Ladies and gentlemen, hello, and thank you for joining this La-Z-Boy fiscal 2020 third quarter results conference call. All participants are in a listen-only mode, but you will have the opportunity to ask questions after today's presentation. With that, I'm pleased to turn the floor over to your host, Kathy Liebmann. Welcome, Kathy.
Thank you, Jim, and good morning. Thank you for joining us to discuss our fiscal 2020 third quarter results. With us this morning are Kurt Darrow, La-Z-Boy's Chairman, President, and Chief Executive Officer, and Melinda Whittington, CFO. Kurt will open and close the call, and Melinda will speak to the financials midway through. We'll open the call to questions. Slides will accompany this presentation, and you may view them through our webcast link, which will be available for one year. The telephone replay of the call will be available for one week beginning this afternoon. Before we begin the presentation, I'd like to remind you that some statements made in today's call include forward-looking statements about La-Z-Boy's future performance. 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. Also, our earnings release is available under the News & Events tab on the Investor Relations page of our website, and it includes reconciliations of certain non-GAAP measures, which are also included as an appendix at the end of our conference call slide deck. With that, I'll now turn over the call to Kurt Darrow, La-Z-Boy's Chairman, President, and Chief Executive Officer. Kurt?
Thank you, Kathy, and good morning, everyone. Following yesterday's close of market, we reported strong third quarter results, which included an increase in sales to $476 million, a double-digit GAAP consolidated operating margin, double-digit upholstery margins, operating cash generation of $66 million, and $19 million returned to shareholders through dividends and share purchases. Our performance for the period reflects the ongoing strength of the La-Z-Boy brand, coupled with our powerful global supply chain. Across the entire North America La-Z-Boy Furniture Galleries network, written same-store sales increased 10.5%, the fourth consecutive quarterly increase, and our company-owned retail segment turned in its seventh consecutive quarterly increase in delivered same-store sales. Looking at our results fiscal year-to-date, consolidated sales are up 3.5%.
Delivered sales for our company-owned retail segment are 9.7% higher, and written same-store sales for the La-Z-Boy Furniture Galleries network are up 6.4%. All in all, a very solid performance. With consumer confidence remaining high, interest rates low, and positive housing trends on the macro side, we believe we are well-positioned to capture market share in this environment with our strong brand, our vibrant La-Z-Boy Furniture Galleries system with vast custom offering, and speed-to-market promise. I will now walk you through our operating results by segment, and we'll start with our retail segment given its ongoing excellent performance. Our retail segment continues to deliver excellent results driven by improved traffic trends, an ongoing strong execution at the store level, increased design sales, selling more complete room groups, and improved engagement with consumers.
Sales for this segment increased 5.1% to $167 million and delivered same-store sales increase of 5.5%, the seventh consecutive quarterly increase, as we noted earlier. On a GAAP basis, operating margin improved to 9.8% from 8.9% in last year's third quarter, and on a non-GAAP operating basis, it increased to 9.8% from 9.1%. Across the broader store network, which includes both company-owned and dealer-owned stores, written same-store sales for the 355 La-Z-Boy Furniture Galleries stores increased 10.5% for the third quarter. We believe this excellent performance reflects the strength of the La-Z-Boy brand, the positive impact our marketing platform featuring Kristen Bell, which I'll talk a little bit more about in a moment, and our broad array of on-trend furniture coupled with our design program. The results also reflect positive momentum in Canada for the quarter and year to date.
The strength across the store system demonstrates our core customers' preference to shop in store, fueling our objective as well as our dealers to continually invest in the La-Z-Boy Furniture Galleries program. For the third quarter across the network, three new stores were opened, three were remodeled, one was relocated, and one was closed. For the fourth quarter, plans are to open one new store, relocate one, remodel one, and close two, ending the year with 354 La-Z-Boy Furniture Galleries stores with 152 in the new concept. Now on to our wholesale business. In the upholstery segment on sales of $337 million, GAAP operating margin increased to 13.8% from 10.3% in last year's third quarter. Non-GAAP operating margin increased to 11.2%, up from 10.3%, reflecting supply chain inflationary pressures more than offset by efficiencies and lower raw materials.
Our non-GAAP operating margin primarily excludes the net benefit of $8.7 million related to our supply chain optimization initiative announced in August, most of which relates to income from the sales of our Redlands, California, facility. Recall as part of our plan, we closed the Redlands La-Z-Boy branded upholstery facility and shifted production to our Neosho, Missouri, and Siloam Springs, Arkansas, plants. We also transitioned our leather cut-and-sew operations from our Mississippi facility to our large cut-and-sew center in Mexico. Although these moves include short-term costs, we believe they will allow us to further optimize operations, strengthen our competitive position in the marketplace over time, and will provide ongoing annual savings. On the commercial side of the business, we continue to see momentum with the relaunch of the Live Life Comfortably campaign, featuring our new brand ambassador, Kristen Bell.
Since the launch, there has been month-by-month increase in consumer recognition of the campaign and Kristen as our spokesperson. Importantly, we are seeing increases in consumers indicating that La-Z-Boy furniture fits their style or is for people like them. We believe this, combined with the quality and comfort that the La-Z-Boy brand is broadly known for, is driving the brand's strong performance in the marketplace. On the merchandising side, as noted last quarter, we are experiencing great success with the new wireless remote upgrade for our power recliners, with orders continuing to increase and exceed expectations. In fact, more than half of consumers are selecting the option with its sleek, stylish wand and various memory positions. We have also introduced a line of pet-friendly fabrics featuring iClean technology, which are doing well, and our sectional sofa business is extremely hot right now.
At the upcoming April High Point Market, we will add to our new sectional super group collection that allows for multiple configurations to meet consumer needs. We will also introduce seating upgrades, an enhanced motion mechanism, and a custom leather offering that will give us more competitive starting price points. Turning to our case goods segment on essentially flat sales. Operating margin was a solid 9%, although slightly down from last year, reflecting the impact of tariffs on the occasional table and increased freight. As noted last quarter, we have moved much of our occasional table sourcing to Vietnam and stabilized the business vis-à-vis last quarter, although there is still some work to be done. Let me spend a few moments on Joybird, the e-commerce business we acquired last fiscal August. For the quarter, Joybird delivered $22 million in sales, up 18% versus the prior year.
The business continued to improve its gross margin quarter-over-quarter, fueled by supply chain synergies. The operating loss decreased versus the prior year period and sequentially from the second quarter. Joybird continues to exhibit fast-paced top-line growth and is bringing La-Z-Boy a new consumer through a new channel. Although the trend in growth and integration efforts is slower than originally anticipated, we remain optimistic about Joybird's prospects to add long-term value and will continue to make improvements across the business model with the objective to balance investments in growth with bottom-line performance. Before Melinda goes through the financials, I want to make a brief comment on the past weekend's news about Art Van Furniture with respect to its private equity owner exploring a variety of options with its creditors, investors, and landlords to ensure it can continue serving its guests and communities.
While Art Van is an important customer for us, no one customer accounts for more than 3% of our consolidated sales. To that end, we are monitoring the situation closely, but it's too early to define how this may or may not impact our business. I will now turn our call over to Melinda.
Thank you, Kurt. Good morning, everyone. As always, let me remind you that we are presenting our results on both a GAAP and a non-GAAP basis. Non-GAAP results continue to exclude purchase accounting adjustments for our acquisitions and one-time charges related to our supply chain optimization initiative announced in August, including the one-time gain on the sale of the Redlands facility during the quarter. Additionally, for this quarter, we excluded an impairment charge for an investment in a privately held startup. We believe this non-GAAP presentation better reflects underlying operating trends and performance of the business. For the fiscal 2020 third quarter, we recorded $1.4 million pre-tax, or $0.02 per diluted share in purchase accounting charges. The majority of which were related to the acquisition of Joybird, which is reflected in corporate and other.
We also recorded a pre-tax charge of $6 million, or $0.10 per diluted share, related to the investment impairment. We recorded a net benefit of $8.7 million pre-tax, or $0.14 per diluted share, related to our supply chain optimization initiative. In last year's third quarter, we recorded $1.5 million pre-tax, or $0.02 per diluted share in purchase accounting charges. As always, a full reconciliation of GAAP to non-GAAP is included on our press release and in the appendix section at the end of our conference call slides. Moving to our consolidated second quarter results, sales increased 1.8% to $476 million, led by our retail segment. GAAP consolidated operating income was $52 million versus $41 million in the prior year quarter.
Excluding the net benefit related to our supply chain optimization initiative and purchase accounting charges, non-GAAP consolidated operating income increased to $45 million from $42 million in last year's quarter. Consolidated operating margin on a GAAP basis was 11% versus 8.7% in last year's quarter, non-GAAP consolidated operating margin was 9.4% versus 9%, reflecting improvement in our upholstery and retail segments. As a reminder, last year's third quarter included a one-time benefit of 110 basis points related to the redesign of our employee benefits programs, which was included in both our GAAP and our non-GAAP numbers. GAAP earnings per diluted share for fiscal 2020 third quarter were $0.74 versus $0.61 in the prior year period. Non-GAAP EPS was $0.72 per diluted share versus $0.63 in last year's third quarter.
Non-GAAP results for the fiscal 2020 quarter exclude charges of $0.02 per diluted share for purchase accounting, the $0.10 per diluted share impairment charge, and the $0.14 net benefit related to the company's supply chain optimization initiative. In fiscal 2019, third quarter non-GAAP results excluded a $0.02 per diluted share charge for purchase accounting. Last year's third quarter GAAP and non-GAAP results included the $0.07 benefit related to employee benefits changes. Turning to gross margin. Third quarter consolidated GAAP gross margin increased 140 basis points versus the prior year quarter, and non-GAAP gross margin increased 150 basis points. 60 basis points of improved gross margin were driven by changes in our consolidated business mix due to growth in our retail segment and the contribution from Joybird, both of which carry a higher gross margin than our wholesale businesses.
The upholstery segment margin benefited from supply chain efficiencies that offset inflationary pressures, as well as from favorable raw material prices. Consolidated gross margin was also impacted by a decline in gross margin for our case goods segment, primarily due to higher ocean freight and higher tariff costs on certain occasional tables. Last year's third quarter GAAP and non-GAAP reporting also included a portion of the one-time benefit from the changes to employee benefits. Moving on to SG&A. GAAP SG&A as a percent of sales decreased 90 basis points in the fiscal 2020 third quarter compared with prior year. Non-GAAP SG&A increased 110 basis points. Changes to our consolidated business mix increased SG&A as a percent of sales by 70 basis points for the quarter.
Last year's third quarter also included a $3.8 million one-time benefit from the employee benefits redesign, which was included again in both GAAP and non-GAAP results. Finally, on a GAAP basis, the sale of Redlands drove a 200 basis point improvement in SG&A as a % of sales for the quarter and has been excluded from our non-GAAP results. Our effective tax rate for the third quarter was 26%, compared with 26.9% in the prior year period. Absent discrete adjustments, the effective tax rate in fiscal 2020 third quarter would have been 25.8%. Our effective tax rate varies from the 21% federal statutory rate, primarily due to state taxes, and we continue to estimate our effective tax rate will be in the range of 25%-26% for the full fiscal year.
Turning to cash, we generated $66 million in cash from operating activities in the quarter on stronger earnings, increased customer deposits due to the increase in retail written sales, and improved working capital management. We ended the period with $168 million in cash equivalents, and restricted cash, and $30 million in investments to enhance our returns on cash. During the quarter, we invested $13 million in capital, primarily related to machinery and equipment, upgrades to our Dayton manufacturing facility, and investments in our retail stores. We also paid $6 million in dividends and spent $12 million purchasing 400,000 shares of stock in the open market under our existing authorized share repurchase program, which leaves 4.8 million shares of purchase availability under that authorization. Our capital allocation priorities remain to invest in the business to drive growth and then provide returns to shareholders with our dividends and discretionary share buyback.
We expect capital expenditures for fiscal 2020 in total to be in the range of $45 million-$55 million, slightly lower than our prior estimate due to the timing of projects. These expenditures are primarily related to plant upgrades and improvements to several of our retail stores. Finally, before turning the call back to Kurt, I want to again remind you of several items for the remainder of fiscal 2020, consistent with our call-outs in previous quarters. We will continue with our non-GAAP presentation, excluding purchase accounting adjustments, as well as the charges related to our supply chain optimization initiative. For acquisitions to date, adjustments continue to be anticipated in the range of $0.08-$0.10 per share for the full fiscal 2020, plus any effect from revaluation of the contingent consideration liability for future earn-outs on Joybird, where the payout could range from $0-$65 million.
Additionally, our supply chain optimization initiative, we expect to record costs of $0.01-$0.02 in the fourth quarter for a total impact of $0.05-$0.06 per diluted share benefit for the full year when including the sale of the Redlands facility. Also, our reminder on mix. Our evolving consolidated sales mix may affect the seasonality of consolidated results. With Joybird and the growth of the retail segment, third quarter consolidated sales could outpace or be level with fourth quarter, which has historically been our largest quarter. Regarding SG&A cost trends, we would again note the impact of changes in our consolidated business mix with retail growing and the acquisition of Joybird.
This mix impact for the full year is expected to be an SG&A increase in the range of 100 to 150 basis points, the majority of which was realized in Q1 given the timing of the Arizona and Joybird acquisitions. Finally, last year's fourth quarter GAAP and non-GAAP results included a one-time $0.03 per share charge for the final stages of the redesign of our employee benefits programs. Now I'll turn the call back to Kurt for his concluding remarks.
Thank you, Melinda. As we head into the end of our fiscal year, I feel positive about La-Z-Boy's positioning in the marketplace. Our foundation is solid and includes a strong brand, world-class global supply chain, well-performing store system, and engaging marketing. This platform, combined with ongoing strategic investments fueled by our strong cash position, will drive long-term profitable growth and return to our stakeholders. We want to thank you for your interest in La-Z-Boy Incorporated today, and we'll turn the call over to Kathy to provide some instructions for getting into the queue for questions. Kathy?
Thank you, Kurt. We will begin the question and answer period now. Jim, please review the instructions for getting into the queue to ask questions.
I'd be glad to, Kathy, and thank you, Kurt and Melinda, for your comments this morning. To our audience joining, if you'd like to ask a question at this time, please press star and one on your telephone keypad. A friendly reminder that if you're joining us today on a speakerphone, please return to your handset prior to pressing star and one to be sure that your signal does reach our equipment. Once again, that is star and one if you would like to ask a question. We'll hear first from John Baugh with Stifel.
Thank you. Good morning, and congrats on a solid quarter. I'll jump right in. I guess the first question is on the comp, which is quite strong. I know it was a little soft in the year prior, but I'm curious, were there any calendar issues? Did it surprise you how good it was? Was weather better? Maybe some cadence during the months? Comments on traffic ticket? You did mention Kristen Bell. Just curious if you could parse out why you think that number was so strong.
I can give you a number of factors, John. I can't give you percentage of which factor is weighted one way or another, but I think start out with La-Z-Boy itself and our dealers have been investing in their stores quite a bit the last four or five years, and our research would indicate that consumers prefer to shop in stores that are on trend and inspiring, and stores that are 15, 20 years old don't really fit that bill. There's been a great effort in upgrading the look of our stores. I do have to give our marketing a call-out in the way we're going to market both online and television, and Kristen Bell has been a fresh spokesperson for us who is attracting a younger customer.
The big issue comes down, to my mind, to what our store teams are doing, their execution, how they close more sales, build the ticket, get into the home. It's coming across. To have a 10% same store sales increase for a quarter, you just can't rely on one region or one area. It's coming across all of North America, and we see pockets of strength everywhere. Can't really comment much about the timing. Was January a better month because the days between Thanksgiving and Christmas shortened and there was more pent-up demand? I don't know how to do that math specifically, but I'd say the only thing there was probably a little weather last year, particularly in the Northeast, but I don't think it was significant.
We have had a warm winter and no major snow on holidays, so I'm sure that hasn't hurt. I just think it's a multi-year effort of finding our sweet spot and determining how we're going to market and what we're doing. We continue to bring product to the market that customer seems to like. We're obviously very pleased with the direction of our retail business.
Okay. The other number, Kurt, Melinda, Kathy, that jumped out at me was upholstery margins. You cited, quote, "efficiencies and the raws being lower." I guess, can you delve into the efficiencies? Is that a byproduct of the restructuring or something else? If it's not the restructuring, maybe remind us how you think that's going to impact productivity costs going forward. Maybe an outlook for the raw material cost situation, I don't know, a few quarters out versus any pricing action you've taken or will take. Thank you.
Sure, John. A couple of things. As we said, you know we have fueled this business for a long time by great work of kind of continuously driving efficiencies on the supply chain side of things. Certainly, the Redlands move, as you noted, is a piece of that we will see benefit over the longer term. We're still in the stage right now where there's costs related to that too, through all of those efficiencies, but starting to see that turn positive. I would say it's just that continual rhythm of looking for those efficiencies while at the same time you know you've got input costs that we're seeing inflation on. On the raw material side of things, that was still a benefit quarter-on-quarter in the third quarter. We will pretty much have anniversaried most of that by the fourth quarter.
That one we're probably, as far as a year-on-year, we're probably starting to even out on that. Broadly, though, I'd say we're obviously very pleased with how the upholstery margins benefited in the current quarter. We'd see some of that to come through, but it's a bit of everything kind of worked all together in our favor this quarter as well.
Okay. Lastly quickly, we've made it this far without talking about the virus, but I'm going to bring it up. Talk to us about how that could influence your business, I guess particularly leather, but walk us through what you're seeing and what you think could or could not happen to your business if we continue to be shut down over there. Thank you.
Sure. For us, we obviously are monitoring the situation very closely. You know that for the most part, the majority of our employees and our operations are in the North American continent. Nonetheless, we have very valuable suppliers and some employees there. The first and most important thing is we know that everyone's safe. We've provided safety equipment to our employees that are there, and we've temporarily brought our expats home while we weather this situation. As far as all of the work that we have with suppliers over there, with all the data we have as of today, we don't expect to see any material impact on the current fiscal year. If things continue to kind of not start to peak down a little bit, we could, at the very end of the fourth quarter, start to see some supply issues.
As you noted, that's really on leather and some of our upholstery components. Right now, we look good, but again, it's fluid day to day. As things continue to evolve, we'll be watching that for potential impacts as we go into next fiscal.
John, just one point.
Yeah.
John, just one little point on that. The tier one suppliers, I think Apple mentioned this, the tier one suppliers are coming back online last week. As the supply chain works over, particularly in China, there's tier two suppliers, tier three suppliers, and we don't have a lot of visibility to the people who actually weave the fabric or find the yarns. We're glad our suppliers are back to work, but if they don't get support from their suppliers, then there could be some little hiccup towards the end of our fiscal year, which Melinda related to.
Okay. Thanks. Good luck.
Thank you, John.
Thank you.
Our next question will come from the line of Bobby Griffin at Raymond James. Please go ahead. Your line is open.
Good morning, everybody. Thank you for taking my questions, and congrats on a good operational quarter. I guess I wanted to first follow back up on John's question on the virus, just to help us maybe get a little bit better of an understanding. Are products actually flowing from your suppliers to your factories now? Or are you relying mostly on just inventory reserves that you've built up for fabric and leather?
If you go back, Bobby, a little bit, a lot of product came our way, some still on the water, right prior to Chinese New Year. Chinese New Year is normally a few weeks, and now they've extended it to get people back. There hasn't been anything moving here for the last three or four weeks. We plan for that. It comes every year. We know. There may be some goods that didn't quite get shipped before they went on break, and that stuff will ship. The concern is about new stuff being made and hitting our deadlines going forward. We're not low on fabric at this point, and we plan out real well, and our supply chain team is monitoring this very closely. Right now, we've not seen any disruption.
It's just the concern that the stories from time to time are changing, and we want to see how the next couple of weeks go.
Okay. That's very helpful. I guess, next for me, pretty big gap between the same-store written sales and the delivered sales. I understand the delivered sales are just for the stores you own, but is there any timing issues there of getting products out, or is there anything to help us think about that gap?
The fact that we operate with a four to five-week backlog, Bobby, that most everything that we sold after Christmas and all through January did not get delivered. In the quarter, January was the strongest month of the three. There was no hiccup other than normal seasonal points of view. We do take vacation at our plants the week between Christmas and New Year's. Nothing unusual, just, thankfully, a little better business.
As you pointed out, Bobby, that written number is across the entire Furniture Galleries network, where obviously the delivery is just the ones that are corporately owned.
Yep. Well, good to hear about January. I guess, Kurt, I will take the chance, since you brought up one of the months, to see if you'll give us any comments on how Presidents' Day trended, at least for the data you do have.
Well, yeah, we're glad to do that. The only data we really have, at this point, since it's only a day after the holiday, we were very pleased with our performance over that holiday. Again, no poor weather. Consumers were out shopping and ready to buy. We're concluding the holiday, I think, in good shape.
Great. Well, I appreciate all the detail. Best of luck in the next quarter. Thanks again for taking my questions.
Thank you, Bobby.
Thank you.
Once more to our telephonic audience this morning, if you would like to ask a live question, please press star and one on your telephone keypad. A friendly reminder, please return to your handset if you're using a speakerphone. We'll hear next from Anthony Lebiedzinski with Sidoti.
Yes, good morning, and thank you for taking the question. Certainly, nice performance on the same-store sales. Just wanted to also look at the product mix. In the 10-Q, you guys do a nice job of breaking down the product mix. Motion upholstery was flat over quarter versus a year ago. Stationary upholstery up nicely, however. Just wanted to dig in as far as what you think as far as the reasons why that is and your expectations kind of going forward.
I think we mentioned in the prepared remark, Anthony, that our sectional business, the larger groups that a whole family can sit on, sit around the TV, both with ourselves and the industry, is becoming more popular. That's growing. We've been seeing a little growth the last few months in our recliner business. Our mix changes quarter to quarter, not substantially, but we may run a promotion on one category and not another, and our dealers may do some other things differently. I couldn't tell you there's a major shift or a major trend going one way or the other, but not every quarter is always equal. Nothing that I can point out that's significantly different than the ebb and flow with our categories in any quarter.
All right. Thank you for that explanation, Kurt. As far as Joybird, you mentioned in your script the integration is proceeding slower than expected. You also mentioned something in the 10-Q about it as well. Just wanted to follow up about the issues as far as the integration is concerned. If you could expand on that'd be very helpful.
Yeah, I'll take that one. What I would say overall is if you look at what's going on out there with e-com companies, there seems to be a bit of an interesting balance of, you can get a lot of top-line growth, but it's been a bit elusive to see bottom-line progress. We were very pleased to see Joybird's growth in the quarter on a top-line basis up 18%, while we, on the bottom line, that small operating loss is getting smaller and smaller. I wouldn't say we have issues. I would just say there's a 1,000 little things that are all continuing to improve, and together, those are taking more time than we initially, optimistically probably, focused on. Our goal is to continue. In the last quarter, we recognized additional growth margin synergies.
There's still a runway ahead of that. We continue to hone the SG&A investment on that business as well. Over the last quarter, their new website launched fully across the nation, and honestly, just in the last week or so are we really starting to see that get complete traction. We still feel very good, and I wouldn't point to issues per se or any one thing. It just is a lot more blocking and tackling than maybe we realized upfront. We feel confident that we're going to continue to make that sequential progress now. Beginning of next fiscal, we're going to hit seasonal lows again on the sales. We'll go through a little bit of that.
We feel like we'll continue to narrow that gap on the bottom line, while still driving growth on the top line that is disproportionate to what we're doing across the rest of our businesses.
Anthony, with more marketing spend and all, we could grow our sales faster, but it wouldn't be profitable, and we're not a student of trying to spend aggressively and wait three or four years to get a return. I also don't think our shareholders want us to spend at all costs and take away from our earnings and the rest of the enterprise. We're taking a balanced approach. We look around the industry, and there's a number of direct-to-consumer furniture companies that aren't making any money. We'd like to break that trend, and that's kind of our target.
All right. Thank you very much, and best of luck.
Thank you.
To our telephone audience, that does conclude the time that we have allotted for questions today. I'd like to turn it back to Kathy Liebmann for any additional or closing remarks that she has.
Thank you, Jim. Thank you, everyone, for participating in our call this morning. Should you have any follow-up questions, please reach out to me and have a great day.
Ladies and gentlemen, this does conclude today's update. We do thank you all for your participation. You may now disconnect your lines, and we hope that you enjoy the rest of your day.