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Larry Thomas

La-Z-Boy invests, returns to profit

Kurt Darrow, La-Z-BoyKurt Darrow, La-Z-Boy
MONROE, Mich. - When La-Z-Boy celebrated its 80th anniversary in early 2007, housing starts were booming, furniture retailers were expanding, and the upholstery and case goods producer's business was steady and profitable.
     There was some concern - the housing bubble was about to burst, and the $1.62 billion in sales for the fiscal year that ended in April 2007 was about 5% below the previous fiscal year. But no one foresaw the spectacular and unprescedented decline that followed.
     Sales fell another 10% to $1.46 billion for the year ended April 26, 2008, and when the housing bubble did actually burst about five months later, sales - and the company's stock price - went into free fall.
     The stock, which traded above $11 per share in mid-September 2008, plunged to less than $1 per share by the end of January 2009, and according to data compiled by Yahoo Finance, traded as low as 53 cents per share the week of March 2, 2009.
     Sales fell to $1.23 billion for the year ended April 25, 2009, and hit what the company now believes was the bottom at $1.18 billion for the year ended April 24, 2010.
     The bottom line wasn't much better. La-Z-Boy reported a net loss of $122.4 million in fiscal 2009 - a figure that included more than $55 million in non cash writedowns.
     But as the company celebrates its 85th anniversary this year, it's clear that La-Z-Boy is a much different company than it was five years ago. The boom of 2007 hasn't returned, but the stock is again trading above $11 a share, and much of the gloom and doom from the recession has dissipated.
     Sales rose to $1.19 billion in fiscal 2011 and increased to $1.23 billion in the most recent fiscal year, which ended April 28.
     And perhaps more importantly, profits rose from $24 million in fiscal 2011 to $88 million in fiscal 2012.
     Kurt Darrow, La-Z-Boy's president and CEO since 2003, said the company isn't celebrating this latest anniversary by basking in its ability to survive a recession that was easily the worst in his 33 years with the company.
     "We have to realize that a lot of our recent growth is from gains in market share," he said. "Business is not robust. The industry is still below the peaks it reached in 2006 and 2007."
     During the depths of the recession, La-Z-Boy did what a lot of other companies did, closing factories, laying off hundreds of workers and aggressively cutting costs.
     But Darrow said the company's management team recognized that cost-cutting alone wouldn't be sufficient. It was critical to continue to invest in the brand - the most recognized brand in the home furnishings industry - and look for ways to make the company more operationally efficient long after the recession ended.
     "It was not a cut and burn strategy," he said. "We were investing in the company. I've never believed you can cost-cut your way out of a recession."
     Those investments included converting its upholstery factories to a cellular manufacturing system, opening a cut-and-sew plant in Mexico to supply its U.S. factories with covers, and hiring actress and model Brooke Shields as a spokesman for the brand.
     Plus, the company strengthened its balance sheet by reducing debt from $104.4 million in fiscal 2008 to $9.76 million in fiscal 2012 - a minuscule amount for a company the size of La-Z-Boy.
     Perhaps the company's most controversial investments, however, were at the retail level.
     The company acquired dozens of struggling La-Z-Boy Furniture Galleries stores (it now owns 85 of the 312 in existence) and kept most of them open while consolidating back-office operations, beefing up sales training and upgrading store designs.
     Since the recession hit, the company-owned stores have yet to record an operating profit, but Darrow is convinced La-Z-Boy made the right decision to buy the stores. He said they are in key markets such as Chicago, south Florida and Southern California, which the company simply couldn't afford to abandon.
     "We bought stores that were having difficulties and we knew it was going to take some time to turn them around," he said. "We needed to stay in those markets."
     Darrow noted that while the company-owned stores posted an operating loss of $1.1 million in the fourth quarter of the most recent fiscal year, it was their 13th consecutive quarter of improved performance. For the full fiscal year, the loss was cut to $7.8 million from $15.1 million the previous fiscal year.
     Darrow wouldn't predict when the stores would turn an operating profit, but he believes it will happen sooner rather than later.
     "With a more qualified customer entering our stores, our retail teams are using established team selling processes, which drove an improvement in our close ratio and average ticket," he said in summarizing results for the most recent quarter.
     And he believes a big reason the stores are drawing more qualified customers - i.e., those already familiar with the La-ZBoy line - is the marketing and advertising campaign featuring Shields that was launched last year.
     "We think she has been a tremendous spokesperson for the brand," said Darrow. "Too many people still think of us as a company with a single product - the recliner - but she's helping change that perception."
     The campaign, which has included television and magazine ads, highlights the variety of stationary and motion upholstery in the line, and focuses on the company's custom upholstery capabilities.
     The company is so pleased with the campaign that it recently extended its partnership with Shields for two years and plans to beef up advertising spending this fall and winter. That move should benefit all La-Z-Boy dealers, he said, not just the company-owned retail stores.
     And it should make the 85th anniversary cake taste a lot sweeter.

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