LA-Z-BOY INC 10-K

ITEM 7. 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. It also includes management’s analysis of past financial results and certain potential factors that may affect future results, potential future risks and approaches that may be used to manage those risks. Refer to "Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report for a discussion of factors that may cause results to differ materially. Note that our 2024 and 2023 fiscal years included 52 weeks, whereas fiscal year 2022 included 53 weeks. Introduction Our Business We are the leading global producer of reclining chairs and one of the largest manufacturer/distributors 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. For additional information about our business, refer to Part I, Item 1, Business of this report. Century Vision Strategy Our goal is to deliver value to our shareholders over the long term by executing Century Vision, our strategic plan for growth to our centennial year in 2027 and beyond, in which we aim to grow sales and market share and strengthen our operating margins. The foundation of our strategic plan is to drive disproportionate growth of our two consumer brands, La-Z-Boy and Joybird, by delivering the transformational power of comfort with a consumer-first approach. We plan to drive growth in the following ways: Expanding the La-Z-Boy brand reach • Leveraging our connection to comfort and reinvigorating our brand with a consumer focus and expanded omni-channel presence. Our strategic initiatives to leverage and reinvigorate our iconic La-Z-Boy brand center on a renewed focus on leveraging the compelling La-Z-Boy comfort message, accelerating our omni-channel offering, and identifying additional consumer-base growth opportunities. We leverage our consumer insights to develop and deliver 22 Table of Contents on-trend upholstered furniture, particularly in the motion and reclining categories. We launched our new brand campaign and marketing platform in fiscal 2024, Long Live the Lazy , with compelling, consumer inspired, messaging designed to increase recognition and consideration of the brand. We expect this new messaging will enhance the appeal of our brand with a broader consumer base. Further, our goal is to connect with consumers along their purchase journey through multiple means, whether online or in person. 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. • Growing our La-Z-Boy Furniture Galleries ® store network . We expect our strategic initiatives in this area 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. We are prioritizing growth of our company-owned Retail business by opportunistically acquiring existing La-Z-Boy Furniture Galleries ® stores and opening new La-Z-Boy Furniture Galleries ® stores where we see opportunity for growth, or where we believe we have opportunities for further market penetration. Over the last five years, as a result of opening new company-owned stores and acquiring independent La-Z-Boy Furniture Galleries ® stores, we increased our ownership percentage in this store network from 44% to 53%. • Expanding the reach of our wholesale distribution channels. Consumers experience the La-Z-Boy brand in many channels including the La-Z-Boy Furniture Galleries ® store network and the La-Z-Boy Comfort Studio ® locations, our store-within-a-store format. While consumers increasingly interact with the brand digitally, our consumers also demonstrate an affinity for visiting our stores to shop, allowing us to frequently deliver the flagship La-Z-Boy Furniture Galleries ® store, or La-Z-Boy Comfort Studio ® , experience and provide design services. In addition to our branded distribution channels, approximately 2,200 other dealers sell La-Z-Boy products, which include some of the best-known names in the industry, providing us the benefit of multi-channel distribution. We believe there is significant growth potential for our consumer brands through these retail channels. Profitably growing the Joybird brand • Profitably growing the Joybird brand with a digital-first consumer experience. During fiscal 2019, we purchased Joybird, a leading e-commerce retailer and manufacturer of upholstered furniture with a direct-to-consumer model. We believe that Joybird is a brand with significant potential and our strategic initiatives in this area focus on fueling profitable growth through an increase in digital marketing spend to drive awareness and customer acquisition, ongoing investments in technology, an expansion of product assortment, and providing additional small-format stores in key urban markets to enhance our consumers' omni-channel experience. Enhancing our enterprise capabilities • Enhancing our enterprise capabilities to support the growth of our consumer brands and enable potential acquisitions for growth. Key to successful growth is ensuring we have the capabilities to support that growth, including an agile supply chain, modern technology for consumers and employees, and by delivering a human-centered employee experience. Through our Century Vision strategic plan, we have several initiatives focused on enhancing these capabilities with a consumer-first focus. Reportable Segments Our reportable operating segments include the Retail segment and the Wholesale segment. • Retail Segment . Our Retail segment consists of one operating segment comprised of our 187 company-owned La-Z-Boy Furniture Galleries ® stores. The Retail segment sells primarily upholstered furniture, in addition to some casegoods and other home furnishing accessories, to end consumers through these stores. • Wholesale Segment . Our Wholesale segment consists primarily of four operating segments: La-Z-Boy, our largest operating segment, our England subsidiary, our casegoods operating segment that sells furniture under three brands (American Drew ® , Hammary ® , and Kincaid ® ), and our international operating segment which includes our international wholesale and manufacturing businesses. 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 23 Table of Contents 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. • Corporate and Other . Corporate and 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 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 and through small-format stores in key urban markets. None of the operating segments included in Corporate and Other meet the requirements of reportable segments. Results of Operations The following discussion provides an analysis of our results of operations and reasons for material changes therein for fiscal year 2024 as compared with fiscal year 2023. Refer to "Results of Operations" in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2023 Annual Report on Form 10-K, filed with the SEC on June 20, 2023, for an analysis of the fiscal year 2023 results as compared to fiscal year 2022. Fiscal Year 2024 and Fiscal Year 2023 Supply Chain Optimization During the third quarter of fiscal 2023, we made the decision to close our manufacturing facility in Torreón, Mexico as part of our initiative to drive improved efficiencies through optimized staffing levels within our plants. As a result of this action, charges were recorded within the Wholesale segment in the third and fourth quarters of fiscal 2023, totaling $9.2 million in selling, general, and administrative ("SG&A") expense for the impairment of various assets, primarily long-lived assets, and $1.6 million in cost of sales, primarily related to severance. During the first quarter of fiscal 2024, we terminated our lease on the Torreón facility and recognized a $1.2 million gain in SG&A expense within the Wholesale segment related to the settlement of our lease obligation on the previously impaired long-lived assets. During the second quarter of fiscal 2024, we announced further actions intended to drive efficiencies and optimize our manufacturing capacity in our global supply chain operations. As part of this initiative, we made the decision to shift upholstery production from our Ramos, Mexico operations to our other upholstery plants and relocate our cut and sew operations back to Ramos, Mexico, resulting in the permanent closure of our leased cut and sew facility in Parras, Mexico, which is expected to be completed by the end of the first quarter of fiscal 2025. As a result of these actions, charges were recorded within the Wholesale segment in the second, third, and fourth quarters of fiscal 2024, totaling $4.3 million in cost of sales, primarily related to severance, and $4.2 million in SG&A expense for the accelerated depreciation and impairment of fixed assets. La-Z-Boy Incorporated (52 weeks) (52 weeks) (FY24 vs FY23) (Amounts in thousands, except percentages) 4/27/2024 4/29/2023 % Change Sales $ 2,047,027 $ 2,349,433 (12.9) % Operating income 150,796 211,439 (28.7) % Operating margin 7.4% 9.0% Sales Consolidated sales in fiscal 2024 decreased $302.4 million, or 13%, compared with the prior year. Sales in fiscal 2023 were fueled by the delivery of a significant backlog resulting from heightened demand in prior periods. Absent this backlog, sales were relatively flat in fiscal 2024 compared with fiscal 2023, as incremental sales from our Retail acquisitions and the addition of new major wholesale dealers were essentially offset by selective pricing taken on products and delivery services, along with promotional actions, to maintain competitiveness. 24 Table of Contents Operating Margin Operating margin, which is calculated as operating income as a percentage of sales, decreased 160 basis points in fiscal 2024 compared with the prior year. • Gross margin increased 200 basis points during fiscal 2024 compared with fiscal 2023. ◦ Lower input costs, led by reduced commodity prices and improved sourcing, drove an increase in gross margin in fiscal 2024 compared with the prior year. ◦ Gross margin further benefited from a favorable shift in product mix within our Retail segment toward higher margin products. ◦ Partially offsetting the benefits above, plant inefficiencies resulting from lower production volume and transition costs related to our supply chain optimization initiative in Mexico drove a decline in gross margin during fiscal 2024 compared with the prior year ◦ Gross margin further decreased from selective pricing and promotional actions taken in fiscal 2024 to maintain competitiveness. • While selling, general, and administrative ("SG&A") expenses were down $22.4 million in fiscal 2024 compared with the prior year, SG&A expenses as a percentage of sales increased 360 basis points over the same period, primarily due to lower delivered sales relative to fixed costs. We explain these items further when we discuss each segment's results later in this Management's Discussion and Analysis. Retail Segment (52 weeks) (52 weeks) (FY24 vs FY23) (Amounts in thousands, except percentages) 4/27/2024 4/29/2023 % Change Sales $ 855,126 $ 982,043 (12.9) % Operating income 111,682 161,571 (30.9) % Operating margin 13.1% 16.5% Sales The Retail segment's sales decreased $126.9 million, or 13%, in fiscal 2024 compared with fiscal 2023, primarily due to the adverse comparison to historic sales levels in fiscal 2023, which were fueled by the delivery of previously built backlog. This decrease in sales was partially offset by a $25.2 million increase in sales related to our fiscal 2024 retail store acquisitions and the full-year impact of our fiscal 2023 retail store acquisitions. Written same-store sales decreased 3% in fiscal 2024 compared with fiscal 2023, primarily due to softer industry-wide demand as a result of a challenging macroeconomic environment. Same-store sales include the sales of all currently active stores which have been open and company-owned for each comparable period. Operating Margin The Retail segment's operating margin decreased 340 basis points in fiscal 2024 compared with fiscal 2023. • Gross margin increased 120 basis points during fiscal 2024 compared with the prior year, primarily due to favorable shift in product mix towards higher margin products. • While SG&A expenses decreased during fiscal 2024 compared with the prior year, SG&A expenses as a percentage of sales increased 460 basis points over the same period, primarily due to lower delivered sales relative to selling expenses and fixed costs, mainly occupancy expenses. 25 Table of Contents Wholesale Segment (52 weeks) (52 weeks) (FY24 vs FY23) (Amounts in thousands, except percentages) 4/27/2024 4/29/2023 % Change Sales $ 1,048,431 $ 1,215,429 Intersegment sales 398,847 474,819 Total sales 1,447,278 1,690,248 (14.4) % Operating income 99,373 115,215 (13.7) % Operating margin 6.9% 6.8% Sales The Wholesale segment's sales decreased 14%, or $243.0 million, in fiscal 2024 compared with fiscal 2023. The decrease in sales primarily reflects a decline in delivered unit volume reflecting the absence of the significant backlog built from prior periods that delivered throughout fiscal 2023, combined with lower furniture demand across the entire industry due to a challenging macroeconomic environment. To a lesser extent, sales also decreased in fiscal 2024 compared with fiscal 2023 as a result of selective pricing on products and delivery services, along with promotional actions, taken to maintain competitiveness. Operating Margin The Wholesale segment's operating margin increased 10 basis points in fiscal 2024 compared with fiscal 2023. • Gross margin increased 210 basis points during fiscal 2024 compared with fiscal 2023. ◦ Lower input costs, led by reduced commodity prices and improved sourcing, drove a 390 basis point increase in gross margin during fiscal 2024 compared with the prior year. ◦ Partially offsetting the item above, plant inefficiencies resulting from lower production volume and transition costs related to our supply chain optimization initiative in Mexico led to a 90 basis point decrease in gross margin during fiscal 2024 compared with the prior year. ◦ Gross margin further decreased 90 basis points in fiscal 2024 compared with the prior year, from selective pricing and promotional actions taken to maintain competitiveness. • SG&A expense as a percentage of sales increased 200 basis points during fiscal 2024 compared with fiscal 2023. ◦ While SG&A expenses decreased in fiscal 2024 compared with the prior year, SG&A expenses as a percentage of sales increased, primarily due to reduced fixed cost leverage from lower delivered sales. ◦ Additionally, higher marketing expense in support of our Long Live the Lazy campaign launch drove a 60 basis point increase in SG&A expense as a percentage of sales in fiscal 2024 compared with the prior year. Investments in this campaign support all La-Z-Boy branded products, including those sold through our Retail segment. Corporate and Other (52 weeks) (52 weeks) (FY24 vs FY23) (Amounts in thousands, except percentages) 4/27/2024 4/29/2023 % Change Sales $ 153,769 $ 166,190 (7.5) % Intercompany eliminations (409,146) (489,048) (16.3) % Operating loss (60,259) (65,347) (7.8) % Sales Corporate and Other sales decreased $12.4 million in fiscal 2024 compared with fiscal 2023, primarily due to a $7.8 million, or 5% decrease from Joybird, which contributed $138.6 million in sales in fiscal 2024. Joybird's overall delivered volume declined in fiscal 2024, largely due to softer demand in the furniture and home furnishings industry experienced over the last year. Written sales for Joybird were down 8% in fiscal 2024 compared with fiscal 2023, reflecting the industry-wide demand challenges noted above. 26 Table of Contents Intercompany eliminations decreased in fiscal 2024 compared with fiscal 2023 due to lower sales from our Wholesale segment to our Retail segment, driven by lower sales in the Retail segment. Operating Loss Our Corporate and Other operating loss decreased $5.1 million in fiscal 2024 compared with fiscal 2023, primarily from improved Joybird operating performance. This was partially offset by unfavorable intercompany inventory profit elimination adjustments, lower operating profit from our global trading company in Hong Kong and a comparative decrease in fiscal 2024 related to an $0.8 million gain recognized in fiscal 2023 to reduce the fair value of the Joybird contingent consideration liability based on our projections at that time. Non-Operating Income (Expense) Interest Income Interest income was $8.8 million higher in fiscal 2024 compared with fiscal 2023. The increase in interest income was primarily driven by higher interest rates on higher cash balances. Other Income (Expense), Net Other income (expense), net was $0.1 million of expense in fiscal 2024 compared with $11.8 million of expense in fiscal 2023. The expense in fiscal 2023 was primarily due to a $10.3 million impairment of our investments in a privately held start-up company combined with exchange rate losses. Income Taxes Our effective income tax rate was 24.8% for fiscal 2024 and 26.2% for fiscal 2023. Refer to Note 18, Income Taxes, for additional information. 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, including fiscal 2025 contractual obligations. We had cash, cash equivalents and restricted cash of $341.1 million at April 27, 2024, compared with $346.7 million at April 29, 2023. Included in our cash, cash equivalents and restricted cash at April 27, 2024, is $80.7 million held by foreign subsidiaries, the majority of which we have determined to be permanently reinvested. In addition, we had investments to enhance our returns on cash of $6.8 million at April 27, 2024, compared with $11.6 million at April 29, 2023. The following table illustrates the main components of our cash flows: Fiscal Year Ended (52 weeks) (52 weeks) (Amounts in thousands) 4/27/2024 4/29/2023 Cash Flows Provided By (Used For) Net cash provided by operating activities $ 158,127 $ 205,167 Net cash used for investing activities (81,554) (70,120) Net cash used for financing activities (81,227) (37,139) Exchange rate changes (926) (86) Change in cash, cash equivalents and restricted cash $ (5,580) $ 97,822 Operating Activities During fiscal 2024, net cash provided by operating activities was $158.1 million, a decrease of $47.0 million compared with the prior year mainly due to lower net income and less favorable changes in working capital relative to the prior year, partially 27 Table of Contents offset by smaller reduction in customer deposits, reflecting a reduced backlog. Our cash provided by operating activities in fiscal 2024 was primarily attributable to net income, adjusted for non-cash items and a $19.9 million decrease in inventory. This was partially offset by a $22.7 million decrease in customer deposits, reflecting the reduced backlog, and a $16.8 million increase in receivables, reflecting higher sales from our Wholesale business to external dealers during the fourth quarter of fiscal 2024 compared with same period a year ago. Investing Activities During fiscal 2024, net cash used for investing activities was $81.6 million, an increase of $11.4 million c ompared with the prior year primarily due to an increase in La-Z-Boy Furniture Galleries ® acquisitions and lower proceeds from the sale of investments, net of investment purchases, all partially offset by lower capital expenditures. Cash used for investing activities in fiscal 2024 included the following: • Cash used for capital expenditures in the period was $53.6 million compared with $68.8 million during fiscal 2023, which is primarily related to upgrades at our manufacturing and distribution facilities, La-Z-Boy Furniture Galleries ® (new stores and remodels) and Joybird store projects. We expect capital expenditures to be in the range of $70 to $80 million for fiscal 2025, primarily related to improvements and expansion of our Retail stores, replacement of machinery and equipment for various manufacturing and distribution facilities, and technology upgrades. We have no material contractual commitments outstanding for future capital expenditures. • Cash used for acquisitions was $39.4 million, related to the acquisition of the Bradenton and Sarasota, Florida, Illinois and Indiana, Colorado Springs, Colorado and Lafayette, Louisiana retail businesses. • Proceeds from the sale of investments, net of investment purchases, was $6.5 million. Financing Activities On October 15, 2021, we entered into a five-year $200 million unsecured revolving credit facility (as amended, the “Credit Facility”). Borrowings under the Credit Facility may be used by the Company for general corporate purposes. We may increase the size of the facility, either in the form of additional revolving commitments or new term loans, subject to the discretion of each lender to participate in such increase, up to an additional amount of $100 million. The Credit Facility will mature on October 15, 2026 and provides us the ability to extend the maturity date for two additional one-year periods, subject to the satisfaction of customary conditions. As of April 27, 2024, we have no borrowings outstanding under the Credit Facility. The Credit Facility contains certain restrictive loan covenants, including, among others, financial covenants requiring a maximum consolidated net lease adjusted leverage ratio and a minimum consolidated fixed charge coverage ratio, as well as customary covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of certain assets. As of April 27, 2024, we were in compliance with our financial covenants under the Credit Facility. We believe our cash and cash equivalents, short-term investments, and cash from operations, in addition to our available Credit Facility, will provide adequate liquidity for our business operations over the next 12 months. During fiscal 2024, net cash used for financing activities was $81.2 million, an increase of $44.1 million compared with the prior year, primarily due to higher share repurchases, partially offset by proceeds from exercised stock options. Cash used for financing activities in fiscal 2024 included the following: • Our board of directors has authorized the repurchase of Company stock and we spent $52.8 million during fiscal 2024 to repurchase 1.6 million shares. As of April 27, 2024, 5.7 million shares remained available for repurchase pursuant to this authorization. With the operating cash flows we anticipate generating in fiscal 2025, we expect to continue repurchasing Company stock. • Cash paid to our shareholders in quarterly dividends was $32.7 million. Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. We expect the board to continue declaring regular quarterly cash dividends for the foreseeable future, but it may discontinue doing so at any time at the board's discretion. • Proceeds from exercised stock options, net of stock issued and taxes withheld as part of our employee benefit plans, was $10.9 million. • Cash paid for holdback payments made on prior-period acquisitions was $5.0 million for a guaranteed payment related to the acquisition of Joybird, which was the final payment related to this acquisition. 28 Table of Contents Exchange Rate Changes Due to changes in exchange rates, our cash, cash equivalents, and restricted cash decreased by $0.9 million from the end of fiscal year 2023 to the end of fiscal year 2024. These changes impacted our cash balances held in Canada, Thailand, and the United Kingdom. Contractual Obligations Lease Obligations. We lease real estate for retail stores, distribution centers, warehouses, plants, showrooms and office space and also have equipment leases for tractors/trailers, IT and office equipment, and vehicles. As of April 27, 2024, we had operating and finance lease payment obligations of $557.8 million and $2.0 million, respectively, with $94.6 million and $0.7 million, payable within 12 months, respectively. Refer to Note 6, Leases, for additional information. Purchase Obligations. We had purchase obligations of $181.7 million, all payable within 12 months, related to open purchase orders, primarily with foreign and domestic casegoods, leather, and fabric suppliers, which are generally cancellable if production has not begun. Open purchase orders also include contracts for indirect services, which are generally cancellable before services commence. Other Our consolidated balance sheet as April 27, 2024 reflected a $1.2 million net liability for uncertain income tax positions. We do not expect that the net liability for uncertain income tax positions will significantly change within the next 12 months. The remaining balance will be settled or released as tax audits are effectively settled, statutes of limitation expire, or other new information becomes available. 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 Estimates We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles ("US GAAP"). In some cases, these principles require management to make difficult and subjective judgments regarding uncertainties and, as a result, such estimates and assumptions may significantly impact our financial results and disclosures. We base our estimates on currently known facts and circumstances, prior experience and other assumptions we believe to be reasonable. We use our best judgment in valuing these estimates and may, as warranted, use external advice. Actual results could differ from these estimates, assumptions, and judgments and these differences could be significant. We make frequent comparisons throughout the year of actual experience to our assumptions to reduce the likelihood of significant adjustments. We record adjustments when differences are known. We consider the following accounting estimates to be critical as they require us to make assumptions that are uncertain at the time the estimate was made and changes to the estimate would have a material impact on our financial statements. Indefinite-Lived Intangible Assets and Goodwill Indefinite-lived intangible assets include our American Drew trade name and the reacquired right to own and operate La-Z-Boy Furniture Galleries ® stores we have acquired. Prior to our retail acquisitions, we licensed the exclusive right to own and operate La-Z-Boy Furniture Galleries ® stores (and to use the associated trademarks and trade name) in those markets to the dealers whose assets we acquired, and we reacquired these rights when we purchased the dealers' other assets. The reacquired rights to own and operate La-Z-Boy Furniture Galleries ® stores are indefinite-lived because our retailer agreements are perpetual agreements that have no specific expiration date and no renewal options. A retailer agreement remains in effect as long as the independent retailer is not in default under the terms of the agreement. Our goodwill relates to the acquisitions of La-Z-Boy Furniture Galleries ® stores, the La-Z-Boy wholesale business in the United Kingdom and Ireland, the La-Z-Boy manufacturing business in the United Kingdom, and Joybird ® , an e-commerce retailer and manufacturer of upholstered furniture. The reporting unit for goodwill arising from retail store acquisitions is our Retail operating segment. Goodwill arising from the acquisition of our wholesale business in the United Kingdom and Ireland and the acquisition of our manufacturing business in the United Kingdom is combined into the United Kingdom reporting unit. The reporting unit for goodwill arising from the acquisition of Joybird is the Joybird operating segment. 29 Table of Contents We test indefinite-lived intangibles and goodwill for impairment on an annual basis in the fourth quarter of our fiscal year, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. We have the option to first assess qualitative factors in order to determine if it is more likely than not that the fair value of our intangible assets or reporting units are greater than their carrying value. If the qualitative assessment leads to a determination that the intangible asset/reporting unit’s fair value may be less than its carrying value, or if we elect to bypass the qualitative assessment altogether, we are required to perform a quantitative impairment test by calculating the fair value of the intangible asset/reporting unit and comparing the fair value with its associated carrying value. When we perform the quantitative test for indefinite-lived intangible assets, we establish the fair value of our indefinite-lived trade names and reacquired rights based upon the relief from royalty method, which requires the use of significant estimates and assumptions including forecasted sales growth and royalty rates. When we perform the quantitative test for goodwill, we establish the fair value for the reporting unit based on the income approach, in which we utilize a discounted cash flow model, the market approach, in which we utilize market multiples of comparable companies, or a combination of both approaches. The income approach requires the use of significant estimates and assumptions including forecasted sales growth, operating income projections, and discount rates and changes in these assumptions may materially impact our fair value assessment. During fiscal 2024, we performed the quantitative impairment test on two reporting units and determined that neither was impaired as discussed below. Joybird Reporting Unit The Joybird reporting unit, which has goodwill of $55.4 million at April 27, 2024, has an estimated fair value that exceeds is carrying value by approximately 6%. We determined the fair value of this reporting unit by applying a combination of the income approach based on its future cash flows and the market approach based on the guideline public company method, weighted 75% and 25%, respectively. The key assumptions that factored into the valuation under the income approach were the projections of revenue and operating income of the business, as well as the terminal growth rate, tax rate, and discount rate used to present value these future cash flows. We performed a sensitivity analysis on the discount rate and terminal growth rate and using a range of reasonable inputs, the fair value of the Joybird reporting unit either exceeded its carrying value or did not exceed its carrying value by an immaterial amount, for each of the various scenarios analyzed. The key assumption that factored into the valuation under the market approach was the market multiples applied to revenue. United Kingdom Reporting Unit The United Kingdom reporting unit, which has goodwill of $20.1 million at April 27, 2024, has an estimated fair value that exceeds is carrying value by approximately 28%. We determined the fair value of this reporting unit using the income approach based on its future cash flows. The key assumptions that factored into the valuation were the projections of revenue and operating income of the business, as well as the terminal growth rate, tax rate, and discount rate used to present value these future cash flows. Refer to Note 7, Goodwill and Other Intangible Assets, for further information regarding our fiscal 2024 impairment testing. Product Warranties We account for product warranties by accruing an estimated liability when we recognize revenue on the sale of warrantied product. We estimate future warranty claims on product sales based on sales volume and claim experience and periodically make adjustments to reflect changes in actual experience. We incorporate repair costs in our liability estimates, including materials, labor, and overhead amounts necessary to perform repairs, and any costs associated with delivering repaired product to our customers and consumers. We use considerable judgment in making our estimates and record differences between our estimated and actual costs when the differences are known. Stock-Based Compensation We measure stock-based compensation cost for both equity-based awards and liability-based awards on the grant date based on the awards' fair value and recognize expense over the vesting period. For liability-based awards, we remeasure the liability for these awards and adjust their fair value at the end of each reporting period until paid. We recognize compensation cost for stock-based awards that vest based on performance conditions ratably over the vesting periods when the vesting of such awards becomes probable. Determining the probability of award vesting requires judgment, including assumptions about future operating performance. While the assumptions we use to calculate and account for stock-based compensation awards represent management's best estimates, these estimates involve inherent uncertainties and the application of our management's best 30 Table of Contents judgment. As a result, if we revise our assumptions and estimates, our stock-based compensation expense could be materially different in the future. If we grant options, we estimate the fair value of each option grant using a Black-Scholes option-pricing model. We estimate expected volatility based on the historic volatility of our common shares. We estimate the average expected life using the contractual term of the stock option and expected employee exercise and post-vesting employment termination trends. We base the risk-free rate on U.S. Treasury issues with a term equal to the expected life assumed at the date of grant. We have elected to recognize forfeitures as an adjustment to compensation expense in the same period as the forfeitures occur. We estimate the fair value of each performance award grant that vests based on a market condition using a Monte Carlo valuation model. The Monte Carlo model incorporates more complex variables than closed-form models such as the Black-Scholes option valuation model used for option grants. The Monte Carlo valuation model simulates a distribution of stock prices to yield an expected distribution of stock prices over the remaining performance period. The stock-paths are simulated using volatilities calculated with historical information using data from a look-back period that is equal to the vesting period. The model assumes a zero-coupon, risk-free interest rate with a term equal to the vesting period. The simulations are repeated many times and the mean of the discounted values is calculated as the grant date fair value for the award. The final payout of the award as calculated by the model is then discounted back to the grant date using the risk-free interest rate. Recent Accounting Pronouncements Refer to Note 1, Accounting Policies, to our consolidated financial statements for a discussion of recently adopted accounting standards and other new accounting standards.