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Nov. 20, 2019, 5:02 p.m. EST

10-Q: LA-Z-BOY INC

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We have prepared this Management's Discussion and Analysis as an aid to understanding our financial results. It should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. After a cautionary note about forward-looking statements, we begin with an introduction to our key businesses and then provide discussions of our results of operations, liquidity and capital resources, and critical accounting policies. Cautionary Statement Concerning Forward-Looking Statements La-Z-Boy Incorporated and its subsidiaries (individually and collectively, "we," "our" or the "Company") make forward-looking statements in this report, and its representatives may make oral forward-looking statements from time to time. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations. More specifically, forward-looking statements may include information regarding: ? future income, margins and cash flows ? future economic performance ? future sales ? industry and importing trends ? adequacy and cost of financial resources ? management plans and strategic initiatives

Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "estimates," "hopes," "plans," "could," "intends" and "expects" or similar expressions. With respect to all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those we anticipate or project due to a number of factors, including: (a) changes in consumer confidence and demographics; (b) the possibility of a recession; (c) changes in the real estate and credit markets and their effects on our customers, consumers and suppliers;

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establishing and maintaining relationships with our Asian suppliers, as well as identifying efficiencies and savings opportunities. We also have contracts with several suppliers in Asia to produce products that support our pure import model for casegoods.

Our company-owned retail business. We are growing this business by increasing same-store sales through improved execution at the store level and by acquiring existing La-Z-Boy Furniture Galleries(R) stores and opening new La-Z-Boy Furniture Galleries(R) stores, primarily in markets that can be serviced through our regional distribution centers, where we see opportunity for growth, or where we believe we have opportunities for further market penetration.

Our unique multi-channel distribution network. In addition to our branded distribution channels, nearly 2,100 other dealers sell La-Z-Boy products, providing us the benefit of multi-channel distribution. These outlets include some of the best-known names in the industry, including Art Van, Nebraska Furniture Mart, and Slumberland. Our other brands, England, American Drew, Hammary, and Kincaid, enjoy distribution through many of the same outlets. We believe there is significant growth potential for our brands through these retail channels.

Our on-trend products including stationary upholstered furniture featured in our Live Life Comfortably(R) marketing campaign. While we are known for our iconic recliners, they account for less than half of our sales in dollars, and we believe we have the potential to expand sales of our other products. To stimulate growth, our Live Life Comfortably(R) marketing campaign features celebrity brand ambassador, Kristen Bell, and focuses on expanding our digital marketing and e-commerce capabilities to build traffic across our multiple digital and physical properties. We are driving change throughout our digital platforms to improve the user experience, with a specific focus on the ease by which customers browse through our broad assortment, customize products to their liking, find stores to make a purchase, or purchase at www.la-z-boy.com .

Our innovative products, including stain-resistant iClean(TM) and eco-friendly Conserve (TM) fabrics and our power products, some of which include dual mechanisms and articulating headrests. Our recent innovation, duo(R), is a revolutionary product line that features the look of stationary furniture with the power to recline at the push of a button. We are committed to innovation throughout our business, and to support these efforts we opened our new state-of-the-art Innovation Center in January 2019 at our Dayton, Tennessee campus.

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Our multi-faceted online strategy to participate in and leverage the growth of online furniture sales. On July 30, 2018, we purchased Joybird, a leading e-commerce retailer and manufacturer of upholstered furniture, which positions us for growth in the ever-changing online selling environment and allows us to better reach millennial and Gen X consumers and leverage our supply chain assets. In addition, we continue to increase online sales of La-Z-Boy furniture through la-z-boy.com and other digital players, such as Wayfair and Amazon.

Our reportable operating segments are the Upholstery segment, the Casegoods segment and the Retail segment.

Casegoods Segment. Our Casegoods segment consists of one operating segment that sells furniture under three brands: American Drew(R), Hammary(R), and Kincaid(R). The Casegoods segment is an importer, marketer, and distributor of casegoods (wood) furniture such as bedroom sets, dining room sets, entertainment centers and occasional pieces, and also manufactures some custom upholstered furniture. The Casegoods segment sells directly to major dealers, as well as La-Z-Boy Furniture Galleries(R) stores, and a wide cross-section of other independent retailers.

Retail Segment. Our Retail segment consists of one operating segment comprising our 155 company-owned La-Z-Boy Furniture Galleries(R) stores. The Retail segment primarily sells upholstered furniture, in addition to some casegoods and other accessories, to the end consumer through these stores.

Corporate & Other. Corporate & Other includes the shared costs for corporate functions, including human resources, information technology, finance and legal, in addition to revenue generated through royalty agreements with companies licensed to use the La-Z-Boy(R) brand name on various products. We consider our corporate functions to be other business activities and have aggregated them with our other insignificant operating segments including our global trading company in Hong Kong and Joybird, an e-commerce retailer that manufactures and sells upholstered furniture such as sofas, loveseats, chairs, ottomans, sleeper sofas and beds, and also imports and sells casegoods (wood) furniture such as occasional tables and other accessories. Joybird sells to end consumers primarily online through its website, www.joybird.com . None of the operating segments included in Corporate & Other meets the requirements of reportable segments at this time.







        Results of Operations
        Fiscal 2020 Second Quarter Compared with Fiscal 2019 Second Quarter
        La-Z-Boy Incorporated
                                          Quarter Ended                        Six Months Ended
        (Unaudited, amounts in
        thousands, except                                          %                                      %
        percentages)                 10/26/19      10/27/18      Change     10/26/19      10/27/18      Change
        Sales                       $ 447,212     $ 439,333        1.8 %   $ 860,845     $ 824,028        4.5 %
        Operating income               29,601        28,500        3.9 %      53,023        51,660        2.6 %
        Operating margin                  6.6 %         6.5 %                    6.2 %         6.3 %
        


Sales

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Operating Margin

Operating margin increased 10 basis points in the second quarter and decreased 10 basis points in the first six months of fiscal 2020 compared with the same periods a year ago.

? Gross margin increased 110 basis points and 150 basis points in the second quarter and in the first six months of fiscal 2020, respectively, compared with the same periods a year ago.

o Changes in our consolidated sales mix increased gross margin by 60 basis points and 110 basis points in the second quarter and the first six months of fiscal 2020, respectively, compared with the same periods last fiscal year. This benefit was driven by the growth of our Retail segment and the acquisition of Joybird, which have higher gross margins than our Upholstery and Casegoods segments.

o Purchase accounting charges associated with acquisitions were lower in the second quarter and the first six months of fiscal 2020, which provided a 50 basis points and 30 basis points benefit to gross margin in the same periods this year, respectively, when compared to the prior year.

o Our Upholstery segment's gross margin benefited from lower raw material costs in both the second quarter and the first six months of fiscal 2020.

o Partly offsetting these benefits was a decline in our Casegoods segment's gross margin, primarily due to higher ocean freight and the impact of higher tariff costs on certain occasional tables.

o In connection with our supply chain initiative, we recognized costs resulting from the shift in manufacturing operations from closed facilities to other manufacturing locations in the second quarter and the first six months of fiscal 2020, which resulted in a gross margin decrease of 60 basis points and 50 basis points, respectively.

? Selling, general, and administrative ("SG&A") expenses as a percentage of sales increased 100 basis points and 160 basis points in the second quarter and the first six months of fiscal 2020, respectively, compared with the same periods a year ago.

o Changes in our consolidated sales mix increased SG&A expenses as a percentage of sales by 80 basis points and 190 basis points in the second quarter and first six months of fiscal 2020, respectively, compared with the same periods last fiscal year. This increase was driven by the growth of our Retail segment and the acquisition of Joybird, which have higher levels of SG&A expense as a percentage of sales than our Upholstery and Casegoods segments.

We discuss each segment's results in the following section.







        Upholstery Segment
                                          Quarter Ended                         Six Months Ended
        (Unaudited, amounts in
        thousands, except                                           %                                      %
        percentages)                 10/26/19      10/27/18      Change      10/26/19      10/27/18      Change
        Sales                       $ 320,855     $ 317,093        1.2  %   $ 614,271     $ 610,491        0.6 %
        Operating income               32,080        32,152       (0.2 )%      58,347        56,036        4.1 %
        Operating margin                 10.0 %        10.1 %                     9.5 %         9.2 %
        


Sales

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Operating Margin

Operating margin decreased 10 basis points and increased 30 basis points in the second quarter and the first six months of fiscal 2020, respectively, compared with the same periods a year ago.

? Gross margin decreased 30 basis points in the second quarter and increased 30 basis points in first six months of fiscal 2020, compared with the same periods a year ago.

o Costs recognized in connection with our supply chain optimization initiative resulted in a gross margin decrease of 90 basis points and 70 basis points in the second quarter and in the first six months of fiscal 2020, respectively.

o Additionally, we experienced inflationary pressures in our supply chain which resulted in an 80 basis point and a 60 basis point decrease in gross margin in the second quarter and the first six months of fiscal 2020, respectively.

o Partly offsetting these items, lower raw material commodity prices provided a 160 basis point and a 150 basis point benefit to the segment's gross margin in the second quarter and the first six months of fiscal 2020, respectively.

? SG&A expense as a percentage of sales decreased 20 basis points in the second quarter and was flat in the first six months of fiscal 2020, compared with the same periods a year ago.







        Casegoods Segment
                                          Quarter Ended                         Six Months Ended
        (Unaudited, amounts in
        thousands except                                            %                                       %
        percentages)                 10/26/19      10/27/18      Change      10/26/19      10/27/18      Change
        Sales                       $  29,390     $  31,377       (6.3 )%   $  56,525     $  59,763       (5.4 )%
        Operating income                2,205         3,761      (41.4 )%       4,802         6,841      (29.8 )%
        Operating margin                  7.5 %        12.0 %                     8.5 %        11.4 %
        


Sales

? SG&A expense as a percentage of sales was 20 basis points lower in the second quarter of fiscal 2020 and 20 basis points higher in the first six months of fiscal 2020, compared with the same periods a year ago.







        Retail Segment
                                          Quarter Ended                        Six Months Ended
        (Unaudited, amounts in
        thousands, except                                          %                                      %
        percentages)                 10/26/19      10/27/18      Change     10/26/19      07/28/18      Change
        Sales                       $ 148,404     $ 139,686        6.2 %   $ 291,400     $ 258,914       12.5 %
        Operating income                8,412         6,563       28.2 %      16,889        11,021       53.2 %
        Operating margin                  5.7 %         4.7 %                    5.8 %         4.3 %
        


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Sales

The Retail segment's sales increased $8.7 million and $32.5 million in the second quarter and the first six months of fiscal 2020, respectively, compared with the same periods a year ago. The increase in sales in the second quarter of fiscal 2020 compared to the same period a year ago was primarily due to a 5.0% increase in same-store delivered sales, or $6.6 million, driven by improved traffic trends and continued strong execution at the store level. Sales in the first six months of fiscal 2020 increased compared to the same period a year ago primarily due to $22.3 million in sales from acquired stores and a 4.3% increase in same-store delivered sales, or $10.8 million.

Operating Margin

Operating margin increased 100 basis points and 150 basis points in the second quarter and the first six months of fiscal 2020, respectively, compared with the same periods a year ago.

? SG&A expense as a percentage of sales improved 10 basis points and 120 basis points in the second quarter and the first six months of fiscal 2020, respectively, compared with the same periods a year ago, as we were better able to leverage our fixed costs (primarily occupancy) on increased delivered same-store sales. Additionally, the first six months of fiscal 2020 benefited from acquired stores which operate with lower SG&A expense as a percentage of sales compared with our existing stores.







        Corporate and Other
                                          Quarter Ended                          Six Months Ended
        (Unaudited, amounts in
        thousands, except                                           %                                         %
        percentages)                 10/26/19      10/27/18      Change       10/26/19       10/27/18      Change
        Sales                       $  24,311     $  22,378        8.6  %   $   44,863     $   26,243       71.0  %
        Eliminations                  (75,748 )     (71,201 )     (6.4 )%     (146,214 )     (131,383 )    (11.3 )%
        Operating loss                (13,096 )     (13,976 )      6.3  %      (27,015 )      (22,238 )    (21.5 )%
        


Sales

Operating Loss

. . .

Nov 20, 2019

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