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Text: Kurt will open and close the call and Melinda will speak to the financials midway through.
We'll 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.
I'm very excited about the new La-Z-Boy leadership team and what they will accomplish in the future.
But first let's review the quarter and then I'll circle back to discussions on the transition of roles.
For the quarter, we experienced strong written trends across the entire La-Z-Boy enterprise as consumers continue to allocate more discretionary dollars to their homes in an environment with travel and other leisure related restrictions.
This continues to translate to a build in our record level backlog even as we add more capacity.
Despite the strong written business delivered sales declined slightly versus the prior year quarter, due to greater than anticipated impacts from COVID-19, which I'll detail more in a minute.
And we delivered strong consolidated non-GAAP operating margin of 9.5%, including another profitable quarter for Joybird.
All of this on a base of last year's third quarter, which was the strongest quarter in the company's recent history for both the sales and consolidated operating margin.
In addition, our strong cash generation enabled us to return more than $7 million to shareholders through dividends and share repurchases and we declared an increase in the dividend to 15% -- to $0.15 per share.
Now I'll take them out to explain the specific COVID-19 impact to the business.
With strict safety protocols in place, including contact tracing, we experienced a higher than anticipated level of absenteeism in our manufacturing facilities as in volumes -- as employees quarantine, which limited our ability to increase production to plant levels.
The impact on sales was further exacerbated by COVID-19 absenteeism disproportionately affecting our most mature US plants were our most complicated and higher price furniture is billed.
So for the quarter with lower-than-expected units made particularly at our mature US facilities, there was a mix shift in production with fewer sectionals and other high-priced items manufactured, even though we have the orders for the.
And because our La-Z-Boy Furniture Galleries stores tend to sell a higher proportion of custom product, sofas and sectionals with higher selling prices, our retail segment was particularly impacted by the shift in mix.
Additionally, we were affected by demand and COVID issues impacting shipping routes around the globe and -- an experienced delays and overseas shipments of finished product to our international and case goods business.
And of component parts to our manufacturing operations during the period, which impacted all of our business.
As an example, we were short of supply of electronic components for our highest margin power units and this two contributed to the shift in mix.
Our supply chain challenges affected our quarter and we'll continue to drive uncertainty in the near-term.
They will be remediated over time.
Our backlog remains strong and we are scaling production as quickly as possible and working with our partners in Asia and domestically to address disruptions in supply, so that we can improve service to our customers and deliver strong financial results as we focus on the health and safety of our employees.
Now in the midst of all these challenges written sales momentum remains very strong.
Across the La-Z-Boy Furniture Galleries network written same-store sales increased 6.3% in the quarter of the strongest momentum in January.
This is on top of last year's third quarter written same-store sales increasing 10.5%.
And for some additional context, stripping out the Canadian stores that were closed at various points during the third quarter due to COVID restrictions, written same-store sales would have increased to 8.2% for the network.
Written same-store sales for fiscal '21 year-to-date increased 18%.
And for calendar year 2020 written same-store sales with the La-Z-Boy Furniture Galleries network increased 6% and the average revenue per store increased to $4.4 million from $4.1 million in calendar '19.
Even with some of the stores being closed for the better part of two months last year, due to the pandemic.
These results continue to demonstrate the strength of our brand and its appeal to consumers during these uncertain times, as well as the ability for store teams across the network to provide a safe shopping experience for the consumer.
As I turn to a discussion of our segments my remarks will detail our non-GAAP numbers, which we believe better reflect underlying operating trends and Melinda will cover the non-GAAP adjustments.
I'll start with our wholesale segment and as a reminder it now includes both our upholstery and our case good companies, as well as our international business.
During the quarter, our wholesale backlog grew to over $600 million, 4.5 times what it was at the end of Q3 last year, and up another 25% since the second quarter.
However, delivered sales declined 4% to $351 million, reflecting the COVID-19 production and delivery challenges and a change in mix, as I detailed a moment ago.
Non-GAAP operating margin for the wholesale segment was 10.2%, reflecting the temporary COVID impacts to our supply chain and increased cost to expand manufacturer capacity, as well as for raw materials.
These factors were partially offset by lower promotional activity, due to the strong demand environment.
With the surgeon product demand, our challenge has been to ramp up capacity at all of our plants and expand overall production capabilities, and we have put many pieces in place.
Recall, we have added manufacturing cells and weekend in third production shift at all of our US plants.
We have temporarily restarted a portion of our Newton, Mississippi assembly plant to service select geographic.
And we have also added sales and available floor space at our cut and sew center in Mexico.
And finally, we opened a new manufacturing facility in Mexico just south of Yuma, Arizona and San Luis Rio Colorado, where production started in December with full ramp-up extending over the first half of the calendar year allowing us to tap into a new labor pool.
And we are already in the process of increasing the number of cells in both Mexican-based locations.
Our supply chain team is ramping production capacity as quickly as possible to shorten lead times, which today stands at an unprecedented five to nine months depending on the product category.
Now let me turn to the retail segment.
For the quarter delivered sales decreased 1% to $166 million, reflecting the COVID-related product delays.
However, written same-store sales for the company-owned stores increased 9% with the strongest momentum in January, reflecting positive trends across all sales metrics, including traffic, conversion and average ticket by increased in both three units and design sales.
For the period delivered same-store sales decreased 6.3%.
Non-GAAP operating margin for the segment was 8.9% slightly down from 9.8% in last year's comparable quarter, primarily related to lower delivered sales relative to fixed cost and higher selling expenses driven by commissions paid on increased written sales, partially offset by decreased spending for the market -- for marketing given the strong demand environment and some lower travel-related spending due to COVID restrictions.
We continue to see our Furniture Galleries as an integral part of our omni-channel offering and are investing in robust plans for new stores, remodels, relocations and technology upgrades.
For fiscal '21 and 2022 each year will include more than 20 projects and they will be completed across the network with more than half of them in our company-owned retail.
So the broad array of styles and accessories, as well as free design services, the stores provide the consumer with our most comprehensive offering in a welcoming safe and inspiring shopping experience.
So it is critical that we keep the store systems up-to-date and engaging.
Finally, I'd like to spend a few moments on Joybird, which turned in another solid and profitable quarter.
Sales for the second quarter, which are reported in corporate and other increased 30% to $29 million.
Written sales increased 79% in the quarter versus the prior year, reflecting ongoing strong demand trends and the strength of the brand in the online marketplace.
Joybird again delivered profitable growth improving the gross margin and investing in marketing to drive customer acquisition.
And one last note before turning over the call to Melinda, last week we announced the expansion of our Board of Directors to 10 members with the addition of Jim Hackett, he currently serves as a Special Advisor to Ford Motor Company and was President and CEO of Ford from 2017 to 2020.
Jim spent most of his career at Steelcase serving as a CEO for 20-years.
A true visionary, Jim will undoubtedly make a significant contribution to La-Z-Boy, and we look forward to his guidance and perspective as we move into the next phase of growth.
Melinda now over to you.
As always, let me remind you that we present our results on both a GAAP and non-GAAP basis.
Last year's third quarter non-GAAP results exclude purchase accounting charges of $1.4 million pre-tax or $0.02 per diluted share.
A charge of $6 million pre-tax or $0.10 per diluted share related to an impairment for one investment and a privately held start-up company and income of $8.7 million pre-tax or $0.14 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.
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 third quarter sales decreased 1.2% to $470 million, primarily due to temporary supply chain impacts from COVID-19.
Consolidated non-GAAP operating income was essentially flat at $45 million versus last year's quarter and consolidated non-GAAP operating margin improved to 9.5% versus 9.4%, mainly driven by strong performance by Joybird.
Non-GAAP earnings per share was $0.74 per diluted share in the current quarter versus $0.72 in last year's third quarter.
Consolidated gross margin for the third quarter increased 60 basis points, changes in our consolidated sales mix, primarily driven by the growth of Joybird, which carries 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 product pricing actions taken, an increase in average ticket and favorable product mix.
Partially offsetting these increases were higher costs related to expanding our manufacturing capacity across the company.
SG&A as a percent of sales increased 50 basis points, primarily reflecting the changes in our consolidated sales mix, due to growth in Joybird, which carries higher SG&A costs than our wholesale businesses.
And non-operating income in the quarter was primarily due to unrealized gains on investments and contributed $0.02 per diluted share to earnings per share in the third quarter on both a GAAP and a non-GAAP basis.
Our effective tax rate on a GAAP basis for fiscal '21 third quarter was 27.7% versus 26% in last year's third quarter.
The increase is due mainly to the increase in the Joybird contingent consideration liability, which is not tax deductible.
Our effective tax rate varies from the 21% federal statutory rate, primarily due to state taxes.
For the full fiscal '21 year, absent discrete items, we estimate our effective tax rate on a GAAP basis to be between 26% and 27%, and on a non-GAAP basis we estimate it will be in the range of 24% to 25% after adjusting out the effects of the non-deductible Joybird contingent consideration.
Turning to cash, year-to-date we generated $250 million in cash from operating activities, reflecting strong operating performance and a $122 million increase in customer deposits and orders for the Company's retail segment and Joybird.
We ended the period with $393 million in cash, more than doubled our $168 million in cash at the end of last year's third quarter.
In addition, we held $31 million in investments to enhance returns on cash, compared with $30 million last year.
As we have managed the business through COVID-19, we've been conservative with cash and in the process have strengthened our resources to capitalize on future value creating opportunities to grow out of the pandemic.
Year-to-date, we have invested $27 million in capital, primarily related to investments in our retail stores, new production capacity in Mexico, machinery and equipment and upgrades to our Dayton, Tennessee manufacturing facility, which have now been completed.
As we make investments in the business to strengthen the company for the future, we expect capital expenditures in the range of $35 million to $40 million for the full fiscal year, which will include investments in new manufacturing capacity in Mexico, technology upgrades, improvements to retail store facilities and technology and upgrades to our Neosho, Missouri manufacturing facility.
Regarding cash return to shareholders fiscal year-to-date, we paid $9.7 million in dividends to shareholders and spent approximately $1 million purchasing 22,000 shares of stock in the open market, since reinstating our program in December under our existing authorized share repurchase program, leaving 4.5 million shares of purchase availability in the program.
And yesterday, our Board of Directors increased the quarterly dividend to $0.15 per share, demonstrating its confidence in the strength of our business.
Before turning the call back to Kurt, let me highlight several important items for the upcoming fourth quarter.
First, I remind you that our effective non-GAAP adjustments for the fourth quarter will include purchase accounting and related tax adjustments for acquisitions to-date, which are expected to be a $0.02 per share benefit in the fourth quarter.
This excludes any further adjustments to the Joybird contingent consideration liability, which is dependent on estimates of Joybird's ongoing business trajectory.
Second, I remind you that last year's fourth quarter included a one-time $16 million benefit in cost of sales for the rebate of previously paid tariffs, which was included in both our GAAP and non-GAAP results and which was mostly offset by a bad debt expense of $13.5 million, due to the Art Van Furniture bankruptcy and a provision for potential credit losses in the COVID-19 environment also included in both our GAAP and non-GAAP results.
Our non-GAAP results for last year's fourth quarter excluded a non-cash, non-tax deductible Joybird goodwill impairment charge of $27 million, mostly related to the future financial projections at the beginning of the pandemic, and a $6 million pre-tax benefit from purchase accounting, primarily related to the reversal of the Joybird contingent consideration liability by its full carrying value also based on financial projections at that time.
And now looking at our ongoing business.
Let me update the perspective previously provided for the fiscal '21 fourth quarter.
But we think it important to offer it in the near-term given the unusual business trends, driven by the pandemic.
We have a significant order backlog that will have a long tail in terms of production and deliveries.
We are expanding output, and we will continue to increase production capacity.
We are optimistic about our business trajectory and confident we will deliver strong results in the fourth quarter and beyond.
With respect to raw materials, we took pricing on written orders beginning in October to cover cost increases given slower progress to work through our backlog in Q3, we will experience less of that benefit in Q4 than originally expected.
Meanwhile with cost for raw materials continuing to escalate, as well as those for freight, we continue to evaluate the need for further pricing actions.
Also, as we saw in Q3, we are still experiencing extreme uncertainty with respect to COVID-19, including related shutdowns and absenteeism affecting our plants, hiring challenges, impacts of global supply chain volatility impacting availability and timing of component parts and finished good shipments and most recently weather challenges.
Considering all of these factors, we now expect fiscal '21 fourth quarter consolidated sales growth of 34% to 39% versus the prior year fourth quarter, which included the month long pandemic shutdown.
We expect non-GAAP consolidated operating margin at the lower end of the 9% to 11% range.
Included in these margin expectations is the anticipation that Joybird will sustain profitable operations, even as we test investment effect in this to optimize topline growth.
And looking to next fiscal year.
With our existing backlog of written orders and the capacity increases we have under way, we will not experience our usual seasonality in Q1 and Q2.
And instead, we expect to continue to make moderate sequential improvement in wholesale capacity from Q4 throughout the first half of next fiscal.
Further as we increase efficiencies, we will focus on reinvesting a portion of returns back into our business to strengthen our capabilities for longer-term results beyond the pandemic.
And of course, we expect the impacts of COVID and the global supply chain disruptions to continue to cause uncertainty and some temporary volatility as we move forward.
And now back to Kurt.
We feel very positive about our business for the long-term.
We have always had one of the strongest brands in the industry and we believe we have further strengthened this over the past year allowing us to build market share and a more solid foundation from which to grow.
At the same time we have build a sizable cash position, which provides us the mean and flexibility to invest in opportunities that will drive long-term growth and return for all of our stakeholders.
I have made the decision to step down as President and CEO of La-Z-Boy after 42-years associated with this great company and I will remain Chairman of the Board.
This decision was not taken lightly and has been in the works for some time.
I believe a thoughtful and dedicated leader should be responsible along with the Board of Directors for a well planned and comprehensive leadership transition.
so the company may continue to move forward with this view of bumps in the road as possible.
I believe we have accomplished that.
These types of things have a timeline of their own and for La-Z-Boy, the timing is right.
We are rounding the corner on the pandemic, all the company's business units are growing and very profitable, we have a fortress balance sheet, our backlog is at an all-time high and our stock price is just about at an all time high as well.
For some perspective in March of 2009, our market cap was around $30 million and now is approaching $2 billion.
But most importantly, we have the right leader and Melinda Whittington, who has earned the respect of our entire organization and a seasoned leadership team that has been battle tested and a successfully dealt with everything that has been thrown out them.
And now it is my distinct pleasure to introduce the new President and CEO of La-Z-Boy, Melinda Whittington.
I am honored to have the opportunity to lead this amazing company through the next phase of our journey.
As Kurt said, we have a great team and a bright future ahead, as we leverage our strong foundation and build our next chapter.
I'm also thrilled today to introduce our new CFO Bob Lucian, who is joining us for today's call.
And while we still have several months of transition ahead of us and I know I can count on.
I wish him the very best in his retirement.
We'll begin the question-and-answer period now.
Holly, please review the instructions for getting into the queue to ask questions.

user
compname reports q3 non-gaap earnings per share $0.74.
q3 non-gaap earnings per share $0.74.
sees q4 sales up 34 to 39 percent.
la-z-boy - for entire la-z-boy furniture galleries network, written same-store sales increased 6.3% for fiscal 2021 q3 compared with fiscal 2020 q3.

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