Leon's Furniture Limited (LNF) Earnings Call Transcript & Summary

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

Thank you. Good day, everyone, and welcome to LFL Group's Second Quarter 2026 Conference Call and Webcast. LFL's second quarter 2026 financial results were released yesterday. 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 yesterday. 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 will turn the call over to Mike Walsh. Mike?

Good morning, everyone, and thank you for joining us. The second quarter played out largely as we described earlier in the year. The consumer remained cautious and value focused with continued pressure market-wide on large discretionary purchases, and we were also comparing against strong performance last year. In this environment, our team executed with discipline and continued to strengthen our position in our core categories. System-wide sales were down 2% with same-store sales down 2.2% Victor will take you through the drivers in more detail. The story under those numbers is clear. Customers are still shopping, but they are doing it with a sharper focus on value and opening price points. That showed up most clearly in average ticket. In an environment like this, our priority is to stay positioned against what Canadians are looking for, keep gaining share in core categories and translate disciplined execution into profitability. Category performance was mixed during the quarter, but that is consistent with our portfolio approach to the overall business. Furniture sales were lower against a very strong second quarter last year when we grew the business 6%. That is the comparison we knew we were facing. We drove 2 years of strong growth in furniture through a market that was under pressure. We managed the category this quarter the same way we built that track record, disciplined assortment, deeper inventory behind our best performers, and targeted promotional activity. Mattresses grew again this quarter, our second consecutive quarter of growth in the category. The same focused assortment playbook that drove our furniture performance over the past 2 years is now delivering in mattresses and the category performed well across the assortment. The dynamic underneath is one we've been talking about for several quarters. Our digital platform is increasingly a research and qualification engine, drawing customers into our stores with clear purchase intent. Online sessions grew again this quarter and sales in the channel grew as well. But we have always managed digital as a channel that works with our stores rather than apart from them, and that has not changed. Whichever way the customer comes to us, our salespeople are well positioned to convert that intent into the right product, the right add-ons and the right solutions for their needs. We also kept investing in our banners this quarter in the products they carry and in how they connect with the customers. In May, we launched the Shaq-O-Pedic collection with Shaquille O'Neal at The Brick, bringing oversized comfort to a segment of the market we believe was underserved. And in June, Alphonso Davies, captain of Canada's men's national soccer team, joined The Brick as a brand ambassador in summer when Canada was co-costing the World Cup. Partnerships like these keep our banners in front of Canadians in ways that matter well beyond a single quarter. On the store network, we continue to expand in a measured way. During the quarter, we opened 4 franchise locations, including 3 Brick locations that opened all on the same day and Leon stored Happy Valley-Goose Bay. Shortly after quarter end, we held the grand opening of our Leon's furniture location in Welland, where the initial customer response has been very strong. More broadly, we continue to see opportunities to expand our network where we can, earn attractive long-term returns, primarily for The Brick on the East Coast and for Leon's on the West Coast. In the commercial channel, sales were down slightly, which is solid performance in the context of a very challenged segment of the market. That resilience reflects progress we've been making on a few fronts. We've continued to grow the property management side of the business and our expansion in Western Canada is paying off, helping offset continued softness in Ontario. We are also winning new business even as builder activity has slowed across the market. We are taking share, and that comes back to our reputation for delivering for our customers when we say we will. With some competitors exiting the channel, we believe there will be further opportunities over time. Looking ahead, the operating environment remains challenging, but we have seen encouraging signs on the demand side early in the third quarter. We are planning the balance of the year prudently. Comparisons eased through the back half with the fourth quarter setting up most favorably. Our focus remains on gaining share through this cycle and coming out of it in an even stronger position as conditions normalize. The fundamentals that drive this business have not changed, trusted banners coast to coast, the scale to source directly and secure expansion 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. Before I turn it over to Victor, I want to recognize our associates across the country. Periods like this ask a lot of our people, in our stores, on our trucks, in our warehouses, and on the phone with our customers. And once again, they delivered. Victor, over to you.

Thanks, Mike, and good morning, everyone. I'll start with the second quarter walkthrough, then move to capital allocation and a few considerations for the back half of the year. Revenue for the quarter was $631.2 million, down 2% year-over-year. The quarter reflected the dynamics Mike described. Customers remained active, but more value focused, and we were comparing against a strong second quarter last year. Average unit price was lower in most categories other than mattress as consumers continue to prioritize value, while retail delivered units were up against last year. The combination is the clearest way to see the trade down. Customers are still buying and they are choosing lower price points when they do. Furniture sales were 4.2% lower against 6% growth in the second quarter of last year, with unit sales down slightly year-over-year. Appliance sales were down low single digits, reflecting softer retail demand and slowing builder pipelines in the commercial channel. Appliance units were up. Mattress sales were up mid single digits and units were higher as well, reflecting the assortment work Mike described and the team's ability to translate merchandising initiatives into share gains. Gross margin was 44.63%, down 19 basis points year-over-year, primarily reflecting us lapping the benefit recorded in last year's second quarter compared with a small headwind this quarter. Normalizing for that swing, the underlying margin story was solid and gross margin rate improved. Improved margin rate in mattresses and increased revenue from higher-margin insurance and delivery service offerings helped offset category mix and targeted promotional activity. SG&A as a percentage of revenue was 36.85%, an increase of 47 basis points over the second quarter of 2025. The increase reflects lower revenue and the related fixed cost deleverage, increased marketing costs due to the timing of promotions and the launch of new product partnerships, increased fuel costs, and higher occupancy costs. This was partially offset by lower point-of-sale retail financing fees due to the lower Bank of Canada interest rates. On a dollar basis, expenses were down year-over-year, which reflects the strict cost discipline we maintained through the quarter despite investments in our business and ongoing inflationary pressures. Adjusted net income was $34.8 million and adjusted diluted EPS was $0.51 compared with $39.4 million and $0.57 respectively last year. The year-over-year comparison reflects the 40 basis point swing in the revaluation of U.S. dollar payables mentioned earlier as well as a $1.4 million settlement benefit recognized in other income in the second quarter of 2025. Both factors contributed to the decline in adjusted earnings. Turning to the balance sheet. We ended the quarter with $560.1 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 gives us the flexibility to invest in the business, navigate volatility, and act opportunistically. Our approach to capital allocations remain 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 are also attuned to returning more to shareholders when it makes sense. Consistent with our opportunistic approach to buybacks, we were active under our NCIB during the quarter, repurchasing approximately 120,000 shares for approximately $3 million. Looking ahead, the freight environment has tightened. Rates and container charges are higher, and we are seeing pressure on certain shipping lanes we use. That shows up for us in 2 places. The first is margin. We have begun to receive inventory carrying higher costs primarily related to fuel, and we are working that into the margin equation through the back half. The second is availability. The lane pressure is creating some inventory delays and our teams are focused on keeping product flowing so we protect sales. That could be a factor in the third quarter. To be clear, it's a supply consideration, not a demand one. Our REIT initiative remains an important strategic priority. Timing continues to be guided by market conditions and regulatory approvals, and we'll share updates when appropriate. The near-term environment remains dynamic and retailers across the sector are navigating a more selective consumer. Our scale, disciplined sourcing and strong balance sheet provides the foundation to continue driving profitable growth and shareholder value over the long term. With that, I'll turn it back to Mike.

Thanks, Victor. To wrap up, the second quarter was a demanding one for the consumer, and our top line reflected that. But the execution underneath was strong. Customers kept choosing to shop with us. We protected margin where accounted, kept tight control on costs despite ongoing inflationary pressure and continue to strengthen our position in our core categories. Most importantly, we continue to invest in our stores in what we offer customers and the capabilities that will matter well beyond this cycle. We are navigating this environment from a position of strength, and we are confident in our ability to keep building long-term value for our shareholders. Thank you to our associates across the country for their execution through a demanding quarter and to our shareholders for their continued support. With that, we'll be happy to take your questions.

[Operator Instructions] And our first question comes from Ahmed Abdullah from National Bank of Canada.

You delivered -- the delivered retail units increased year-over-year per your commentary, even though revenue declined given the lower pricing. Can you help us perhaps understand how these unit trends progressed through the quarter and maybe some commentary around July and how that's been progressing? And are you seeing any evidence that perhaps demand is beginning to recover? Or is the unit growth that we were seeing primarily a function of consumers trading down, but buying more?

Yes, I'll try and unpack that. I think from an assortment perspective, if you think about it in terms of good, better, best and best being premium, we're seeing the premium customer still spending money in that place. What we're seeing though is really our target is in the midpoint, we're seeing that customer lowering down to more of the opening price point. So yes, we're selling more units at a lower average sale.

Okay. And how is that progressing kind of into July? Are you seeing anything different? Or is it more of the same?

Yes. I would say we're cautiously optimistic. As we went through July, we saw some green shoots on a written perspective. We saw some of the traffic coming back. We saw some of the average sales coming back, but July is the smallest month of the quarter. And so I just want to balance that that's based on written, not delivered. We still have to translate those written sales into delivered. So early days, cautiously optimistic.

Okay. And acknowledging what Victor said about supply issues, demand kind of picture where you noted that comps ease through the back half. Can you perhaps help us square that off with how modeling should look like from top line and profitability? Do you expect profitability to be down in the back half because of the supply constraints where you're not able to deliver versus the expected sales?

Yes. As you know, Ahmed, we're not going to give specific guidance on that. I think just to kind of build off of Mike's points there, we're seeing some improvement in traffic in July, some improvement in average unit price. So I think we take that as a positive. Very early days in the quarter. And so we haven't necessarily seen a significant shift in the consumer environment, but we've seen some improvements. And so we'll have to see where August and September come in. I think the other thing we got to consider is we are comping a monster furniture quarter last year where we were up 11%. So that's a consideration. And then the inventory -- some of the inventory delays we're seeing is a consideration as it comes -- as it relates to delivered sales. That said, we're -- the teams are working really, really hard to make sure we're getting the right flow and that we can mitigate some of those risks to the quarter. And then we've got -- on the positive side, we have the 4 franchise stores that opened. We'll get a full quarter of that. We've got 2 corporate stores opening midway through the quarter in Q3. And then as I think you suggested and we suggested on -- in our call, Q4, the comps start to ease, and we feel that we're still really well positioned for Q4, especially with the flyer issues we had last year and the weather issues we had last year. We think Q4 is still set up favorably for us.

Okay. That's helpful. And I'll give it a shot, but not sure I'll get much out of it. You now disclosed an appraisal value of $1.17 billion of the owned real estate. Can you give us any color as to how that came about? And also, what are the milestones that you're still kind of progressing towards before you can formally launch the REIT IPO that you have mentioned before?

Yes. Ahmed, thanks for the question. I think on just the real estate appraisal value, as we've talked about for the last number of years, we've been very forward around real estate being a valuable asset for us. And obviously, real estate on our books is at historical cost. And we thought it was important for us to get a good market reference. I think analysts have taken a shot at what the value of our real estate is or was. And we thought it was time and important for us to establish a market-based reference point for our portfolio. And that's all there is to that. And so I think we're feeling good about that. And it validates what we've been saying all along. I think as it relates to the REIT process, it remains a strategic priority subject to market conditions and regulatory approvals. There's no change there. It does remain a strategic priority for us.

The next question comes from Martin Landry from Stifel.

I would like just to go back to the inventory availability. I'm sorry, I didn't understand fully, what was the cause for maybe a bit of a shortage on inventory. If you could just expand on that, it would be great.

Yes. I wouldn't say -- so the shortage midway through, I would say, Q2, we started to experience some delays or hear back from our carriers around some delays as it relates to specific lanes in Asia. And so the -- those delays may result in some of the inventory, obviously, that we need to deliver for customers not coming in exactly when we need it to come in. So that's all that was about, Martin. We're working hard, obviously, with our carriers and our brokers to find alternative ways to get that inventory in. But we're just trying to signal that there may be some delays in certain lanes. Related to some of the geopolitical supply-demand issues that we're seeing, spot market rates have jumped up quite a bit over the last couple of months as well. So I think it's just that dynamic where spot rates jump up and supply tightens, which is typically what happens in the environment, then we start to see delays in certain lanes, and we're starting to see that now, which may impact our ability to deliver furniture in Q3. That being said, we're obviously working very hard to try to find alternative ways and mitigate any of that risk.

Okay. And just to be clear, this was not just in Q2, but it's still ongoing, right?

Yes. The delays in certain lanes that we're seeing is ongoing. It didn't impact Q2 because it's inventory on the water and it takes a few months to start to impact your inventory position, but yes, on a go-forward basis, beginning Q3. And we're planning by Q4 that we would have mitigated some of that -- some of those impacts, you never know, but we're working hard to find alternative routes to ensure Q4 is not impacted.

Okay. You have also talked about starting to receive inventory with higher costs. And I was just trying to understand what's going to be your pricing strategy in relation to that? Do you intend to pass these higher costs to consumers or absorb them?