La-Z-Boy Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings everyone and welcome to the La-Z-Boy Fiscal 2024 Third Quarter Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions after the presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Mark Becks, CFA of La-Z-Boy Incorporated. You may begin Mark.
Mark Becks: Thank you, Jenney. Good morning, everyone, and thanks for joining us to discuss our fiscal 2024 third quarter. With us today are Melinda Whittington, La-Z-Boy Incorporated's President and Chief Executive Officer; and Bob Lucian, La-Z-Boy's SVP and CFO. Melinda will open and close the call and Bob will speak to segment performance and the financials midway through. We will then open the call to questions. Slides will accompany this presentation and you may view them through our webcast link, which will be available for one year, and a telephone replay of the call will be available for one week beginning this afternoon. Before we begin the presentation, I would like to remind you that some statements made in today's call include forward-looking statements about La-Z-Boy's future performance and other matters.
Although we believe these statements to be reasonable, our actual results could differ materially. The most significant risk factors that could affect our future results are described in our annual report on Form 10-K. We encourage you to review those risk factors, as well as other key information detailed in our SEC filings. Also, our earnings release is available under the News Events tab, on the Investor Relations' page of our website, and it includes reconciliations of certain non-GAAP measures, which are also included as an appendix at the end of our conference call slide deck. With that, I will now turn the call over to Melinda Whittington, La-Z-Boy Incorporated's President and Chief Executive Officer. Melinda?
Melinda Whittington: Thank you, Mark and good morning everyone. Yesterday, following the close of market, we reported results for our January ended third quarter. Highlights for the quarter included consolidated delivered sales of $500 million, up 5% versus our most recent pre-pandemic third quarter and down 13% versus prior year, which benefited from delivering the above-normal pandemic backlog. Total consolidated non-GAAP gross margin, up 140 basis points year-over-year, with gross margin expansion across all segments. Non-GAAP operating margin of 6.6%, non-GAAP EPS of $0.67. Strong operating cash flow of $48 million for the quarter, bringing us up to $105 million year-to-date and continued progress against our Century Vision growth strategy, including completing the acquisition of six-store independent La-Z-Boy Furniture Galleries network in the Midwest, and signing an agreement to acquire another two-store independent network in Florida in the fourth quarter.
The overall furniture and home furnishings industry is in a continued slowdown as housing turnover remains at historic lows, driven by challenging interest rates and housing affordability. January, the third month of our quarter was further affected by winter weather events across much of the U.S., which had a negative impact on traffic and related written sales at our retail stores across the Central U.S. These winter weather events in the second and third weeks of January also caused multiple days of manufacturing shutdowns in our U.S. assembly plants where the majority of our product is manufactured and disruption to our distribution, temporarily impacting our ability to produce and deliver products and causing our delivered sales and profits to fall short of the low-end of our guidance range for the quarter.
After January's weather disruptions, production and deliveries are now back to normal in the fourth quarter as we focus on servicing our customers and consumers with the high-quality comfortable products they expect from us. Recapping our third quarter written sales trends. Total written sales for our company-owned Retail segment were down 2% versus last year's strong third quarter. Written same-store sales for our company-owned Retail segment in the third quarter declined 8% versus the prior year. Same-store sales grew in both November and December, but declined in January versus a year ago, impacted by softening traffic against the strong January 2023 comparison period and the winter weather. Although Retail performance fell short of expectations due to this depressed traffic, store level execution continues to be very strong.
Conversion rates, average ticket, and design sales metrics were all improved even versus last year's strong quarter. Written same-store sales for the entire La-Z-Boy Furniture Galleries network of 353 stores followed similar patterns for the quarter and declined 6% versus prior year. Against the backdrop of a 7% industry contraction during our third quarter, our stores executed well, and we expect to continue to drive comparatively positive results going forward on the strength of our brand and our execution in our La-Z-Boy Furniture Galleries. For the first nine months of our fiscal year, written same-store sales across our entire network were down 1%, while the industry was down 7%. And importantly, our fourth quarter is off to a solid start with President's Day results for company-owned stores coming in on track with our expectations for the fourth quarter.
Turning to Joybird, written sales declined 14% in the quarter versus a year ago as the online furniture market continues to be challenged, consistent with the broader furniture industry. As we navigate this environment, we remain focused on providing innovative, high-quality products for our customers and consumers. Favorable demographics, including the structural housing shortage and anticipated interest rate reductions later in the year will ultimately drive the return to a more normalized furniture demand, likely in the back half of our fiscal 2025. On the foundation of our strong financial position and prudent management, we continue to strategically invest in strengthening our business for the long-term as part of our Century Vision growth strategy.
and prepare to harness those positive trends when they emerge, even as we navigate near-term industry challenges. Recall, our Century Vision is our strategic framework, setting up La-Z-Boy Incorporated for our next 100 years as we celebrate our first century in 2027. This is measured by our intention to grow top line at a pace double the market and deliver consistent double-digit operating margins over the long-term. A cornerstone to our Century Vision is expanding our La-Z-Boy brand reach. An imperative pillar of this expansion is growing our La-Z-Boy Furniture Galleries network and our own company-owned Retail portion of that network through new stores, acquired stores, and remodels to provide an outstanding end-to-end consumer experience.
Our total network currently stands at 353 stores, up seven from a year ago. And we see potential for continued expansion up to approximately 400 stores over the next several years. Further, we are increasing the number of company-owned stores, which now total 184 and represent 52% of our entire network. Notably, we have nearly doubled our company-owned store count over the past decade and continue to see meaningful opportunity for expansion. During the quarter, we opened one new store and completed the acquisition of an independent La-Z-Boy Furniture Galleries network of six stores across Illinois and Indiana. Further, in January, we signed an agreement to acquire an additional two-store network from an independent dealer in Florida, scheduled to close in the fourth quarter.
Completing this acquisition will bring our total to 11 acquired stores in fiscal 2024. As a reminder, these store acquisitions are immediately accretive to our profitability and allow the company to benefit from the integrated wholesale retail margin. As we grow our company-owned retail, our vertically integrated and primarily North American-based supply chain will become an even more meaningful differentiator versus many competitors in the industry as we are able to deliver high-quality custom furniture with strong speed-to-market. A second key pillar of expanding La-Z-Boy brand reach is our Long Live the Lazy brand campaign that launched last August. Long Live the Lazy is our most database marketing campaign in the company's history, leveraging consumer insights and our brand heritage of comfort and quality to connect with the broader consumer base.
Our goal is to build top-of-mind awareness, relevance, and updated perceptions of the brand. And while the impact of the campaign are expected to gain momentum over time, our early data shows that the new campaign is already driving meaningful results in brand awareness, consideration, and purchase intent. Also encouraging are the indications that this campaign is catching the attention of younger consumers. Beyond our La-Z-Boy brand, to deliver our Century Vision, we continue to optimize Joybird to deliver a balance of sales growth and profitability and we're pleased to see delivered sales grow in the quarter compared to a year ago and progress made toward profitability. The brand continues to have significant opportunity to grow share, which will be our focus as we make prudent investments.
Joybird currently operates 12 stores with the November opening of our newest store in Portland, Oregon, and we have identified a total of 25 potential locations over the intermediate term with our expansion pace depending on opportunities in real estate and overall market conditions. And finally, across our entire enterprise, we continue to progress on building a more agile business model. Now, that we have successfully lowered our unprecedented backlog to a more normalized level, we are meaningfully improving plant productivity. Over the past year, we have made decisions to further optimize our global supply chain by closing assembly plants in Torreón and Ramos, Mexico and shifting cut and sew activities back to Ramos, enabling the closure of our Parras, Mexico operations.
These strategic decisions are made possible through continued productivity improvements achieved across the remainder of our plant network. And now let me turn the call over to Bob to review the results in more detail. Bob?
An upholstery furniture product in modern living room, showcasing the design and comfort of the furniture.
Bob Lucian: Thank you, Melinda and good morning everyone. As a reminder, we presented results on both a GAAP and non-GAAP basis. We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business. Non-GAAP results exclude items, which are detailed in our press release and in the table in the appendix section of our conference call slides. On a consolidated basis, fiscal 2024 third quarter sales decreased 13% to $500 million versus the prior year as trends return to more seasonal levels, following a historically high comparative period in the prior year, which benefited from delivering the above-normal pandemic backlog. As a reminder, last year fiscal -- last fiscal year benefited by an approximately $300 million increase in delivered sales due to the delivery of backlog of COVID-related furniture orders.
Consolidated GAAP operating income decreased to $33 million and non-GAAP operating income was $33 million, a decrease of 38% versus last year's third quarter. Consolidated GAAP operating margin was 6.5% and non-GAAP operating margin was 6.6%, reflecting a 270 basis point decline versus last year, primarily resulting from fixed cost deleverage on lower delivered sales. GAAP diluted EPS was $0.66 for the third quarter versus $0.74 in the prior year quarter. Non-GAAP diluted EPS was $0.67 in the current year quarter versus $0.91 last year. As I move to the segment discussion, my comments from here will focus on our non-GAAP reporting, unless specifically stated otherwise. Starting with the Retail segment for the quarter, delivered sales were $205 million, an 18% decrease over the prior year's third quarter, which benefited from higher deliveries of backlog, while weather events in January during this year's third quarter negatively impacted our ability to deliver product.
Importantly, sales were 22% higher than our fiscal 2020 third quarter, a 5% compound annual growth rate over that four-year period. Retail non-GAAP operating margin decreased to 10.9% versus 17.6% in the prior year quarter. Gross margin improvements from a favorable shift in product mix were more than offset by a higher SG&A as a percentage of sales with fixed cost deleverage due to lower delivered sales volume. Retail margins were also negatively impacted by winter weather, preventing the production and delivery of Retail orders written earlier in the quarter. For our Wholesale segment, delivered sales for the quarter declined to $356 million, a 13% decrease versus the prior year period, which benefited from pandemic backlog production and deliveries.
Additionally, delivered sales were negatively impacted by lost production due to multiple days of plant shutdowns at our U.S. assembly plants as a result of the winter weather conditions across the Central U.S. in mid-January. Non-GAAP operating margin for the Wholesale segment was 6.4% versus 6.6% in last year's third quarter, reflecting strong gross margin improvement, which was more than offset by fixed cost leverage on lower sales and higher marketing to support the Long Live the Lazy campaign across all channels. Gross margin improved from lower input costs, including improved sourcing and reduced commodity prices, partially offset by selective pricing actions and temporary plant inefficiencies from winter weather effects in January and temporary inefficiencies related to our Mexico supply chain optimization project, which remains on track to be completed by the beginning of fiscal 2025.
Joybird reported in corporate and other had delivered sales of $34 million, an 18% increase versus the prior year quarter, driven by mix and pricing benefits in comparison against a challenged base period. Joybird made meaningful progress on improving profitability in the quarter with strengthened product mix and improved return on advertising spend. Putting all of this together for the quarter, consolidated non-GAAP gross margin improved across all reportable segments and for the entire company improved by 140 basis points versus the prior year third quarter. Gross margin expansion was attributed to lower input costs from improved sourcing and reduced commodity prices, partially offset by selective pricing actions and plant inefficiencies resulting from winter weather events in January.
To note, at the beginning of this fiscal year, we made a voluntary reclassification of certain distribution costs from SG&A to cost of sales. At the same time, we retrospectively adjusted our historical numbers, so the comparisons are on a consistent basis. Thus, the 140 basis point improvement in gross margin reflects real underlying growth. SG&A non-GAAP expense dollars decreased $3 million year-over-year and $5 million sequentially from the second quarter. Non-GAAP SG&A as a percentage of sales for the third quarter increased by 410 basis points compared with the same period last year, primarily due to sales deleverage against last year's backlog-aided top line results. Our effective tax rate on a GAAP basis for the third quarter was 20.2% compared to 27.7% for the prior year period, favorably impacted by return to provision adjustments, primarily related to an increase in U.S. R&D tax credits and a reduction in taxes on foreign earnings.
Absent these discrete items, the effective tax rate would have been 25.6%. Recall, our effective tax rate varies from the 21% federal statutory rate, primarily due to state taxes. We expect our effective tax rate to be in the range of 25% to 25.5% for the full fiscal 2024. Turning to liquidity, we ended the quarter with a robust balance sheet, $333 million in cash and no externally funded debt. We generated $48 million in cash from operating activities in the quarter. Solid cash generation was primarily driven by profit performance and improved cash collections. Through the first three quarters, cash flow from operations was $105 million, down from last year due to lower sales after fulfilling our pandemic backlog, but still at very healthy levels.
We spent $12 million in capital expenditures during the quarter, primarily related to retail store openings and remodels and upgrades at our manufacturing and distribution facilities. We also spent $18 million on the acquisition of a six-store independent La-Z-Boy Furniture Galleries network in the Midwest, including the purchase of buildings and land for five of those stores. For the quarter, we returned $29 million to shareholders via dividends and share repurchases, including $9 million paid in dividends in the third quarter. Additionally, we repurchased 567,000 shares in the quarter, which leaves 6 million shares available under our existing share repurchase authorization. We view share repurchases and our dividend as an attractive use of our cash and positive return to shareholders with our stated target of 50% of our capital allocation reinvested back into the business and about 50% in share repurchases and a dividend over the long-term.
In the near-term, we have numerous strategic investments to make as we execute Century Vision and anticipate capital allocation to be more heavily weighted to investments in the business, where our ROIs are two times our cost of capital. Now, before turning the call back to Melinda, let me highlight several important items for fiscal 2024 and our fourth quarter. Consistent with our Century Vision strategy, we continue to target sales growth double the industry growth rate and double-digit margins over the long-term. When I first outlined our expectations for fiscal 2024, during our fiscal 2023 year-end earnings call back in June, I noted that we expected furniture industry demand would in dollar terms, be flat to down 5% versus the prior year.
And I called out our expectation to grow total company sales ahead of the industry after adjusting for last year's backlog-related sales deliveries. Well, nine months into our fiscal year, the environment has actually materialized to be much more challenging than expected for furniture. Despite these trends, though, we are able to report that we have significantly outperformed the industry. Specifically, over the first nine months, the furniture industry has been down about 7%, while our total furniture network, written same-store sales were down only 1%. Such as the tale of two cities in which we are currently operating, strengthening our enterprise capabilities and preparing to leverage eventual tailwinds of housing shortages and improved affordability, all while navigating very challenging short-term trends.
With this in mind, we are planning prudently for the near-term, while investing and building for the long-term, and therefore, expect sales in the range of $505 million to $535 million and non-GAAP operating margins in the range of 7% to 8% for the fourth quarter. We expect our tax rate for the full fiscal year to be in the range of 25% to 25.5%. We anticipate non-GAAP adjustments for purchase accounting charges for the year to be in the range of $0.01 to $0.03 per share. We expect capital expenditures to be in the range of $50 million to $60 million for fiscal 2024 as we invest to strengthen the company for the future, consistent with our Century Vision strategy. And finally, presuming no significant worsening in macroeconomic trends, we expect to continue share repurchases at dollar levels consistent with pre-COVID levels.
And now I will turn the call back to Melinda.
Melinda Whittington: Thanks Bob. We continue to execute on our strategic initiatives and are appropriately investing in strengthening our brands and our capabilities to deliver our Century Vision goals and disproportionately leverage more normalized consumer trends when they emerge. We are engaging with an even broader consumer base than we have in the past. And although the macroeconomic environment remains challenging, we will continue to focus on driving our business, delighting the consumer, and continuously improving our execution. We have every intention of growing, gaining share, and believe the best is yet to come as we deliver long-term profitable growth and returns for all stakeholders. Finally, today, I want to highlight the recent publication of our fiscal 2023 sustainability report, delivering sustainable comfort.
This is the second sustainability report published in our company's history and highlights our continued progress. Aligned with our core values, we empower courage for a sustainable culture, embrace curiosity for sustainable design, and operate with compassion for a sustainable planet. As always, I want to thank the entire La-Z-Boy Incorporated team for their hard work and solid progress toward our goals even in this challenging environment. And we thank you for your time this morning. I'll turn the call back to Mike -- Mark.
Mark Becks: Thank you, Melinda. We will now begin the question-and-answer period. Jenny, please review the instructions for getting into the queue to ask questions.
