La-Z-Boy Incorporated (LZB) Earnings

Management highlights

### Overall Q1 Performance - Consolidated delivered sales were down 1% year-over-year after adjusting for the case goods divestiture, with strong retail growth offset by lower wholesale and Joybird sales. GAAP operating income was a $2 million loss (including one-time plant exit charges), while adjusted operating income was $19 million, with an adjusted operating margin of 3.9% (down from 4.8% year-over-year). - The company ended the quarter with a strong balance sheet: $267 million in cash and no external debt. - $35 million was returned to shareholders via share repurchases and dividends, a 62% increase year-over-year, with a consistent 50/50 capital allocation split between business reinvestment and shareholder returns. ### Retail Expansion - Added 4 company-owned stores in Q1 (1 new, 3 acquired), bringing total company-owned stores to 234, representing 62% of the total North American Lazy Boy network. A two-store independent dealer acquisition in Louisiana is pending closing in October, with a solid pipeline of future independent acquisition opportunities. - The long-term target is to expand the total network to 450 locations, with approximately 10 new stores opened annually, primarily company-owned. Independent dealer acquisitions are immediately sales and profit accretive and open opportunities in underpenetrated markets. ### Digital and Omnichannel Transformation - Ongoing enhancements to the e-commerce platform to support consumers who begin their purchase journey online (the company's website receives ~50 million annual visitors): new content management system with high-definition 3D product imagery, AI-enriched product descriptions, AI-powered search, and shared cart functionality that enables shoppers to share selections with in-store consultants for a seamless connected experience. Most consumers still complete purchases in-store to access personalized service and product testing. ### Supply Chain and Manufacturing Optimization - Over 90% of the company's upholstered furniture is produced domestically, a competitive advantage that enables 4-6 week delivery of customized products and mitigates trade and tariff volatility. - One of two planned small plant consolidations was completed in Q1, with the second scheduled to close by the end of fiscal 2027; ample remaining capacity exists to support future growth. - The multi-year distribution and home delivery transformation project (reducing 15 distribution centers to 3 centralized hubs) is on track, with the remaining two hubs expected to open by the end of fiscal 2027. The completed project will cut mileage traveled by 20%, reduce total square footage by 30%, and double the consumer delivery radius. ### Wholesale Segment Strategy - The company continues to expand relationships with strategic wholesale partners and grew branded in-store locations to over 1,400 (Lazy Boy comfort studios and dedicated branded spaces). The segment focuses on organic expansion with existing partners and evaluation of new compatible distribution opportunities to reach consumers that do not shop at dedicated Lazy Boy stores.

Guidance

- **Second Quarter 2027**: Excluding the case goods divestiture impact, sales are expected to range from $500 million to $520 million, representing year-over-year growth between -1% and +2%. Adjusted operating margin is expected to range from 4% to 5.5%, impacted by lapping a 110 basis point one-time warranty benefit from the prior year, near-term strategic investment friction costs, and ongoing drag from Joybird results. - **Full Fiscal 2027**: Capital expenditures are expected to range from $90 million to $110 million, making this the largest investment year for the distribution transformation, manufacturing consolidations, and new/remodeled retail stores. The normalized effective income tax rate is expected to be between 26% and 27%. Approximately 10 new retail stores will be opened during the full year. Joybird manufacturing integration into the U.S. plant network is expected to be completed by the end of the fiscal year, and the second manufacturing plant consolidation is also expected to be completed by year-end. - The company maintains its long-term Century Vision strategic goal of growing sales at twice the industry rate, gaining market share, and strengthening margins over time.

Segment performance

1. **Retail Segment**: Delivered sales increased 10% year-over-year to $229 million, driven by growth from acquired and new stores; delivered same-store sales were down slightly year-over-year. Adjusted operating margin increased to 6.5% from 6.3% year-over-year. This segment contributed 40.2% of total enterprise delivered sales (excluding case goods divestiture impact). 2. **Wholesale Segment**: On a reported basis, delivered sales decreased 9% year-over-year to $323 million; after adjusting for the completed case goods divestiture, delivered sales decreased 5% year-over-year, impacted by uneven order patterns. Adjusted operating margin decreased to 6.8% from 7.5% year-over-year, driven by fixed cost deleverage on lower volume and strategic investment friction costs, partially offset by a 240 basis point favorable tariff impact. This segment contributed 56.7% of total enterprise delivered sales (excluding case goods divestiture impact). 3. **Joybird (reported in Corporate & Other)**: Delivered sales were $27 million, down 4% year-over-year, as the direct-to-consumer segment faces high macro-driven consumer volatility. Corporate & Other adjusted operating loss increased year-over-year, primarily due to expense deleverage on lower Joybird sales and near-term friction costs from integrating Joybird manufacturing into the existing U.S. plant network. This segment contributed 3.1% of total enterprise delivered sales (excluding case goods divestiture impact).

Risks & headwinds

- Broad furniture industry demand remains soft and uneven, with a highly bifurcated consumer and uncertain timing for an industry recovery. - Wholesale order patterns are choppier than expected, and the wholesale segment faces more volatility than company-owned retail due to limited control over partner performance in a fragmented market, leading to fixed cost deleverage that pressures margins. - The Joybird business faces significant consumer demand volatility, with written sales down 17% in Q1, and is currently a drag on consolidated enterprise results. - Near-term friction costs from running multiple large strategic projects (distribution transformation, two manufacturing plant consolidations, digital transformation, retail expansion) in parallel pressure near-term margins. - Evolving tariff and trade policy creates incremental cost impacts, though these are currently manageable given the company's high domestic production share.

Analyst Q&A

• Q: What factors drove the improvement in retail written same-store sales in Q1, how should these factors contribute to Q2, and what has early August trending looked like?

  A: No single factor drove the improvement; incremental gains across all retail KPIs reflected broad strong execution across marketing, in-store service, and digital customer capture. Digital transformation is a newer focus area that drives more in-store foot traffic, which remains the company's biggest conversion opportunity. Tentpole holiday selling events are the key drivers of quarterly performance; no trends for the upcoming Labor Day event are available yet.

• Q: What is driving the choppy order trends in wholesale, and how should we expect the segment to perform in coming quarters?

  A: Choppiness stems from uneven performance across the fragmented wholesale market, where privately held partners are facing greater pressure from the challenging consumer environment. Q1 was already seasonally the lowest demand quarter for the industry, with additional timing bumps from order flow and the annual one-week plant shutdown. Wholesale remains an important channel for reaching consumers that do not visit dedicated Lazy Boy stores, and the company enters Q2 with a solid backlog, though ongoing choppy demand is expected.

• Q: What portion of wholesale goes to non-Lazy Boy multi-branded retailers, and what is the company doing to support this pressured channel?

  A: Approximately one-third of total manufactured Lazy Boy product is sold through multi-branded retailers (down slightly over time), which are critical for expanding brand reach to new consumers. The company is focusing on deepening partnerships with strong strategic multi-branded players, expanding dedicated in-store comfort studio and branded space displays to better showcase the Lazy Boy brand, and evaluating additional support to drive mutual value creation in the challenging environment.

• Q: Is the underlying core operating margin of the business improving, or is it just masked by transitory investment costs?

  A: The current period has many overlapping strategic initiatives, but this is the right time to invest during industry softness to position the company for stronger gains when demand recovers. The underlying retail business (the company's core strategic focus) is already performing well with both sales and margin growth, in line with the Century Vision strategy. Wholesale is currently pressured by uneven demand and deleverage, while Joybird remains a drag as it is reorganized; underlying core performance is strong for the company's primary core business.