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Text: Kurt will begin and close the call and Melinda will speak to the financials midway through.
We will then open the call to questions.
Although we believe these statements to be reasonable, our actual results could differ materially.
The most significant risk factors that could affect our future results are described in our Annual Report on Form 10-K.
We encourage you to review those risk factors as well as other key information detailed in our SEC filings.
With that, I will turn over the call to Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer.
Following yesterday's close of market, we reported strong operating results for our fiscal 2021 second quarter, reflecting record demand trends and strong execution across all of our businesses.
I cannot be prouder of the team and every member has my respect and admiration.
Now on to the results.
During the quarter, we experienced strong written orders as consumers continue to allocate more discretionary dollars to their homes rather than on travel and other leisure related activities.
The company delivered increases in sales and operating income with a double-digit consolidated operating margin reflecting excellent performance across all companies.
Also contributing this quarter was Joybird, which turned profitable for the first time since acquisition fueling an increase in earnings per share.
Additionally, we generated $196 million in cash from operations for the year-to-date period, increased our company-owned store footprint with an acquisition, paid dividend, and ended the quarter with no borrowings outstanding on our credit line.
All-in-all for the quarter, these are outstanding results, particularly as our supply chain had to turn on a dime last spring to restart production after the COVID-19 related shutdown and continues to ramp-up capacity to satisfy unprecedented demand levels.
While we are increasing production weekly, demand acceleration continues to outpace capacity acceleration creating a record backlog and extended lead times.
Across the La-Z-Boy Furniture Galleries network, written same-store sales increased 34%, demonstrating the strength of our band and its appeal to consumers during uncertain times as well as the ability of our store teams across the network to provide a safe shopping experience for consumers.
As I turn to a discussion of our segments, my remarks will detail our non-GAAP GAAP numbers, which we believe reflects underlying operating trends and Melinda will cover the non-GAAP adjustments.
I'll start with our wholesale segment, which as a reminder now includes both upholstery and case goods companies as well as our international businesses.
For the quarter, our backlog grew to record levels, but delivered sales declined 2% to $343 million.
This was primarily the result of lower delivery unit volume as our ongoing efforts to significantly increase our production capacity to meet demand were offset by a temporary supply shortage of foam, which reduced sales by more than 2%.
However, even with a decline in sales non-GAAP operating margin increased to 12.2%, reflecting tight cost controls with ongoing cost savings projects roughly offsetting investments in our start-up capacity ramping.
Operating margin in the period also benefited as we pulled back on our marketing spend, given the strong demand environment and had lower expenses such as travel, cost due to COVID related restrictions and lower salary and wages due to the business realignment plan and reduction enforced announced last quarter.
With the surge in product demand, our challenge has been to ramp up capacity at all plants and expand our overall production capacity.
Our current backlog for the La-Z-Boy branded business is 5 times what it was at the end of Q2 last year and we are quoting lead times of 16 weeks to 26 weeks depending on product category, which also include an estimate of the delivery time to the ultimate customer.
Our supply team has done an excellent job to increase weekly production while identifying new opportunities, for both short and long term.
We have added production sales at our three US-based upholstery manufacturing facilities as well as additional weekend shifts.
Secondly, we have temporarily reactivated a portion of our Newton, Mississippi assembly plant to service select geographics.
We have also added manufacturing cells in available floor space at our Cut-and-Sew Center in Mexico, allowing us to tap into a new labor pool.
And finally, we signed a lease on a 200,000 square-foot facility in Mexico just south of Yuma, Arizona, in San Luis Rio Colorado.
Production is expected to start in December with full ramp up extending over the first half of the new calendar year.
As part of our longer-term strategic plan, we were looking to expand our manufacturing footprint to more efficiently service the western portion of North America and we are excited to take this first step with the new facility in Mexico, which we will be calling SLRC.
Once all of these operations are producing at expected capacity likely later in our fiscal year, these moves will significantly increase our capabilities and capacity to support long-term growth.
However during our second quarter, the industry experience temporary supply shortages of foam due to disruption in TDI production, a key component of this product.
As a result we were limited in our ability to fully utilize our existing capacity for almost two weeks during the quarter.
We have recently learned of new issues with form supply in November, which will again temporarily limit our ability to maximize output in the third quarter.
While these disruptions -- while we believe these disruptions are temporary in nature, they effect the entire industry and other industries that use form and they highlight the volatility of the global supply chain in these unusual times.
Now let me pivot to the commercial side of the La-Z-Boy branded business.
During the pandemic related shutdown, as you would imagine, we saw a significant increase in our online business.
While it peaked during that time, today our [Indecipherable] e-comm business remains up some 300% versus pre-pandemic levels, concurrent with an increase in store traffic and sales.
I would note that our e-commerce business is still a very small percentage of our overall business, we recognize it's critical to have a robust online presence in today's environment.
While the core La-Z-Boy customer continues to demonstrate a preference to shop-in-store, she typically starts by spending time on our site to research product and our goal is to facilitate a seamless cross channel experience.
For example, if the consumer wants to come into the store for a higher level of service, wants to touch and feel the product and possibly work with a designer, but prefers to make the final purchase from the comfort of her own home, we are working to make that entire process to seamless as possible.
We are also making a series of ongoing enhancements to the omnichannel experience from internal process improvements to enable scale to customer facing enhancement that simplify and broaden the online experience.
As an example, we are working to simplify the ability to customize online, ensure all products sold in store are available on our website, enhance consumer visibility to available inventory and order progress, and drive better pricing consistency between online and in store.
This will be a journey and we are excited about growing with the changes in consumer behaviors in the omnichannel space.
On the marketing side, we continue to be very pleased with the Kristen -- with Kristen Bell as our brand ambassador.
One of our objectives is to increase consideration among a new generation of consumers, 35 year old to 44 year old, which we view as our opportunity customers.
At the same time we want to ensure our marketing campaign continues to resonate with our core 45 year old to 65 year old customers, who have more disposable income and tend to purchase furniture at higher price points.
Kristen is equally appealing to both consumer groups.
In particular, young -- younger consumers view her as having a great sense of style and being relatable to them.
This makes our marketing dollars work harder and be more efficient.
Now turning to the product side, last month was the high point furniture market.
While we did have some customers visit our showrooms both during pre-market and regular market, our merchandising and marketing teams did a fantastic job of putting together an interactive virtual market for our customers to see and learn about products and marketing initiatives, while maintaining personal safety during the pandemic.
Sectionals and power motion continue in popularity and we introduced a comprehensive new stationary leather program that allows for customization and quicker delivery times of the imported product, which was very well received.
We also introduced a antimicrobial fabric collection as part of our expensive iClean line.
Now let me turn to the retail segment.
For the quarter, delivered sales increased 9% to $162 million and written same-store sales for the company-owned La-Z-Boy Furniture Galleries stores increased 36%, reflecting strong traffic trends and demand as well as stellar execution at store level, including an increase in conversion and average ticket driven by increased units and more design sales.
For the period, delivered same-store sales for the core base of 150 stores increased 6.3%.
Non-GAAP operating margin for the segment improved to 9.4% from 5.8% in last year's comparable quarter resulting from fixed-cost leverage on a higher delivered sales volume, lower spending on marketing due to the already strong demand environment and reduced expenses including travel related spending due to COVID.
Also during the quarter, in September, we completed the acquisition of six Seattle-based La-Z-Boy Furniture Galleries stores, which had approximately $30 million in annual retail sales in calendar '19 and one distribution center.
As the company is already recording a portion of the Seattle-based store volume in its Wholesale segment, the acquisition of these six stores is expected to contribute approximately $15 million of additional sales annually to the company on a consolidated basis, based on their calendar year 2019 sales.
For the current second quarter, they added $3.5 million of sales to our retail volume segment.
The Seattle stores have historically performed above the network average and we believe they are great prospects for the company in this dynamic market.
Over time, we plan to make investments in the operation with store remodels and potential new stores so that the business can continue to grow and expand its potential.
I now want to spend a few minutes on Joybird, which delivered its first profitable quarter.
Since purchasing Joybird, we have been on a journey to build and strengthen the Joybird business and integrate systems to take advantage of the synergies between Joybird and La-Z-Boy.
On the front end, Joybird gives us a new customer and channel and on the back end our supply chain has delivered value through our regional distribution centers, manufacturing Joybird product at our Dayton facility and combined purchase power.
While these synergies took longer than anticipated, they now have come to fruition and were very evident in the results for the period.
Sales for the second quarter, which are reported in corporate and other, increased 42% to $29 million.
For the period Joybird improved its gross margin significantly and lowered SG&A costs, driven primarily by a lower marketing spend and other expense reductions.
Written sales increased 25% in the quarter, reflecting the ongoing strong demand trends that we are seeing across all of our businesses.
We are encouraged by Joybird's performance for the quarter and optimistic about its trajectory for accelerated growth as we move through the year.
We believe Joybird is on a run rate to be a $90 million to $100 million business this fiscal year and expect it will be profitable for the full year.
Moving forward, we will continue to balance investments in top line growth, while watching bottom line performance.
As always, let me remind you that we present our results in both the GAAP and non-GAAP basis.
Last year's second quarter non-GAAP results exclude a pre-tax charge of $2.8 million, or $0.04 per diluted share related to the company's supply chain optimization initiative, which included the closure of our Redlands, California facility and relocation of our Newton, Mississippi leather cut-and-sew operation, a pre-tax purchase accounting charge of $1.6 million, or $0.03 per diluted share primarily related to Joybird and pre-tax income of $1.9 million, or $0.03 per diluted share related to the 2019 termination of the company's defined benefit pension plan.
Now on to our results.
My comments from here will focus on our non-GAAP reporting unless specifically stated otherwise.
On a consolidated basis, fiscal '21 second quarter sales increased 2.7% to $459 million, reflecting record demand across all businesses.
Consolidated non-GAAP operating income increased to $51 million versus $34 million in last year's quarter and consolidated non-GAAP operating margin increased to 11.1% versus 7.5%.
Non-GAAP earnings per share was $0.82 per diluted share in the current year quarter versus $0.52 in last year's second quarter.
Consolidated gross margin for the second quarter increased 240 basis points.
Changes in our consolidated sales mix due to growth in our retail segment and contribution from Joybird, both of which carry a higher gross margin than our wholesale businesses drove the biggest change in margin.
Additionally, Joybird experienced a significant improvement in gross margin primarily resulting from supply chain synergies and improved plant performance.
SG&A as a percent of sales decreased 120 basis points, reflecting ongoing expense management, a decrease in advertising spend given strong order rates, reduced spending including travel and limited furniture market events due to COVID-19 related restrictions and a decline in salaries and wages related to our business realignment plan, including the 10% reduction in force announced in June.
This was partially offset by changes in our consolidated mix due to the growth in our retail segment in Joybird, both of which carry higher SG&A costs than our wholesale business, as well as an increase in selling expenses on strong written order trends.
On a GAAP basis, our effective tax rate for fiscal '21 second quarter was 26% versus 26.6% in last year's second quarter.
Our effective tax rate varies from the 21% federal statutory rate, primarily due to state taxes.
For the full fiscal 2021, absent discrete items, we continue to estimate our effective tax rate on a GAAP basis, will be in the range of 25% to 26%.
Turning to cash, year-to-date we generated $196 million in cash from operating activities, reflecting strong operating performance and $100 million increase in customer deposits from written orders for the company's retail segment and Joybird.
We ended the period with $353 million in cash, nearly triple the $120 million in cash at the end of last year's second quarter.
In addition, we held $27 million in investments to enhance returns on cash, compared with $33 million last year.
During the quarter, we repaid the $50 million remaining balance on our credit line drawn back in March in conjunction with our COVID-19 action plan.
We ended the quarter with no borrowings outstanding.
Year-to-date, we have invested $15 million in capital, primarily related to machinery and equipment, upgrades to our Dayton manufacturing facility, which have now been completed, and investments in our retail stores.
We expect capital expenditures to be in the range of $40 million to $45 million for fiscal 2021, although spending will be largely dependent on economic conditions, continued business recovery, and liquidity trends.
Our spending for the year will include upgrades to upholstery manufacturing facilities and costs for the new production capacity in Mexico, technology upgrades and improvements to several retail stores.
Also during the quarter, given solid business trends and our strong cash position, we reinstated our 401(k) match for employees, as well as full salaries for remaining senior management, thereby reinstating all ongoing cash uses for operations that were temporarily suspended as part of our COVID-19 action plan.
Regarding cash return to shareholders.
Yesterday, our Board declared a quarterly dividend of $0.14 per share, restoring the dividend to the full amount that was in place prior to the pandemic.
Recall, as part of our COVID-19 action plan to preserve cash and provide for financial flexibility, we eliminated our expected June dividend and temporarily suspended opportunistic share repurchases.
In August, our Board of Directors elected to reinstate a regular quarterly dividend to shareholders of $0.07 per share, 50% of the quarterly dividend amount paid prior to the pandemic, paying $3.2 million to shareholders in the second quarter.
We are pleased to now reinstate the full dividend of $0.14 per share, which will be paid in December.
And finally, going forward we will continue to monitor and assess business conditions to determine when it may be appropriate to resume share repurchases.
There are 4.5 million shares of purchase availability under our authorized program.
Before turning the call back to Kurt, let me highlight several important items for the remainder of fiscal 2021.
First, a reminder that our expected non-GAAP adjustments will continue to include purchase accounting adjustments for acquisitions to date, which are estimated to be in the range of $0.09 to $0.11 per share for the full year.
This excludes any further adjustments to the Joybird contingent consideration liability, dependent on Joybird's ongoing business trajectory.
On our non-GAAP results, let me provide a bit more perspective on what we anticipate for the back half of fiscal '21.
We are optimistic about our business trajectory and confident we will deliver a strong second half based on the factors we can control.
However, there is still extreme uncertainty with respect to COVID-19, including the risk of related shutdowns impacting our facilities and impacts of global supply chain volatility such as the recent industry wide foam issues.
What we do know is we have a significant backlog and we are working hard to ramp our production, shortening delivery times as we work to service our customers with high quality products and quick delivery.
With the initiatives undertaken to expand output, we will continue to significantly increase production capacity throughout the back half of the fiscal year.
Further to cover raw material cost increases that we are experiencing now, we have announced pricing on new La-Z-Boy written orders beginning in October, which will be realized on orders delivered beginning in the fourth quarter given our significant backlog.
Considering all of these factors, accounting for our best current understanding of new foam availability issues and provided there are no significant shutdowns [Indecipherable] facilities related to the pandemic, we expect to deliver consolidated sales growth in the third quarter of flat to 4% above last year's record high third quarter.
For the fourth quarter of fiscal '21, accounting for continued growth in production capacity, announced pricing, and the effects of last year's April pandemic related shutdown in the prior year's fourth quarter base period, we anticipate fiscal '21 fourth quarter sales growth of 40% to 45% versus last year's fourth quarter.
On profit, we expect to continue to deliver historically high consolidated operating margins of approximately 9% to 11% for the balance of the year, providing the strong delivered sales volume is achieved.
Included in these margin expectations, is the anticipation that Joybird will sustain profitable operations even as we test investment effectiveness to optimize top line growth.
We do expect some volatility in margins quarter-to-quarter as we manage multiple factors, including input cost increases that we are experiencing now without the benefits of pricing until late in the year.
Beyond the current fiscal year, we have even more unknowns and a continued pandemic effects, demand trends, and supply challenges, but our business is strong and we are optimistic for the future.
However, I would note that there will eventually come a time when we will have to once again invest more in marketing to drive demand, similarly to pre-pandemic times.
We've been a benefactor of the sector rotation that has taken place over the last several months, which play well for us.
Although this has allowed us to keep our marketing spend at reduced levels, in time it will be necessary to increase it.
There will be other costs that will resume over time as the pandemic is brought under control as well including those for travel, furniture market and spending for other discretionary projects that were canceled or postponed due to COVID-19.
That said, we do anticipate being able to deliver strong margin performance over the long term as incremental investments related to bringing on new capacity are completed and we return to more stable operating pattern.
As you can see we are very pleased with the agility our entire organization has demonstrated as it responds to the new operating environment.
Our supply team is pulling out all stops to drive production, our merchandising and marketing teams have pivoted to find new ways to showcase product, highlight the La-Z-Boy brand and its attributes, and target consumers in a manner that will drive growth for the long term.
And our retail team is performing at a very high level, providing a great store experience for customers while keeping them safe.
And all of our other operating companies including Joybird, England, Casegoods, and our international business are also adapting to the landscape and performing very well.
We believe the strength of the La-Z-Boy brand carries great weight in this environment as consumers tend to gravitate to brands, they know and trust during uncertain time.
With our vast distribution including the vibrant La-Z-Boy Furniture Galleries stores and thousands of other distribution points, our world class supply chain, successful marketing platform, focused on expanding omni channel offering, and our strong balance sheet, we believe we are extremely well positioned to continue to navigate and thrive in this environment, capture market share, and return long-term value to our shareholders.
We will begin the question-and-answer period now.
Jim, can you please review the instructions for getting into the queue to ask questions.

user
q2 non-gaap earnings per share $0.82.
qtrly written same-store sales for entire la-z-boy furniture galleries network increased 34%.
company anticipates fiscal 2021 fourth-quarter sales growth of 40% to 45% versus prior-year quarter.
board declared a quarterly cash dividend on co's common stock of $0.14 per share.
expects consolidated sales growth in q3 of flat to 4%.
optimistic company will deliver strong results in second half of fiscal 2021.

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