La-Z-Boy Inc
NYSE:LZB
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
30.88
45.77
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
La-Z-Boy Inc
You don't have any saved screeners yet
Greetings, and welcome to the La-Z-Boy Fiscal 2018 Fourth Quarter and Year End Results Conference Call. At this time, all participants will be in a listen-only-mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Kathy Liebmann, Director of Investor Relations and Corporate Communications. Please go ahead.
Thank you, Rob. Good morning. And thank you for joining us to discuss our fiscal 2018 fourth quarter and year end results. With us this morning are Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer; Mike Riccio, our Chief Financial Officer; and Melinda Whittington, Senior Vice President and who will become CFO of La-Z-Boy Incorporated tomorrow. Kurt will begin today's call, and then Mike will speak about the financials before turning the call back to Kurt for his concluding remarks. We will then open the call to questions. A telephone replay of the call will be available for one week beginning this afternoon. Slides will accompany this presentation and are available for viewing through our webcast link.
These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles to communicate with investors about the company's current operations and future prospects. We will make forward-looking statements during this call. So I will repeat our usual safe harbor remark. While these statements reflect the best judgment of management at the present time, they are subject to numerous future risks and uncertainties as detailed in our regular SEC filings, and they may differ materially from actual results due to a wide range of factors. We undertake no obligation to update any forward-looking statements made during this call.
And with that, let me 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. This morning, I am delighted to welcome Melinda Whittington to our team. Melinda brings with her excellent experience and expertise, with more than 25 years as a financial professional in the consumer products arena.
She is a leader with a proven track record of operational excellence, and she will be an asset to our organization, as well as a great fit for our culture. I look forward to working with her, and I am confident you will enjoy getting to know her and working with her as well.
At the same time, it's with mixed emotions that we say goodbye to Mike. He has been a great partner and advocate of La-Z-Boy, playing a pivotal role in helping transform the company during his tenure. While his contributions were many over his 12 years as CFO, his lasting legacy will be the work he did to strengthen our balance sheet.
With the philosophy of financial conservatism and discipline, Mike leaves us in an excellent financial position, one that will enable us to invest in our future and weather inevitable economic cycles. I have the highest regard for Mike as a colleague, as a leader and a friend. And I thank him for his many contributions to La-Z-Boy and wish him all the best in his retirement. Mike will step down as CFO at the end of today, and Melinda will become our new CFO as of tomorrow.
So now let me turn to the business at hand. By now, you have all had the opportunity to see our results for fiscal 2018 and the fourth quarter, which we released late yesterday afternoon. All in all, it was a solid year where we maintained top quartile profitability performance within the furniture industry.
I will take a step back for a moment to provide some perspective on our company in terms of how we approach the business and how we are executing a dual growth strategy.
First, to capture more share with our core customer, and second, to expand our business with younger consumers, who exhibit different shopping characteristics and patterns.
For the past nine decades, our commitment to provide innovative, stylish and high quality products and services to the consumer has not wavered. And while the face of La-Z-Boy may look different today, our priority is to invest in the company, build on our strengths, take calculated risks, develop strategic advantages in a dynamic marketplace and position the company for long-term financial success. Our consistent strong cash generation allows for that, and at the same time, provides the opportunity to venture into new areas.
In fiscal 2018, we engaged in four large capital projects across the company, primarily designed to enhance our operations and competitive positioning. We also strengthened the La-Z-Boy Furniture Galleries store network by adding stores and upgrading others into the new design format.
And finally, we unveiled a multi faceted Internet strategy that ensures flexibility in the e-commerce world and allows for participation in the consumer shift to digital shopping and purchasing.
Before reviewing the quarter, I will run through a few highlights for the full year - for the full fiscal 2018 year. Consolidated sales increased 4.2%, and our consolidated operating margin was 8.2%, driven by solid performance in all three business segments.
Earnings per diluted share for fiscal '18 were $1.67 versus $1.73 in the prior year. The two main call-outs that make the comparisons between fiscal '18 and fiscal '17 somewhat challenging are the inflationary pressure from raw materials and tax reform.
We generated $116 million in cash from operating activities and returned $79 million to shareholders through share repurchases and an increased dividend.
Additionally, written same-store sales for the La-Z-Boy Furniture Galleries store network increased 2.3%, reflecting increases at all four quarters throughout the year. We ended fiscal 2018 with a strong balance sheet, access to lines of credit and virtually no debt, providing us with the financial flexibility to continue to invest in the business and to drive long-term growth, profitability and returns to our shareholders.
Now let me review the quarter and each operating segment. First, upholstery. For the quarter, on a slight increase in sales for the upholstery segment, we delivered a solid operating margin of 12.8%. There are still a lot of noise across the industry with respect to raw material inflation, particularly for foam, lumber and steel, and we are not immune to it. Transportation costs have also become an issue.
At this point, we believe we have appropriately balanced cost inputs and selling prices, while remaining sensitive to offering consumers innovative, quality products and compelling price points.
In addition to the drag on our margins from these inflationary pressures, unit volume was marginally lower than the previous year, and that also negatively impacted our margin for the period.
On the product side, Power continues to be a growing category, and our Duo line is outpacing expectation, already becoming a significant collection. And at the April High Point market, we introduced what we are terming as Reimagined Urban Attitudes collection with a new set of frame styles that could easily be mixed and matched to provide a foolproof decorating experience for the consumer.
It also features a curated collection of iClean's performance fabrics to simplify design. Urban Attitudes has been a very - has been very successful for us over the past few years, and this refreshed collection was well received by dealers. We look forward to it reaching the retail floors this fall, supported by a comprehensive and integrated marketing campaign.
Our new innovation center at our Dayton, Tennessee campus is scheduled to open this summer and is a testament to our commitment to remain the industry's most innovative manufacturer. This year, we established a formalized process to ensure a regular cadence of innovative product introductions.
This help keep the La-Z-Boy name at the forefront in consumers' minds when they think about furniture, as it's not only great-looking and comfortable but offers all the bells and whistles they want.
This process will be supported by the new innovation center where our engineering and manufacturing teams are working side by side to develop, test, refine and bring exciting and progressive new products, like Duo to the market.
Supply chain excellence has been a hallmark to our upholstery platform, both in terms of procurement and also our day to day manufacturing. And as our sales and marketing teams worked to drive sales across all product category and channels, we will also benefit as we gain further traction with Duo, renewed interest in Urban Attitudes and momentum with other product categories. We will be able to further leverage the fixed cost structure of our plants with the additional volume.
England, our upholstery company, with a unique manufacturing and distribution process, which allows it to ship orders in 21 days or less, is working to expand its footprint across the United States.
In February, we began construction on its main plant to add some 80,000 - 87,000 square feet of manufacturing space to support the volume growth England has experienced over the last several years.
Additionally, we broke ground on the site for their new corporate office building to replace the one we lost in a fire a year ago, May. The New England corporate office as well as the innovation center are expected to be LEED certified, just like our world headquarters is today.
Last summer, we unveiled an e-commerce strategy that includes three components, with the first to sell more La-Z-Boy furniture online. We have made a number of enhancements to la-z-boy.com to further engage the consumer and provide meaningful information.
However, research and anecdotal evidence tells us that many of our core customers still prefer to shop in-store, touch and feel the furniture and avail themselves to all the services offered on-site, including free In-Home Design services.
As we had noted in the past, this is our preference too, as we have the opportunity to sell a full-room group of furniture and increase the average ticket.
That said, it is imperative to provide a best-in-class site and experience to the consumer, and we continue to see an increase in traffic to la-z-boy.com and believe it is providing increased traffic to the La-Z-Boy Furniture Galleries store system, as well as all of our La-Z-Boy dealers.
In addition to selling La-Z-Boy furniture on la-z-boy.com and on Wayfair, we lost - we launched a test program with Amazon late February. While many La-Z-Boy consumers seem to prefer to shop in a retail outlet, one of our objectives is to increase sales with younger customers, many of whom prefer to shop online.
And since the La-Z-Boy brand does not have the same appeal to the Gen X or the millennial consumer as much as our core customer, we need to go after this consumer group through other means.
The second component of our e-com strategy is to leverage the strength of our world class supply chain to support other e-commerce brands as it provides a powerful combination of efficiency, customization ability and speed to market advantages. We have been engaged in this endeavor for more than a year and are looking for additional opportunities to leverage our amazing supply chain.
And finally, we are investing in early stage furniture brands and companies with strong business models with a focus on selling directly to consumers online.
While e-commerce is a small part of our business today, we believe it has the potential to play a more significant role in the future. We are investing and taking action with these various opportunities using a portfolio approach to determine what will work well and provide value ahead, and we will make appropriate adjustments as we move forward.
With respect to our store build-out program, we completed the five years in our 4-4-5 moniker. While we did not make the first four, meaning the 400-store target by year five, I'm happy to report that while many retailers across North America are closing locations, we are doing just the opposite.
The La-Z-Boy Furniture Galleries store system is vibrant and growing and is a key element of our expansive strategy, and the company, along with our independent dealer base, will continue to open stores in pursuit of the 400 store target.
The main delay in reaching our target by year five of the 4-4-5 was principally a result of real estate challenges in circuit - in certain markets, such as New York, Boston and Miami, as we were unwilling to compromise our store evaluation process and operating metrics.
Our objective continues to be to build a $1.6 billion retail business through the store network, and we believe we can achieve that level over time with our improved store performance even if we have fewer stores than our original plan.
Across the network, 20 projects were completed in fiscal 2018, including new stores, relocations and remodels. And in the fourth quarter, two stores were opened, two stores were closed and one was relocated.
This activity significantly upgraded the store network by moving stores into better location and re-modeling the older stores. We ended fiscal 2018 with 315 La-Z-Boy Furniture Galleries stores across North America, with 132 in the new design format.
For fiscal '19, we are planning for approximately 24 projects to be completed and expect to end the year with 355 stores in total, with about 154 stores in the new design concept format.
For the fourth quarter of fiscal '18, written same-store sales for the Furniture Gallery network increased 3.9% on top of a 2.4% increase in last year's fourth quarter. This marks the fifth consecutive quarter of written same-store sales increases for the network. For the full 2018 fiscal year, same-store written sales for the network increased 2.3%.
Now let me turn to our case goods business. Sales for fiscal '18 were $30.6 million and in - fourth quarter, excuse me, were $30.6 million, an increase of 17.5% from last year's fourth quarter revenue of $26 million.
The operating margin for the segment increased to 9.2% versus 7.8% in the comparable period in fiscal 2017. And for the full year, the segment achieved an operating margin of 10.5% versus 8.6% in fiscal 2017.
With an all-import model, our supply chain team has done an excellent job in flowing product from overseas to ensure we have a high in-stock position on our bestsellers as well as most of our other inventory, allowing us to ship product quickly to our dealers, typically, in as little as five days from the time we receive an order.
This has enabled us to gain floorspace with many existing dealers and opened new accounts with other retailers. Additionally, our product line-up is as compelling as it has been in the last decade, featuring more transitional styling that is more appealing to today's customers who tend to live in less formal spaces.
The April market, Kincaid, introduced Trails, a nature-inspired collection made of solid oak, solid steel bar and top grain leather, playing to the consumer’s love of the outdoors and growing interest in organic products. This collection was met with overwhelming positive response by dealers, and we look forward to it reaching retail floors in the fall.
We are very pleased with the trajectory of our case goods business, which is well positioned for growth and market share gains as it continues to leverage supply chain excellence and domestic distribution capabilities to provide the excellent service to our customers with beautifully designed collections.
And now moving to retail. While most of you are very familiar with our integrated retail strategy, some of you on today's call may be new to our story, so the benefit of this strategy bears repeating.
Sales through our company-owned La-Z-Boy Furniture Galleries stores provide the company with the greatest level of profitability due to our integrated retail model where we benefit from the combined margin, earning a profit on both the wholesale and retail sales at the same time.
Additionally, as the retail business becomes a larger portion of our overall business, we will benefit from its increased size, capturing more of the profit on sales of our product.
Sales in the fiscal fourth quarter increased 3% to $121 million versus the prior year. On the core 138 stores, including from the last year's fourth quarter, delivered sales decreased 1.1% compared with a decrease of 8.2% in the prior period.
The segment's operating margin increased 6.6 - increased to 6.6% for the 2018 fourth quarter, the highest of all four quarters throughout the year. While traffic was down for the period, consistent with other retailers, we know that a large percentage of our consumers are interfacing with us on our website before setting out to shop in retail locations, and for the period, our conversion was positive.
When consumers enter our stores, they are able to take advantage of all the services we offered, which makes for a better shopping experience and typically results in a more satisfied consumer. For the quarter, increased custom orders and design sales drove an increase in the average ticket.
For the fourth quarter, the company opened one new La-Z-Boy Furniture Gallery store and closed two. And for fiscal '18, the company opened six new stores, closed four and acquired one from an independent dealer, bringing our company owned store count to 146; of which, 58 are in the new design concept. With two new store openings, two closures and three remodels planned for fiscal '19, our store count is projected to remain the same at 146 at the end of next year.
I will now turn over the call to Mike for him to review our financials. Michael?
Thank you, Kurt. I will quickly review our numbers for the fourth quarter since Kurt already spoke about our performance by segment.
Sales for the fiscal 2018 fourth quarter were $420 million, up 1.8% from a $413 million in last year's fourth quarter. Consolidated operating income increased 5% to $45.7 million, and the consolidated operating margin increased to 10.9%.
The company reported net income attributable to La-Z-Boy Incorporated of $34 million or $0.72 per diluted share versus $28 million or $0.57 per diluted share in the prior year period. The current year quarter included a $0.06 per share benefit related to tax reform.
Consolidated sales for the fiscal 2018 full year were $1.58 billion, an increase of 4.2%. For the year, consolidated operating income declined to $129 million from $133 million in fiscal 2017, and the consolidated operating margin was 8.2% versus 8.8% last year.
The company reported net income attributable to La-Z-Boy Incorporated of $81 million or $1.67 per diluted share. For fiscal 2018 compared with fiscal 2017, net income of $86 million or $1.73 per share. The reduction for the current year period was primarily due to tax reform charges.
Our consolidated gross margin decreased 0.8 percentage points in fiscal 2018, primarily a result of the decline in the upholstery segment's gross margin, stemming from the raw material price increases that Kurt mentioned earlier.
The gross margin in the case goods segment increased 0.2 percentage points for the year due to increased volume and a shift in our product mix to newer, higher margin collections, which was offset somewhat by higher freight expense on imported product.
In our retail segment, the gross margin declined 0.2 percentage points for the year. Offsetting some of the inflationary pressures to our gross margin was an improvement of 0.2 percentage points in fiscal 2018 due to the change in our consolidated sales mix as retail now comprises a higher percentage of our overall business and carries a higher gross margin compared to the wholesale segments. Additionally, fiscal 2017 included a 0.2 percentage point benefit related to a favorable legal settlement.
SG&A as a percent of sales decreased 0.2 percentage points in fiscal 2018 compared with fiscal 2017, primarily as a result of lower incentive compensation expense, which was 0.4 percentage points lower in fiscal 2018 compared with fiscal 2017, due to our consolidated financial performance for fiscal 2018 being below our incentive-base targets for the year.
Additionally, we benefited from favorable absorption of fixed SG&A cost on higher sales and a reduction in discretionary spending. Partially offsetting these items was the impact of the previously announced legal settlement, which increased SG&A expense as a percent of sales by 0.3 percentage points for '18 versus '17.
With the announced settlement, which resolved all of our past and future obligations at issue in the litigation, we recognized an additional charge of $4.1 million in the third quarter of fiscal 2018.
As I noted a moment ago, our retail business became a larger component of our consolidated sales. Our SG&A as a percent of sales were also increased as retail carries a higher level of SG&A compared to the wholesale businesses. For the year, this accounted for 0.3 percentage point increase in our consolidated SG&A expense.
Now turning to the balance sheet. During the quarter, we generated $25 million in cash from operating activities, and for the year, we generated $116 million. We ended fiscal 2018 with $135 million in cash and cash equivalents, $34 million in investments and enhanced returns on our cash and $2.4 million in restricted cash.
For fiscal 2017, our capital allocation included share buybacks, dividends, capital expenditures and cash used for acquisitions.
For the full fiscal year, we spent $57 million to purchase 2 million shares, including 400,000 shares in the fourth quarter. This leaves 6.7 million shares in the program authorized for purchase or approximately 14% of the total outstanding shares.
Based on cash flows and other capital needs to invest in the business to drive growth, we plan to continue to be opportunistic in the market with respect to buyback activity. We also paid $22 million in dividends, returning a total of $79 million to shareholders when combined with our share repurchases.
During the fiscal year, we also invested almost $16.5 million when we finalized our payment for the UK and Ireland business early in the year and acquired one La-Z-Boy Furniture Gallery store.
We will continue to use our cash prudently during fiscal 2019, with our first priority to invest in the business to drive growth; the second to pay our dividend, and depending on how much we spend on the first two, the third would be to buy shares back.
Capital expenditures for fiscal 2018 were $36.3 million compared with $20.3 million for fiscal 2017. Capital expenditures were higher in fiscal 2018, primarily due to the construction of our new innovation center.
Our effective tax rate for continuing operations was 36.7% for fiscal 2018 compared with 33.5% for fiscal 2017. As we reported in the third quarter, on December 22nd, 2017, the Tax Cuts and Jobs Act, as we call the Tax Act, was enacted into law. Most of its provisions are effective for tax years beginning on or after January 1, 2018.
Because we are a fiscal year U.S. taxpayer, the majority of the provisions, such as elimination of the domestic manufacturing deduction, new taxes on certain foreign sourced income and new limitations on certain business deductions, will begin applying to us in fiscal 2019.
For fiscal 2018, the most significant impacts include a lower U.S. federal corporate income tax rate applied to our fiscal 2018, a revaluing of our U.S. net deferred taxes and a new transition tax on the deemed repatriation of certain foreign earnings.
The phasing in of the lower corporate statutory income tax rate resulted in a blended federal rate of 30.4% for fiscal 2018 compared with the previous 35%. The federal statutory tax rate will be reduced to 21% in subsequent fiscal years.
We recorded a charge of $5.5 million in fiscal 2018, reflecting the net effect of the Tax Act. This included a $10 million charge for the re-measurement of certain deferred taxes and related amounts, a provisional $0.2 million of income tax expense for the estimated effects of the transition tax, and a benefit of $4.7 million, primarily related to the lower blended federal statutory tax rate.
The change from the third quarter is primarily due to the adjustments to the transition tax and fourth quarter earnings at a lower blended federal rate.
In December of 2017, the Securities and Exchange Commission staff issued guidance, which provides that companies that have not completed their accounting for the effects of the Tax Act should include a provisional amount based on their reasonable estimates in their financial statements, with final adjustments not to extend beyond one year of the enactment date.
As of April 28, 2018, we have not completed our accounting for all the tax effects of the Tax Act. However, we made reasonable estimates to record provisional adjustments during fiscal 2018. We may alter our estimates as we continue to finalize calculations and review further guidance that may be issued.
Impacting our effective tax rate for fiscal 2018, in addition to the above items related to the Tax Act, was a net tax benefit of $2.4 million, primarily from research and development credits related to the amended prior year tax returns and the release of valuation allowances relating to certain U.S. state deferred tax assets and state income tax credits. Absent discrete adjustments, the effective tax rate in fiscal 2018 would have been 30.6%.
Before turning the call back to Kurt, I'd like to go through a few items that are important for fiscal year 2019. Raw material economics. While Kurt spoke of our quest to balance cost inputs with selling prices depending on the timing of various supply contracts, there may be some timing differences to deal with through the summer period.
As we move into the early fall, we believe these differences will settle out and will be in the equilibrium, provided we do not continue to face rising costs from this point forward.
Capital expenditures. We expect total capital expenditures for fiscal 2019 to be in the range of $55 million to $65 million, higher in the fiscal 2018 due to the construction of the new corporate office building and planned expansion for our England subsidiary, plant upgrades to our manufacturing facility in Dayton, Tennessee, and the relocation of 1 of our regional distribution centers, all of which we anticipate being completed by the end of this fiscal year.
Sales for the fiscal 2019 first quarter. As a reminder, our first quarter is typically the weakest in terms of sales and earnings due to a general slowdown throughout the furniture industry related to the summer period.
As a result of this, the majority of our manufacturing facilities will close for a week in July for vacation and maintenance. With lower volume during the period and addition to the one week without production and shipments, we historically convert at a lower rate during the first quarter.
I would like to thank all of you for your interest in and support of La-Z-Boy over the years. It has indeed been a pleasure to work with you. I believe we have built a great business here at La-Z-Boy and that this company will continue to grow and prosper.
While I look forward to my retirement, I will certainly miss many aspects of my day-to-day here and will be watching the company closely to see how it evolves. And of course, it goes without saying, I wish Melinda all the best in her new role as CFO of La-Z-Boy.
And now I'll turn the call back to Kurt for his concluding remarks.
Thank you, Mike, and good luck. I too see a promising future for La-Z-Boy. We are playing the long game and are making prudent and strategic investments across the company to ensure it continues to evolve in a dynamic marketplace.
A solid balance sheet and consistent cash flows are enabling us to invest in our brand and our global supply chain, which we believe are key to long-term success, while providing the ability to pursue a multidimensional e-commerce strategy to capture a new and younger customer.
In this changing environment, our leadership team challenges itself every day to drive growth, continue to create innovative product and gaining market share by leveraging our supply chain in support of such endeavors.
I'm invigorated by what is yet to come, and I'm confident in this company's long-term prospects as we capitalize on our strong legacy of innovation and our uncompromising commitment to evolve and meet the challenges in a changing world.
We want to thank you for your interest in La-Z-Boy Incorporated. And we'll turn over the call to Kathy to provide some instructions for getting into the queue for our questions. Kathy?
Thank you, Kurt. We will begin the question-and-answer period now. Rob, please review the instructions for getting into the queue to ask questions.
Thank you, Kathy. [Operator Instructions] Thank you. The first question today comes from the line of Bobby Griffin with Raymond James. Please proceed with your question.
Good morning. Good morning, guys and I appreciate you taking my questions. And Mike, congrats on the retirement. It's been a pleasure to work with you, and I wish you nothing but the best going forward.
Thanks, Bobby.
I just want to quickly follow-up on some of the raw material comments. Maybe just to help us understand, what is - what are the current trends that you're seeing in some of those items, like steel and foam? Has it finally started to level out where we can then understand as you play a little bit of the pricing catch-up, the back half will look a little better or is the trajectory still kind of inflationary on - if we think about on the graph?
So you have to quantify this, Bobby, as to what we know today. We have had to take over the last 12 months two price increases because of the inflationary pressure, particularly on steel, lumber and foam. The last one of which went into effect June 1st. And should nothing else change, we believe by the second quarter of fiscal '19, we should be at that equilibrium.
But as soon as I say that, we are now also faced with some challenges on tariffs and have no clear path to know whether or not the raw material increases have topped out. We have no indication that we've got anything coming in the future that we have planned on.
But we really didn't expect the second round of increases last fall either. So we'll just have to see what happens, and you really can't get ahead of it. You have to wait until you deal with the raw materials and then decide how much you pass on and how much you keep.
Okay. That's helpful. The tariff issues, is that potentially on like some of the Canadian tariffs for your business that's up there?
Yeah. There's a tariff of approximately 10% being enacted on all furniture coming from America going into Canada. And then we learned late last week that there is the potential to have a tariff on the actuators that are coming from China that you - are used at most of the industry's power products.
Okay…
And then there's the announcement of a plan for more tariffs coming. So it is an uncertain time as far as our cost inputs.
Okay. Thank you. And then lastly from me. Was there some delivery impacts or maybe written orders late in the quarter. Because the written order business during the quarter was fairly strong. The delivered business wasn't quite as strong. So I was just curious if there's any timing issues there. I noticed in the 10-K, the backlog was up pretty nicely in upholstery?
Yeah. We have seen a steady increased progression. I mean, you saw the written sales was almost 4% for the network in Q4, and the average for the year was about 2.7%. So there was some acceleration. And these are all -- there's always a little bit of timing issues because of the way the backlog and our predominance of custom orders work.
But nothing significant and that gap will close over time as eventually the increased written business gets delivered. So we would expect most of that to get delivered out in the fourth - in the first quarter.
I appreciate you guys taking my questions. And best of luck in the next fiscal year.
Thanks, Bobby.
Our next question is coming from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.
Hi. Good morning, everyone. And Melinda, welcome to the team. And Mike, let me add my best wishes to you as you move into retirement. As well, we really enjoyed working with you.
Thanks, Brad.
I wanted to follow-up on Bobby's last question, just about the sales trends. And I was particularly encouraged by the same-store sales results. I mean, I think that 3.9 is the strongest in 2.5 years. So echoing Bobby's comment, I was a little surprised that the total revenues in the upholstery didn't clock in quite as strong.
Could you give us a little more color about what you're seeing from some of the national and independent dealers of La-Z-Boy? And how you're expecting that side of the business to grow as we look to the year ahead?
So my response to that, Brad, is it's - our sales do not go up linearly every quarter. So in this environment, we had a 4 - a little over 4% growth for the year. Last quarter, we had a 6% growth this year. This quarter, it was 2%. The average is around that 4%. We would anticipate given our recent sales increases and what you see or what was written in the fourth quarter, we would anticipate our first quarter deliveries to be better than flat in upholstery.
And so they're mostly just the ebb and flow of holidays, inventory, markets, things of that nature. But we're pretty happy with the year at 4% and think there is nothing fundamentally different. And you would see an improved number there in the first quarter.
That's helpful. Thank you, Kurt. And then with respect to the outlook for gross margin, with the price increase that you put through June 1, is it set up where if 1Q sort of plays out similar to 4Q, where the rate of gross margin decline would moderate in 1Q, it'll still be down but moderate? And then do you think you could be that closer to flat in 2Q or there are still too many headwinds out there with freight and some other factors?
So in our planning, Brad, our gross margin, I think, got as high as 40 points - 40%. And I think we were at 39 something here in the fourth quarter. That's not a big gap. And the two things that would drive that is more volume through the plants to pick up absorption and then the pricing versus - the raw material pricing versus the selling price. So I don't think we're that far apart. In our - in the furniture industry, our gross margins are pretty respectable even at this level.
But in our planning, it was to not only take the price increase on the actual cost but actually have our margin pick up as well. So if it was a perfect world, nothing changed, we got volume at or above the previous year, yes, our margin should be back to where we've been, our historical high. But I wouldn't expect it to grow a whole hell of a lot beyond that.
Great. That’s really helpful color. I appreciate it.
[Operator Instructions] The next question is coming from the line of Anthony Lebiedzinski with Sidoti & Company. Please proceed with your question.
Good morning. And thank you for taking the questions. Mike, certainly enjoy your retirement. I'm sure you're looking forward to it. And welcome aboard, Melinda, to the La-Z-Boy team.
Thank you.
So for first, I just wanted to ask as far as – you know, obviously, that you are dealing with inflation. You have increased share prices to offset these raw material prices going up.
What is your expectation as far as unit volume? I mean, do you think it will decline again or do you think it could flatten out? So I'm just wondering about what your expectations for unit volume in light of these price increases that you're taking?
So we're not planning on a one for one relationship between pricing and - pricing going up, volume going down. We still have opportunities with a number of our different channels of distribution, expanded channels of distribution, the Internet business, same-store sales at the La-Z-Boy stores. We -- we're not planning on a unit reduction.
But the honest question, Anthony, is it all depends on how the consumer reacts. So the industry has been faced with this inflationary pressures and the cost of furniture is up x amount, and no one will know how she reacts to that until we go through the next three or six months. So stay tuned for that. But it's certainly not our plan to go backwards in units. And if we get the other - the next hurdle of more tariffs, that's another thing we'll have to take into our pricing element.
Right. Understood. And as far as your SG&A, there was a commentary in the 10-K that you reduced your discretionary SG&A spending. I was wondering if there are additional levers that you can pull to better manage SG&A?
So I think we managed SG&A really well. And there is always discretionary spending you can do. We try not to do much of it that effects our customers or our employees. But we examine every expenditure we make and try to do that.
On the other hand, part of the reduction in our SG&A, particularly in the fourth quarter, was even though we had a good year in La-Z-Boy, we had higher expectations. And so we did not achieve the 100% level of our payouts in our compensation.
So that had an impact on lower SG&A. That is not our plan for next year. Our plan is to make that up. So if you see SG&A go up next year and it's primarily in the comp area, we'll be happy to defend that.
Got it. Okay. And so as far as the incentive compensation, was that all kind of reversed in the fourth quarter or is that - I was just wondering about the - how that flowed throughout the year because typically, your fourth quarter does have higher SG&A. I think it was close to $5 million lower than a year ago?
So we look at it every quarter. We look at our forecast. We look what we have reserved and planned, and we make adjustments as we go. Being the fourth quarter always is our largest quarter, it has a little more impact and on some of the things you don't know the final answers on certain targets to the end of the year. But we watch that number and make judgments throughout the whole year.
Got it. Okay. And last question, kind of a longer term, so obviously, store traffic continues to be an issue for all brick-and-mortar retailers. So when you look at your store base between your dealer stores and your company stores, is your expectation to kind of more or less kind of keep it flat for the next few years or - I'm just wondering how we should think about that? Thank you.
So our response to that, Anthony, would be that our traffic is consistent with most other retailers in the country right now. The customer is using the Internet a lot more for information, and to make choices, she is visiting less stores. And that phenomenon is not going to change.
But the customers that do come into the stores are -- have a higher propensity to buy because they've done their research, and they've chosen La-Z-Boy as one of the places they want to visit and buy.
So we watch the combination of traffic, ticket and conversion. And our traffic was down in the fourth quarter, and we still had same-store sales of 4%. So I think that's a good indicator of the things we're trying to do to keep growing our business.
Okay. Thank you. Best of luck.
Thanks, Anthony.
Our next question is a follow-up from the line of Bobby Griffin with Raymond James. Please proceed with your question.
Actually, it's the old guy. It's Budd, back in for Bobby on this one. So Mike, I just wanted to also wish you the best going forward, so good luck on that. And Melinda, welcome to the fray of the investors of La-Z-Boy.
Thank you.
Thanks, Budd.
I do have - Mike or- and Kurt, I do have a few follow-up questions that I'd like to ask. One - and Anthony, I think, talked a little bit about it, and you talked a little bit about it, Kurt, in explaining the corporate overhead in the fourth quarter, at least as we can do the numbers with the publicly available data, it looks like it was down about $4 million year-over-year.
Is that pretty much all the reversal of the accrual of incentive comp? You also talked about it in your script about some discretionary expenses. Can you give us - maybe quantify the dollars of how they impacted the fourth quarter?
So Budd, I would say that probably three quarters of the reduction in corporate was related to either stock comp or performance comp. The rest of it is just ebbs and flows of our expenses, of us just trying to maintain some things, maybe some projects that we delayed into the summer, some things.
So there's nothing - I mean, I think it's the lowest it was going to be for the quarter. So I don't expect it to stay that low. We still are -- as Kurt has talked about, our IT and the work that we do to make sure that we're staying ahead of the game on that and us -- and not getting behind the eightball, what we're going to continue to keep investing in that. Not that we're going to have a huge expense over what we've been spending, but we're going to stay pretty consistent on that.
So we don't expect it to stay down there. But we - as Kurt mentioned, Anthony, we will continue to look at every expenditure and make sure that we're spending money on things that are enhancing the customer's experience and help - and looking at our employees as well, so.
I could tell you as one, we're rooting for you to make the incentive comp. But we would like to see that. I think that would benefit everybody so…
Hoping [ph] it.
Raw materials, as you normally give us a dollar amount, and I know it's a lens that's pretty cloudy because of all the moving parts. But knowing what you know today, what's the dollar impact of raw material increase year-over-year for the new fiscal year?
I don't - Budd, I don't have that number off the top of my head and because of the flow of when various price increases come in. So I would say that I think we took at least half, maybe a little more of all the price increases in last fiscal year. But we have another 40 plus percent here to flush through here in the first four, five months of the new year.
So we took a price increase in June 1st that we haven't seen any benefit from yet, but we will. And we'll get the full benefit in Q2. But - and the magnitude of it was similar to the first one because the magnitude...
How much was that, Kurt? I don't think we knew the...
I don't - again, I don't have those right off the top of my head. But it - I think - so I know - I kind of know what the price increase values were, but not the actual raw material cost. We can get that for you and let you know.
Okay. That would be great. Because I think you said you'll be in an equilibrium. So if we know what the percentage price increase is, theoretically, we can probably get an idea of the dollar amount of the raw material increases.
I think you also said that units were down slightly in the fourth quarter. Can you quantify that? Is that - and I think you were talking about upholstery, if I remember it right?
So we've quantified in the K, Budd, that our upholstery units for the entire year were down around 2%.
And in the fourth quarter, we don't get the quarterly break-out in the K?
You want it weekly?
If you care, but no. But quarterly, well, we usually get it - we'd love you to file a 10-Q for the fourth quarter as well?
I'm sure. I don't think it was - I think it was consistent pretty much throughout the year. I don't - the fourth quarter wasn't a - our end. The fourth quarter a year ago was up 6% on a comparable basis.
So I - I don't think there's anything alarming about it. As I answered in the first question, we were up 6% in the third quarter. We were up 4% for the year. I don't think we'll be flat in the first quarter of next year so - on the upholstery business. So it's just kind of the ebb and flow of the way the business is.
Sure. And I know your upholstery margins are spectacular anyway. So that's - we understand that. We were just...
Thank you for recognizing that.
I always have. And that is the - you and I both know that's the crown jewel of La-Z-Boy and always has been and that they are spectacular. But we have a job to do, and unfortunately, we look at it that way as well.
A lot of noise in the industry recently about the China situation. Obviously, you're now situated with stuff, over which you have no control. The - there has been, at least from those of us who watch it, a price war between some of the Chinese importers that has led to a lot of disruption for some of the manufacturers I think you probably felt a little bit in motion.
Where does it sit - what's the situation with that today, where is that going? Is there likely to be any administrative action as a result of that?
Well, I can't comment, Budd, on what we may or may not do or what upholstered furniture companies may do. I think we're all watching with a keen interest on what's going in bedding. And I think the article in furniture today, last week, was that there were 4 million more inexpensive mattresses shipped into the U.S. last year and I think at prices that make some of us gasp at what they are.
So there is a lot of talk about the bedding industry taking some action, and I think that would be appropriate. And so we're going to see what the outcome of that is and determine what our next steps could be as an industry.
And then your China partner, I think, also has made some other relationships. How is that relationship working with you - for you?
Our China partner - our relationship in China is very strong. There is over 250 La-Z-Boy stores now in Mainland China, and they are aggressively buying up some other companies in Europe and in China for manufacturing. So they are on an aggressive acquisition mode.
And as far as we can tell, they are buying some very quality companies. Some of which we use as suppliers, too. So on an overall basis, our partnership has gotten even tighter with things they have done from an acquisition standpoint.
And was your China business up in the fourth quarter?
Again, I don't have that in front of me.
But first, Budd, we only get the royalty from that. We don't get the sales on that.
Okay. That is correct. I understand that. Okay, finally, from me, CapEx. We thought CapEx was going to come in a bit higher in the fourth quarter. Was that just the timing, and is that somewhat related to what - the increase in CapEx and in fiscal '19 expected?
Yes. That's pretty much it. But some of our projects, I mean, I think the England office or their plant or something, they had so much rain in the spring. We couldn't pour the foundation in the time we wanted to do it and...
In some of the innovation center, we got put off until May or June...
So both of our - most of our projects are a little behind their time lines, not due to anything other than weather and timing. Plus, our projects are - our major spends are all in the state of Tennessee. And Tennessee is a hot state right now for growth and manufacturing jobs, and there's the challenge to get contractors to work on buildings and all.
So we're just - it's just taking a little longer, but they're great projects. They're going to be a great asset to the company when they're finished. But a lot of them are having a 60 or 90 day delay.
Right. And that is some of the carryover and why our number for '19 is a little larger.
Got you. Mike, again, best of luck. Kurt, best of luck to you Melinda, welcome again. And I look forward to seeing the innovation center and maybe the new offices of England if you will allow us to come visit at some point in time.
You're always welcome, Budd.
Thank you, sir. Thank you, gentlemen and lady thank you very much.
Thank you, Budd.
Our final question today comes from the line of Matt Kupersmith with Iron Compass. Please go ahead with your question.
Hi. Thanks for taking the question. If I look at the last six quarters, I observed that the written comp is consistently positive, and the delivered comp for each of the last six quarters was down. Can you just explain how that divergence can exist over that period of time? And then more broadly discuss how you think investors should use each of those two metrics?
Yes. Great question. And it - they are two different metrics, and that's why you can't run the math succinctly. We believe for investors, giving you the written same-store sales for the entire network of stores, which is 350, which includes the 146 we own and all of the dealers that we have that own La-Z-Boy stores.
That's an accumulation of their written business every quarter, which they report to us. We think that is the best leading indicator of what's going on in our business since the La-Z-Boy stores represent almost half of the La-Z-Boy-branded business. Okay?
The other number we give you is the delivered sales, not the written. The delivered sales of the same stores that we owned a year ago so comp sales delivered on 146 stores that we own. So there's timing differences. There's - one is all dealers, one is just our dealers. I think over time, they have a way of leveling out. But any given quarter, there is -- there could be a three or four point differential.
Okay. But over six quarters, there has been a pretty material differential. And I guess, does that imply that your company-owned stores are consistently doing worse than your dealer-owned stores?
I would say they're not doing as well. I wouldn't say they're doing consistently worse. So they are slightly - as we've said, they're running a couple of points behind what our independent dealers do.
One of the issues for us is that we - over time, we've had to take back a lot of the markets that weren't performing well and start over. And that's one of the reasons our performance hasn't been quite as well as the independent dealers, and the longevity of a number of the families that we have that owned La-Z-Boy stores in these markets for years and years is a benefit they have that works to their advantage.
But we keep closing that gap. We don't think it's going to last forever. But right now, there is a couple of point differences between the independent dealers and the stores that we operate.
But we have some markets that do well and some that we're working on. So it's not all evenly across our markets.
Is it possible to give the delivered comp for your whole network to be consistent?
No, no, no. That - they're not - we don't own them. They're not part of our public numbers. They have different fiscal years. They have all kinds of -- that is not possible or probable.
Do you have those numbers though?
We get annual financial statements from our customers. But we don't get into that level of detail with independent dealers who aren't connected to the company.
We do not have that information.
Okay. All right. Thank you.
You’re welcome.
Thank you. Ladies and gentlemen, this will conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.