La-Z-Boy Management Discusses Q3 2012 Results - Earnings Call Transcript

La-Z-Boy (LZB)

Q3 2012 Earnings Call

February 22, 2012 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

Chad Bolen

Matthew S. McCall - BB&T Capital Markets, Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Todd A. Schwartzman - Sidoti & Company, LLC

Barry Vogel

Unknown Analyst

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the La-Z-Boy Fiscal 2012 Third Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kathy Liebmann, Director of Investor Relations of La-Z-Boy Inc. Ms. Liebmann, you may begin.

Kathy Liebmann

Thank you, Jackie. Good morning, and thank you for joining us to discuss our fiscal 2012 third quarter results. Present on the call are Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer; and Mike Riccio, our Chief Financial Officer. Kurt will begin today's call, and then Mike will speak about the financials before turning the call back to Kurt for his concluding remarks. We will then open the call to questions. A telephone replay of the call will be available for one week, beginning this afternoon. These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles to communicate with investors about the company's current operations and future prospects.

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 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, and thanks for joining us. Yesterday afternoon, we reported our third quarter results for fiscal 2012. We posted an increase of 8.4% in consolidated sales, led by a strong performance in our Upholstery segment and a 70% increase in consolidated operating income.

Additionally, same-store written sales for the La-Z-Boy Furniture Galleries network increased 8.6%. And our retail segment significantly improved its results, recording a slight operating loss of 1.1% on a 6.7% delivered sales increase on our base 67 stores.

Although the environment for furniture remains challenging, we've maintained a disciplined mindset and approach all along that we would control the controllables. And the changes we have made to our business are delivering results even in this economy. We continue to execute against our strategy to achieve growth, retail profitability, and positive conversion, in other words, a higher margin on incremental volume. And our performance demonstrates we are on a successful path to meeting our objectives.

Now let me take a few minutes to discuss our wholesale operations. For the quarter, sales for the upholstery segment increased 10.7%, $249 million versus last year's third quarter. And the operating margin increased to 9.1% from 8.2% in the comparable period last year. We believe the increase in sales, combined with the increase in same-store written sales for the La-Z-Boy Furniture Gallery network, continues to give credence to our assertion that we are indeed gaining market share. In fact, for the full calendar year of 2011, the same-store written sales comps for the Furniture Gallery network was almost 10%.

We are pleased with our brand platform as we believe it's driving a more interested and qualified consumer to our stores. At the same time, our product and merchandising team is doing a great job to further entice the consumer. We're growing our in-home design program, which presents significant opportunity for us, and are continuing to expand the network of La-Z-Boy Furniture Gallery stores by opening additional stores in the new design and converting existing ones. All in all, a lot of positive on the sales side, and we will continue to -- and we will continue our focus on increasing volume throughout the segment.

On the operating side, we have a lean and efficient structure, including our Mexico-based cut-and-sew facility, which is on track to deliver the expected savings for the year, an incremental $8 million to $10 million over last year. Going forward, our operating platform is positioned to allow us to convert well on increased volume.

Importantly, because we freed up floor space throughout the La-Z-Boy-branded facilities when we moved the cutting and sewing work to Mexico, we have the ability to grow our business substantially without adding any brick or mortar. We would have to add some equipment and additional employees. The manufacturing space already exists in our current facilities.

As we mentioned last quarter, on an annual basis, we continue to believe, with adequate volume and stable raw material costs, our Upholstery segment’s operating margin can approach the low double-digit level.

In our Casegoods segment, sales for the quarter declined 3.4% to $34 million compared to last year's third quarter. However, even on a decline in volume, our operating margin improved to 5.4%. As we talked about in the past, the Casegoods business, specifically bedroom and dining room, is more challenged in this environment compared to Upholstery due to the higher comparative cost of full-room groups. That said, we've noticed an uptick in our occasional business, as well as in the home entertainment area, which dovetails nicely with the Upholstery category. We plan to debut a number of new styles and collections in these categories at the April Furniture Market in High Point.

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