What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-17 compared with 2021-02-16 · 109 added, 175 removed, 118 unchanged (71% of the section changed)

19 unchanged sentences

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.

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.

As of July 24, 2021, our supply chain operations included the following:

• Five major manufacturing locations and seven regional distribution centers in the United States and four facilities in Mexico to support our speed-to-market and customization strategy

• A logistics company that distributes a portion of our products in the United States

• A wholesale sales office that is responsible for distribution of our product in the United Kingdom and Ireland

• 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.

Additionally, 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:

1 unchanged sentence

• The centerpiece of our retail distribution strategy is our network of 352 La-Z-Boy Furniture Galleries ® stores and 560 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.

We consider this dedicated space to be “proprietary.”

◦ 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.

We own 157 of the La-Z-Boy Furniture Galleries ® stores, while the remainder are independently owned and operated.

◦ 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.

All 560 La-Z-Boy Comfort Studio ® locations are independently owned and operated.

◦ 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.

18 unchanged sentences

• 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.

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.

Further, we are driving change throughout our digital platforms to improve the user experience, with a specific focus on the ease with 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 .

3 unchanged sentences

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.

In addition, we continue to increase online sales of La-Z-Boy furniture through la-z-boy.com and other digital players.

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 .

3 unchanged sentences

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.

We aggregate these operating segments into one reportable segment because they are economically similar and 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.

1 unchanged sentence

• 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.

Our Retail segment consists of one operating segment comprised of our 157 company-owned La-Z-Boy Furniture Galleries ® stores.

The Retail segment sells primarily upholstered furniture, in addition to some casegoods and other accessories, to end consumers 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.

We consider our corporate functions to be other business activities and have aggregated them with our other insignificant operating segments, including our global trading company in Hong Kong and Joybird, an e-commerce retailer that manufactures upholstered furniture such as sofas, loveseats, chairs, ottomans, sleeper sofas and beds, and also imports casegoods (wood) furniture such as occasional tables and other accessories.

Joybird sells to the end consumer primarily online through its website, www.joybird.com.

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

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

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.

We have been and continue to be impacted by the COVID-19 pandemic.

Specifically, beginning in the fourth quarter of fiscal 2020, the temporary closure of our manufacturing facilities, state and local restrictions limiting our ability to deliver product to consumers, and the temporary closure of our company-owned stores consistent with most retailers across North America negatively impacted our financial results.

In response to the financial impacts of the pandemic, beginning at the end of fiscal 2020, we took several actions to conserve cash in the near term and during 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.

By the end of the first quarter of fiscal 2021, all retail and manufacturing locations had reopened, and since that time, we have experienced a strong pace of written order trends as consumers continue to allocate more discretionary spending to home furnishings.

In response to demand for our products outpacing our production capacity and with backlog still at a record level, our supply chain team continues to demonstrate agility and flexibility to identify ways to increase production capacity.

We have increased capacity by adding manufacturing cells at our Mexico Cut-and-Sew Center, adding second shifts and weekend production shifts to our U.S.

plants, and temporarily reactivating a portion of our Newton, Mississippi upholstery manufacturing facility.

In addition, we opened a leased upholstery assembly plant in San Luis Rio Colorado, Mexico and a leased sewing facility in Parras, Mexico during the third quarter of fiscal 2021 and the first quarter of fiscal 2022, respectively.

Further, during the first quarter of fiscal 2022, we signed a lease to open additional manufacturing capacity in Torreon, Mexico.

We continue to actively manage the impact of the COVID-19 crisis as we face continued 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 of raw materials and freight 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 along with the adoption and effectiveness of vaccines, status of government orders, directives and guidelines, recovery of the business environment, global supply chain conditions, economic conditions, and consumer demand for our products, all of which are highly uncertain.

Results of Operations

Fiscal 2021 Third Quarter Compared with Fiscal 2020 Third Quarter

Fiscal 2022 First Quarter Compared with Fiscal 2021 First 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 %

Quarter Ended

(Unaudited, amounts in thousands, except percentages) 7/24/2021 7/25/2020 % Change

Sales $ 524,783 $ 285,458 83.8%

1 unchanged sentence

Operating margin 6.5% 1.5%

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.

Consolidated sales increased 83.8%, or $239.3 million in the first quarter of fiscal 2022, compared with the same period a year ago.

The sales increase was primarily due to the prior year 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.

Since retail and manufacturing locations reopened by the end of the first quarter of fiscal 2021, we have experienced a strong pace of written order trends, and in response we have continued to scale and increase our manufacturing capacity to meet demand.

The sustained increase in demand for our products, our strong execution at the store level, and the continued expansion of our manufacturing capacity contributed to record sales in the first quarter of fiscal 2022.

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.

Operating margin, which is calculated as operating income as a percentage of sales, increased 500 basis points in the first quarter of fiscal 2021, compared with the same period a year ago.

• Gross margin, which is calculated as gross profit as a percentage of sales, decreased 230 basis points in the first quarter of fiscal 2022, compared with the same period a year ago.

◦ Availability challenges in the global supply chain caused by COVID-19, as well as an increase in demand, drove higher raw material and freight costs resulting in a 580 basis point decline in gross margin.

◦ The expansion of our manufacturing capacity in response to the increase in written order demand led to higher production costs and labor challenges resulting in a 300 basis point decline in gross margin.

◦ Changes in our consolidated mix improved gross margin by 220 basis points, driven by growth of our Retail segment and Joybird, which have higher gross margins than our Wholesale segment.

◦ Partially offsetting the declines above, the remaining benefit was primarily due to an improved gross margin at Joybird, the result of higher sales volume, product pricing actions taken, an increase in average ticket, favorable product mix, and synergies due to its integration into our broader supply chain operations.

• Selling, general and administrative ("SG&A") expenses as a percentage of sales decreased 730 basis points in the first quarter of fiscal 2022, compared with the same period a year ago, primarily due to higher sales volume relative to fixed costs, mainly in the Retail segment.

Additionally, the first quarter of fiscal 2021 included expenses resulting from our business realignment plan noted above, the absence of which led to a 90 basis point improvement in the first quarter of fiscal 2022.

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 %

Quarter Ended

(Unaudited, amounts in thousands, except percentages) 7/24/2021 7/25/2020 % Change

Sales $ 393,499 $ 223,573 76.0%

1 unchanged sentence

Operating margin 4.7% 8.0%

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.

The Wholesale segment’s sales increased $169.9 million in the first quarter of fiscal 2022, compared with the same period a year ago, led primarily by an increase in delivered unit volume.

At the beginning of fiscal 2021, sales were adversely affected due to the impact of COVID-19, which caused temporary store and manufacturing closures in the latter part of the fourth quarter of fiscal 2020 and a phased reopening in the first two months of fiscal 2021.

Since reopening by the end of the first quarter of fiscal 2021, we have continued to expand and scale our manufacturing capabilities in response to significant increases in order demand.

In addition to higher volume, sales in the first quarter of fiscal 2022 benefited from favorable pricing actions taken in response to rising manufacturing costs.

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

reduced due to lower salaries and wages driven by our business realignment plan and reduction in workforce in the first quarter of fiscal 2021.

Operating margin decreased 330 basis points in the first quarter of fiscal 2022, compared with the same period a year ago.

• Gross margin decreased 530 basis points in the first quarter of fiscal 2022, compared with the same period a year ago.

◦ Rising raw material and freight costs due to higher demand and global supply chain challenges resulted in a 650 basis point decrease in gross margin.

◦ Continued manufacturing capacity expansion, in response to significant increases in written order demand, drove an increase in production costs and labor challenges resulting in a 350 basis point decrease in gross margin.

◦ Partially offsetting these decreases, gross margin benefited from higher delivered sales volume and pricing actions taken in response to rising manufacturing costs.

• SG&A expense as a percentage of sales decreased 200 basis points in the first quarter of fiscal 2022, compared with the same period a year ago, primarily due to higher sales volume relative to fixed costs combined with higher SG&A expenses in the first quarter of fiscal 2021 resulting from our business realignment actions noted above.

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 %

Quarter Ended

(Unaudited, amounts in thousands, except percentages) 7/24/2021 7/25/2020 % Change

Sales $ 181,847 $ 91,137 99.5%

Operating income 14,707 16,383 (10.2) % 23,173 33,272 (30.4) %

Operating income 20,438 (6,627) N/M

Operating margin 11.2% (7.3)%

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.

N/M - Not meaningful

The Retail segment’s sales increased $90.7 million in the first quarter of fiscal 2022, compared with the same period a year ago, led by a 92.2% increase in delivered same-store sales.

The first quarter of fiscal 2021 was negatively impacted by COVID-19 related closures which began in the fourth quarter of fiscal 2020 followed by a phased reopening of our retail locations through the first two months of fiscal 2021.

Since the reopening of all our retail stores, we have continued to experience strong sales trends.

In the first quarter of fiscal 2022, written same-store sales increased 21.9% compared with the same period last year, driven by sustained higher 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.

Operating margin increased 1,850 basis points in the first quarter of fiscal 2022, compared with the same period a year ago.

• Gross margin increased 70 basis points in the first quarter of fiscal 2022, compared with the same period a year ago, primarily due to product mix and the impact COVID-19 had in the prior year.

• SG&A expense as a percentage of sales decreased 1,780 basis points in the first quarter of fiscal 2022, compared with the same period a year ago, primarily due to higher delivered sales relative to fixed costs, mainly occupancy and selling expenses.

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 %

Quarter Ended

(Unaudited, amounts in thousands, except percentages) 7/24/2021 7/25/2020 % Change

Sales $ 43,634 $ 16,741 160.6%

1 unchanged sentence

Operating loss (4,398) (6,988) 37.1%

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.

Sales increased $26.9 million in the first quarter of fiscal 2022, compared with the same period a year ago, led by Joybird sales which increased $25.2 million to $38.7 million.

The increase was primarily due to increased demand for products in the home furnishings category, investments in marketing and website improvements which increased online conversion, and added retail store locations.

Further, sales in the first quarter of fiscal 2021 were negatively impacted by COVID-19, although to a lesser extent than our other retail businesses as Joybird primarily operates in the online, direct-to-consumer marketplace.

Despite this, written sales for Joybird were still 30.5% higher in the first quarter of fiscal 2022, compared with the same period a year ago.

Intercompany eliminations increased in the first quarter of fiscal 2022 compared with the same period a year ago due to higher sales from our Wholesale segment to our Retail segment, driven by higher sales in the Retail segment compared with the depressed sales in the prior year due to closures related to COVID-19.

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.

Our Corporate and Other operating loss decreased $2.6 million in the first quarter of fiscal 2022, compared with the same period a year ago.

The decrease was primarily due to Joybird's positive operating profits partially offset by higher investments in our information technology infrastructure.

Joybird's positive operating profits, compared with a loss in the first quarter of fiscal 2021, are primarily due to higher sales volume, increases in gross margin due to product pricing actions taken, an increase in average ticket and favorable product mix.

Joybird has achieved sustained structural profitability and we will continue to invest in marketing to expand awareness and customer acquisition to drive growth.

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.

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.

Other income (expense), net was $0.1 million of expense in the first quarter of fiscal 2022 compared with $1.5 million of income in the first quarter of fiscal 2021.

The income in fiscal 2021 was primarily due to unrealized gains on investments and gains on company-owned life insurance.

Our effective tax rate was 25.9% for the quarter ended July 24, 2021, compared with 19.8% for the quarter ended July 25, 2020.

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

The increase in our effective tax rate in fiscal 2022 compared with fiscal 2021 is primarily due to additional tax benefits from stock compensation in fiscal 2021.

Absent discrete adjustments, our effective tax rate would have been 25.3% and 26.1% in the first quarter of fiscal 2022 and the first quarter of fiscal 2021, respectively.

Liquidity and Capital Resources

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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 had cash, cash equivalents and restricted cash of $336.2 million at July 24, 2021, compared with $394.7 million at April 24, 2021.

In addition, we had investments to enhance our returns on cash of $32.5 million at both July 24, 2021 and April 24, 2021.

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.

Availability under the credit agreement fluctuates according to a borrowing base calculated on eligible accounts receivable and inventory, net of customer deposits.

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.

At July 24, 2021, we were not subject to the fixed-charge coverage ratio requirement, had no borrowings outstanding under the agreement, and had excess availability of $60.7 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 our high balance of customer deposits.

Capital expenditures for the first quarter of fiscal 2022 were $19.3 million compared with $9.8 million during the first quarter of fiscal 2021.

Capital expenditures in the first quarter of fiscal 2022 included improvements to our retail stores, plant upgrades to our upholstery manufacturing and distribution facilities, new upholstery manufacturing capacity in Mexico, and technology upgrades.

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.

We expect capital expenditures to be in the range of $65 to $75 million for fiscal 2022, which will include improvements to a number of our retail stores, plant upgrades to our upholstery manufacturing and distribution facilities in Neosho, Missouri, new upholstery manufacturing capacity in Mexico, and technology upgrades.

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.

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 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

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.

As of July 24, 2021, 2.5 million shares remained available for repurchase pursuant to this authorization.

We spent $35.6 million in the first quarter of fiscal 2022 to repurchase 0.9 million shares.

On August 17, 2021, the board of directors approved a 6.5 million increase in its share repurchase authorization, which when combined with the 2.5 million shares remaining at the end of the first quarter of fiscal 2022, represents approximately 20% of shares outstanding.

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

Nine Months Ended

Quarter Ended

(Unaudited, amounts in thousands) 7/24/2021 7/25/2020

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Net cash provided by operating activities $ 6,163 $ 106,300

Net cash used for investing activities (35,680) (31,114)

Net cash provided by (used for) investing activities (19,519) 1,248

Net cash used for financing activities (44,675) (35,706)

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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.

During the first quarter of fiscal 2022, net cash provided by operating activities was $6.2 million.

Our cash provided by operating activities was primarily attributable to net income generated during the period partially offset by an increase in working capital.

The increase in working capital was led by higher inventory to ensure input material availability to support increased sales demand and manufacturing capacity.

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.

During the first quarter of fiscal 2022, net cash used for investing activities was $19.5 million, primarily due to c ash used for capital expenditures in the period of $19.3 million, which primarily related to spending on retail store improvements, plant upgrades to our upholstery manufacturing and distribution facilities, new upholstery manufacturing capacity in Mexico, and technology upgrades.

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.

During the first quarter of fiscal 2022, net cash used for financing activities was $44.7 million, primarily due to $35.6 million used to repurchase our common stock pursuant to our share repurchase authorization and $6.8 million paid to our shareholders in quarterly dividends.

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.

Due to changes in exchange rates, our cash, cash equivalents, and restricted cash decreased by $0.4 million from the end of fiscal year 2021 to the end of the first quarter of fiscal 2022.

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

During the third quarter of fiscal 2021, there were no material changes to the information about our contractual obligations

During the first quarter of fiscal 2022, 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 24, 2021.

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We disclosed our critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended April 24, 2021.

There were no material changes to our critical accounting policies during the nine months ended January 23, 2021.

There were no material changes to our critical accounting policies during the quarter ended July 24, 2021.

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.

See Note 1, Basis of Presentation, to the 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 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.

During the first quarter of fiscal 2022, 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 24, 2021.

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