Good day, ladies and gentlemen, and welcome to your La Z Boy Fiscal 2022 First Quarter Conference Call. All lines have been placed on a listen only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Kathy Liebmann, Investor Relations. Ma'am, the floor is yours.
Thank you, Taryn, and good morning, everyone. Thank you for joining us to discuss our fiscal 2022 Q1 results. With us this morning are Melinda Whittington, La Z Boy's President and Chief Executive Officer and Bob Lushian, CFO. Melinda will open and close the call and Bob will speak to segment performance and the financials midway through. We'll then open the call to questions.
Slides will accompany this presentation, and you may view them through our webcast link, which will be available for 1 year, and a telephone replay of the call will be available for 1 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 and other matters. 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 ks. 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 and 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 Melinda Whittington, La Z Boy's President and Chief Executive Officer. Melinda?
Thank you, Kathy, and good morning, everyone. Yesterday afternoon, following the close of market, we reported our fiscal 2022 Q1 results, a quarter marked by multiple successes as well as some expected challenges. Across the La Z Boy enterprise, we delivered all time record high sales of $525,000,000 making and selling more furniture in the quarter than we ever have in modern history. Even with production running only 12 weeks in the quarter due to our annual 1 week maintenance shutdown in July versus 13 weeks in most quarters. Demand across all businesses also remained high and backlog remains at record levels.
Written same store sales for the La Z Boy Furniture Galleries network increased 10% versus the prior year quarter and has grown at a compounded annual growth rate of 13% across the last 2 years since pre pandemic, demonstrating the continued strength of demand for our La Z Boy branded product. Written same store sales for our company owned Retail segment increased 22% versus the prior year period and at a compounded annual growth rate of 16% over the last 2 years. And Joybird continued on its strong growth journey, writing 31% more business than in last year's Q1 and growing at a compounded annual growth rate of 35% across the last 2 years. On the manufacturing front, We continue to increase capability to build and deliver more furniture to better service continued strong demand and are in the process of increasing our cell count across the La Z Boy branded business. And also during the quarter, We continued to return value to shareholders with a dividend payment and $36,000,000 of share repurchases, and we've recently expanded our repurchase authorization.
At the same time, we are experiencing challenges in our wholesale business. We continue to have inefficiencies at the plant level as we open additional upholstery capacity and hire, train and work to retain what is currently about 1 third more workers versus pre pandemic. And we are continuing to invest to increase flexible capacity through the remainder of this fiscal year in order to work through our backlog. Also, as expected, We experienced significant short term margin compression on the wholesale business, primarily due to higher raw material and freight costs, which have risen at unprecedented rates and speed over an extended period. As we've talked previously, We made the decision to not take action on the backlog with our first four rounds of price increases since the pandemic began.
With wait times extending up to 7 months for the La Z Boy branded business, that has resulted in delayed recognition of those price increases until they work their way through to our delivered sales. But looking to the future, during the quarter, We also made several strategic decisions to take us through this unprecedented period and ensure we emerge stronger post pandemic. Recognizing the commodity prices are expected to remain at highest levels in recent history. In July, we took our 5th Price increased since the pandemic began, but this time also took a surcharge on our backlog. Given the unparalleled nature of rising material costs, we are asking our business partners to share in the financial impact during a period where we are all experiencing record demand.
Since our first price increase last October, Cumulative price increases and surcharges now add up to the high teens versus pre pandemic. 2nd, on the practical side, our procurement team has significantly increased inventory for key component parts to minimize future supply disruptions and ensure a steady stream of furniture is manufactured and delivered. 3rd, We launched Project Century, our long term strategic path for strong growth and profitability as we head toward our centennial anniversary in 2027. At a high level, key components include a focus on growing market share for our strong consumer brands, specifically La Z Boy and Joybird. In an extremely fragmented industry, the iconic La Z Boy brand enjoys an unparalleled identity For comfort and quality, while being a leader in motion.
We believe we can fully leverage these attributes to grow our business and will invest to expand our reach to a broad range of consumers, including younger consumers through consumer insights, product innovation, new experiences and messaging. At the same time, we will continue to expand and strengthen our omnichannel presence. We will offer a state of the art e commerce experience and a strong brick and mortar footprint to ensure we easily reach consumers wherever they prefer to shop. And now that we have a sustainably profitable direct to consumer model with Joybird, we'll increase investment to expand consumer awareness and accelerate profitable growth. At the same time, we'll enhance Joybird's omnichannel offering by opening additional small footprint brick and mortar stores in high traffic urban areas.
Our first three stores in Brooklyn, Chicago and Washington, D. C. Have met with great success and there is exciting potential for additional stores, including one in Los Angeles planned to open in the fall. As the final pillar of Project Century, we'll enhance our corporate capabilities and leverage the balance of the enterprise portfolio to efficiently support these initiatives and over time enable the potential for Taclon acquisitions They can benefit from our supply chain expertise and accelerate the La Z Boy Incorporated growth story. With these initiatives in place, Over time, we envision sales growth outpacing industry averages, while delivering industry leading margins as we complete our 1st century in 2027.
Now, let me turn the call over to Bob to review the results for the quarter. Bob?
Thank you, Melinda, and good morning, everyone. As a reminder, we present our results on both a GAAP and non GAAP basis. We believe the non GAAP presentation better reflects underlying operating trends and performance of the business. Our fiscal 2022 Q1 non GAAP results exclude purchase accounting charges, which are detailed in our press release and in the tables in the appendix section of our conference call slides. On a consolidated basis, fiscal 2022 first quarter sales increased 84% to a record $525,000,000 reflecting strong demand, Capacity increases and the comparison to the fiscal 2021 Q1 when we restarted our plants at reduced capacity after a month long shutdown and most retailers were closed for a portion of the quarter due to COVID-nineteen.
Sequentially from fiscal 2021 Q4, 1st quarter sales increased even with our annual 1 week maintenance shutdown in July. Compared with the pre pandemic fiscal 20 1st quarter, Sales increased 27% for a compounded annual growth rate of about 13%. Consolidated GAAP Operating income increased to $34,000,000 and non GAAP operating income increased to $35,000,000 Consolidated GAAP operating margin was 6.5% and non GAAP operating margin was 6.6%, reflecting expected significant short term pressure on wholesale margins as the realization of previously announced pricing actions trailed escalating input costs and we continue to invest in capacity expansion. GAAP diluted EPS was $0.54 for the fiscal 2022 1st quarter versus $0.10 in the prior quarter, non GAAP diluted EPS was $0.55 in the current year quarter versus $0.18 in last year's Q1. My comments from here will focus on our non GAAP reporting unless specifically stated otherwise.
I will now turn to a review of our results by segment. Demand for product across all businesses remains robust. Starting with our wholesale segment, delivered sales for the quarter grew 76% to $393,000,000 compared with the prior year period. Compared with the pre pandemic fiscal 2020 Q1, sales were 23% higher for a compounded annual growth rate of 11%. Non GAAP operating margin for the Wholesale segment was 4.7%, reflecting expected gross margin pressure as raw material and freight cost increases outpaced the realization of previously announced pricing actions and we continue to invest in bringing online new capacity.
Now let me turn to the Retail segment, which produced excellent results. For the quarter, delivered sales doubled, increasing 100 percent to our Q1 record of $182,000,000 Delivered same store sales increased 92% versus the year ago quarter, which was impacted by COVID. Compared with the pre pandemic fiscal 20 21st quarter, sales increased 27% for a compounded annual growth rate of 13%, reflecting strong execution at the store level. Non GAAP operating margin increased to 11.2%, Another first quarter record, driven primarily by fixed cost leverage on the higher delivered sales volume. Last year's Q1 margin was negative 6.8% With the period marked by a significant reduction in delivered sales due to delays in product deliveries and COVID related manufacturing shutdowns in April, as well as retail closures with some stores closures extending into June.
As Melinda noted, we are continuing to invest in the La Z Boy Furniture Galleries store system with new stores, remodels and relocations. We have approximately 25 projects scheduled this fiscal year for the company owned stores out of a total of approximately 35 projects across the network. Additionally, we are pleased to announce that earlier this week, we closed on the acquisition of 3 stores on Long Island, New York and look forward to expanding and strengthening the business there. Sales for Joybird, which was reported in corporate and other, Increased 188 percent to $39,000,000 almost tripling from the prior year Q1. From the pre pandemic fiscal 20 1st quarter, delivered sales increased 125% for a compounded annual growth rate of about 50%, reflecting Joybird's strong positioning in the direct to consumer marketplace, as well as excellent end to end execution by the team.
For the period, Joybird increased its gross margin primarily from higher sales volume, product pricing actions, an increase in average ticket and synergies due to its integration into our broader supply chain. It also experienced Increased conversion on the website and a significant increase in retail store traffic. We have achieved sustained structural Profitability at Joybird and will continue to increase our marketing spend to expand awareness, improve customer acquisition and accelerate growth. Pulling all this together, consolidated non GAAP gross margin for the fiscal 2022 Q1 decreased 270 basis points versus the prior year quarter, primarily driven by significant increases in commodity and freight costs, in addition to start up costs associated with the expansion of our manufacturing capacity and labor challenges in our wholesale businesses. These items were partially offset by changes in our consolidated sales mix, driven by the faster growth of retail and Joybird, which carry a higher gross margin than our wholesale businesses and from an improved gross margin performance at Joybird.
Consolidated SG and A as a percentage of sales for the quarter decreased 6 20 basis points, primarily reflecting fixed cost leverage on the higher sales volume, mainly in our Retail segment. Our effective tax rate on a GAAP basis for the fiscal 2022 Q1 was 25.9% versus 19.8% in the Q1 of fiscal 2021. The increase in our effective tax rate for this year's Q1 versus last year's Q1 was primarily due to additional tax benefits from stock compensation in fiscal 2021, which should not occur in fiscal 2022. Absent discrete adjustments, Our effective tax rate would have been 25.3 percent 26.1 percent in the 1st quarters of fiscal 2022 2021, respectively. We expect our effective tax rate for the full fiscal 2022 year to be between 25.5% and 26.5%.
Turning to cash, we generated $6,000,000 in cash from operating activities in the quarter. We invested $39,000,000 in higher inventory levels to protect against supply chain disruptions and support increased production and delivered sales. Additionally, during the quarter, we made seasonal incentive compensation payments related to the last fiscal year. We also spent $19,000,000 in capital, primarily related to improvements to our retail stores, upgrades at our manufacturing and distribution facilities, new upholstery manufacturing capacity in Mexico and technology upgrades. We ended the period with $336,000,000 in cash and no debt Compared with $337,000,000 in cash at the end of fiscal 2021 Q1, which included $50,000,000 and cash proactively drawn on our credit facility.
In addition, we held $33,000,000 in investments to enhance returns on cash compared with $16,000,000 last year. Regarding cash return to shareholders, during the quarter, We continue to aggressively buy back shares, spending $36,000,000 repurchasing more than 900,000 shares of stock in the open market under our existing authorized share repurchase program. Over the past two quarters, we have returned $79,000,000 to shareholders via share repurchase. We also paid $7,000,000 in dividends to shareholders in the last quarter. Earlier this week, demonstrating its confidence in the company's ability to grow profitably and continue to generate strong cash flow from operations, The Board of Directors approved an increase of 6,500,000 shares to the company's existing share repurchase authorization.
With the 2,500,000 shares available for repurchase under the program as of the end of the fiscal 2022 Q1. This increase brings the total share repurchase authorization to $9,000,000 representing approximately I'm sorry, 9,000,000 shares, representing approximately 20% of shares outstanding. This equates to approximately $320,000,000 at Monday's closing stock price. The company expects to execute the repurchase program over a 3 to 4 year period, subject to market conditions, operational performance, cash flow from operations, cash balances, potential M and A activity and other business investments. Additionally, the Board approved a dividend of $0.15 per share to shareholders of record as of September 2, 2021.
As we look to the future from a capital allocation perspective, over the long term, we will target to invest Approximately half of operating cash flow back into the business, primarily via CapEx and M and A and return the remainder to shareholders via dividends and share repurchases. Before turning the call back to Melinda, let me highlight several important items for the remainder of fiscal 2022. As noted, demand trends remain strong across the business and remain significantly higher than pre COVID levels. With robust written order trends, Our backlog remains at a record level, setting us up for a strong year of shipments as we continue to increase production capacity sequentially Each quarter, we improved product mix capability and worked through our wholesale and retail backlogs. While raw material and freight cost prices remain high and global supply chain disruptions continue, Pricing actions taken to date, including the recent surcharge on our backlog, will begin to flow through our numbers in Q2.
As a result, We expect to finish the fiscal year with a consolidated full year non GAAP operating margin atorneardouble digits, more consistent with our performance in the fiscal 2021 Q4. Finally, as we make investments in the business to strengthen the company for the future, We expect capital expenditures to be in the range of $65,000,000 to $75,000,000 for fiscal 2022. Spending will support updating our La Z Boy Furniture Galleries stores, Updates to our plants and distribution facilities in Neosho, Missouri, new upholstery manufacturing in Mexico and investments in technology solutions across the organization. And now, I will turn the call back to Melinda.
Thanks, Bob. We continue to operate in a very volatile environment with COVID uncertainties, high input costs, ongoing supply chain disruptions and continued strong demand curves. Our team is doing an outstanding job of managing the competing priorities of
our various
stakeholders, including our customers, shareholders and employees. We expect capacity expansion efforts We'll enable strong business growth as we move forward, and we are focused both on near term tactics while designing our future for our 100th year and beyond. I believe the best is yet to come for La Z Boy Incorporated. We thank you for your attention. And now I'll turn the call back to Kathy.
Thank you, Melinda. We'll begin the question and answer period now. Taryn, Please review the instructions for getting into the queue to ask questions.
Thank you. The floor is now open for questions. We'll take our first question from Bobby Griffin with Raymond James. Please go ahead.
Good morning, everybody. Thank you for taking my questions.
Good morning.
I guess the first question or first area I want to hit on is just Production capabilities and the throughput. And just want to make sure I'm understanding your comments correctly and thinking about the right way. But Are you guys thinking that the kind of weekly production capabilities should continue to build sequentially as you bring more People in the plants or capacity comes on, etcetera. So when we look at the Q2, and recognizing you have a record level backlog, we would expect 13 weeks of throughput at least the same rate that we saw here in 1Q. Is that fair?
That's fair. Yes, for our wholesale business with between folks training and just continuing to pick up pace as well as the We are continuing to open. That is a very fair assumption.
Okay. And then I guess secondly, It's unprecedented times naturally with raw material and the pandemic and things like that. So putting the surcharge in your backlog, even though it's the first time, mode. With the environment, it's not necessarily that surprising, but just curious on what the feedback's been given that it's something that's not Typically done in any commentary around that?
Yes. It's, as you said, unprecedented times and it's not an unprecedented action at this in the current environment. We've seen a lot of manufacturers Take similar actions. I mean the challenge is always balancing the needs of our various constituencies, Right between our shareholders, our customers and our employees. And as you mentioned, the situation with Multiple cost components, inflating at historic levels and historic pace for an Extended period.
We held off as long as we could, honestly. And so it was not a light decision to make, but We have taken that decision and are looking to kind of share the challenges Across our businesses and with our both with our own retail, as well as with our customers. And so I mean it's been a challenge, and we're working through that. But we're confident that if If you think about that backlog, a healthy portion of the backlog can still be priced to the end consumer. And that would be the way certainly even on our own retail business that we'll be looking to recoup some of that because we do the same, right?
We charge our own retail from our wholesale business as well. And so Working with our business partners, the opportunity to take a price increase to the end consumer on a healthy portion That backlog would be the way to mitigate a portion of that overall increase.
Okay. That's I guess lastly for me, in the comments you mentioned, I think, half the cash flow back in the business through capital expenditures and M and A and investments like that. But Maybe just can you talk a little bit on your M and A strategy? Has that changed recently now coming post pandemic here? And maybe just refresh us on
Yes. I think the 2 things. We have always said that Opportunistically, we would be interested in purchasing a higher portion of of our furniture galleries and you saw that with the Long Island transaction here this quarter. We continue to interact with our furniture gallery owners To the extent that they're interested in a transaction like that. And it does give us the opportunity to drive some synergies on the overall network.
We also over time, as I mentioned, as we look at kind of our next 6 years or so, we want to take the learnings we've had from Certainly, the Joybird acquisition, where we now have a business model that we're proud of and ready to continue to grow And get better at how we would do that sooner. We've always said we're not a bet the farm acquisition kind of organization, but the opportunity To take our learnings and some of those key skill sets that we have, primarily the supply chain know how that we have and potentially create value by some tack on acquisitions over the next 6 years or more, is certainly an area we'll continue to look at, particularly given the higher cash balances that we've accumulated over the last year or 2.
Thank you. I appreciate the details. Best of luck here going through the rest of the calendar year.
Thank you. Our next question
So Just wondering, so with the price increases on the backlog, any sort of Notable changes as far as order cancellations that you can point to or not? Have you not seen that?
We have not yet seen that yet, Anthony. We're continuing to monitor the situation, but we've seen no change in the Cancellation rates that we typically see.
Got it. Okay. That's great to hear. And then, you mentioned that the Backlog is at a record high level. Did you guys quantify that or maybe I missed it?
We did not quantify it. I will tell you it's higher than it was Then what we did quantify for folks at the in the 10 ks. So we orders came in stronger than we were able to make even though we were making more than we made in the previous quarter.
Got it. Okay. And then given the extended lead times that people are waiting for custom Furniture, just wondering, have you guys seen any changes as far as what people are buying? Or are they shifting more to in Stock merchandise versus custom furniture
or just wondering,
have you seen any changes as to what people are buying?
No real changes, Anthony. I mean, the lines begin to blur a bit because There are situations where the customers come in and chosen not to customize, but they may place an order on something that normally would have been A stock order, so those lines blur a bit, but as far as what folks are ordering, no big changes.
Got it. Okay. And then lastly, I guess, just a little bit more of a housekeeping kind of question. But on the wholesale revenue piece, just If you could just broadly speak about unit volume increase versus price increase, what you saw in the quarter?
From a delivered sales standpoint?
Yes.
Okay. I'd say that the volume was the sales were probably 3% to 4% up due to pricing in the quarter versus the prior year?
The vast majority of the uptick is volume. Yes. Because of that, we mentioned that our stacked pricing at this point is up to High teens, but what's actually coming through undelivered because of the backlog is, call it, a third or less of that.
Got it. Okay. All right. Well, thanks and best of luck.
Thank you.
We'll take our next question from Brad Thomas with KeyBanc Capital Partners. Please go ahead.
Hi, good morning, everybody. A couple of follow-up questions, If I could, I was wondering if you could talk a little bit about written orders and the cadence In the quarter and how you're feeling about the trend, you referenced still feeling like the demand backdrop is very healthy. I know As we get into August and into June July, you were up against months where your written orders had been up, I believe, in the 30% range last year. So just curious How growth was shaping up as you were lapping those difficult comparisons?
Yes. We really like you said, there's You've got a strange base of comparisons for this quarter, right, because we are essentially shut down. Most of our customers were shut down in the first in May, a year ago, mixed openings finishing up in June, then everyone going to town in July. But broadly, what I would say is we are not Seeing this year, right? If I look at this year, we are not seeing month to month any significant drop off in the order rates at this point.
Got you. And so as you've lapped, are you still posting some growth In the written orders, as you lap these tougher comparisons?
In Q1, the answer is yes. So across that, What Melinda just described is a strange period of very low in May and then increasing in June July. So across the Q1 quarter, we did see an increase.
Which is again, both a good thing and a challenge, right? What that says is we're really not seeing the slowing. You have to expect some of that We'll come at some point, but it's also a bit of our challenge on why our backlog continues to grow because even though we are manufacturing more furniture mode incrementally each week, each month, that demand pace continues to be solid.
Yes.
Okay. And then if we to follow-up on the earlier question on Price versus unit, I mean if we look at the written quarters of 10.4% in the July quarter, mode. Your pricing as of now is running up high teens as you mentioned. Does that mean basically on a run rate basis we're starting to get to flat or negative year over year On the unit basis? I'm just trying to think about mathematically how it works and break the order trend apart a little bit here.
Yes. I mean units overall will continue to increase. What we are producing, units continue to increase each quarter. Now on any given, When you get into the nuances like we'll see some challenges likely in our Casegoods business as we go forward this next Quarter because a healthy portion of that is imports out of Vietnam and you know the challenges there. So The devil is in the details on some of those pieces.
Our U. K. Business has Heavy orders lower, delivery in the near term. So on the fringes, there's some Overall ups and downs, but if you think about the biggest chunk of our business, such as what we're manufacturing for North America on the La Z Boy brand as well as for the Joybird brand, units continue to increase sequentially and year on year.
Okay, great. And then just a last one for me on gross margin. With the price increases and now the Backlog price increase, does this set up this 1st fiscal quarter as kind of the low watermark For gross margin to where it may still be down in the October quarter, but at a lesser rate than what you saw in 1Q, is that sort of the way to think about the cadence going forward Yes,
that's correct. That's
correct, yes.
Okay, great. Thank you so much and best of luck.
Thank
you. Thank you.
That concludes our question and answer session. We'll turn the floor back to our presenters for closing remarks.
Thank you everyone for joining us this morning. Should you have any follow-up questions, please give me a call. Thank you and have a great day.
Ladies and gentlemen, this does conclude today's teleconference. We thank you again for your participation. You may disconnect your lines at this time. Have a great day.