The furniture industry is facing tough times. Rising interest rates, a sluggish housing market, and cautious consumer spending have created a challenging environment. Even a giant like La-Z-Boy has felt the pinch, reporting sales declines for the past two quarters. However, a surprising detail from their recent Q3 2024 earnings call reveals a hidden strength, a profit engine ready to power their recovery. And that engine, unexpectedly, runs on snowstorms.

That's right, snowstorms. La-Z-Boy, famous for its comfy recliners and sofas, found an unlikely advantage in the harsh winter weather that hit much of the U.S. in January. While the storms disrupted production and deliveries, they also accidentally revealed a key insight: La-Z-Boy's vertically integrated retail network, especially its growing company-owned stores, is a powerful tool for boosting profits, even in a difficult market.

Here's why. When the storms shut down La-Z-Boy's U.S. assembly plants, it mainly affected their ability to fill orders from their wholesale business – those going to other retailers. This caused a 13% drop in wholesale sales. But the company-owned retail side saw only an 18% drop in sales, doing much better than the overall industry, which shrank by 7% in the same period.

This difference shows the power of vertical integration. By controlling the entire process from manufacturing to selling, La-Z-Boy can prioritize getting orders to their own stores, ensuring faster deliveries and keeping more profit. This approach, always part of their strategy, became super clear during the January storms.

But it's not just about faster deliveries. La-Z-Boy's own retail stores also have higher profit margins. Their non-GAAP operating margin for retail was 10.9% in Q3, much lower than the previous year's 17.6%, mostly because of fixed costs spreading over lower sales due to the storms. But even with this decline, the retail margin was way higher than the 6.4% wholesale margin.

This better profit picture comes from several things. First, La-Z-Boy keeps all the profit from sales in its own stores, instead of sharing it with other retailers. Second, these stores are very efficient, converting shoppers into buyers well, having higher average purchase amounts, and seeing a growing part of sales from design services, which usually lead to bigger orders.

La-Z-Boy is focused on expanding its company-owned stores as a key part of its "Century Vision" plan. This strategy aims for sales growth double the market rate and consistent double-digit operating margins in the long run. And they're making real progress.

In the past ten years, La-Z-Boy has almost doubled its company-owned store count, reaching 184 stores, which is 52% of the entire La-Z-Boy Furniture Galleries network. The company sees room for even more growth, aiming for up to 400 stores in the next few years.

The January snowstorms, though a short-term problem, brought a vital lesson: La-Z-Boy's company-owned retail stores are a powerful engine for profit growth and a major driver of the company's future success. This strategy, along with a more adaptable supply chain, sets La-Z-Boy up to weather the current industry storm and come out stronger, taking a bigger slice of the recovering market and bringing great returns for its investors.

Operating Margin Comparison: Retail vs. Wholesale

The following table compares La-Z-Boy's operating margins for its retail and wholesale segments, as reported in the Q3 2024 earnings call.

Hypothetical Projected Operating Income Contribution

This chart illustrates a hypothetical projection of how La-Z-Boy's operating income could be distributed between the retail and wholesale segments over the next five years, assuming conservative sales growth for retail and flat sales for wholesale.

"Fun Fact: La-Z-Boy's iconic recliner, now a symbol of comfort, was first created as a porch chair! Only later did the company see its potential as a living room staple. This innovative spirit continues to drive La-Z-Boy's product development and strategic vision, positioning it as a leader in the ever-changing world of furniture."