Earnings Call Transcript - LZB Q2 2025

Mark Becks, Director of Investor Relations and Corporate Development

Thank you, Holly. Good morning, everyone, and thanks for joining us to discuss our fiscal 2025 second quarter. With us today are Melinda Whittington, La-Z-Boy Incorporated's President and Chief Executive Officer; Bob Lucian, La-Z-Boy's SVP and CFO; Taylor Luebke, VP, Finance and Treasurer. Melinda will open and close the call, and Bob will speak to segment performance in 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'd like to remind you that some statements made in today's call include forward-looking statements about La-Z-Boy Incorporated'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 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, President and Chief Executive Officer

Thanks, Mark, and good morning, everyone. Yesterday, after the market closed, we shared our results for the second quarter ending in October. We were pleased with the strong performance in our retail segment, even with ongoing challenges in the macro environment and a sluggish home furniture industry. Our total delivered sales increased for the second quarter in a row, thanks to our well-recognized brand and excellent execution across the company. Highlights from the quarter included consolidated delivered sales of $521 million, a 2% rise compared to the previous year. Notably, our retail segment sales grew by 3%, driven by acquisitions of independent La-Z-Boy Furniture Galleries, new store openings, and exceptional Labor Day results. We reported GAAP and non-GAAP diluted EPS of $0.71, with a quarterly dividend of $0.22, marking a 10% increase, alongside continued progress in our Century Vision growth strategy. This included opening three new company-owned La-Z-Boy Furniture Galleries, completing an acquisition of a two-store independent network in Florida, and signing an agreement for another two-store acquisition in the Midwest expected to close in the third quarter. Our results exceeded guidance for both sales and non-GAAP operating margin, showcasing the impact of our effective execution and strategic investments, while managing what we can to ensure favorable outcomes even amid uncertain conditions for consumers. Consumers are gravitating towards our comfortable, high-quality custom furniture, coupled with rapid delivery. In our Furniture Galleries, our associates enhance this foundation by providing a superior shopping experience. We are optimistic about building on our progress and continuing to outperform the industry in the latter half of our fiscal year and beyond as we capitalize on our strategic investments. The furniture industry continues to face challenges, with home-related spending affected by high mortgage rates and limited housing availability and affordability. However, our strong performance demonstrates that consumers are choosing brands they trust during challenging times. With nearly 100 years of experience delighting consumers with comfort and quality, La-Z-Boy Incorporated stands out. Although a recovery in the industry's momentum to more historic levels is inevitable, the timing of that recovery remains uncertain. Nonetheless, I am increasingly confident in our ability to capture a significant portion of consumer demand in the fragmented furniture and home furnishings sector. We are actively pursuing our Century Vision strategy and achieving success. Looking ahead, our total written sales for our company-owned retail segment rose by 6% compared to last year's second quarter. Written same-store sales for this segment, excluding newly opened and acquired stores, were down 1% compared to the same quarter last year, which is an improvement from the 3% decline in Q1. Consistent with recent trends and increased consumer interest around important holidays, same-store sales were strongest during the Labor Day sales period as traffic increased, and once again, our excellent in-store execution improved conversion rates, average ticket size, and design sales compared to the same period last year. Written same-store sales across the entire La-Z-Boy Furniture Galleries network, comprising 358 stores, were also down just 1% compared to the previous year. According to U.S. Census Bureau data, the furniture and home furnishings industry grew by 1% during our fiscal second quarter, supported by relative strength in the sundry furnishings subcategory of that measure. Given the recent performance disparity between the furniture and furnishings categories, I’d like to share additional insights on this externally sourced measure. It encompasses both furniture, which is our primary focus, and furnishings, which are not our main concern. The relevant furniture data from the Census Bureau is reported on a one-month lag. It’s worth noting that furniture results have lagged behind home furnishings results in five of the last six quarters, with a gap of over 800 basis points in August and September. Therefore, we provide extra context regarding the all-in furniture and furnishings data, as well as insights on two months of furniture-only data, which showed a 5% decline in August and September for the industry. Turning to Joybird, its written sales increased by 1% during the quarter compared to last year as conversion improved. Looking to the longer term, I want to recap our progress this quarter to strengthen our business for the future. Century Vision is our strategic framework designed to prepare La-Z-Boy Incorporated for the next century as we celebrate our first hundred years in 2027. Our goal is to grow our top line at double the market pace and achieve consistent double-digit operating margins in the long run. As one of the largest furniture brands in the United States, we are well-placed to strategically grow the iconic La-Z-Boy brand. We have successfully expanded La-Z-Boy’s presence over the past two years, supported by our North American manufacturing capabilities, allowing us to offer high-quality, on-trend products with depth and variety, bringing personalized solutions to market across various fabric and leather options. A crucial aspect of this expansion is our total Furniture Galleries network, which ended the quarter with 358 stores, and we are on track to grow this network to around 400 stores in the coming years. Additionally, we are expanding the company-owned portion of this network, which has increased to 193 stores, up 16 stores from last year, now making up 54% of the total La-Z-Boy Furniture Galleries network. We opened three new stores during the quarter in Topeka, Kansas, Fairview, North Carolina, and Saskatoon, Canada. Moreover, we acquired two stores in Florida and recently signed an agreement to acquire another two-store network from an independent dealer in the Midwest, expected to close in the third quarter. Expanding our company-owned La-Z-Boy Furniture Galleries is crucial, as we manage the complete consumer experience and can gather more sophisticated consumer insights. These acquisitions directly enhance our profitability, enabling us to benefit from both integrated wholesale and retail margins. We're also growing our business through our refined channel strategy as the La-Z-Boy brand appears in more showrooms, increasing our presence with major dealers and providing a wider range of consumers access to our brand. Our strategic partnerships with national and regional retailers such as Slumberland, Furniture Row, Rooms To Go, and Gardner-White help us reach a broader audience and bring beloved products, like the iconic La-Z-Boy recliner, into more homes. In October, we unveiled our newly renovated showroom for our wholesale customers and supply partners at the High Point furniture market. It was a pleasure to welcome our key stakeholders and supporters to our refreshed space. We showcased new products that reflect our integration of consumer insights, enabling us to create more on-trend merchandise in our core upholstery categories, particularly reclining and motion furniture. Consumers are seeking more functionality and modern designs, and with our North American manufacturing foundation, we can design and produce these styles with a quick turnaround. Another key component of our Century Vision growth strategy is our Long Live the Lazy brand campaign, which launched in August 2023 on National Lazy Day. After a little over a year, the campaign has succeeded in enhancing unaided awareness, consideration, and purchase attempts among those who have engaged with it. I’m pleased to report that during this time, we have also lowered the average age of our consumer by two years, indicating our growing appeal. We activated our second National Lazy Day on August 10 with media promotions across platforms like New York Times games, Amazon, ESPN, Meta, and Pinterest. Additionally, we conducted a satellite media tour featuring influential thought leader Dr. Sue Varma discussing the health benefits of relaxation. As we push forward with the Long Live the Lazy campaign, our aim is to broaden our impact and connect with both new and existing consumers. Joybird is also a key part of Century Vision, where we are optimizing the brand for a balance of sales growth and profitability. Joybird had a solid quarter with positive trends in delivered and written sales and improving operating performance compared to the previous year. This resulted in breakeven profits for the quarter as we enhance efficiency through targeted marketing, advertising, and a more profitable product mix. We have confidence in Joybird's long-term growth potential, and we are taking a disciplined approach to expanding the business, including exploring opportunities for additional store openings. Strengthening our foundational capabilities, including developing a more agile supply chain, is another critical pillar of Century Vision. Clearly, there have been—and likely will continue to be—significant disruptions in global supply chains. We are well-positioned to design and manufacture our comfortable, customized furniture with quick speed-to-market, thanks to our North American footprint. As we enter the third quarter, we anticipate a challenging macro environment for the rest of the fiscal year. While there is a disconnect between recent Fed rate cuts and long-term interest rates, which correlate with mortgage rates, we believe ongoing Fed reductions will eventually have a positive impact on housing activity. In the meantime, we remain optimistic about our capacity to continue outperforming the market while investing in our business through Century Vision, so we are well-prepared to benefit significantly when trends improve. Now, before I hand it over to Bob, I want to acknowledge that this will be Bob’s final earnings call as our CFO. I would like to thank him for his significant contributions to La-Z-Boy Incorporated. He has been an extraordinary partner to me and a strong leader for our team. We wish him all the best as he approaches retirement at the end of the fiscal year. Now, let's turn the call over to Bob for a more detailed review of the results.

Bob Lucian, SVP and CFO

Thank you, Melinda, and good morning, everyone. As a reminder, we present our 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 tables in the appendix section of our conference call slides. On a consolidated basis, fiscal 2025 second quarter sales increased 2% to $521 million versus the prior year, primarily driven by higher delivered volume within our retail segment and Joybird business. Consolidated GAAP operating margin was $39 million and non-GAAP operating margin was also $39 million, a decrease of 4% versus last year's second quarter. Consolidated GAAP operating margin was 7.4% and non-GAAP operating margin was 7.5%, reflecting a 40 basis points decline versus last year, due to demand challenges in our Casegoods import business and a significant temporary customer disruption in our international wholesale business. GAAP diluted EPS was $0.71 for the second quarter versus $0.63 in the prior year quarter. Non-GAAP diluted EPS was $0.71 versus $0.74 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 $222 million, a 3% increase over the prior year's second quarter, primarily due to growth from acquired stores. Importantly, conversion rates, average ticket, and design sales all remained strong, improving year-over-year. Retail non-GAAP operating margin was 12.6% versus 13% in the prior year quarter. This was driven by slightly lower same-store sales and an increase in selling expense and fixed costs, supporting our long-term strategy of growing our retail business through new and acquired stores, partially offset by gross margin improvements resulting from a favorable shift in product mix. For our Wholesale segment, delivered sales for the quarter were flat at $364 million as higher sales to our Retail segment mostly offset lower delivered sales in our international wholesale business. Non-GAAP operating margin for the Wholesale segment was 6.8% versus 7.7% in last year's second quarter. This was driven by demand and macroeconomic challenges in our Casegoods import business and fixed cost deleverage on lower sales in our international wholesale business, partially offset by an improvement in non-GAAP operating margin for the core North America La-Z-Boy brand wholesale business. I want to spend a moment on our international business. If you recall, last quarter, we called out a temporary customer disruption negatively impacting this business, I'm excited to report that in September, we announced a major partnership with DFS, the leading UK furniture retailer. Our brands are closely aligned in the mission of delivering high quality, comfortable furniture. This is an exclusive partnership in the UK and Ireland where DFS will introduce a range of La-Z-Boy reclining furniture in-store and online. The product has begun to reach DFS showrooms and we expect sales to begin to accelerate in the fourth quarter of this fiscal. For Joybird, reported incorporate and other delivered sales were $39 million, up 20% versus the prior year quarter on stronger sales trends in Joybird retail stores. Joybird operating margin performance saw a year-over-year improvement from higher gross margins driven by a favorable product mix and fixed cost leverage on higher sales. This resulted in breakeven operating margin for the quarter. Moving on to our consolidated non-GAAP gross margin and SG&A performance for the quarter. Consolidated non-GAAP gross margin increased slightly across all reportable segments, up 10 basis points versus the prior year second quarter. Gross margin expansion was primarily driven by the positive shift in consolidated mix towards our Retail segment, which has a higher gross margin rate than our Wholesale segment, mostly offset by lower gross margins in our Casegoods business. Non-GAAP SG&A as a percentage of sales for the quarter increased by 50 basis points, compared with the same period last year, primarily due to reduced leverage in our wholesale segment due to a significant temporary international customer disruption and the mix shift to our Retail segment, which carries a fixed cost structure relative to Wholesale. Our effective tax rate on a GAAP basis for the second quarter was largely unchanged at 26.3% compared to 26.5% for the prior year. Turning to cash. We ended the quarter with a strong balance sheet, $303 million in cash and no externally funded debt. We generated $16 million in cash from operating activities in the quarter, and year-to-date, cash flow from operations was $68 million, up 20% from last year's comparable period. We invested $17 million in capital expenditures during the quarter, primarily related to La-Z-Boy Furniture Galleries, including new stores and remodels. We also spent $11 million on acquisitions during the period. For the quarter, we returned approximately $28 million to shareholders via dividends and share repurchases, including $8 million paid in dividends. Additionally, we repurchased 467,000 shares in the quarter, which leaves 4.3 million shares available under our existing share repurchase authorization. Year-to-date, $70 million has been returned to shareholders, approximately double the same period last year. And finally, subsequent to quarter end, reflecting the confidence in the company's long-term growth prospects, the Board of Directors increased the regular quarterly dividend by 10%. This takes our per share dividend to $0.22. We continue to view share repurchases and our dividend as an attractive use of our cash and a positive return to shareholders. Our capital allocation target is to reinvest approximately 50% of operating cash flow back into the business and return approximately 50% to shareholders in share repurchases and dividends over the long term. Now before turning the call back to Melinda, let me highlight several important items for the back half of fiscal 2025 and our third quarter. Looking forward, we expect the industry to continue to be challenged by lower consumer demand, driven by higher mortgage rates and low housing turnover. Against that backdrop, we expect to continue to outperform the market throughout fiscal 2025, similar to our performance in fiscal 2024. Consistent with our Century Vision strategy, we continue to target sales growth double the industry growth rate and double-digit operating margins over the long term with the benefit of more normalized industry growth rates. Third quarter's delivered sales are generally lower than the second quarter due to multiple holiday periods of downtime at our North America plants. Additionally, recall that we experienced adverse winter weather events in January last year. We shifted some sales from the third quarter into the fourth quarter. Taking this into account, we expect third quarter delivered sales in the range of $505 million to $525 million, representing growth versus last year. Further, we expect second quarter non-GAAP operating margin to be in the range of 6% to 7%. As we continue to invest in our Century Vision pillar of growing retail, we expect near-term margin compression versus the prior year, primarily driven by expected negative same-store sales trends from the continuing, challenging demand environment, which will more than offset the margin accretion from independent La-Z-Boy Furniture Galleries acquisition in our Retail segment. Additionally, Wholesale margins will continue to be negatively impacted by our Casegoods businesses and the start-up of our new partnership with DFS in the UK for the balance of the year. We continue to expect to open 12 to 15 new La-Z-Boy Furniture Galleries stores for the fiscal year. We expect our tax rate for the full fiscal year to be in the range of 25.5% to 26.5%. 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 continue to expect capital expenditures to be in the range of $70 million to $80 million for fiscal '25, as we invest to strengthen the company for the future, consistent with our Century Vision strategy. This includes land and building investments in stores, to maintain the growth rate of our retail network. And finally, presuming no significant worsening in macroeconomic trends, we expect to continue share repurchases at dollar amounts consistent with pre-COVID levels. Finally, last month, it was announced that I will be ceding the role of CFO to Taylor Luebke, effective January 1 and retire at the end of our fiscal year. It has been an absolute privilege and honor to lead this company with Melinda. I am proud of the progress the company has made towards realizing our Century Vision and am very excited for what is in store next. I've known and worked with Taylor for over a decade. He has a thorough understanding of this company and I’m very confident he will continue to deliver on our Century Vision and financial success. It will be a positive and seamless transition. With that, I'll turn the call back to Melinda.

Melinda Whittington, President and Chief Executive Officer

Thanks, Bob and congratulations again to you, and welcome to Taylor. In spite of the challenging industry backdrop, we continue to make progress towards achieving our Century Vision goals and outperforming the industry. Our focus remains on the expansion of our La-Z-Boy brand, driving growth of our company-owned retail segment, improving agility across our supply chain, and driving efficiency and margin expansion throughout our business, both now and as our industry rebounds. I'd like to congratulate our entire team for yet another quarter of outstanding execution at both the tactical and strategic levels. Finally, I'd like to wish you all a happy and healthy holiday season, and thanks for joining us today. With that, I'll turn the call back to Mark.

Mark Becks, Director of Investor Relations and Corporate Development

Thank you, Melinda. We will begin the question-and-answer period now. Holly, please review the instructions for getting into the queue to ask questions.

Operator, Operator

Certainly. At this time, we will be conducting a question-and-answer session. Your first question for today is from Bobby Griffin with Raymond James.

Bobby Griffin, Analyst

Good morning, everybody. Thanks for taking my questions. I guess, Bob, since this is your last call, I got about six or seven, I'm just going to fire-off and make sure I get a little bit more out of you before you go.

Bob Lucian, SVP and CFO

Thank you, Bobby.

Bobby Griffin, Analyst

No, but in all seriousness, congrats on your retirement. It's been fun working with you over the last couple of years. I hope to see you down here in Florida. And Taylor, great meeting you at High Point, look forward to working with you over the next couple of years.

Taylor Luebke, VP, Finance and Treasurer

Likewise, Bobby.

Bobby Griffin, Analyst

So I guess, first, maybe can we just talk a little bit about the Wholesale side of the business. Understand there's some transition going on internationally. So when we look at the difference of the year-over-year step down in EBIT margins on that segment, how much of that international transition and kind of, what I would deem as short-term disruption was the driver of that year-over-year stepdown in margins?

Bob Lucian, SVP and CFO

I'd say about roughly half.

Bobby Griffin, Analyst

Okay.

Bob Lucian, SVP and CFO

It was about half, considering the impacts we have been observing in Casegoods along with the effects of the transition from SCS to DFS in the UK.

Melinda Whittington, President and Chief Executive Officer

Yes. Said another way, if you strip out those sort of unique businesses that we usually don't spend a lot of time talking about, our core La-Z-Boy branded North America business was actually positive on margins for the quarter.

Bob Lucian, SVP and CFO

They've always been positive, but they were positive and there was an increase.

Bobby Griffin, Analyst

Okay. That's very helpful. And is that growth in the core La-Z-Boy branded margins, is that a reflection of some of this manufacturer efficiencies and the work we've been doing on the plants? Is that starting to show up now? I know we are targeting, I believe, 50 basis points to 60 basis points of total improvement once we're done with some of the manufacturing footprint changes.

Bob Lucian, SVP and CFO

Yes, it is.

Bobby Griffin, Analyst

Okay. We are making progress towards our goal of achieving an improvement of 50 to 60 basis points by early fiscal year 2026.

Bob Lucian, SVP and CFO

Yes.

Bobby Griffin, Analyst

Okay. Perfect. Just switching gears a little. Melinda, we got to see the new High Point showroom, which was great to see. Can you talk a bit about the mood from some of your dealers, how they are thinking about the calendar year '25, their views on the new products, and any initial orders, as well as the new introductions?

Melinda Whittington, President and Chief Executive Officer

We are really encouraged by the excitement in our showroom, and our customers have shared similar sentiments. It's important to note that general dealers who carry multiple brands are also feeling this buzz. However, the industry remains cautious overall. We recognize that the consumer recovery will come eventually as housing conditions improve, but we have yet to see significant progress in that area. Like others, we are planning carefully. That being said, we are very pleased with the positive feedback we've received, especially in our La-Z-Boy showroom. We are focusing on understanding our consumers better, listening to their feedback, and incorporating that into our product offerings, selling experiences, and messaging across all our businesses. Additionally, amidst this somewhat unstable market, our solid financial management and a century-long history in North America have generated further interest.

Bobby Griffin, Analyst

Okay. There's clearly a lot happening during the quarter, including the start of the holiday season and the election-related distractions towards the end. Have you noticed anything interesting in terms of orders or feedback from retail customers since the election that you'd like to highlight? I realize it's a brief timeframe, but given all the election-related activity, I'm curious if things have stabilized or returned to a more normal state.

Melinda Whittington, President and Chief Executive Officer

We're still in the early stages of this quarter, and we're happy with our strong start. As we approach the holidays, the details will matter significantly. We're very optimistic about our position as we head into this season. I believe the consumer market will remain active for a while, and with the election behind us, there is less uncertainty and more clarity. These are all encouraging signs, but it's too soon to celebrate any success. We will focus on what we can control and feel confident as we enter the major sales periods.

Bobby Griffin, Analyst

Okay. And then, Melinda, maybe one last one, notable call out Joybird back to breakeven. You guys have owned it now for a good bit. Just kind of curious on, with it trending back towards breakeven, what you think the game plan is for that brand, the opportunity for it? Is it move-in to more of accelerated growth type investment phase or we kind of still on the plan that we've been talking about before?

Melinda Whittington, President and Chief Executive Officer

For Joybird to be achieving its current positive sales trends and reaching breakeven while many similar companies are closing down makes us feel optimistic. However, we recognize there is still work ahead. We are satisfied with the disciplined approach to operating the business and pleased with consumer feedback. As we enhance execution in all areas of Joybird, including brand identity and messaging, we remain confident that our existing stores benefit our business model. Therefore, we are now carefully planning to gradually expand Joybird stores as we look forward to next year. This process will be measured and deliberate. The consumer environment remains unpredictable, which complicates business operations, but we are transitioning back into a growth phase for Joybird.

Bobby Griffin, Analyst

Okay. I appreciate the details and congrats on the quarter. I think as we round out earnings season here, we'll see that your down one same-store written looks very good versus a lot of peers, so congrats on that performance. And Bob, again, congrats on retirement and look forward to staying in touch.

Bob Lucian, SVP and CFO

Thank you.

Melinda Whittington, President and Chief Executive Officer

Thank you.

Operator, Operator

Your next question is from Anthony Lebiedzinski with Sidoti & Company.

Anthony Lebiedzinski, Analyst

Good morning, everyone. And likewise, Bob, best wishes for your upcoming retirement and look forward to working with you, Taylor, and the rest of the La-Z-Boy team.

Bob Lucian, SVP and CFO

Thanks, Anthony.

Anthony Lebiedzinski, Analyst

So I guess my first question is about the guidance for Q3. Regarding the margin guidance you've provided, if you were at the high end of your revenue guidance, it still suggests that the margin would be lower than what you reported for Q2. Is that mainly due to what's happening in the Casegoods business, or are there other factors contributing to this?

Bob Lucian, SVP and CFO

The main factor is the Casegoods business, which is experiencing ongoing margin compression, along with the continued efforts to bring DFS up to speed. We are not yet achieving the sales rates that align with our long-term expectations, and we likely won't reach that until the end of the fourth quarter. We need to properly set up all the stores and get involved in the merchandising rotation, among other things. This is the primary reason for the margin compression we are observing in Q3 compared to last year. Additionally, our Q3 margins tend to be lower due to the numerous holidays during this period when our plants are often down. Historically, in years that were not impacted by disruptions, like 2019, we can see this trend.

Melinda Whittington, President and Chief Executive Officer

I know it's…

Bob Lucian, SVP and CFO

We see that Q3 margins are typically slightly lower than Q2 because our plants are not operating as much, resulting in more inefficiency in the system.

Anthony Lebiedzinski, Analyst

Thank you. You have mentioned increases in average ticket and the importance of design in your business. Could you elaborate on that? Given the challenges in the industry, do you believe you can continue to raise the average ticket?

Melinda Whittington, President and Chief Executive Officer

Yes.

Anthony Lebiedzinski, Analyst

Okay.

Melinda Whittington, President and Chief Executive Officer

I always think back to five years ago when we aimed for $4 million per store, which was an ambitious goal. Now, we're targeting $5 million per store. Success depends on several factors, including how well we execute in the store, our design efforts, and how well our sales associates can meet consumer needs for a positive selling experience. It's also crucial to ensure we have the right products and messaging to attract customers, as well as timely delivery. Our ability to provide custom furniture in four to six weeks is appealing to consumers and not widely available elsewhere. I believe we still have room for growth, as achieving one set of goals leads us to the next. Even in this difficult environment, our sales associates have been able to turn the slower traffic we’re experiencing into an opportunity to focus on providing each individual consumer who enters the store with an exceptional experience.

Bob Lucian, SVP and CFO

I want to emphasize the importance of both discipline and inspiration. On the discipline front, our stores are effectively managing their sales processes and associate training, which are crucial for our success. At the same time, we are committed to enhancing the consumer experience through ongoing investments in remodels and a strong focus on design. These two elements will ensure we continue to achieve growth, as Melinda mentioned.

Anthony Lebiedzinski, Analyst

Got you. Okay. Yeah. Thanks for that. And then, as far as your inventory, it was up 8% from last year. So a bit higher than what we would have expected. What drove that increase and do you think your inventory is in good shape?

Bob Lucian, SVP and CFO

The inventory increase was a planned increase. We have been spending a lot of time on ensuring that we have the raw materials that we need to make sure that when consumers or customers order product from us, we're able to get that turnaround time and get it to them as quickly as possible, so we've invested in that. Our stock levels in our regional distribution centers for in-stock product, we've taken that to a little bit higher level going into this season and we've done that with the expectation that this is the busy season. We want to make sure that we're winning with consumers on delivering to them on as fast as possible timing. And then, we typically will always see a little bit of a bump up in Q2 and into Q3, just getting ready with materials coming in from China or Vietnam, due to the Chinese New Year and the Tet New Year shutdowns for those suppliers.

Anthony Lebiedzinski, Analyst

All right. Well, that makes a lot of sense. Well, thank you, again, and best of luck.

Bob Lucian, SVP and CFO

Thank you, Anthony.

Melinda Whittington, President and Chief Executive Officer

Thank you.

Operator, Operator

Your next question is from Brad Thomas with KeyBanc.

Brad Thomas, Analyst

Hi. Good morning, everyone. First of all, nice quarter, great results in a built-up environment for the industry. Bob and Taylor, congrats to both of you on new opportunities.

Bob Lucian, SVP and CFO

Thanks, Brad.

Brad Thomas, Analyst

I would like to discuss the topic of tariffs. Can you provide insights on how much exposure you may have, how this impacts your business model, and any potential effects on the profit and loss statement if tariffs are implemented next year?

Melinda Whittington, President and Chief Executive Officer

Yeah. I'll take that one. Obviously, a lot of uncertainty right now on how that will all play out. For us versus our competition, we're in a pretty good position, given that the vast majority of our consumer base is U.S. based, and North America and U.S. Canada, and that the vast majority of our products are manufactured, final assembly here in the U.S. Net versus competition, that puts us in a pretty good spot with some of the tariff expectations that are out there. Certainly, when you get into, we do have operations in Mexico. We do some of our cut and sew there and so forth, and that's an important part of our business. We've managed through tariffs before and as an industry those costs have generally been pretty much passed through to the customer and then the end consumer through surcharges. And so, we've got some experience with that, and I think the key is to stay agile on that. But overall, I think we're positioned relatively well.

Brad Thomas, Analyst

That's helpful. And Melinda, you all have done a really good job, I think of working with your wholesale partners. Can you just talk a little bit more about how you're thinking about that opportunity over the next year in a backdrop where many of your manufacturing competitors are, I think really struggling because of volume levels out there right now?

Melinda Whittington, President and Chief Executive Officer

Yeah. It's definitely an opportunity for us. And I think in particular, like, last quarter, you saw year-on-year that general dealer, those retailers that sell multi-brands came on particularly strong year-on-year in our business. So there's maybe a couple of things at play. One, the folks that we are already doing business with, are looking, in many cases, to expand their play with us additional vignettes and so forth. But then also, we really are building those strategic partnerships and over the last year or two, we've added some important new partners. We've talked a lot about Rooms To Go, Furniture Rows, some of those. And we're looking for compatible distribution that's going to help us reach a consumer base that we're not going to reach with our Furniture Galleries, right, truly compatible. And ideally, they are retailers that advertise a lot, we talked about them being noisy. So they continue to kind of spread the word about La-Z-Boy and keep that top of mind regardless of where the consumer wants to shop. But to your very specific point, given that we can provide that surety of our sound financial base and our North America footprint, we are definitely in some additional conversations and we saw at this last market that maybe we haven't been into for a while where folks are seeing that flight to safety. And again, building on that by strong product on-trend, high quality, so it's not a hard sell.

Brad Thomas, Analyst

That's helpful. And maybe, Bob, I’ll let you off the hook, we'll try and rope you in here for one last question.

Bob Lucian, SVP and CFO

Thanks, Brad.

Brad Thomas, Analyst

Just as we think about the balance sheet and the cash balance, you all seem to have some pretty nice momentum halfway through your fiscal year to be growing sales and seeing a trough in earnings. Can you all just talk a little bit about how you think about the appropriate level of cash balance to have going forward?

Bob Lucian, SVP and CFO

Longer term, we anticipate that pre-COVID, our average was around $100 million. We believe that with our transition to more retail operations and increased customer deposits on the balance sheet, we should aim for a range in the low $200 million area in terms of cash. Over time, I expect us to head in that direction. We are also making significant investments in new stores and pursuing other capital projects, while continuously seeking opportunities for Furniture Gallery acquisitions. I foresee a mix of expenditures on the business and share repurchases as we gradually reach that cash level, all while maintaining strong operating cash flows year-over-year.

Brad Thomas, Analyst

Very helpful. Thank you so much.

Melinda Whittington, President and Chief Executive Officer

Thank you, Brad.

Bob Lucian, SVP and CFO

Thanks, Brad.

Operator, Operator

We have reached the end of the question-and-answer session. And I will now turn the call over to Mark for closing remarks.

Mark Becks, Director of Investor Relations and Corporate Development

Thanks, Holly. Melinda, Bob, Taylor, and I will be in our offices to respond to any follow-up questions. Thanks and have a great day.

Operator, Operator

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.