Good day, ladies and gentlemen, and welcome to your La-Z-Boy Fiscal 2020 First Quarter Results Conference Call. Today's conference is being recorded. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to Ms. Kathy Liebmann, Director of Investor Relations. Ma'am, the floor is yours.

Thank you, Cynthia, and good morning. Thank you for joining us to discuss our fiscal 2020 first quarter results. With us this morning are Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer; and Melinda Whittington, CFO. Kurt will open and close the call, and Melinda will speak to the financials midway through. We'll 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 the telephone replay of the call will be available for one week, beginning this afternoon. Before we begin the presentation, I'd like to remind you that some statements made in today's call include forward-looking statements about La-Z-Boy's future performance. 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 view those risk factors as well as other key information detailed in our SEC filings. Also our earnings release is available under the News and Events tab on the Investor Relations page on 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. And with that, I will now turn the call over to Kurt Darrow, La-Z-Boy's Chairman, President and CEO. Kurt?

Thank you, Kathy, and good morning, everyone. After yesterday's market close, we released solid fiscal 2020 first quarter results, demonstrating the strength of the La-Z-Boy brand within today's challenging home furnishings environment as well as the power of our global supply chain. Our Retail segment delivered strong sales momentum and also nearly doubled operating profit. The broader La-Z-Boy Furniture Galleries network posted increases in the first quarter written same-store sales on a one, two and three year basis. Within wholesale Upholstery, while sales were flat, we still delivered GAAP operating margin of 9% and a non-GAAP operating margin of 9.5%. Additionally, we generated $19 million in cash from operating activities and returned $18 million to shareholders through share repurchases and dividends. But before getting into a discussion of each operating segment, I would like to take a few minutes to share some of the highlights of our La-Z-Boy branded business. With respect to the brand platform, the launch of our advertising campaign featuring new brand ambassador, Kristen Bell, is on track. While early in the process, market research reveals that once customers have seen the campaign, they are more interested in and more likely to consider La-Z-Boy. Additionally, the research highlights an uptick in those indicating the La-Z-Boy brand is relevant to them and fits their style. During the quarter, we increased our marketing spend on the campaign launch and are confident the campaign will deliver strong results over time as we continue to invest in the strong brand equity of La-Z-Boy. In other marketing news, we launched an augmented reality app for Apple mobile devices to deepen engagement with consumers as usage of the mobile channel increases in popularity. And we are also testing a virtual reality experience as part of the design program in select stores to better…

Thanks, Kurt, and good morning, everyone. As always, let me remind you that we are presenting our results in both the GAAP and non-GAAP basis. Non-GAAP results continue to exclude purchase accounting adjustments for our acquisitions. And we are now also including the onetime charges related to our supply chain optimization initiative that Kurt discussed a moment ago. We believe this non-GAAP presentation better reflects underlying operating trends and performance of the business. For the fiscal '20 first quarter, we recorded $1.5 million or $0.02 per diluted share in purchase accounting charges, the majority of which related to the acquisition of Joybird, which is reflected in Corporate and Other. We also recorded $1.5 million or $0.02 per diluted share for severance charges related to our global supply chain optimization initiative, which is reflected in our Upholstery segment. And as always, a full reconciliation of GAAP to non-GAAP is included in our press release and in the Appendix section at the end of our conference call slides. Moving to consolidated first quarter results. Sales increased 7.5% to $414 million, reflecting strong retail performance, a combination of core growth and the August 2018 addition of the Arizona-based La-Z-Boy Furniture Galleries as well as the impact of Joybird, which we acquired in fiscal August 2018. GAAP consolidated operating income was $23.4 million versus $23.2 million in the prior year quarter. Excluding purchase accounting charges and the charge for our supply chain optimization initiative, non-GAAP consolidated operating income increased to $26.2 million from $23.3 million in last year's quarter. Consolidated operating margin on a GAAP basis was 5.7% versus 6% in last year's quarter and non-GAAP consolidated operating margin was 6.3% versus 6.1%, primarily driven by favorable raw material prices in the Upholstery segment and a higher leverage of fixed cost in our Retail…

Thank you, Melinda. The home furnishings environment remains challenging amid tariff uncertainty, geopolitical concerns, stock market volatility in addition to ups and downs of the consumer confidence index over the past couple of months. But against that backdrop, we continue to believe La-Z-Boy is competitively well positioned with a strong brand, multichannel distribution including a growing retail business, and a world-class supply chain, which we continue to strengthen. Additionally, we are optimistic about the long-term growth perspective prospects for Joybird as our e-commerce strategy and business evolve. With a strong balance sheet, we will continue to make prudent and strategic investments to deliver long-term performance and provide returns to our shareholders. We do thank you for your interest in La-Z-Boy Incorporated. And we will turn over the call to Kathy to provide instructions for getting into the queue for questions. Thank you again.

[Operator Instructions]. Our first question comes from John Baugh of Stifel.

Congrats on a good quarter in a tough environment. I'll jump right in. I'm particularly intrigued by the seeming spread of performance between the La-Z-Boy upholstery brands and England. Can -- what do you think that's attributable to?

Well, John, I think the La-Z-Boy stores have performed very well. In fact, we've had seven of the last eight quarters in the system with same-stores sales comp, which is not the trend in the industry. Then I think our consistency to -- for execution, investing in the brand, having some innovative products, I think a lot of that is what's setting us apart. So England does not sell any product to the La-Z-Boy stores. And our wholesale business is not as strong as we'd like it to be right now. But I think it's reflective of a lot of the general trade that is having a little more difficult time. And it reflects in England's number because that's who their main customer.

Okay. And you mentioned Kristen Bell and it's on track. I'm curious where are you with that advertising rollout? What, if any, clarity or correlation have you seen with that campaign and traffic or sales in the La-Z-Boy-branded stores?

First of all, I would say we're very pleased with the launch. We're very pleased with the way she comes across on media. A lot of additional coverage in social media, which we never had before. But frankly, John, it's been 90 days. And we only launched her in May. And it's going take a time to really -- we've got some early reads, but we will give you some more color later in the year when we have more time with her on the air. And we'll spend considerably more money in the back half of the year on marketing due to the seasonality and the holidays. So we'll get more exposure. But we're getting great reviews on her from customers that love her personality and that she comes across as a very authentic spokesperson. But it's too early to really say anything that we would read as a definite trend yet.

Okay. And then quickly, you mentioned Canada. Could you remind us again why the prices went up? It sounds like they came back down. What have you learned about the elasticity as it relates to Canada costs and prices?

Well, I wish it was that simple because there were two factors. So the Canadian retailers are -- were paying all the tariffs that a U.S. dealer would pay on finished goods coming up to their country. And then the retaliatory tariff came into effect, which was 10%. And that seems bad. But when the Canadian dollar was CAD 1.40 to $1, you combine the two of them, it was extremely difficult. So I haven't looked in the last week or two about the currency difference. But just having that tariff come off has to be a big relief, and it showed up immediately. So yes, there is a point where we're feeling fairly good right now but only passing on 3% to 4%. But if we had to pass on 25% or 30%, I'm sure it would have a huge impact to our volume. And that's what they experienced.

And keep in mind, the Chinese tariffs are on component parts. So that 25%, as Kurt said, becomes a 3.5%, 4% uptick for us. That Canadian tariff was a finished goods tariff. So that was 10% of the entire value of a finished good product.

Okay. That's helpful. And lastly, just quickly, you mentioned international. Is that the U.K. or other parts? What's -- and how much of a drag is that on the overall upholstery business?

Well, it's actually everywhere, John. It's with our Asian business. It's with our European business, particularly the U.K. There's just so much uncertainty. But on the overall basis, the international business is not that big of a part of our sales mix. So a hiccup there is not, I would say, material. But we like it a lot better when they're contributing positively than negatively.

Our next question comes from Brad Thomas of KeyBanc Capital Markets.

Kurt, Melinda and Kathy, let me add my congratulations as well on a good quarter here.

Thank you.

Thank you.

I just want to follow up on some of John's questions and maybe talking about trends here in the United States. Obviously, very strong results out of your La-Z-Boy network. And I guess I was hoping you could help us to think about how some of the U.S. dealerships, major dealers, smaller dealers have been performing. Are they adding additional La-Z-Boy floor space? What are their inventory levels? How are they doing if you kind of piece apart some of the international headwinds you're seeing in that Upholstery division?

I think I'd answer that, Brad, in a couple of ways. One, we -- since we own 40% of the stores and our independent dealers are reporting a lot of data so that we know what's going on, I can speak chapter and verse about what's happening inside the 355 La-Z-Boy stores. But when it comes to our other 2,500 dealers, exactly what they're doing from day-to-day, their metrics, we can tell how much they buy from us. But having any insight into the inventory levels that they carry, we just don't have that kind of data. But we have seen a trend particularly in the smaller dealers in rural America. We have seen a trend of them struggling more with the cost of doing business, trying to keep their websites up to date, doing all the things that is required today of marketing furniture. And so I think that is part of -- probably the impact that the e-commerce channels have had on the business and the share they've taken. But we have -- and I'm not casting a shadow on the entire -- but we have dealers that are -- independent dealers, both big and small, who are having solid growth with us. And we have ones going the other way. The net result is, in the aggregate, if you take out the La-Z-Boy stores, we're not seeing the growth we've been accustomed to.

That's helpful. And if I could move over to margins. I think the Upholstery segment had an 80-basis point benefit from raw materials. I guess could you talk a little bit about the cadence of that? Is that a tailwind that could get bigger over the next couple of quarters? Or is this a run rate that may continue at this pace going forward? How should we think about that?

Clearly, we're very pleased with the margins we were able to achieve in Upholstery this quarter on essentially a flat top line. We mentioned coming into three months ago -- I guess it was only two months ago given the year end. We talked about the fact that we would see some tailwinds from raw materials. But we continue to see other cost increases between people costs, health care costs, transportation and so forth. And so we're very pleased with how we were able to offset those costs with other supply chain efficiencies in the quarter. But looking forward, in addition, there's a lot of uncertainty out there. It has certainly been the topic of the conversation. And volume in the end cures a lot of evils. And so we need to continue to see the strong business top line to be able to consistently deliver on those strong bottom lines, both for Upholstery and our Retail business.

[Operator Instructions]. We will take our next question from Anthony Lebiedzinski with Sidoti & Company.

So first, I just wanted to get a better sense as to the same-store sales traffic versus unit volume, if you could provide some color on that.

So our traffic is trending up. And we are -- as is our close rate and our average ticket. So those are the three big drivers. We're doing more In-Home Design. We're selling more room packages, and that is driving the ticket. And with less customers coming into stores nationally over the last few years, conversion has been a big focus of ours to be sure we maximize the share of wallet of every customer that comes through the doors.

Got it. And in terms of the penetration level of your In-Home Design, where are you guys now at?

I think across the network, it is in the low 30% of our sales. Certainly not 30% of our customers, but 30% of our sales delivers a huge dollar value to our -- a small percentage of our customers delivers a high -- the 30% dollar value to our total revenue.

Got it. Okay. And then switching over to Joybird. Are you already making products from Dayton, Tennessee? And if you are, what percentage of the product sales are flowing through that?

We are making some of their best sellers in our plant in Tennessee. A lot of that effort has gone to getting our regional distribution centers that support our retail business stocked with the Joybird product. And I think we'll report at the end of the next quarter that a lot more has started to go out to the consumer as we ramp up the transition. And the teams are working incredibly hard to make this transition. But getting two different companies and different systems and different ways to go to market 100% in sync overnight doesn't happen. So we're confident we'll get it worked out. There's great cooperation and learnings on both sides. But there's still a lot of work to do. And one of the reasons we're a little bit behind, and it's just because of the complexity, is -- our systems have to be integrated. And that's taking longer than we anticipated.

Understood. And lastly, just longer term strategically. How are you thinking about your store base just -- given overall the traffic trends across retail with less foot traffic? Just longer term, just any updated thoughts on your store base?

I believe that we still feel we have the opportunity to grow the store base to eventually 400 stores someday. And as I mentioned earlier, we have experienced 7 of the last 8 quarters of same-store sales growth throughout the network. Our dealers are investing in remodeling their stores, opening new stores. The company is, but it's not easy. And it's no guarantee what's happening today is going to continue into future. But if you don't invest in your stores, if you don't update them, if you don't have compelling product or a message, it's going to be tougher and tougher for you to perform well. And we keep working at everything we do in our retail business one step at a time. There is no single silver bullet. It takes a combination of a number of things. But we don't think retail is going away. We think perhaps some inefficient or bad retail probably will. But our customer today, it could be different in 10 years, but our consumer today continue to tell us she likes to shop in our stores. And so we are continually to -- we are continuing to foster that and try to build as big a retail network as is prudent.

There appears to be no further questions at this time. I will now turn the conference back over to Kathy Liebmann for closing comments.

Again, thank you for your participation in our call this morning. Should you have follow-up questions, please get in touch with me. Thanks again, and have a great day.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.