Well, good afternoon, everybody. Thanks for joining us. Yeah, hope everybody's enjoying the conference. I'm Bobby Griffin, cover Consumer Hard lines, retail, and furniture here at Raymond James. This afternoon, we have the pleasure of hosting La-Z-Boy for a presentation. With us from the company, our CEO, Melinda Whittington, CFO, Bob Lucian, and Mark Becks, who heads up Investor Relations as well as corporate development. Today's format's gonna be a presentation between Melinda and Bob. First, before I turn it over, I'd like to thank you both for the support and joining us again this year.
Thanks for having us. Okay, we'll go ahead and get started. For those of you, well, first of all, don't let me forget this piece, standard disclaimer. Don't forget about, about all of that. But for those of you that may or may not be familiar with, with La-Z-Boy, we are a 97-year-old company, almost 100 years of delivering the transformational power of comfort with our iconic brand and, and upholstered furniture. Our history has been as a manufacturer, primarily serving North America. And really, our pivot in recent years has been around owning much more of the chain of the direct-to-consumer portion of the business, and we'll spend a lot of—a lot of time on that today. Our core values are around, we talk about courage, curiosity, and compassion.
It's the courage to continue to reinvent ourselves, the curiosity to learn everything about the consumer, and really bring a consumer-first standpoint to furniture, which is not always there and has not always historically been there broadly, in a space that touches consumers every day. And then the compassion to really think about each of our stakeholders and our impacts on them that has really led to us being a good corporate citizen, of the world that has contributed to our 97 years of history. Wanna speak a little bit to the numbers?
Yes, certainly. Despite the last four years being extremely challenging on a number of fronts, we've emerged from COVID as a larger, stronger, and more disciplined company. We've got an extremely healthy balance sheet. We've got over $300 million of cash. We have no externally funded debt. Over this time, we've really focused on our retail business and disproportionately grown it both on the top line and the bottom line. We've done that growth through organic increases, such as same-store sales as well as opening new stores and acquiring some of our independent Furniture Gallery dealers. As a result, our direct-to-consumer business through retail and Joybird now represents about half of our sales mix, whereas historically, we've been more of a wholesale company.
And all while we've been doing this, we've been able to invest in focusing on creating capabilities for future growth, specifically in the supply chain and the IT areas.
So we're gonna take our time together today to really focus on sort of six areas of why to invest in La-Z-Boy Incorporated. I'll start first with the leadership team. On a foundation of about 10,000 employees, many of whom have really deep industry experience in furniture, what we've brought in in recent years is some real talent from some great industries to bring best practices into our industry. This team that we put together. I've been with the company now six years. I started as the CFO, and then wrapping up my third year as CEO. This team has been together for the most part now for these three years, many of them grow, spending some time in the industry already, but you can see some of the blue-chip type of companies that we're bringing experience from.
Our newest addition is Rebecca Reeder, who comes to us to lead our retail organization behind a retirement and some shift in management. She was our first true retail professional to bring in from outside into the industry. She comes from Chico's, and we're really excited about where she'll take our now very strong and stable retail business into the next level as we really expand that piece of our business.
So, La-Z-Boy ranks near the top of the list when consumers think about purchasing new furniture. We've had that leadership position in reclining chairs since our founding back in 1927, almost 100 years ago. We've been able to successfully broaden out that assortment to provide design services and furniture solutions throughout the entire home. As a result, La-Z-Boy has become an iconic brand with an impressive history in what's a very, very fragmented furniture industry. Our scale and vertical integration, with a point of differentiation that we have that we're enabled us to compete against others in the industry.
Next.
So we are well—we believe we're well-positioned to benefit from favorable industry dynamics. And if anybody's looking at the industry right now, it's not very favorable. But long term, we think there's very favorable dynamics. Typically, the home and furniture and home furnishings industry grows about 3%-4% per year, but it's extremely fragmented. Over the last five years—so five to six years—we've grown about two times that rate. Over this fiscal year—we're nine months into our fiscal year—our same-store sales are tracking at about -1%, and the overall industry is at -7%. So we're doing—we'd love to be growing, but we're just—we're kind of holding our own right now. We're doing much better than the industry—than the industry.
Even though the industry has these recent headwinds that we've been going into, coming out of COVID with higher interest rates and the impact it's had on slow housing turnover, over the medium to long term, we're very bullish on the category. It's structurally well-positioned to return to growth, due to the significant housing shortage, which isn't kept up with the population growth and the household formation growth that we've had in the United States. Just depending on what source you look at, we're somewhere between two to six million units of housing behind, and that needs to be addressed. As soon as interest rates start moving lower and they start to normalize and housing turnover starts to increase, we expect to see that industry growth continue to move forward and potentially accelerate and to make up some of the shortfall we're seeing.
And as I mentioned, we've grown faster than the market historically. We expect to do that looking forward into the future. And that's what we're banking on relative to how we're investing against the Century Vision.
So importantly, three years ago, almost three years ago now, we kicked off our Century Vision, which was really around our strategy of how do we wanna wrap up our first 100 years and prepare ourselves for the next 100. The biggest pillar around that work is really strengthening the iconic brand of La-Z-Boy and then leveraging it to grow even further. We started investing three years ago for the first time in true in-house consumer understanding capability, and we're now using that work in a database way to really address everything we're working on, from our latest Long Live La-Z-Boy marketing campaign to how we look at product innovation to where we look to grow our business from here. The other very big pillar is really around expanding our own company-owned retail.
So we'll speak a little bit more around the various channels that where you can buy La-Z-Boy product, but we know that the consumer benefits the most when they're buying La-Z-Boy product in our La-Z-Boy stores, and we benefit the most financially. Other pieces of the pillar are really around, we purchased Joybird, which is an e-commerce business, a couple of years ago, and getting that to a good profitable growth business for us again. And then really investing in enhancing our capabilities around our people, our technologies, and our supply chain so that we're really agile and able to continue to grow with whatever comes next.
So, over the past five years, we've invested heavily in our retail business, and its operating results are beginning to show. We have become—excuse me, I wanna make sure I get this. We've become a better operator. We've been remodeling our stores. We've been updating our store formats. We've been improving our in-store technology for both training our associates as well as providing a great consumer experience. This has led to a significant increase in consumer and customer conversion, average ticket price, and we've had a higher percentage of design sales, now almost a third of our sales. And all of these have enabled us to growth not only in sales but operating margins and has moved us up consistently into the mid-teens.
In the wholesale segment, we experienced a significant amount of disruption from the pandemic, including major expansion of operations to help service a backlog that became unprecedented. We were out six to nine months, and in some cases, 12-12 months on some of the products that we make. We've been able to get that backlog back to pre-pandemic levels now, so we're back to the four to six-week delivery that we like to promise our consumers. And right now, we're focused on improving supply chain efficiencies, to enable the segment to return to the roughly 10% margin. If you look at the bottom left of that, when the industry demand returns back to pre-pandemic levels, we'll get back to that 10% margin.
This, the combination of our algorithm or a combination of retail being in the mid-teens, wholesale being at 10%, and Joybird, returning to profitability is how we expect to be able to deliver sustainable, double-digit margins.
Important to all of that is, again, the strength of the brand that is our foundation. As we look at the long-lived La-Z-Boy campaign, hopefully by now you've seen it. It launched last August, and it's really around, it's our most data-based campaign. It really - we went back to look at everyone knows La-Z-Boy, but people may not think about La-Z-Boy being right for them, even though they have a very positive attribution to the brand. They recognize that we, we provide a strong value, that you can trust us, and that we are about comfort. Our entire campaign is really around expanding who we're reaching and really leveraging what is core to us in that space rather than trying to fight it and becoming more relevant for today's consumer.
We're only about six months into this campaign that we believe that it was very ownable and that we'll be with for a long term. And we are, are excited to see that the early metrics (even though these are long purchase cycles) the early metrics show that we are having meaningful improvement across awareness around brand consideration and around purchase intent, as well as starting to capture the, the attention of the younger consumer. And a little bit about that is both the messaging but also it's, it's also the where. And so beyond some of our more traditional areas, we're looking to be more relevant with influencers in social media and even in the mix of our of our marketing.
If you're a Golf Channel aficionado or news channel, some of those areas are places where we're finding a very large chunk of our consumers consume their data every day. I'd also call out that then part of it's about strengthening the brand. And then beyond strengthening the brand, it's strengthening the ownership, as I mentioned, of where do we own all the way to the end consumer. And that's really in our own retail. Today, you can purchase our La-Z-Boy across a lot of different areas, but where you get the best consumer experience is when you're working within our own retail. We're excited in expanding this from a couple of different directions. One is obviously what does in-store execution look like?
And we continue to grow each of the metrics around what does average ticket look like, what is the amount of conversion that we're having, and what is the amount of design sales in our stores? And I see that getting stronger and stronger even as we put new eyes on this under Rebecca's leadership. But beyond the organic growth is then how many new stores can we open? Today, we're at 353. We see a pathway in the regular footprint that we have today, which is on average about a 15,000 sq ft suburban store. We see a path to 400 stores, and we expect to be opening those up about 10 a year. We've opened up seven in the last year as a bit of a reference point, and that's across the entire network.
And then the third way for us to grow as La-Z-Boy Incorporated is that out of our 353 stores, just under half of those today are independently owned by generational investors in our space. Over the last several years, we've become much more strategic in buying back a lot of those individual independently owned Furniture Galleries. And this year, by the end of our fiscal year, we will have bought back 11 more stores. And we actually this year tipped over to having more company-owned stores than independently owned stores. What we like about that is both it is we believe with the execution we now have in store, it's the best consumer experience when it's a La-Z-Boy company-owned Furniture Gallery. It's a sticky experience.
It enables us to really deliver a really powerful omnichannel experience because today's consumer expects that to be seamless between in-store and online. And last but not least, we are able to capture a much bigger portion of the profit across the entire integrated purchase cycle. So, it's a big piece of what we're looking at to do is to continue to buy back Furniture Galleries as we're able to from those independents. I'd also mention, though, and Bob talked about our wholesale and our retail. We're not walking away from the wholesale side. This gives you a sense of where we stand today. Today, of everything manufactured under that La-Z-Boy name, about a third of it is selling through our company-owned retail. Again, just over a third.
Just under a third is selling through independently owned Furniture Galleries that should ideally be seamless to the end consumer but, of course, is still, you know, a wholesale sale for us. And then the last third is around a variety of other general dealers who sell multi-branded furniture. Half of that you see that sort of the lightest shade blue, the La-Z-Boy Comfort Studios, is branded space, so store within a store space. So it's still where the La-Z-Boy brand is really standing up. We think it's still important to keep that wholesale business very strong because we are in an incredibly fragmented market where consumers even though we are the second biggest player in furniture, we're still at, you know, single-digit share. And so we have consumers that are never gonna think of La-Z-Boy unless there's multiple messaging.
What this does for us is it captures that consumer that's never gonna walk into a La-Z-Boy store or think about La-Z-Boy. But if they're shopping a broader portfolio, we get our chance to, to be in that mix and draw that attention. A lot of times, these tend to be more, individual chair purchases and those type of things. Not always. We have some, some broader, broader mix there, but as opposed to in our stores, tend to be more often a design sale and a whole-room solution. So we, we find all of these partners very important, but obviously, our biggest strategic priority is really around driving that company-owned, the company-owned Furniture Galleries. So when you put it all together, our pivot is really around being a vertically integrated retailer. All the channels are important.
Our manufacturing is super important to us because almost half of what we sell from a product standpoint is customized to the end consumer. We talk about mass customization. So for that middle-income consumer, which is a broad demographic of population, they're able to come into our Furniture Galleries or where we're available and other areas where we're available and pick out their style, their fabrics, their finished wood, all the pieces that they want, and have a customized piece of furniture in their home for four to six weeks, which can only happen when you have a footprint that is located where you're making that final sale.
So from a capital allocation standpoint, our allocation principles over the long term is that we're going to invest about 50% of our operating cash flow into the business via CapEx and acquisitions, with the remainder going to shareholders. More recently, we've kind of skewed capital usage towards the business as we navigated our way through the pandemic, and we've been investing in a lot of Century Vision initiatives, including some of the Furniture Gallery acquisitions we mentioned before. That said, we did increase our dividend for the second year in a row by 10% last December, and we're now consistently repurchasing shares under our share repurchase authorization. With all that, we have a very strong balance sheet. We've got $333 million in cash, no external debt.
And we've been fairly conservative in how we've managed our high cash balance due to what's gone on during COVID as well as all the macroeconomic and geopolitical uncertainty that's out there. And we wanna make sure we have the opportunity to purchase any independent Furniture Gallery dealers that come up, as they become available. Generally speaking, though, our, our goal isn't to keep increasing cash. It's to keep it at this level or in or invest it. So we're not trying to, to hoard any more cash. We wanna make sure we're putting it to the best use possible. And finally, just to summarize, our business is materially larger than it was pre-COVID. Our sales are about 18% higher on the top line, and our EPS is up over 40% versus pre-pandemic levels.
and importantly, we're positioned to grow from these levels forward both on the top line and the bottom line.
Last but not least, I started the beginning talking about our courage, our curiosity, and our compassion to be to all of our stakeholders. You don't last for 100 years if you're not doing right by the environment in which you operate. We just published our second sustainability report a couple of weeks ago. You can find that on our website, but it's important to us to make sure that we are being responsible citizens of the planet as well. And so with that, I think we can open it up to questions. Bobby?
Take a few questions if there aren't. I can get us started as well. Bob, I mean, I guess first, one of the big opportunities here is getting to the double-digit margin target and versus some other targets that are out there for companies. You guys actually do have the proof point there at the wholesale segment. So can you maybe unpack some of the drivers that have resulted in kind of the step down in wholesale and then kind of the building blocks to get wholesale back to the 10% operating margin target?
Sure. The biggest impact that drove the margins down as much as they did was just what happened with COVID. We had a significant increase in incoming orders, and our plants weren't able to keep up. So we had to open up a number of new facilities, and importantly, during this time, this is only four years ago. If people recall, there were a lot of people that just decided they didn't wanna work anymore. So we lost some good employees in our U.S. plants that we had to replace and train. And it's an artisanal process to manually make furniture.
So we took a big step back relative to our efficiencies as well as all the startup costs associated with starting up three new operations down in Mexico, actually, three upholstery operations in Mexico and one cut-and-sew operation in Mexico, as well as trying to get our plants back in the U.S. back up to staffing. And that was just we were running a lot of overtime. We had a lot of training. We were very, very inefficient. And that's what dropped our, our, oh, it's not up there anymore, but that's what dropped our margins down. What we're focusing on now is getting that efficiency back up. We've kind of stabilized. Volumes are down below where they were pre-pandemic. So the folks are now focusing on getting good at what they're doing. And that has enabled us to shut down two of those operations.
One, we announced about a year ago. The second one, we just announced in at the end of Q2. And by the end of this Q4, that all will be down. That's worth 50-60 basis points alone, just that one operation that we're shutting down right now for the wholesale segment. So that's what we're doing all the things we can do relative to how we're training our employees, how efficient the plants are getting, and how we're managing our network. The other piece that's gonna need to happen to get that all the way back up to 10 is to get our units back to where they were pre-pandemic. Right now, units are down about 15% versus pre-pandemic.
As the industry starts coming back and we start coming out of what I'll call, you know, the doldrums right now, we'll, that's a second component that will help us get back to the 10%.
Just to put a little more perspective on the industry, units down about 15%, if you're not familiar with the industry overall, through all that disruption, input costs end up going up 30%+ . The industry overall that historically has not done a lot of pricing actually priced up 30%-40%. A good 20% of that remains. So what we're seeing right now, if you compare us for all the disruption up and down and so forth, what you find is we've got pricing still sustaining up about 20%, units down about 15% on a wholesale apples-to-apples basis. Now, obviously, our company with the growth of the retail business in particular has grown well in excess of that, but those are kind of the fundamentals you're seeing on the industry.
Very good. That was actually gonna be my second part of the question, on pricing. But maybe, you know, in this period of volume low, this is called a low, and hopefully, we'll be coming up from it soon. What are, what are you seeing from a competitor standpoint across maybe different price points? Are, are people starting to behave irrationally because volumes have just been so weak for so long? Or, you know, are you seeing, you know, the industry kind of hold on to some of this pricing per se or, or whatever you wanna call it? Since it is an industry, the history did not do particularly well in holding on to that.
Yeah. We've been pleased thus far to really see that 20% or so sustain. And to be clear, it's not like even as things went up 30%, everything didn't full-scale kind of pro rata drop down to 10. What you saw is really a bit of a stratification. And so what we're seeing is consumers, you know, overall, we have consumers that will come in that are looking for our most advanced products with the most different articulations and power and leather and so forth that are still very much, you know, very much able to make those kind of price points. There are opening price points that are sharpening for sure, but that's been a little bit of the art that we're driving is really to manage across those. We are not seeing to date a real dramatic uptick in promotional.
Our industry broadly does have, you know, five major holidays where you see that, you know, big promotions, and that's just the cadence of the industry to drive an urgency of purchase. Those have not really deepened to this stage. The biggest thing is you need to have some appropriate value price points to bring people into your franchise. And that's the piece that is probably, you know, most relevant to us to make sure we're really sharpening those price points maybe, you know, with a few less features and all, but so that consumers are able to come into our space.
Importantly, on the retail side, retailers, including ourselves, have seen wages go up for the associates. They've seen rent go up. They've seen utilities go up, etc. So, there's the—you're not gonna see retailers driving those prices down either because then they're gonna be eating right into their own margins and hurting themselves. So all of that just with the challenges we face as an economy right now, people are holding on to what they've got right now.
Other input costs, really, while they're down from peaks, are not down relative to what you saw pre-pandemic when you think about foam and steel and wood and.
Maybe, maybe on the cost side of the equation, you know, we got an event coming up here in November, you know, with some potential. There's been some rumblings of tariffs or whatnot. So I'll try not to dive all the way into that, but just kind of where how is La-Z-Boy positioned for potential change in the kind of the tariff environment? Furniture is heavily exposed kind of from Asia in different parts or even on some of the finished goods. So just any details there.
Yes. Certainly, our supply chain starts around the world. I mean, a very significant portion of the world's fabrics are woven in China, as an example. A lot of electronic parts out of various parts of Asia. So like everyone, the healthy portion of our supply chain does start in Asia. However, you know, as you mentioned before, in order to enable the customization that we do, 95% of our sales are in North America, and the vast majority of that manufacturing process occurs in North America. So as you know, now across the industry, many moved overseas 10, 15 years ago, you know, from a wage arbitrage standpoint. But for us to be able to support customized furniture, it's always been important for us to stay primarily within North America.
You know, we certainly look at different options in some areas like, you know, looking at Turkey and some other countries that are starting to do more from a fabric standpoint just so that we have diversification. Because if we learned nothing else through the pandemic, we should realize that you need diversification because I love to tell the point. We have a certain part that at one point, it comes from Mississippi and Vietnam, and both of them were shut down a few years ago, right? So, you know, you certainly learn that you need to have agility across your footprint. But broadly, as protected as you can be, I feel good about where we are and certainly relative to business in general and relative to our peers, as far as being reasonably unaffected by any election outcomes that could be dramatic.
I guess just maybe lastly, just talk a little bit about what you're seeing from the consumer today. I mean, I think, you know, some winter weather events kind of in January that put a little pressure on the manufacturing side of things. So maybe unpack that. And I believe we just wrapped up President's Day, which you gave some comments on as well.
Sure. So, you know, Bob mentioned this earlier. In a tough industry where traffic has been down kind of double digits for, you know, we talk about a furniture recession for at least the last year and a half, the industry broadly, as measured from Census Bureau data, for our first nine months of the year has been down 7%. Our same-store sales at our Furniture Galleries so that's, you know, without any benefit of acquisitions or anything. Our same-store sales, have done nine months are down 1%. So that's a 600-basis point improvement versus or strengthening versus, you know, what the industry is seeing. So we've been really happy to see that outperform. If I take out January, our same-store sales for those eight months was actually even a +1%, not a -1%. So January was tough for us.
A big chunk of that on the delivered side was because our manufacturing is in the states where the ice and, and cold weather really affected plants. We had large plants shut down for multiple days and simply couldn't catch up on that before the end of our end of January quarter end. We also saw it from a consumer side. So, in January was a tough month for us because of the, the weather and consumers also getting out to spend. January was tough for the industry because January a year ago was the one positive month that, that the industry had seen in about 14 months. And so it was a tough comparison. And then there was a little bit of a question on, what are we seeing out of you know, what does this mean?
Is there something different going on from the with the consumer versus even the already challenging results? What we saw, as we mentioned in our earnings call, is that our President's Day looked a lot more like what we had been seeing up until January. So, you know, we feel good about that and that we can continue to sort of move along there and, again, wait for those eventual strategic or structural tailwinds that we're anticipating to drive demand in the business longer term.
Got about two minutes left, I guess. Bob, there's a slide on, on there. I think it was the fiscal year 2023 cash flow from ops was around $205 million or so. There was probably some backlog benefit there. But just, you know, as, as you guys work your way to the double-digit margin target, what is a sustainable cash flow from ops number for this business as we think about, you know, kind of working down some of that cash and, and the capital distribution side?
From an operating cash flow standpoint, we'll be in the $160-$170 range, and moving forward as the business grows and as the margins grow. We've made some good improvements in fiscal year 2023 on our inventory. We'll continue making some additional improvements. I mean, getting back to what the right way to be operating the wholesale side of the business, that's gonna help generate a little bit of extra in the short term as well.
And then maybe $50 million-$60 million is kind of CapEx, or you're trying to work it down.
That's typically what will be from a business standpoint to be able to support the business that we have going forward.
So, north of $100 million free cash flow year.
Yeah. So north of $100 million kind of having free cash flow year is sustainable. Yeah. Yeah. Oh, yeah. Absolutely.
We do maintain a little bit of a cushion between both just the, you know, challenging market environment and also when we have those opportunities to buy back independent Furniture Galleries. So that gives us a little bit of flexibility.
Very good. Well, with that, I think we're right on time. Thank you for joining us, everybody.
Okay. Thank you.
Thank you.