What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-18 compared with 2020-02-18 · 143 added, 178 removed, 96 unchanged (77% of the section changed)

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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;

(d) international political unrest, terrorism or war;

(e) volatility in energy and other commodities prices;

(f) the impact of logistics on imports and exports;

(g) tax rate, interest rate, and currency exchange rate changes;

(h) changes in the stock market impacting our profitability and our effective tax rate;

(i) operating factors, such as supply, labor or distribution disruptions (e.g.

port strikes);

(j) changes in legislation, including the tax code, or changes in the domestic or international regulatory environment or trade policies, including new or increased duties, tariffs, retaliatory tariffs, trade limitations and termination or renegotiation of bilateral and multilateral trade agreements impacting our business;

(k) adoption of new accounting principles;

(l) fires, severe weather or other natural events such as hurricanes, earthquakes, flooding, tornadoes and tsunamis;

(m) our ability to procure, transport or import, or material increases to the cost of transporting or importing, fabric rolls, leather hides or cut-and-sewn fabric and leather sets domestically or abroad;

(n) information technology conversions or system failures and our ability to recover from a system failure;

(o) effects of our brand awareness and marketing programs;

(p) the discovery of defects in our products resulting in delays in manufacturing, recall campaigns, reputational damage, or increased warranty costs;

(q) litigation arising out of alleged defects in our products;

(r) unusual or significant litigation;

(s) our ability to locate new La-Z-Boy Furniture Galleries ® stores (or store owners) and negotiate favorable lease terms for new or existing locations;

(t) the ability to increase volume through our e-commerce initiatives;

(u) the impact of potential goodwill or intangible asset impairments;

and (v) those matters discussed in Item 1A of our Annual Report on Form 10-K for the year ended April 27, 2019 , and other factors identified from time-to-time in our reports filed with the SEC.

We undertake no obligation to update or revise any forward-looking statements, whether to reflect new information or new developments or for any other reason.

After a cautionary note regarding 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 Note Regarding Forward-Looking Statements

La-Z-Boy Incorporated and its subsidiaries (individually and collectively, "we," "our," "us," "La-Z-Boy" or the "Company") make "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Generally, forward-looking statements include information concerning expectations, projections or trends relating to our results of operations, financial results, financial condition, strategic initiatives and plans, expenses, dividends, share repurchases, liquidity, use of cash and cash requirements, borrowing capacity, investments, future economic performance, business and industry and the effect of the novel coronavirus ("COVID-19") pandemic on our business operations and financial results.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.

Forward-looking statements may include words such as "anticipates," "believes," "continues," "estimates," "expects," "feels," "forecasts," "hopes," "intends," "plans," "projects," "likely," "seeks," "short-term," "non-recurring," "one-time," "outlook," "target," "unusual," or words of similar meaning, or future or conditional verbs, such as "will," "should," "could," or "may." A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur.

You should not place undue reliance on forward-looking statements, which speak to our views only as of the date of this report.

These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties, many of which are unforeseeable and beyond our control, such as the continuing and developing impact of, and uncertainty caused by, the COVID-19 pandemic.

Additional risks and uncertainties that we do not presently know about or that we currently consider to be immaterial may also affect our business operations and financial performance.

Our actual future results and trends may differ materially from those we anticipate depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed in our Annual Report for the year ended April 25, 2020 , under Item 1A, "Risk Factors" and Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results.

Any or all of the forward-looking statements contained our Annual Report or any other public statement made by us, including by our management, may turn out to be incorrect.

We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements.

We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or for any other reason.

We are the leading global producer of reclining chairs and the second largest manufacturer/distributor of residential furniture in the United States .

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In addition, we import, distribute and retail accessories and casegoods (wood) furniture products under the Kincaid ® , American Drew ® , Hammary ® , and Joybird ® tradenames.

As of January 25, 2020 , we had six major manufacturing locations and six regional distribution centers in the United States and two facilities in Mexico to support our speed-to-market and customization strategy.

We have closed our manufacturing facility located in Redlands, California as of the end of the second quarter of fiscal 2020.

As of July 25, 2020 , we had five major manufacturing locations and six regional distribution centers in the United States and two facilities in Mexico to support our speed-to-market and customization strategy.

We closed our manufacturing facility located in Redlands, California as of the end of the second quarter of fiscal 2020.

On June 4, 2020, we announced the closure of our Newton, Mississippi upholstery manufacturing facility.

Production from both of these facilities has shifted to available capacity at the Company’s Dayton, Tennessee, Neosho, Missouri, and Siloam Springs, Arkansas plants.

We operate a wholesale sales office that is responsible for distribution of our product in the United Kingdom and Ireland.

We also participate in two joint ventures in Thailand that support our international businesses:

one that operates a manufacturing facility and another that operates a

wholesale sales office.

We operate a global trading company in Hong Kong which helps us manage our Asian supply chain by establishing and maintaining relationships with our Asian suppliers, as well as identifying efficiencies and savings opportunities.

We also participate in two consolidated joint ventures in Thailand that support our international businesses:

one that operates a manufacturing facility and another that operates a wholesale sales office.

We also have contracts with several suppliers in Asia to produce products that support our pure import model for casegoods.

We sell our products to furniture retailers or distributors in the United States, Canada, and approximately 60 other countries, including the United Kingdom, China, Australia, South Korea and New Zealand, directly to consumers through stores that we own and operate and through our websites, www.la-z-boy.com and www.joybird.com.

We sell our products through multiple channels:

to furniture retailers or distributors in the United States, Canada, and approximately 60 other countries, including the United Kingdom, China, Australia, South Korea and New Zealand, directly to consumers through retail stores that we own and operate, and through our websites, www.la-z-boy.com and www.joybird.com.

The centerpiece of our retail distribution strategy is our network of 355 La-Z-Boy Furniture Galleries ® stores and 558 La-Z-Boy Comfort Studio ® locations, each dedicated to marketing our La-Z-Boy branded products.

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We also have approximately 2.7 million square feet of floor space outside of the United States and Canada dedicated to selling La-Z-Boy branded products.

Our other brands, England, American Drew, Hammary, and Kincaid enjoy distribution through many of the same outlets, with approximately half of Hammary’s sales originating through the La-Z-Boy Furniture Galleries ® store network.

Our other brands, England, American Drew, Hammary, and Kincaid enjoy distribution through many of the same outlets, with slightly over half of Hammary’s sales originating through the La-Z-Boy Furniture Galleries ® store network.

Kincaid and England have their own dedicated proprietary in-store programs with 611 outlets and approximately 1.9 million square feet of proprietary floor space.

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The foundation of our strategic initiatives is driving profitable sales growth in all areas of our business.

We drive growth in the following ways:

We plan to drive growth in the following ways:

Our branded distribution channels, which include the La-Z-Boy Furniture Galleries ® store network and the La-Z-Boy Comfort Studio ® locations, our store-within-a-store format .

We expect this initiative to generate growth in our Retail segment through an increased company-owned store count and in our wholesale Upholstery segment as our proprietary distribution network expands.

We expect this initiative to generate growth in our Retail segment through an increased company-owned store count and in our Wholesale segment as our proprietary distribution network expands.

We are not only focused on growing the number of locations, but also on upgrading existing store locations to our new concept designs.

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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.

These outlets include some of the best-known names in the industry, including Slumberland, Nebraska Furniture Mart, Mathis Brothers and Raymour & Flanagan.

Our other brands in the Wholesale segment, 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.

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To stimulate growth, our Live Life Comfortably ® 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 product 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™ and eco-friendly Conserve ™ fabrics and our power products, some of which include wireless hand remote, dual mechanisms and articulating headrests .

Millennial actress and social media influencer, Kristen, injects youthful style and sensibility into our marketing campaign which enhances the appeal of our brand with a younger customer base.

Further, 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 product 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™ and eco-friendly Conserve ™ fabrics and our power products, some of which include a wireless hand held remote, dual mechanisms and articulating headrests .

Our innovation, duo ® , is a revolutionary product line that features the look of stationary furniture with the power to recline at the push of a button.

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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.

Upholstery Segment .

Our Upholstery segment is our largest business segment and consists primarily of two operating segments:

La-Z-Boy, our largest operating segment, and the operating segment for our England subsidiary.

The Upholstery segment also includes our international wholesale businesses.

We aggregate these operating segments into one reportable segment because they are economically similar and because they meet the other aggregation criteria for determining reportable segments.

Our Upholstery segment manufactures and imports upholstered furniture such as recliners and motion furniture, sofas, loveseats, chairs, sectionals, modulars, ottomans and sleeper sofas.

The Upholstery segment sells directly to La-Z-Boy Furniture Galleries ® stores, operators of La-Z-Boy Comfort Studio ® locations, England Custom Comfort Center locations, major dealers, and a wide cross-section of other independent retailers.

Casegoods Segment.

Our Casegoods segment consists of one operating segment that sells furniture under three brands:

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.

Our reportable operating segments include the Wholesale segment and the Retail segment.

Effective in the first quarter of fiscal 2021, in order to better align with the manner in which we view and manage the business, coupled with economic and customer channel similarities, we revised our reportable operating segments by aggregating the former Upholstery segment with the former Casegoods segment to form the newly combined Wholesale segment.

The change in our reportable operating segments reflects how the Company evaluates financial information used to make operating decisions.

There were no changes to our Retail operating segment or Corporate & Other as part of this revision.

Wholesale Segment .

Our Wholesale segment consists primarily of three operating segments:

La-Z-Boy, our largest operating segment, our England subsidiary, and our casegoods operating segment that sells furniture under three brands:

American Drew ® , Hammary ® , and Kincaid ® .

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 ® stores, and a wide cross-section of other independent retailers.

The Wholesale segment also includes our international wholesale businesses.

We aggregate these operating segments into one reportable segment because they are economically similar and because they meet the other aggregation criteria for determining reportable segments.

Our Wholesale segment manufactures and imports upholstered furniture, such as recliners and motion furniture, sofas, loveseats, chairs, sectionals, modulars, ottomans and sleeper sofas and imports casegoods (wood) furniture such as bedroom sets, dining room sets, entertainment centers and occasional pieces.

The Wholesale segment sells directly to La-Z-Boy Furniture Galleries ® stores, operators of La-Z-Boy Comfort Studio ® locations, England Custom Comfort Center locations, major dealers, and a wide cross-section of other independent retailers.

Retail Segment.

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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.

None of the operating segments included in Corporate & Other meet the requirements of reportable segments at this time.

Impact of COVID-19

In the fourth quarter of fiscal 2020, in response to the COVID-19 pandemic, we took actions to conserve cash in the near term, including the furlough of approximately 70% of our workforce while our manufacturing and retail operations were temporarily closed, temporary 50% salary reductions for our executive team and 25% salary reductions for the rest of our salaried workforce, along with the temporary suspension of our 401(k) match and our share repurchase program.

Effective as of June 4, 2020, in the first quarter of fiscal 2021, we announced our business realignment plan, which included the reduction of our global workforce by about 10% across our manufacturing, retail and corporate locations, including the closure of our Newton, Mississippi upholstery manufacturing facility.

As of the end of the first quarter of fiscal 2021, our manufacturing facilities and stores had all re-opened and the majority of our furloughed employees had returned to work.

The temporary salary reductions ended and full base salaries were reinstated as of June 1, 2020, for all employees other than the named executive officers of the Company.

The Newton, Mississippi upholstery manufacturing facility has permanently closed and production has been shifted to available capacity at our Dayton, Tennessee, Neosho, Missouri, and Siloam Springs,

Arkansas plants.

Effective as of August 1, 2020, in the second quarter of fiscal 2021 and subsequent to this financial report, the temporary 50% salary reductions for the named executive officers ended and full base salaries were reinstated, as was the Company's 401(k) match and cash compensation for the board of directors.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES Act”) was signed into law.

The CARES Act, among other things, includes provisions providing for refundable payroll tax credits, deferment of employer social security

payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

The Company continues to examine the impact that the CARES Act may have on its results of operations, financial condition and/or financial statement disclosures.

We continue to actively manage the impact of the COVID-19 crisis and we are unable to predict the impact COVID-19 will have on our financial operations in the near and long term.

The timing of any future actions in response to COVID-19 is largely dependent on the mitigation of the spread of the virus, status of government orders, directives and guidelines, recovery of the business environment, economic conditions, and consumer demand for our products.

Additionally, as we have re-opened stores and re-started manufacturing facilities, we continue to follow enhanced health and safety protocols across all locations to ensure our employees and our customers are well-protected

Results of Operations

Fiscal 2020 Third Quarter Compared with Fiscal 2019 Third Quarter

Fiscal 2021 First Quarter Compared with Fiscal 2020 First Quarter

La-Z-Boy Incorporated

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Operating margin

Consolidated sales increased $8.3 million and $45.1 million in the third quarter and the first nine months of fiscal 2020 , respectively, compared with the same periods a year ago.

The sales increase in the fiscal 2020 periods was primarily due to sales growth in our Retail segment, higher tariff surcharge revenue in our Upholstery segment and higher Joybird sales.

Additionally, sales in the first nine months of fiscal 2020 included the benefit of second quarter fiscal 2019 acquisitions, both in our Retail segment and from the acquisition of Joybird.

Consolidated sales decreased $128.2 million in the first quarter of fiscal 2021 , compared with the same period a year ago.

The sales decrease was primarily due to the impact of COVID-19 which caused temporary store closures in the latter part of the fourth quarter of fiscal 2020 and a phased reopening in the first two months of fiscal 2021, temporary closures of our manufacturing facilities, and a negative impact on our ability to deliver product to customers.

This period of closure, given our production cycle from written order to delivery, has resulted in lower reported sales in the first quarter of fiscal 2021.

As our retail and manufacturing locations have reopened, we have experienced a strong pace of written order trends and our manufacturing production is continuing to ramp up production to meet the demand.

Operating Margin

Operating margin, which is calculated as operating income as a percentage of sales, increased 230 basis points and 70 basis points in the third quarter and first nine months of fiscal 2020 , respectively, compared with the same periods a year ago.

Gross margin, which is calculated as gross profit as a percentage of sales, increased 140 basis points in both the third quarter and the first nine months of fiscal 2020 , respectively, compared with the same periods a year ago.

Changes in our consolidated sales mix improved gross margin by 60 basis points and 100 basis points in the third quarter and the first nine 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 Joybird, which have higher gross margins than our Upholstery and Casegoods segments.

In both the third quarter and the first nine months of fiscal 2020, the Upholstery gross margin was impacted by supply chain inflationary pressures which were more than offset by efficiencies and lower commodity costs.

Additionally, the prior year third quarter included a one-time benefit due to changes to our employee vacation policies, which absent this quarter, resulted in a decreased the Upholstery segment's gross margin in the third quarter and first nine months of this year.

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

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 third quarter and the first nine months of fiscal 2020, which resulted in a gross margin decrease of 20 basis points and 40 basis points, respectively.

SG&A expenses as a percentage of sales decreased 90 basis points in the third quarter but increased 70 basis points in the first nine months of fiscal 2020 , compared with the same periods a year ago.

Changes in our consolidated sales mix increased SG&A expenses as a percentage of sales by 70 basis points and 140 basis points in the third quarter and first nine 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.

The sale of our Redlands facility, which resulted in a $9.7 million pre-tax gain, drove a 200 basis point and 70 basis point improvement in SG&A expense as a percent of sales in the third quarter and first nine months of fiscal 2020, respectively.

In the third quarter of fiscal 2019 we recognized a one-time benefit of $3.8 million due to changes to our employee vacation policies, the absence of which in fiscal 2020 resulted in a comparative 80 basis point and a 30 basis point increase in SG&A as percent of sales in the third quarter and first nine months of this year, respectively.

Operating margin, which is calculated as operating income as a percentage of sales, decreased 420 basis points in the first quarter compared with the same period a year ago.

Gross margin, which is calculated as gross profit as a percentage of sales, increased 20 basis points in the first quarter of fiscal 2021 , compared with the same period a year ago primarily due to targeted cost reduction actions relative to lower sales volume and gross margin improvements in our Joybird business.

Selling, general and administrative ("SG&A") expenses as a percentage of sales increased 440 basis points in the first quarter of fiscal 2021 , compared with the same period a year ago primarily due to lower sales volume relative to fixed costs as well as an increase in expenses resulting from our business realignment plan, which included a reduction in workforce and the shut down of our Newton manufacturing location.

These increases in SG&A expenses as a percentage of sales were partially offset by cost reductions in response to the lower sales volume driven by the COVID-19 closures.

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

Upholstery Segment

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Operating income

Operating margin

The Upholstery segment’s sales increased $2.2 million and $6.0 million in the third quarter and first nine months of fiscal 2020 , respectively, compared with the same periods a year ago.

In response to an increase in tariff rates, our tariff surcharges increased sales by 0.7% and 1.4% in the third quarter and the first nine months of fiscal 2020, respectively, compared with the same periods a year ago.

The tariff rate on goods from China was increased to 25% at the start of the current fiscal year, compared to 10% in the prior year comparative periods.

In the third quarter of fiscal 2020, unit volume increased 0.3% but was offset by increased promotional activity.

For the first nine months of fiscal 2020, we experienced an unfavorable change in our

product mix, which drove lower sales of our higher-priced products including power motion sofas and leather products, with a shift to stationary sofas and sectionals.

Operating Margin

Operating margin increased 350 basis points and 140 basis points in the third quarter and the first nine months of fiscal 2020 , respectively, compared with the same periods a year ago.

Gross margin increased 60 basis points and 50 basis points in the third quarter and in first nine months of fiscal 2020 , respectively, compared with the same periods a year ago.

Inflationary pressures in our supply chain were more than offset by efficiencies in the third quarter and the first nine months of fiscal 2020, respectively.

Lower raw material commodity prices provided an 80 basis point and a 110 basis point benefit to the segment’s gross margin in the third quarter and the first nine months of fiscal 2020, respectively.

Partially offsetting this, costs recognized in connection with our supply chain optimization initiative resulted in a gross margin decrease of 30 basis points and 60 basis points in the third quarter and the first nine months of fiscal 2020, respectively.

Additionally, the prior year third quarter included a one-time benefit due to changes to our employee vacation policies, the absence of which in fiscal 2020 resulted in a comparative 40 basis point and 10 basis point decrease in the segment's gross margin in the third quarter and first nine months of this year, respectively.

SG&A expense as a percentage of sales decreased 290 basis points and 90 basis points in the third quarter and first nine months of fiscal 2020 , respectively, compared with the same periods a year ago, primarily due to the $9.7 million pre-tax gain on the sale of the Redlands facility.

Partly offsetting this, the prior year third quarter included a one-time benefit due to changes to our employee vacation policies, the absence of which in fiscal 2020 resulted in a comparative 40 basis point and 20 basis point increase in the third quarter and first nine months of this year, respectively.

Casegoods Segment

Wholesale Segment

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Operating margin

The Casegoods segment’s sales were flat in the third quarter of fiscal 2020, but decreased $3.2 million in the first nine months of fiscal 2020 , when compared with the same periods a year ago.

The decrease in the first nine months was primarily due to lower sales volume on certain occasional tables that have been impacted by higher tariff costs.

The Wholesale segment’s sales decreased $97.0 million in the first quarter of fiscal 2021 , compared with the same period a year ago.

In the first quarter of fiscal 2021 , lower unit volume decreased sales 28.4% due to the impact of COVID-19, which caused temporary store closures in the latter part of the fourth quarter of fiscal 2020 and a phased reopening into the first two months of fiscal 2021 and closures of our manufacturing facilities.

This period of closure, given our production cycle from written order to delivery, has resulted in lower reported sales in the first quarter of fiscal 2021.

As our wholesale operations have reopened in the first quarter, we have experienced a strong pace of written order trends and our manufacturing facilities are continuing to ramp up production to meet the demand.

For the first quarter of fiscal 2021 , we also experienced an unfavorable change in our product mix resulting from planned sales promotions.

Operating Margin

Operating margin decreased 290 basis points in both the third quarter and the first nine months of fiscal 2020 compared with the same periods a year ago.

Gross margin decreased 330 basis points and 290 basis points in the third quarter and the first nine months of fiscal 2020 , respectively, compared with the same periods a year ago, primarily due to higher ocean freight costs and the impact of higher tariff costs on certain occasional tables.

SG&A expense as a percentage of sales was 40 basis points lower in the third quarter of fiscal 2020 and flat in the first nine months of fiscal 2020 , compared with the same periods a year ago, primarily due to disciplined spending in response to lower sales volume.

Partly offsetting this, the prior year third quarter included a one-time benefit due to changes to our employee vacation policies, the absence of which in fiscal 2020 resulted in a comparative 70 basis point and 20 basis point increase in the third quarter and first nine months of this year, respectively.

Operating margin decreased 100 basis points in the first quarter of fiscal 2021 , compared with the same period a year ago.

Gross margin decreased 90 basis points in the first quarter of fiscal 2021 , compared with the same period a year ago.

The decrease in sales volume resulted in a 130 basis point decrease in gross margin, due to lower absorption of overhead costs, partially offset by manufacturing cost reduction actions.

The change in product mix resulted in a 100 basis point decrease in gross margin.

Higher selling prices, net of discounts, resulted in a 70 basis point increase in gross margin.

Lower raw material commodity prices provided a 50 basis point benefit to the segment’s gross margin.

Costs associated with our business realignment plan in the first quarter of fiscal 2021, which primarily included severance related expenses associated with the closure of our Newton manufacturing location, were largely offset by similar costs from our supply chain initiative in the first quarter of fiscal 2020 resulting from the closure of our Redlands manufacturing facility.

SG&A expense as a percentage of sales was essentially flat, increasing 10 basis points in the first quarter of fiscal 2021 , compared with the same period a year ago.

The increase in SG&A expenses resulting from the business realignment actions in the first quarter of fiscal 2021, which included the reduction in workforce and the shut down of our Newton manufacturing location, were largely offset by expense reductions in response to lower sales volume.

Retail Segment

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Operating margin

The Retail segment’s sales increased $8.1 million and $40.6 million in the third quarter and the first nine months of fiscal 2020 , respectively, compared with the same periods a year ago.

The increase in sales in the third quarter of fiscal 2020 compared to the same period a year ago was primarily due to a 5.5% , or $8.6 million , increase in delivered same-store sales driven by improved traffic trends and continued strong execution at the store level.

The Retail segment’s sales decreased $51.9 million in the first quarter of fiscal 2021 , compared with the same period a year ago.

The decrease in sales in the first quarter of fiscal 2021 compared with the same period a year ago was primarily due to a 36.7% , or $51.7 million , decrease in delivered same-store sales driven by a phased reopening of our retail locations throughout the first half of the first quarter of fiscal 2021 due to COVID-19.

With all of our retail locations now open, we are seeing positive sales trends with written same store sales up 11.1% in the first quarter of fiscal 2021 compared with the same quarter last year, due to increased demand for products in the home category and strong execution at the store level.

Same-store delivered sales include the sales of all currently active stores which have been open for each comparable period.

Sales in the first nine 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 3.6% increase in delivered same-store sales, or $18.6 million .

Operating Margin

Operating margin increased 90 basis points and 130 basis points in the third quarter and the first nine months of fiscal 2020 , respectively, compared with the same periods a year ago.

Gross margin increased 80 basis points and 40 basis points in the third quarter and the first nine months of fiscal 2020 , respectively, compared with the same period a year ago, primarily due to favorable product mix and lower purchase accounting charges.

SG&A expense as a percentage of sales improved 10 basis points and 90 basis points in the third quarter and the first nine 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 and advertising) on increased delivered sales.

The improvement in the first nine months of fiscal 2020 was primarily attributable to acquired stores which operate with lower SG&A expense as a percentage of sales compared with our existing stores.

Partly offsetting this, the prior year third quarter included a one-time benefit due to changes to our employee vacation policies, the absence of which in fiscal 2020 resulted in a comparative 60 basis point and 20 basis point increase in the third quarter and first nine months of this year, respectively.

Operating margin decreased 1320 basis points in the first quarter of fiscal 2021 , compared with the same period a year ago.

Gross margin was relatively flat in the first quarter, compared with the same period a year ago.

SG&A expense as a percentage of sales increased 1310 basis points in the first quarter of fiscal 2021 , compared with the same periods a year ago, primarily due to lower delivered sales relative to fixed costs (primarily occupancy and selling expenses).

Corporate and Other

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Operating loss

Sales increased $2.8 million in the third quarter and $21.4 million in the first nine months of fiscal 2020 compared with the same periods a year ago.

The sales increase in the third quarter of fiscal 2020 was primarily due to $3.3 million higher Joybird sales, a 17.9% increase to $21.9 million for the quarter.

Joybird was acquired at the start of the second quarter of fiscal 2019, and the sales comparison for the first nine months includes the benefit of two additional quarters of sales in fiscal 2020.

Intercompany eliminations increased in the third quarter and the first nine months of fiscal 2020 compared with the same periods a year ago due to higher sales from our Upholstery and Casegoods segments to our Retail segment, resulting from increased sales in the Retail segment and the impact of acquired stores.

Sales decreased $3.8 million in the first quarter of fiscal 2021 compared with the same period a year ago, primarily due to a $3.7 million decrease in Joybird sales to $13.4 million for the quarter.

Joybird sales were down 21.7% in the first quarter of fiscal 2021 due to the impact of COVID-19 which resulted in the temporary closure of our manufacturing facilities in the latter part of the fourth quarter of fiscal 2020 and into the first quarter of fiscal 2021.

We are seeing positive sales trends, with written sales up 38.2% in the first quarter of 2021 compared with the same quarter last year, due to increased demand for products in the home category and increased online traffic, especially earlier in the quarter when many brick-and-mortar retail stores were closed due to COVID-19.

Intercompany eliminations decreased in the first quarter of fiscal 2021 compared with the same period a year ago due to lower sales from our Wholesale segment to our Retail segment, resulting from decreased sales in the Retail segment due to COVID-19 related closures.

Operating Loss

Our Corporate and Other operating loss increased $1.9 million and $6.7 million in the third quarter and the first nine months of fiscal 2020 , respectively, compared with the same periods a year ago.

Joybird operating loss for the quarter improved compared with the same quarter in the prior year, and has improved sequentially in each quarter of fiscal year 2020.

The Company is continuing to make improvements across the business model with the objective to balance investments in growth with bottom-line performance.

Our integration efforts are taking longer than anticipated and, as such, near-term growth and profitability expectations have been somewhat tempered.

Nine-month results for Joybird also reflect these trends.

In addition, the prior year third quarter operating loss in Corporate and Other included a $1.1 million one-time benefit due to changes to our employee vacation policies.

Our Corporate and Other operating loss decreased $6.9 million in the first quarter of fiscal 2021 , compared with the same period a year ago.

Despite lower Joybird sales in the first quarter of fiscal 2021 compared with the same period last year, operating losses improved as the Company is continuing to align costs with sales volume and make improvements across the business model with the objective to balance investments in growth with bottom-line performance.

Further, as a result of our COVID-19 action plan, corporate spending was down in the first quarter fiscal 2021 when compared with the same period last year.

Non-Operating Income (Expense)

Other Income (Expense), Net

Other income (expense), net was $6.0 million of expense in the third quarter of fiscal 2020 compared with $0.9 million of expense in the third quarter of fiscal 2019 .

The expense in third quarter of fiscal year 2020 was primarily due to a $6.0 million impairment of our investment in a privately held start-up company.

The expense in fiscal 2019 was primarily due to pension and retirement-related expenses.

Other income (expense), net was $5.4 million of expense during the first nine months of fiscal 2020 compared with $2.0 million of expense during the first nine months of fiscal 2019.

The expense in the first nine months of fiscal 2020 was due to the investment impairment charge noted above, partially offset by exchange rate gains.

The expense in the first nine months of 2019 was primarily due to pension and retirement-related expenses, partially offset by exchange rate gains.

Our effective tax rate was 26.0% and 25.3% for the third quarter and the first nine months of fiscal 2020 , respectively, compared with 26.9% and 24.6% in the third quarter and the first nine months of fiscal 2019 , respectively.

Other income (expense), net was $1.5 million of income in the first quarter of fiscal 2021 compared with $0.8 million of expense in the first quarter of fiscal 2020 .

The income in the first quarter of fiscal year 2021 was primarily due to unrealized gains on investments and gains on company owned life insurance.

The expense in fiscal 2020 was primarily due to foreign exchange losses, partially offset by unrealized gains on investments.

Our effective tax rate was 19.8% for the first quarter of fiscal 2021 , compared with 22.0% in the first quarter of fiscal 2020 .

Absent discrete adjustments, primarily related to tax deductions from stock-based compensation, our effective tax rate in the first quarter of fiscal 2021 would have been 26.1% .

Our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes.

Absent discrete adjustments, our effective tax rate in the third quarter of fiscal 2020 would have been 25.8% .

Liquidity and Capital Resources

Our sources of liquidity include cash and equivalents, short-term and long-term investments, cash from operations, and amounts available under our credit facility.

We believe these sources remain adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, and fulfill other cash requirements for day-to-day operations, dividends to shareholders, and capital expenditures.

We had cash, cash equivalents and restricted cash of $168.2 million at January 25, 2020 , compared with $131.8 million at April 27, 2019 .

In addition, we had investments to enhance our returns on cash of $30.1 million at January 25, 2020 , compared with $31.5 million at April 27, 2019 .

We maintain a revolving credit facility secured primarily by our accounts receivable, inventory, and cash deposit and securities accounts.

Our sources of liquidity include cash and cash equivalents, short-term and long-term investments, cash from operations, and amounts available under our credit facility.

We had cash, cash equivalents and restricted cash of $336.7 million at July 25, 2020 , compared with $263.5 million at April 25, 2020 .

In addition, we had investments to enhance our returns on cash of $16.5 million at July 25, 2020 , compared with $28.6 million at April 25, 2020 .

We maintain a revolving credit facility secured primarily by our accounts receivable, inventory, cash deposit and securities accounts.

Availability under the credit agreement fluctuates according to a borrowing base calculated on eligible accounts receivable and inventory.

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The credit agreement includes affirmative and negative covenants that apply under certain circumstances, including a fixed-charge coverage ratio requirement that applies when excess availability under the credit line is less than certain thresholds.

At January 25, 2020 , we were not subject to the fixed-charge coverage ratio requirement, had no borrowings outstanding under the agreement, and had excess availability of $145.5 million of the $150.0 million credit commitment.

Capital expenditures for the first nine months of fiscal 2020 were $35.5 million compared with $35.8 million during the first nine months of fiscal 2019 .

Capital expenditures in the first nine months of fiscal 2020 included spending on manufacturing machinery and equipment, upgrades to our upholstered furniture manufacturing plant in Dayton, Tennessee, and improvements to select retail stores.

In response to economic conditions resulting from COVID-19, to strengthen our financial position and maintain

liquidity, we proactively borrowed $75.0 million from our revolving credit facility in the fourth quarter of 2020.

Subsequently, in the first quarter of fiscal 2021, following consideration of business performance, liquidity and trends during the first quarter of fiscal year 2021, $25.0 million was repaid which reduced the outstanding borrowing on our revolving credit facility to $50.0 million as of July 25, 2020 .

At July 25, 2020 , we were not subject to the fixed-charge coverage ratio requirement and had excess availability of $28.3 million of the $150.0 million credit commitment.

Excess availability was lower than the total remaining credit commitment primarily due to a decrease in eligible assets as of July 25, 2020 , resulting primarily from lower eligible accounts receivable due to a decrease in delivered sales in the quarter as a result of the impact of COVID-19, as well as higher reserves required due to the increase in customer deposits during the quarter.

Capital expenditures for the first quarter of fiscal 2021 were $9.8 million compared with $12.3 million during the first quarter of fiscal 2020 .

Capital expenditures in the first quarter of fiscal 2021 included spending on manufacturing machinery and equipment, upgrades to our upholstered furniture manufacturing plant in Dayton, Tennessee, and improvements to select retail stores.

We have no material contractual commitments outstanding for future capital expenditures.

We expect capital expenditures to be in the range of $45 to $55 million for fiscal 2020, consisting of, among other things, plant upgrades to our upholstered furniture manufacturing facilities in Dayton, Tennessee and Neosho, Missouri, as well as improvements to several of our retail stores.

We expect capital expenditures to be in the range of $40 to $45 million for fiscal 2021, largely dependent on liquidity and scaled in response to the recovery of the business environment, economic conditions, and consumer demand for our products.

Our fiscal 2021 capital spending will reflect essential maintenance spending, other projects as business conditions permit, and projects that have already begun, which will include plant upgrades to our upholstery manufacturing and distribution facilities in Dayton, Tennessee and Neosho, Missouri, technology upgrades and improvements to several of our retail stores.

In response to the COVID-19 pandemic, in the fourth quarter of fiscal 2020, we took action to conserve cash in the near term.

Actions taken at that time included, the furlough of approximately 70% of our workforce while our manufacturing and retail operations were temporarily closed, temporary 50% salary reductions for our executive team and 25% salary reductions for the rest of our salaried workforce, along with the temporary suspension of our 401(k) match and our share repurchase program.

Further, effective as of June 4, 2020, the Company reduced its global workforce by about 10% across its manufacturing, retail and corporate locations, including the permanent closure of its Newton, Mississippi upholstery manufacturing facility.

As of the end of the first quarter of fiscal 2021, our manufacturing facilities and stores had all re-opened and the majority of our furloughed employees had returned to work.

Full base salaries were reinstated as of June 1, 2020, for all employees other than

the named executive officers of the Company.

As of August 1, 2020, full base salaries were reinstated for our named executive officers, as were the Company's 401(k) match and cash compensation for the board of directors.

Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms.

We expect the board to continue declaring regular quarterly cash dividends for the foreseeable future, but it may discontinue doing so at any time.

Our board of directors has authorized the purchase of company stock.

As of January 25, 2020 , 4.8 million shares remained available for purchase pursuant to this authorization.

We purchased 1.1 million shares during the first nine months of fiscal 2020 , for a total of $35.3 million .

With the cash flows we anticipate generating in fiscal 2020 , we expect to continue being opportunistic in purchasing company stock.

As announced on March 29, 2020, the June 2020 dividend was eliminated to preserve near-term financial flexibility in response to the impact of COVID-19.

In accordance with our long-term capital allocation strategy, we will seek to return value to our shareholders through dividends and share repurchases when appropriate to do so.

On August 18, 2020, the board of directors elected to reinstate a regular quarterly dividend to shareholders of $0.07 per share, 50% of the dividend amount paid quarterly prior to the Company's suspension of dividends.

The dividend will be paid on September 15, 2020, to shareholders of record as of September 3, 2020.

Our board of directors has authorized the repurchase of company stock.

As of July 25, 2020 , 4.5 million shares remained available for purchase pursuant to this authorization.

The authorization has no expiration date.

As announced on March 29, 2020, share repurchases under the board of directors’ prior authorization were temporarily halted to prioritize near-term financial flexibility in response to the impact of COVID-19, as such, there were no share repurchases in the first quarter of fiscal 2021.

Reinstatement of a share repurchase program under the board’s prior authorization is at the discretion of management and will depend on our earnings, capital requirements, financial condition and other factors that we consider to be relevant, such as the timing and extent of the economic recovery and the consumer demand for our products.

The following table illustrates the main components of our cash flows:

Nine Months Ended

Quarter Ended

(Unaudited, amounts in thousands)

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Net cash provided by operating activities

Net cash used for investing activities

Net cash provided by (used for) investing activities

Net cash used for financing activities

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Operating Activities

During the first nine months of fiscal 2020 , net cash provided by operating activities was $119.8 million .

Our cash provided by operating activities was primarily attributable to net income generated during the period, an increase in customer deposits driven from growth in our Retail business and improved working capital management.

During the first nine months of fiscal 2019 , net cash provided by operating activities was $91.4 million .

Our cash provided by

operating activities was primarily attributable to net income generated during the first nine months of the year, as well as an $18.5 million increase in accrued expenses, primarily related to accrued incentive compensation costs.

Partially offsetting net income was $19.0 million to fund seasonal inventory growth in advance of Chinese New Year, $7.0 million used for a discretionary pension contribution, and $7.5 million used for prepaid compensation related to the Joybird acquisition.

During the first quarter of fiscal 2021 , net cash provided by operating activities was $106.3 million .

Our cash provided by operating activities was primarily attributable to a $61.1 million increase in customer deposits driven by the increase in written Retail and Joybird sales in the period.

Additionally, changes to working capital resulted in an increase in cash provided by operating activities, as receivables and inventory both decreased and payables increased $8.9 million in the quarter.

Investing Activities

During the first nine months of fiscal 2020 , net cash used for investing activities was $31.1 million primarily due to $35.5 million used for capital expenditures and $6.4 million used to fund guaranteed payments related to the acquisition of Joybird.

This was partially offset by $11.2 million in proceeds from the disposal of assets primarily due to the sale of the Redlands upholstery facility in the third quarter of fiscal 2020.

Our capital expenditures during the period primarily related to spending on manufacturing machinery and equipment, upgrades to our Dayton, Tennessee upholstered furniture manufacturing facility and improvements to select retail stores.

During the first nine months of fiscal 2019 , net cash used for investing activities was $114.4 million , primarily due to $78.6 million used for acquisitions and $35.8 million used for capital expenditures.

Our cash used for acquisitions during the period included the acquisition of the assets of two independent operators of La-Z-Boy Furniture Galleries stores, one that operated nine stores and two warehouses in Arizona and one that operated one store in Massachusetts, as well as our acquisition of Joybird, an e-commerce retailer and manufacturer of upholstered furniture.

Our capital expenditures during the period primarily related to spending on manufacturing machinery and equipment, construction of our new Innovation Center, upgrades to our Dayton, Tennessee Upholstery manufacturing facility, expansion of our England subsidiary’s plant and construction of their new corporate office building, and relocation of one of our regional distribution centers.

During the first quarter of fiscal 2021 , net cash provided by investing activities was $0.8 million , primarily due to $14.7 million in proceeds from the sale of investments, as we shifted a portion of our investments to cash, partially offset by $3.6 million used for the purchase of investments.

Cash used for capital expenditures in the period was $9.8 million , which primarily related to spending on manufacturing machinery and equipment, upgrades to our Dayton, Tennessee upholstered furniture manufacturing facility and improvements to select retail stores.

Financing Activities

During the first nine months of fiscal 2020 , net cash used for financing activities was $53.3 million , primarily due to $35.3 million used to purchase our common stock pursuant to our share repurchase authorization and $18.6 million paid to our shareholders in quarterly dividends.

During the first nine months of fiscal 2019 , net cash used for financing activities was $10.3 million , primarily due to $16.7 million used to purchase our common stock and $17.4 million paid to our shareholders in quarterly dividends.

This was partly

offset by a net $20.0 million borrowed from our credit facility, including $35.0 million of borrowings during the second quarter, of which $15.0 million was repaid during the third quarter.

During the first quarter of fiscal 2021 , net cash used for financing activities was $35.3 million , primarily due to $25.0 million in payments on our revolving credit facility and $8.5 million in dividends paid to our joint venture minority partners, resulting from the repatriation of dividends from our foreign earnings that we no longer consider permanently reinvested.

Exchange Rate Changes

Due to changes in exchange rates, our cash, cash equivalents, and restricted cash increased by $1.1 million and decreased by $0.1 million from the end of fiscal year 2019 to the end of the third quarter of fiscal 2020 and from the end of fiscal 2018 to the end of the third quarter of fiscal 2019 , respectively.

These changes impacted our cash balances held in Canada, the United Kingdom, and Thailand.

During the third quarter of fiscal 2020 , there were no material changes to the information about our contractual obligations and commitments shown in the table contained in our fiscal 2019 Annual Report on Form 10-K.

Due to changes in exchange rates, our cash, cash equivalents, and restricted cash increased by $1.3 million from the end of fiscal year 2020 to the end of the first quarter of fiscal 2021 .

These changes impacted our cash balances held in Canada, Thailand, and the United Kingdom.

During the first quarter of fiscal 2021 , there were no material changes to the information about our contractual obligations and commitments shown in the table contained in our Annual Report on Form 10-K for the fiscal year ended April 25, 2020 .

We do not expect our continuing compliance with existing federal, state and local statutes dealing with protection of the environment to have a material effect on our capital expenditures, earnings, competitive position or liquidity.

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We disclosed our critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended April 25, 2020 .

There were no material changes to our critical accounting policies during the nine months ended January 25, 2020 except for changes related to our adoption of Accounting Standards Codification Topic 842 as described in Note 1 and Note 5 to the condensed consolidated financial statements included in this Form 10-Q.

There were no material changes to our critical accounting policies during the quarter ended July 25, 2020 .

Recent Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements included in this Form 10-Q for a discussion of recently adopted accounting standards and other new accounting standards.

See Note 1, Basis of Presentation, to the condensed consolidated financial statements included in this Form 10-Q for a discussion of recently adopted accounting standards and other new accounting standards.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the first nine months of fiscal 2020 , there were no material changes from the information contained in Item 7A of our Annual Report on Form 10-K for the fiscal year ended April 27, 2019 .

During the first quarter of fiscal 2021 , there were no material changes from the information contained in Item 7A of our Annual Report on Form 10-K for the fiscal year ended April 25, 2020 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis