?

Yes. It really depends on the results of the test and what we see. So we're -- the next test that we're planning is just bigger in nature. It's actually -- it will probably be out West, another big opportunity for us out West that we're looking at. And again, if that's successful, our #1 focus is on customer experience, making sure we're getting -- that we're not we're not taking away from getting products to the customers on time. I think we got to really be cautious around that. And then it's around, okay, are we seeing the right efficiency from a transportation perspective, from an SG&A perspective. And if we start to see that and we feel good about that consolidation, that's going to give us the confidence to roll that out and then potentially invest in a new facility and move a bit quicker on the rest of the consolidation. But the next step, which, again, is still in the planning phases because it's pretty involved and complicated. But if that does go well, I do believe that will give us the confidence to move a bit more quickly on Ontario.

Okay. Got it. And then just lastly for me. Obviously, the balance sheet is in a really good spot. So could you just remind us of your free cash flow priorities for this year? And -- on a related note, I guess, what's your framework for special dividend? Like is there a cash threshold you might target before possibly declaring another one?

Yes. I think typically, the way we approach it, and we talked a bit about that in our last call is focus on -- first of all, we like carrying extra liquidity at this point in time in the cycle, and we continue to feel strongly about that. It positions us to be opportunistic. But we talked about investing more in our business, in our store network specifically. There are strategic opportunities, obviously, that continue to come our way that we will evaluate. There is -- we continue to think about the regular dividend is something we continue to think about. The special dividend we just announced one. Look, we have conversations around capital allocation all the time. I'm not going to talk about any particular cash threshold. It's really how we're feeling about the underlying business and how we're feeling about the priorities in front of us, how much cash do we feel like we need to hold given where the environment is. And depending on how we feel around those different variables, that's what triggers conversation to whether it's doing a special or accelerating buybacks or any incremental return of capital to shareholders. But that's generally our framework, continues to be our framework. And again, we've been pretty balanced as we just executed on the special. So we'll continue to do that.

There are no further questioners at this time. And this concludes today's conference call. Thank you for attending today's presentation, and you may now disconnect.