LA-Z-BOY INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We have prepared this Management’s Discussion and Analysis as an aid to understanding our financial results. It should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. After a cautionary note 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 in 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. Introduction Our Business We are the leading global producer of reclining chairs and the second largest manufacturer/distributor of residential furniture in the United States . The La-Z-Boy Furniture Galleries ® stores retail network is the third largest retailer of single-branded furniture in the United States . We manufacture, market, import, export, distribute and retail upholstery furniture products under the La-Z-Boy ® , England, Kincaid ® , and Joybird ® tradenames. 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 23, 2021, we operated five major manufacturing locations and seven regional distribution centers in the United States and three facilities in Mexico to support our speed-to-market and customization strategy. In the first quarter of fiscal 2021, we announced the closure of our Newton, Mississippi upholstery manufacturing facility. Subsequent to the announced closure of our Newton facility, consumers have continued to allocate more discretionary spending to home furnishings and as a result, the demand for our products has outpaced our production capacity. In response, our supply chain team continues to demonstrate agility and flexibility to identify ways to increase production capacity on both an opportunistic and permanent basis. We have increased capacity by adding manufacturing cells at our Mexico Cut-and-Sew Center, adding weekend production shifts to our U.S. plants, and temporarily re-activating a portion of our Newton, Mississippi upholstery manufacturing facility. Further, during the third quarter of fiscal 2021 we opened a leased upholstery assembly plant, in San Luis Rio Colorado, Mexico. 22 Table of Contents We operate a wholesale sales office that is responsible for distribution of our product in the United Kingdom and Ireland. 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 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 351 La-Z-Boy Furniture Galleries ® stores and 563 La-Z-Boy Comfort Studio ® locations, each dedicated to marketing our La-Z-Boy branded products. We consider this dedicated space to be “proprietary.” We own 158 of the La-Z-Boy Furniture Galleries ® stores. The remainder of the La-Z-Boy Furniture Galleries ® stores, as well as all 563 La-Z-Boy Comfort Studio ® locations, are independently owned and operated. La-Z-Boy Furniture Galleries ® stores help consumers furnish their homes by combining the style, comfort, and quality of La-Z-Boy furniture with our available design services. La-Z-Boy Comfort Studio ® locations are defined spaces within larger independent retailers that are dedicated to displaying and selling La-Z-Boy branded products. In total, we have approximately 7.8 million square feet of proprietary floor space dedicated to selling La-Z-Boy branded products in North America. We also have approximately 2.8 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 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 618 outlets and approximately 1.9 million square feet of proprietary floor space. In total, our proprietary floor space includes approximately 12.5 million square feet worldwide. Joybird sells product primarily online and has a limited amount of proprietary retail showroom floor space it uses to develop its brand. Our goal is to deliver value to our shareholders over the long term through executing our strategic initiatives. The foundation of our strategic initiatives is driving profitable sales growth in all areas of our business. 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 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. • Our company-owned retail business. We are growing this business by increasing same-store sales through improved execution at the store level and by acquiring existing La-Z-Boy Furniture Galleries ® stores and opening new La-Z-Boy Furniture Galleries ® stores, primarily in markets that can be serviced through our regional distribution centers, where we see opportunity for growth, or where we believe we have opportunities for further market penetration. • Our unique multi-channel distribution network . In addition to our branded distribution channels, nearly 2,100 other dealers sell La-Z-Boy products, providing us the benefit of multi-channel distribution. These outlets include some of the best-known names in the industry, including 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. • Our on-trend products including stationary upholstered furniture featured in our Live Life Comfortably ® marketing campaign . While we are known for our iconic recliners, they account for less than half of our sales in dollars, and we believe we have the potential to expand sales of our other products. To stimulate growth, our Live Life Comfortably ® 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. As a 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. 23 Table of Contents • 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. We are committed to innovation throughout our business, and to support these efforts we opened our new state-of-the-art Innovation Center in fiscal 2019 at our Dayton, Tennessee campus. • Our multi-faceted online strategy to participate in and leverage the growth of online furniture sales . During fiscal 2019, 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. 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 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. Our Retail segment consists of one operating segment comprising our 158 company-owned La-Z-Boy Furniture Galleries ® stores. The Retail segment primarily sells upholstered furniture, in addition to some casegoods and other accessories, to the end consumer through these stores. • Corporate & Other. Corporate & Other includes the shared costs for corporate functions, including human resources, information technology, finance and legal, in addition to revenue generated through royalty agreements with companies licensed to use the La-Z-Boy ® brand name on various products. We consider our corporate functions to be other business activities and have aggregated them with our other insignificant operating segments including our global trading company in Hong Kong, and Joybird, an e-commerce retailer. Joybird manufactures and sells upholstered furniture such as sofas, loveseats, chairs, ottomans, sleeper sofas and beds, and also imports and sells casegoods (wood) furniture, such as occasional tables and other accessories. Joybird sells to end consumers primarily online through its website, www.joybird.com. None of the operating segments included in Corporate & Other meet the requirements of reportable segments at this time. Impact of COVID-19 In response to the COVID-19 pandemic, we took the following actions over the past nine months to conserve cash in the near term and ensure the well-being of our employees and their families, our customers and the communities in which we operate. Fourth quarter of fiscal 2020 • In accordance with government regulations, temporarily closed all manufacturing and retail operations • Furloughed approximately 70% of our workforce • Implemented a temporary 50% salary reduction for our executive team and 25% salary reduction for the rest of our salaried workforce along with the temporary suspension of our 401(k) match • Temporarily eliminated our June quarterly dividend and suspended our share repurchase program 24 Table of Contents First quarter of fiscal 2021 • 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. • Re-opened all of our other manufacturing facilities, retail stores, and corporate headquarters along with the implementation of best-practice health and safety protocols • The majority of our furloughed employees returned to work, temporary salary reductions ended and full base salaries were reinstated for all employees other than the named executive officers Second quarter of fiscal 2021 • Temporary salary reduction for the named executive officers ended and full base salaries were reinstated • Reinstated 401(k) match for employees and cash compensation for the board of directors • 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. This dividend was paid on September 15, 2020, to shareholders of record as of September 3, 2020. Third quarter of fiscal 2021 • On November 17, 2020, the board of directors declared a quarterly dividend to shareholders of $0.14 per share. This returns the quarterly dividend to the full amount paid quarterly prior to the company's suspension of dividends. The dividend was paid on December 15, 2020, to shareholders of record as of December 2, 2020. • Resumed share repurchases under our previous share repurchase authorization. Fourth quarter of fiscal 2021 • On February 16, 2021, the board of directors declared a quarterly dividend to shareholders of $0.15 per share, an increase of $0.01 per share, or 7%. The dividend is payable on March 15, 2021, to shareholders of record as of March 4, 2021. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“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, lengthening 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. In the third quarter of fiscal 2021, the Company determined amounts that it is eligible to claim for employee retention payroll tax credits and recognized $5.2 million in non-operating income for wages and healthcare costs paid to employees during suspension of operations due to government orders which qualify under the provisions of the CARES Act. The Company continues to evaluate 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 there is uncertainty regarding the impact COVID-19 will have on our financial operations in the near and long term. We also continue to actively manage our global supply chain and manufacturing operations, which have been adversely impacted with respect to availability and pricing based on uncontrollable factors as well as COVID-19 related constraints on our manufacturing capacity as we continue to prioritize the health and safety of our employees. The need for, or 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, global supply chain conditions, economic conditions, and consumer demand for our products. Results of Operations Fiscal 2021 Third Quarter Compared with Fiscal 2020 Third Quarter La-Z-Boy Incorporated Quarter Ended Nine Months Ended (Unaudited, amounts in thousands, except percentages) 01/23/21 01/25/20 % Change 01/23/21 01/25/20 % Change Sales $ 470,196 $ 475,856 (1.2) % $ 1,214,774 $ 1,336,701 (9.1) % Operating income 34,414 52,313 (34.2) % 86,678 105,336 (17.7) % Operating margin 7.3 % 11.0 % 7.1 % 7.9 % 25 Table of Contents Sales Consolidated sales decreased $5.7 million and $121.9 million in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. Since retail and manufacturing locations have reopened after the COVID-19 related temporary closures, we have continued to experience a strong pace of written order trends through the first nine months of fiscal 2021. Compared with the third quarter of fiscal 2020, which had the strongest sales in our recent history, sales in the third quarter of fiscal 2021 were 1.2% lower primarily due to the impact of COVID-19-related production and delivery challenges combined with delays in overseas shipments in the supply chain that have impacted the speed at which we have been able to scale our manufacturing production capacity to meet record demand. The sales decrease in the first nine months of 2021, compared with the same period last year, 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. Operating Margin Operating margin, which is calculated as operating income as a percentage of sales, decreased 370 basis points and 80 basis points in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. • Gross margin, which is calculated as gross profit as a percentage of sales, increased 80 basis points and 160 basis points in the third quarter and the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. ◦ Changes in our consolidated sales mix increased gross margin by 40 basis points in both the third quarter and the first nine months of fiscal 2021, compared with the same periods last fiscal year. This benefit was primarily driven by the growth of Joybird, which has a higher gross margin than our Wholesale segment. ◦ The third quarter and the first nine months of last fiscal year included supply chain initiative costs, primarily associated with the closure of our Redlands manufacturing facility, which were higher when compared with the expenses resulting from our business alignment actions in fiscal 2021. The absence of higher business initiative costs in fiscal 2021 resulted in a comparative 20 basis point and 30 basis point increase in gross margin in the third quarter and the first nine months of this year, respectively. ◦ Additionally, Joybird experienced significant improvements in gross margin in the third quarter and the first nine months of fiscal 2021, primarily resulting from product pricing actions taken, increase in average ticket and favorable product mix. The work to integrate Joybird and leverage synergies has begun to come to fruition and as we build on the trajectory of the business, we will continue to balance investments in top-line growth with bottom-line performance. ◦ Partially offsetting these increases, higher costs related to expanding our manufacturing capacity in the third quarter and the first nine months of fiscal 2021 negatively impacted gross margin when compared with the same periods last fiscal year. • Selling, general and administrative ("SG&A") expenses as a percentage of sales increased 450 basis points and increased 240 basis points in the third quarter and the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. ◦ The pre-tax charge resulting from the increase in the fair value of the Joybird contingent consideration liability increased SG&A $10.0 million, or 210 basis points as a percentage of sales, and $12.5 million, or 100 basis points as a percent of sales, in the third quarter and the first nine months of fiscal 2021, respectively. ◦ The third quarter and the first nine months of last fiscal year included the sale of our Redlands facility, which resulted in a $9.7 million pre-tax gain, the absence of which in fiscal 2021 drove a comparative 210 basis point and 80 basis point increase in SG&A expense as a percentage of sale in the third quarter and in the first nine months of this fiscal year, respectively. ◦ Changes in our consolidated sales mix increased SG&A expense as a percentage of sales by 30 basis points and 40 basis points in the third quarter and in the first nine months of fiscal 2021, respectively. This increase was primarily driven by the growth of Joybird, which has a higher SG&A rate than our Wholesale segment. ◦ Additionally, in the first nine months of fiscal 2021, SG&A expense as a percentage of sales increased compared with the same period last year primarily due to lower delivered sales relative to fixed costs coupled with higher selling expenses driven by the increase in written sales. The increase was partially offset by cost reductions in response to the lower sales volume driven by the COVID-19 closures, including a decrease in marketing and travel expenses. 26 Table of Contents We discuss each segment’s results in the following section. Wholesale Segment Quarter Ended Nine Months Ended (Unaudited, amounts in thousands, except percentages) 1/23/21 1/25/20 % Change 01/23/21 01/25/20 % Change Sales $ 350,708 $ 364,811 (3.9) % $ 917,297 $ 1,035,607 (11.4) % Operating income 35,686 49,046 (27.2) % 95,309 112,195 (15.1) % Operating margin 10.2 % 13.4 % 10.4 % 10.8 % Sales The Wholesale segment’s sales decreased $14.1 million and $118.3 million in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. Sales were lower in the third quarter and in the first nine months of fiscal 2021 compared with the same periods last year, due to a decrease in volume and unfavorable product mix as COVID-19-related production and delivery challenges, and delays in overseas shipments in the supply chain, have impacted the speed at which we have been able to scale our manufacturing production capacity to meet record demand. Further, sales in the first nine months of fiscal 2021 were lower than the same period last year due to the impact of COVID-19, which caused temporary store and manufacturing facility closures in the latter part of the fourth quarter of fiscal 2020 and a phased reopening in the first two months of the first quarter of fiscal 2021. Operating Margin Operating margin decreased 320 basis points and 40 basis points in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. ● Gross margin decreased 70 basis points and 10 basis points in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. ◦ In the third quarter and the first nine months of fiscal 2021, gross margin decreased 160 basis points and 110 basis points, respectively, compared with the same periods last fiscal year, due to higher costs related to expanding our manufacturing capacity as well as COVID-19 related issues which impacted our production and delivery volume and product mix. ◦ Further, in the third quarter of fiscal 2021, rising raw material costs negatively impacted gross margin by 40 basis points compared with the same period last year. ◦ Partially offsetting these items was a decrease in promotional activity in response to strong product demand, which improved gross margin 100 basis points and 90 basis points in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods last year. ◦ Additionally, the third quarter and the first nine months of last fiscal year included supply chain initiative costs primarily associated with the closure of our Redlands, California manufacturing facility, which were higher when compared with the expenses resulting from our business realignment actions in the first nine months of 2021. The absence of higher business initiative costs in fiscal 2021 resulted in a comparative 30 basis point and 40 basis point increase in the segment's gross margin in the third quarter and in the first nine months, respectively. ● SG&A expense as a percentage of sales increased 250 basis points and 30 basis points in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. ◦ The third quarter and the first nine months of last fiscal year included the sale of our Redlands facility, which resulted in a $9.7 million pre-tax gain, the absence of which in fiscal 2021 drove a comparative 280 basis point and 110 basis point increase in SG&A expense as a percentage of sales in the third quarter and in the first nine months of this year, respectively. ◦ Partially offsetting the above item was a 20 basis point and 30 basis point reduction in SG&A as a percentage of sales in the third quarter and in the first nine months of the fiscal 2021, respectively, due to favorable adjustments to our bad debt reserves resulting from improved business conditions. ◦ Additionally, SG&A as a percentage of sales decreased in the third quarter and in the first nine months of fiscal 2021 due to disciplined expense management related to our spending on advertising given the strong order demand and lower administrative expenses due to COVID-19 travel restrictions, and was further 27 Table of Contents reduced due to lower salaries and wages driven by our business realignment plan and reduction in workforce in the first quarter of fiscal 2021. Retail Segment Quarter Ended Nine Months Ended (Unaudited, amounts in thousands, except percentages) 1/23/21 1/25/20 % Change 01/23/21 01/25/20 % Change Sales $ 165,959 $ 167,494 (0.9) % $ 419,371 $ 458,894 (8.6) % Operating income 14,707 16,383 (10.2) % 23,173 33,272 (30.4) % Operating margin 8.9 % 9.8 % 5.5 % 7.3 % Sales The Retail segment’s sales decreased $1.5 million and $39.5 million in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. The decrease in sales in the third quarter of fiscal 2021 was primarily due to a 6.3% decrease in same-store delivered sales, or $10.3 million, due to COVID-19-related production challenges in our wholesale segment. Partially offsetting this decline was the benefit of $8.0 million of delivered sales from our recently acquired Seattle-based stores. The decrease in sales in the first nine months of fiscal 2021 was primarily due to a 11.7%, or $52.1 million, decrease in delivered same-store sales driven by a phased reopening of our retail locations throughout the first two months of the first quarter of fiscal 2021 due to COVID-19 and subsequent COVID-19-related production challenges in our wholesale segment. Partially offsetting this decline was the benefit of $11.4 million of delivered sales from our recently acquired Seattle-based stores. In fiscal 2021, since all of our retail stores have re-opened, we have continued to experience strong sales trends. Written same store sales were up 9.1% and 18.2% in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods last year, driven by increased demand for products in the home furnishings 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. Operating Margin Operating margin decreased 90 basis points and 180 basis points in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. ● Gross margin increased 10 basis points and 20 basis points in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. ● SG&A expense as a percentage of sales increased 100 basis points and 200 basis points in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago, primarily due to lower delivered sales relative to fixed costs coupled with higher selling expenses driven by the increase in written sales. This was partially offset by lower advertising given the strong demand and lower administrative expenses due to COVID-19 travel restrictions. Corporate and Other Quarter Ended Nine Months Ended (Unaudited, amounts in thousands, except percentages) 01/23/21 01/25/20 % Change 01/23/21 01/25/20 % Change Sales $ 33,691 $ 25,669 31.3 % $ 84,149 $ 70,532 19.3 % Intercompany eliminations (80,162) (82,118) 2.4 % (206,043) (228,332) 9.8 % Operating loss (15,979) (13,116) (21.8) % (31,804) (40,131) 20.7 % 28 Table of Contents Sales Sales increased $8.0 million and $13.6 million in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. The increase in sales in the third quarter of fiscal 2021, compared with the same period last year, was primarily due to a $6.6 million, or 30.3%, increase in Joybird sales to $28.6 million, primarily driven by strong written order trends through the first nine months of this fiscal year as we continue to experience increased demand for products in the home furnishings category and increased online traffic. In the first nine months of fiscal 2021, compared with the same period last year, Joybird sales increased $11.6 million to $71.5 million despite lower delivered sales 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. Written sales for Joybird were up 79% and 47% in the third quarter and in the first nine months of fiscal 2021, respectively, compared with the same periods a year ago. Intercompany eliminations decreased in both the third quarter and in the first nine months of fiscal 2021 compared with the same periods a year ago due to lower sales from our Wholesale segment to our Retail segment due to lower sales volume resulting from COVID-19-related production and delivery challenges and delays in overseas shipments in the supply chain. Operating Loss Our Corporate and Other operating loss increased $2.9 million and $8.3 million in the third quarter and first nine months of fiscal 2021, respectively, compared with the same periods a year ago. The operating loss in the third quarter and in the first nine months of fiscal 2021 includes a $10.0 million and a $12.5 million pre-tax charge, respectively, resulting from the recognition of the increase in the fair value of the Joybird contingent consideration liability, as we expect consideration will be owed under the terms of the earnout agreement in connection with the acquisition of Joybird based on significant improvements to our most recent financial projections. These pre-tax charges were partially offset by Joybird's positive operating profits in the third quarter and first nine months of fiscal 2021, which have improved when compared with the same periods last year primarily due to significant increases in gross margin due to product pricing actions taken, an increase in average ticket and favorable product mix. The work to integrate Joybird and leverage synergies has begun to come to fruition and as we build on the trajectory of the business, we will continue to balance investments in top-line growth with bottom-line performance. Non-Operating Income (Expense) Other Income (Expense), Net Other income (expense), net was $6.5 million of income in the third quarter of fiscal 2021 compared with $6.0 million of expense in the third quarter of fiscal 2020. The income in fiscal 2021 was primarily due to $5.2 million of payroll tax credits resulting from the CARES Act along with unrealized gains on investments. The expense in fiscal 2020 was primarily due to a $6.0 million impairment of our investment in a privately held start-up company. Other income (expense), net was $8.0 million of income in the first nine months of fiscal 2021 compared with $5.4 million of expense in the first nine months of fiscal 2020. The income in the first nine months of fiscal year 2021 was primarily due to the payroll tax credits noted above along with unrealized gains on investments. The expense in the first nine months of fiscal 2020 was primarily due to the investment impairment charge noted above combined with exchange rate losses, partially offset by the return of $1.9 million in pre-tax cash from the settlement of our defined-benefit pension plan in our La-Z-Boy operating unit, which occurred during the fourth quarter of fiscal 2019. Income Taxes Our effective tax rate was 27.7% and 26.4% for the third quarter and the first nine months of fiscal 2021, respectively, compared with 26.0% and 25.3% for the third quarter and the first nine months of fiscal 2020, respectively. The increase in our effective tax rate in fiscal 2021 compared with fiscal 2020 is primarily due to the tax effect of the non-deductible increase in the Joybird contingent consideration liability. Our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes. 29 Table of Contents Liquidity and Capital Resources 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 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 and capital expenditures. We had cash, cash equivalents and restricted cash of $393.0 million at January 23, 2021, compared with $263.5 million at April 25, 2020. In addition, we had investments to enhance our returns on cash of $30.6 million at January 23, 2021, 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. We amended this agreement on December 19, 2017, to extend its maturity date to December 19, 2022. 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. 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, considering business performance, liquidity and trends during the first six months of fiscal 2021, $25.0 million was repaid in the first quarter of fiscal 2021 and $50.0 million was repaid in the second quarter of fiscal 2021, bringing the outstanding balance on our revolving credit facility to zero. As of January 23, 2021, borrowings outstanding under the revolving credit facility remain at zero and we were not subject to the fixed-charge coverage ratio requirement and had excess availability of $56.7 million of the $150.0 million credit commitment. Excess availability was lower than the total remaining credit commitment primarily due to higher reserves required due to the increase in customer deposits during the first nine months of fiscal 2021. Capital expenditures for the first nine months of fiscal 2021 were $26.7 million compared with $35.5 million during the first nine months of fiscal 2020. Capital expenditures in the first nine months of fiscal 2021 included spending on manufacturing machinery and equipment, upgrades to our upholstered furniture manufacturing plant in Dayton, Tennessee, improvements to select retail stores, and costs for new production capacity in Mexico. We have no material contractual commitments outstanding for future capital expenditures. We expect capital expenditures to be in the range of $35 to $40 million for fiscal 2021, which will include plant upgrades to our upholstery manufacturing and distribution facilities in Dayton, Tennessee and Neosho, Missouri, new upholstery manufacturing capacity in Mexico, technology upgrades and improvements to a number 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 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. 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. 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. This dividend was paid on September 15, 2020, to shareholders of record as of September 3, 2020. On November 17, 2020, the board of directors declared a quarterly dividend to shareholders of $0.14 per share. This returned the quarterly dividend to the full amount paid quarterly prior to the company's suspension of dividends. The dividend was paid on December 15, 2020, to shareholders of record as of December 2, 2020. Further, on February 16, 2021, the board of directors declared a quarterly dividend to shareholders of $0.15 per share, an increase of $0.01 per share or 7%. The dividend is payable on March 15, 2021, to shareholders of record as of March 4, 2021. Our board of directors has authorized the repurchase of company stock. 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 30 Table of Contents to the impact of COVID-19, as such, there were no share repurchases in the first and second quarters of fiscal 2021. On December 14, 2020, we resumed share repurchases under the previous share repurchase authorization, pursuant to which 4.5 million shares currently remain available for purchase. We spent $0.9 million in the third quarter of fiscal 2021 to purchase less than 0.1 million shares. With the cash flows we anticipate generating in fiscal 2021, we expect to continue to be opportunistic in purchasing company stock. The following table illustrates the main components of our cash flows: Nine Months Ended (Unaudited, amounts in thousands) 1/23/21 1/25/20 Cash Flows Provided By (Used For) Net cash provided by operating activities $ 249,831 $ 119,759 Net cash used for investing activities (35,680) (31,114) Net cash used for financing activities (87,843) (53,294) Exchange rate changes 3,191 1,107 Change in cash, cash equivalents and restricted cash $ 129,499 $ 36,458 Operating Activities During the first nine months of fiscal 2021, net cash provided by operating activities was $249.8 million. Our cash provided by operating activities was primarily attributable to a $121.9 million increase in customer deposits driven by the increase in written Retail and Joybird sales in the period and net income, including non-cash adjustments, generated during the period. Investing Activities During the first nine months of fiscal 2021, net cash used for investing activities was $35.7 million, primarily due to c ash used for capital expenditures in the period of $26.7 million, which primarily related to spending on manufacturing machinery and equipment, upgrades to our Dayton, Tennessee upholstered furniture manufacturing facility, improvements to select retail stores, and costs for new production capacity in Mexico. Additionally, cash used for acquisitions was $7.8 million, which primarily included guaranteed payments related to the acquisition of Joybird, and the acquisition of the assets of the Seattle, Washington business that operated six independently owned La-Z-Boy Furniture Galleries ® stores and one warehouse. Financing Activities During the first nine months of fiscal 2021, net cash used for financing activities was $87.8 million, primarily due to $75.0 million in payments on our revolving credit facility, $9.7 million paid to our shareholders in quarterly dividends, 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 $3.2 million from the end of fiscal year 2020 to the end of the third quarter of fiscal 2021. These changes impacted our cash balances held in Canada, Thailand, and the United Kingdom. Other During the third 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. Critical Accounting Policies 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 23, 2021. 31 Table of Contents Recent Accounting Pronouncements 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the first nine months 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.