La-Z-Boy (LZB) Q2 2012 Earnings Call December 01, 2011 8:30 am ET Executives Kathy Liebmann - Director of Investor Relations and Corporate Communications Kurt L. Darrow - Chairman, Chief Executive officer and President Louis M. Riccio - Chief Financial officer and Senior Vice President Analysts Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division Budd Bugatch - Raymond James & Associates, Inc., Research Division Unknown Analyst Todd A. Schwartzman - Sidoti & Company, LLC Jack C. Stimac - BB&T Capital Markets, Research Division John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division Presentation Operator
We will make forward-looking statements during this call, so I will repeat our usual Safe Harbor remark. While these statements reflect the best judgment of management at the present time, they are subject to numerous future risks and uncertainties, as detailed in our regular SEC filings. And they may differ materially from our actual results due to a wide range of factors. We undertake no obligation to update any forward-looking statements made during this call.And with that, let me turn over the call to Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer. Kurt? Kurt L. Darrow Thank you, Kathy. Good morning, everyone. Yesterday afternoon, we reported our second quarter results for fiscal 2012 which included a 5% increase in sales, a 9.2% same-store sales growth for the La-Z-Boy Furniture Galleries store system, an increase in our gross margin, positive cash generation, and more than doubling of our operating income to $12 million. All in all, a very strong quarter, with our team executing well against our targeted objectives of growth, retail profitability and conversion. Before discussing the quarter, I would like to take a moment to put some context around the operating environment and La-Z-Boy's positioning within it, particularly for those of you who may be new to the story. It's been a difficult few years for the furniture industry on the heels of what was a challenging start to the decade with so many changes occurring throughout the business. Today, macroeconomic challenges persist, with low consumer confidence, a weak housing sector and volatility in the financial markets. Against that backdrop, over the past several years, we undertook a number of strategic initiatives to ensure we operate profitably in this lower-volume environment. To name a few of the major changes we made: We sold 6 companies that were not core to our business, we paid down our debt, strengthened our cash position, transformed our La-Z-Boy manufacturing facilities to operate with a cellular platform, moved our La-Z-Boy cutting and sewing operations to a new lower-cost facility in Mexico, consolidated warehouse across the company and restructured our retail operation, establishing a path of continuing performance improvement as we work towards making the segment profitable. Today, we are an efficient producer, positioned to convert well an additional volume as we demonstrated this quarter.
Also, during this period, we believe we have gained share in the marketplace based on our same-store sales numbers. Additionally, with the strength of our brand, ability to deliver custom furniture quickly, quality and style of our product and the service the consumer receives from us, we further believe La-Z-Boy is well-positioned to capitalize on the eventual strengthening of the economy.The balance sheet is strong, providing flexibility to invest in the business and we are focused on the 3 key objectives I mentioned a moment ago: Sales growth, retail profitability and conversion on that growth. The ability to leverage today's cost structure, we believe we can make an additional 20% to 30% on the additional volume, depending on which business segment generates the increased sales. Finally, we are focused on branded or proprietary distribution. And we believe it offers the greatest opportunity for us to profitably grow our business, giving the changing distribution landscape; and I will touch on that in more detail when I discuss our retail segment. Now let's turn to our wholesale operations. For the quarter, sales for the upholstery segment increased 7.3% to $241 million versus last year's second quarter, and the operating margin increased to 8.7% versus 7.6%. On the operating side, in addition to the lean structure at our U.S. facilities, our Mexican-based Cut-and-Sew operation is on track to deliver the incremental $8 million to $10 million of savings over last year's level. As referenced a moment ago, this efficient structure allowed us to realize a healthy conversion on the additional volume we experienced during the quarter. On the marketing side, we continue to be pleased with the success of the "Live Life Comfortably" campaign, featuring Brooke Shields for the La-Z-Boy branded business. We believe it is driving a more qualified consumer to our stores and dealer base, and it has been an important factor in our near double-digit sales -- same-store sales growth we achieved throughout the network of stores this quarter. And importantly, for the calendar year, same-store sales are up 9.3%. Read the rest of this transcript for free on seekingalpha.com