Earnings Call Transcript - LZB Q2 2026

Operator, Operator

Greetings. Welcome to the La-Z-Boy Fiscal 2026 Second Quarter Conference Call. Please note this conference is being recorded. I will now hand the conference over to your host, Mark Becks, Director of Investor Relations and Corporate Development of La-Z-Boy Incorporated. You may begin.

Mark Becks, Director of Investor Relations and Corporate Development

Thank you, Holly. Good morning, everyone, and thanks for joining us to discuss our fiscal 2026 Second Quarter. Joining me on today's call are Melinda Whittington, La-Z-Boy Inc.'s Board Chair, President and Chief Executive Officer; and Taylor Luebke, SVP and CFO. Melinda will open and close the call, and Taylor will speak to segment performance and the financials midway through. After our prepared remarks, we will open the line for questions. Slides will accompany this presentation, and you may view them through our webcast link, which will be available for 1 year. And a telephone replay of the call will be available for 1 week beginning this afternoon. 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 and Events tab on the Investor Relations page of our website, and it includes reconciliations of certain adjusted 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.

Melinda Whittington, Board Chair, President and CEO

Thank you, Mark. Good morning, everyone. Yesterday, following the close of market, we reported solid October ended second quarter results. We were pleased to once again deliver modest sales growth, particularly in our Wholesale segment, where we also again delivered margin expansion, continuing to create our own momentum in what remains a choppy market. Highlights for our second quarter included total delivered sales of $522 million, up slightly from the prior year. In our Retail segment, delivered sales increased slightly, and total written sales increased 4%, with written same-store sales improving sequentially over the last 2 quarters. In addition, we opened 5 new company-owned stores in the quarter, bringing our total to 15 new company-owned stores over the last 12 months. In our Wholesale segment, delivered sales grew 2%, once again led by growth in our core North American La-Z-Boy Wholesale business. We made continued progress on our distribution and home delivery transformation project with the consolidation of 2 additional distribution centers. Our GAAP operating margin was 6.9%, and adjusted operating margin was 7.1%. We generated strong operating cash flow of $50 million for the quarter, triple last year's comparable period. We announced a 10% dividend increase, marking our fifth consecutive year of double-digit increases. Overall, our operating performance for the second quarter was solid amidst a choppy landscape, with sales slightly ahead of the midpoint of our guidance and adjusted operating margin exceeding our expectations. As I noted, total written sales for our company-owned retail segment increased 4% versus last year's second quarter, driven by new and acquired stores. Written same-store sales, which exclude the benefit of new and acquired stores, decreased 2% for the quarter, but demonstrated continued sequential improvement in written same-store sales trends over the last 2 quarters. While consumer trends remain challenging for our industry, we continue to be agile and hone our execution. We saw our strongest results of the second quarter in October, where we achieved positive written same-store sales. However, results in early November remain mixed. For Joybird, total written sales for the quarter were a positive 1% increase versus a year ago, demonstrating significant improvement versus the prior 2 quarters and driven by strength in retail store performance. We have made substantial progress against our strategic initiatives, focusing on our core, vertically integrated North American upholstery business. We completed our 15-store acquisition in the Southeast U.S. region, expanding our ownership of important growing markets. We announced the planned exit of non-core businesses, including Kincaid casegoods, American Drew casegoods, and Kincaid upholstery. We also announced the proposed closure of our U.K. manufacturing facility. Notably, we expect all of these exits to be substantially completed by the end of our fiscal year. We have strategically realigned our senior commercial leadership, as well as realigned our corporate staffing to more efficiently support our streamlined business. These strategic initiatives are a clear demonstration of our proactive approach to driving our own momentum in what remains a challenged marketplace. We remain agile and committed to strengthening our business to prudently navigate the current environment while at the same time best positioning ourselves for the next 100 years. To expand a bit more on these important Century Vision strategic initiatives, we were thrilled to complete our acquisition of the 15-store network in the Southeast U.S. region at the end of October. These acquired stores are located in attractive markets: Atlanta, Georgia; Orlando and Jacksonville, Florida; and Knoxville, Tennessee. Our ownership of these markets will enable new store growth on top of the already high-performing existing store base. This is the largest independent store acquisition in our company's history and will add an estimated $80 million in annual retail sales and roughly $40 million net to the total company on a consolidated basis. Recall, our Wholesale segment already manufactured and sold products to this business and therefore already recognizes the wholesale portion of these annual sales. Given the strong profitability of this network, immediate sales and profit accretion and opportunity for further market expansion, this is a very attractive investment for our company. As an important pillar of our Century Vision strategy, over the last several years, we have maintained a consistent cadence of independent dealer acquisitions. We see the opportunity for a continued pipeline over time, with roughly 40 independent dealers and nearly 150 independent stores still in our network. New store growth is another key lever to growing our retail business, and our strong balance sheet gives us the flexibility to make disciplined investments even in more challenging macroeconomic conditions. We opened 5 new company-owned stores in the quarter, closed 3, and opened 15 new stores in the last 12 months and closed 5, as we deliver the most significant period of new retail store growth in our company's history. Looking back even further, over the last 24 months, we have added 20 new company-owned stores as we continue to expand our La-Z-Boy store network towards our target of over 400 stores. With this recently completed acquisition, company-owned stores now represent 60% of the current 370 La-Z-Boy store network, a significant increase from 45% of the approximately 350 store network just 5 years ago. We were also pleased to open our 15th Joybird store just last week in Easton Town Center in Columbus, Ohio, one of the Midwest's premier open-air shopping and dining destinations. We remain on track to open 3 to 4 new Joybird stores this fiscal year and are pleased with the ramp-up and performance of our Joybird retail stores. In wholesale, our refined channel strategy is also contributing to our sales momentum as we expand our brand reach with compatible strategic partners. We recently added living spaces, a top 100 furniture retailer with over 40 stores across Western states. We also launched La-Z-Boy products at Costco on floors in over 350 locations, as well as on Costco.com. This follows the addition of Farmers Home Furniture, with over 260 stores in the Southeast, in our first quarter. Each of these strategic additions is complementary to our existing distribution and expands our brand reach to even more consumers. Lastly, highlighting our industry-leading service levels, we're proud to once again be named to Forbes' 2026 Best Customer Service list, recognizing our team's passion and commitment to our mission of transforming homes, rooms, and communities for our customers and consumers. We're also capitalizing on the momentum from our ongoing initiatives to continue rolling out our new brand identity, which has been well received. The response from media, customers, and consumers has been overwhelmingly positive, generating headlines such as La-Z-Boy just rebranded to prove it's more than your grandmother's recliner and how La-Z-Boy made comfort cool again. We plan to build on this success and continue executing our strategy to drive brand consideration and purchase intent across a broad range of consumers, including millennials and Gen X. On our final strategic pillar, strengthening our foundational capabilities, including building a more agile supply chain, we are making strong progress on our multiyear project to transform our distribution network and home delivery program. This transformation will reduce our distribution footprint from a total of 15 large distribution centers to 3 centralized hubs. In the second quarter, we consolidated an additional 2 distribution centers. As a reminder, the cumulative benefits of this transformation will include an estimated 30% reduction in square footage across our warehouse network, an approximate 20% reduction in the mileage of inventory traveled across our network, doubling of our delivery radius from 75 to 150 miles, enabling us to reach even more consumers, and improved inventory productivity and working capital levels. All while improving an already strong consumer experience and, once completed, delivering 50 to 75 basis points of wholesale segment margin improvement, the equivalent of up to 50 basis points on the total enterprise margin. Finally, as I noted earlier, we are taking steps to optimize our portfolio by focusing on our core vertically integrated North American upholstery business. We have announced plans to exit our non-core wholesale casegoods businesses, which include Kincaid casegoods, American Drew casegoods, and Kincaid upholstery. We are currently evaluating alternatives for these exits and will provide more details as negotiations progress. Importantly, we will continue to offer optimized case goods offerings in our La-Z-Boy stores, Comfort Studios, and branded spaces as they enable consumers to furnish their homes and elevate our design business. We are confident our new structure will further enhance our offerings in the future. While we remain committed to growing our La-Z-Boy business in the U.K., we have announced the proposed closure of our U.K. manufacturing facility in favor of more financially sustainable sourcing alternatives. We are currently in the required 45-day collective consultation period as required by the U.K. statutory process. We expect all of these strategic actions to be substantially completed by the end of our fiscal year, and we are committed to supporting our customers, our consumers, and our employees through these transitions. As we announced last month, we also strategically realigned our executive commercial leadership and corporate staffing to focus on our core and enhance operating efficiency. As our industry continues to evolve, it's important we remain agile and evolve our business to position us for continued profitable growth into the future. Collectively, these initiatives sharpen our focus on growing our core business where we have a leadership position and a right to win with the consumer. They also align with our Century Vision goals of growing double the market and delivering double-digit operating margins over the long term. The furniture industry has experienced tremendous change and challenge in recent years, but despite this, our mission remains the same: to empower our people to transform rooms, homes, and communities. Our iconic brand, well-positioned manufacturing base, strong balance sheet, and talented team provide the foundation for sustained sales growth and margin expansion. Now, let me turn the call over to Taylor to review the financial results in more detail.

Taylor Luebke, SVP and CFO

Thank you, Melinda, and good morning, everyone. As a reminder, we present our results on both a GAAP and adjusted basis. We believe the adjusted presentation better reflects underlying operating trends and performance of the business. Adjusted 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 2026 second quarter sales increased slightly from the prior year to $522 million as growth in our retail and wholesale businesses was partially offset by lower delivered volume in our Joybird business. Consolidated GAAP operating income was $36 million and adjusted operating income was $37 million. Consolidated GAAP operating margin was 6.9%, and adjusted operating margin was 7.1%. Retail margin deleverage due to lower delivered same-store sales and the impact of investment in new stores was partially offset by stronger wholesale segment margin, which included solid operating trends as well as the 110 basis point benefit of a change in our dealer warranty arrangements during the quarter. Diluted earnings per share totaled $0.70 on a GAAP basis and adjusted diluted EPS was $0.71, flat versus last year's comparable period. As I move to the segment discussion, my comments from here will focus on our adjusted reporting, unless specifically stated otherwise. Starting with the retail segment for the second quarter, delivered sales increased slightly to $222 million. Retail adjusted operating margin was 10.7% versus 12.6% due to fixed cost deleverage on lower delivered same-store sales and investments in new stores. For our Wholesale segment, delivered sales for the first quarter increased 2% to $369 million versus last year, driven by growth in our core North American La-Z-Boy branded wholesale business. Adjusted operating margin for the wholesale segment was 8.1% versus 6.8%, with 160 basis points improvement driven by lower warranty expense due to the change in our dealer warranty arrangements, as well as solid operating trends, partially offset by incremental expenses related to our distribution transformation project and increased advertising expenses. On our Wholesale business, we view our North America supply chain as a competitive advantage, with approximately 90% of finished goods produced in the U.S. As such, we are well positioned to navigate the current trade and tariff environment. For Joybird, reported in Corporate and Other, delivered sales were $35 million, down 10%, primarily due to lower delivered sales volume. Joybird operating loss increased versus the prior year, primarily due to deleverage on lower Joybird delivered sales. Moving on to our consolidated adjusted gross margin and SG&A performance for fiscal 2026 second quarter. Consolidated adjusted gross margin for the entire company increased 10 basis points versus the prior year second quarter. The increase in gross margin was primarily driven by lower input costs, led by favorable ocean freight and improved sourcing, partially offset by higher supply chain costs, including friction costs related to our distribution and home delivery transformation. Adjusted SG&A as a percent of sales for the quarter increased by 50 basis points compared with last year due to fixed cost deleverage in our retail stores, as well as investment in new stores. This was partly offset by the benefit of a change in our dealer warranty arrangements in the quarter that resulted in a one-time benefit due to a reduction in our ongoing warranty liability. This change has no impact on the end consumer and provides significant improvements in program management and administration. Our effective tax rate on a GAAP basis for the second quarter was largely unchanged at 26.7% versus 26.3% in the second quarter of fiscal 2025. Turning to liquidity, we ended the quarter with $339 million in cash and no externally-funded debt. We generated a strong $50 million cash from operating activities in the second quarter, triple the year-ago period with improved working capital and higher customer deposits. We invested $20 million in capital expenditures during the quarter, primarily related to new stores, remodels, and supply chain-related investments. We continue to believe that the best use of our cash and highest return on investment is prudently reinvesting back into the business. As such, we remain committed to disciplined investment in new stores, acquisitions, and our distribution and home delivery transformation project to profitably grow our core business. Regarding cash returned to shareholders, year-to-date, we returned $31 million to shareholders through dividends and share repurchases, including $18 million paid in dividends. We repurchased 23,000 shares in the quarter, which leaves 3.4 million shares available under our existing share repurchase authorization. Subsequent to quarter end, reflecting the confidence in the company's financial strength and long-term growth prospects, the Board of Directors increased the regular quarterly dividend by 10%. This is the fifth consecutive year of double-digit increases to the dividend. We continue to also view share repurchases and our dividend as an attractive use of our cash and positive return to shareholders. Capital allocation in fiscal 2026 is tilted more into the business through investments in the recent 15-store acquisition in our distribution and home delivery transformation project. Longer term, our capital allocation target remains consistent to reinvest 50% of operating cash flow back into the business and return 50% to shareholders in share repurchases and dividends. Before turning the call back to Melinda, let me highlight several important items for fiscal 2026 in our third quarter. We expect fiscal third quarter sales to be in the range of $525 million to $545 million, a growth of 1% to 4% year-over-year and adjusted operating margin to be in the range of 5% to 6.5%, reflecting advancement of our Century Vision initiatives, friction costs related to portfolio optimization and supply chain transformation, and a measured view on the uncertain macroeconomic backdrop. We expect to open approximately 15 new company-owned and independent La-Z-Boy stores during the full fiscal year, of which the majority are company-owned, as well as 3 to 4 new Joybird stores. We continue to expect our tax rate for the full year to be in the range of 26% to 27%. We expect capital expenditures to be in the range of $90 million to $100 million for fiscal 2026, consistent with prior guidance. This includes investments for new stores and remodels, our multiyear project to transform our distribution network and home delivery program, and continued manufacturing-related investments. Of note, I want to spend a few moments on the expected financial benefits of our strategic initiatives to hone our portfolio, which Melinda covered earlier. With the combined impacts of our 15-store acquisition, our case goods exit, our proposed closure of the U.K. facility, and our management reorganization, we expect the going annual impact on our enterprise to be an approximate $30 million net sales decrease with a significant adjusted operating margin improvement of 75 to 100 basis points across the entire enterprise. We expect all of these initiatives to be substantially completed by the end of this fiscal year, and at this time, we do not expect these exits to have a material one-time gain or loss for the enterprise. Lastly, we anticipate adjustments for all other purchase accounting charges for the year to be in the range of $0.01 to $0.02 per share. With that, I will turn the call back to Melinda.

Melinda Whittington, Board Chair, President and CEO

Thank you, Taylor. We are sharpening our focus on our core businesses and enhancing our agility to navigate the challenging home furnishings environment. At the same time, we're executing on our long-term strategic objectives, and I am more excited than ever about the opportunities that lie ahead. Before I close, I want to welcome the employees of our latest acquisition. I want to thank all of our employees around the world for their continued dedication to our mission of bringing the transformational power of comfort to more homes. And now, 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

Your first question for today is from Anthony Lebiedzinski with Sidoti & Company.

Anthony Lebiedzinski, Analyst

So first, I just wanted to check in with you about just if you saw any differences in geographic sales dispersion in your markets? Or was it more or less kind of consistent in your operating area?

Melinda Whittington, Board Chair, President and CEO

Nothing dramatic, Anthony. Good morning. On any given week, you might see a little bit of choppiness across different geographies, but nothing significant. Canada continues to be more challenged just with the trade tariff situation and some of those areas there, so that is maybe a little more bouncing, but nothing dramatic.

Anthony Lebiedzinski, Analyst

Got you. All right. And then just can you also comment on the extent of your pricing actions? And also, just wanted to get a better understanding of how do we think about unit volumes in Q2 and your expectations for Q3 as it relates to unit volumes?

Taylor Luebke, SVP and CFO

Anthony, yes. So on pricing, we mentioned throughout the year in our playbook to deal with trade and tariff changes, one of our levers beyond just sourcing adjustments or inventory moves is some nominal pricing actions. So earlier in the year, we took a round of nominal pricing based on trade policies at that time. Given some changes with the 232 in the sectoral tariffs on upholstered furniture within the quarter, we actually took another round of nominal pricing to help offset, but we are still well positioned competitively versus our peers. Again, 90% of the products we make are produced in the U.S., so that other 10% is a little bit exposed, but still very well positioned. Overall, through the course of calendar year '25, we're still in the single digits, which is at the very low end of what we're hearing is out in the market. On volume per se, directly related to pricing elasticity, it's hard to piece out in this industry, particularly with everything else going on around traffic and other kind of just general consumer uncertainty. But in our quarter, on our main North America wholesale La-Z-Boy business, we saw volume flat year-over-year, which relatively speaks to our pricing is going well in the market.

Anthony Lebiedzinski, Analyst

And then also in terms of the guidance, you talked about friction costs related to portfolio and supply chain optimization costs, can you expand on that and help us better understand the expected impact of this? And when should we see less of those friction costs?

Taylor Luebke, SVP and CFO

Well, a couple of things on the friction costs. So that's a combination of our distribution and home delivery transformation project. We outlined a quarter ago as a multiyear project and hugely excited for the benefit to our network, to our consumers, and to the company. Once we're through it, we'll improve all of our stakeholders, as well as make us more profitable. In that case, you just have to get a little bit more inefficient in the short term to get way more efficient ongoing with some called dual lease costs or just transition costs as we move out of the, call it, 15 distribution centers to 3 over time. So manageable, but it's there. On the strategic initiatives that Melinda had mentioned, our case goods exit and our U.K. shutdown, we expect to be completely out of those businesses or those transitions completed by the end of our fiscal year. So I'm really just talking more about the back half of the year, and particularly quarter 3 as I outlined those friction costs as it relates to those 2 areas.

Anthony Lebiedzinski, Analyst

Got you. All right. And then my last question, so you mentioned expanding into Living Spaces on Costco. I know last year, you expanded more into Rooms to Go. How do you guys think about the opportunity there as far as it relates to expanding to other wholesale partners? Just broadly speaking, how do we think about the opportunity going forward?

Melinda Whittington, Board Chair, President and CEO

I think a couple of things. Our focus over recent years has been very much around making sure we've got the right strategic partners that are going to represent our brand well and that are looking to grow and accelerate and give the consumer the right experience going forward. We certainly see that those who are winning out there in a very tough marketplace right now tend to be the more sophisticated kind of midsized regional players, and a lot of those are the type of partners that we're working with. It's always important that it's compatible distribution, in that it's going to reach a consumer that we're not otherwise going to reach in our furniture galleries. We've had some really good wins, as you noted here in the last couple of months with particularly, as you mentioned, Living Spaces, Farmers down in the Southeast, and recent Costco, which just puts more eyeballs on the product. I think going forward, because we want to make sure that distribution is compatible, along with also growing our own retail, what we'll see is probably as much an expansion of growth with the existing base and really building with those as opposed to lots of big additional new customers. But at the same time, the world is always changing, and we're going to make sure we're working with the right partners for the medium and long term.

Operator, Operator

Your next question is from Bobby Griffin with Raymond James.

Robert Griffin, Analyst

I just want to clarify the impact of all the different changes. The acquisition of the 15 stores is expected to generate $40 million in net sales for the company, while we sold off some non-core businesses. In your prepared remarks, you seemed to be balancing those two figures against each other. So, is it accurate to say that the loss from divesting the non-core businesses is approximately $70 million in sales that will be deducted from the wholesale segment?

Taylor Luebke, SVP and CFO

Yes, your math is correct, Bobby. Note, we are in a process now of evaluating sale or other strategic transactions, but net of, call it, this fiscal year, that should be the impact across the entire enterprise of that plus $40 million from the retail acquisition, minus $70 million from the exit of these non-core businesses.

Robert Griffin, Analyst

Okay. You would then see the corresponding increase in wholesale margins from the savings and improved efficiency. I believe the 75 to 100 basis points you mentioned is primarily a wholesale margin increase for that segment?

Taylor Luebke, SVP and CFO

The 75 basis points, it's all bucketed together, Bobby, on the retail acquisition, these wholesale moves on non-core as well as, they call it, commercial leadership realignment. So all of that together is the 75 to 100 basis points to the entire La-Z-Boy enterprise.

Robert Griffin, Analyst

Okay. All right. That's helpful. That helps clean it up. And then just secondly, on the tariff aspect, there's some good commentary. I appreciate that. Does the nominal pricing you guys took here in 2Q, will that cover the expected kind of modest step-up that we see on Jan 1 in the 232?

Taylor Luebke, SVP and CFO

Yes.

Robert Griffin, Analyst

Okay. So you're all covered now based on what we know today from tariffs?

Taylor Luebke, SVP and CFO

We've executed our playbook and some of it is also adjusting where we make products to more optimize our network for current trade policies, but as well as additional nominal pricing we put into the market at the tail end of the quarter to both cover the current as well as the expected change on January 1. Obviously, we'll continue to be agile if anything changes between now and then. Overall, we feel really good and well positioned with our 90% of our product made in the U.S.

Robert Griffin, Analyst

Yes, very good. You have an advantage compared to many in the industry. On another note, I have some questions. Inventories were significantly down this quarter. Is that a result of some efficiency gains starting to take effect? Could you provide any commentary on that in comparison to last year?

Taylor Luebke, SVP and CFO

Just great work by our supply chain team on being really tight on our inventory management while also protecting in-stock and service levels. I mean we continue to get better year-over-year. So really, it's just the everyday blocking and tackling and just getting smarter. This time, we do have a little bit of a build in the comparator period as we were building some stock to protect ourselves in certain cases for cover availability. But overall, just great work across the organization on getting tighter on our working capital management.

Robert Griffin, Analyst

I appreciate it. Melinda, this is a significant acquisition with 15 stores, and it's great to see you reach this milestone. Can you discuss the organizational changes and how the integration is going? Also, regarding the retail network and the next phase of growth, what is the current state of the store base in terms of remodels and opportunities for the upcoming multi-year journey?

Melinda Whittington, Board Chair, President and CEO

Yes. A couple of things on retail. We will open an estimated about 15 this year, and we have talked about continuing the pace of sort of net new stores in the 10 to 15 range. We intend to continue that trajectory. As we've talked, we see our way to over 400 stores, and we're about 370 across the network at this point, and those will be more heavily weighted towards company-owned stores as we continue that expansion. From a remodel standpoint, we have invested heavily over the last 5-plus years to make sure that our stores across the network, along with our independently owned stores, are the appropriate reflection of our brand. I feel good about the overall use of our fleet, if you will, and we're going to continue to make sure that, that sees it that way because it's important that consumers are inspired when they come into our stores, particularly when they're going to come in and participate in design and really think about bringing that product and investing into their home. We will continue to expand our rebranding across all of our stores over the next several years, and we're doing that prudently just given the time right now, but we've had such a great reception to the new branding, and we want to get that out across all those stores. But as I say, we're going to do that prudently as we go. The other way to expand the company-owned stores is, of course, the transactions, like you said. I'm very pleased with the integration of this big acquisition and how that's all been working together for the company. I think there's still a pipeline there. Again, those are arms-linked transactions, but there are still a lot of independently owned stores out there. I think over time, we'll have more opportunity to expand in that way. I can't talk about retail without calling out just the fact that I'm super pleased with in-store execution, even in really challenging times. So we continue to strengthen that execution and, to your point, make sure that we are appropriately but efficiently supporting those operations as well. That kind of speaks to your point on overall reorganization. I'm really good about how that's going right now with our 2 commercial presidents and the move of marketing over into the retail organization. We're already seeing some early wins there. Again, it’s important to be as agile and effective as we can be in what's still going to be, I think, a challenging environment for a while.

Robert Griffin, Analyst

And I guess one final one, if I could sneak one more in. Is the kind of selling the non-core businesses? And then as you think about, given your designers in the stores, the product portfolio they need, how do you kind of balance that? I guess, are there opportunities on case goods for partnerships? Or do you still have some case goods sourcing that could be there, and this is just a different non-core business that was sold? Just anything around that aspect?

Melinda Whittington, Board Chair, President and CEO

The short answer to your question is yes. Case goods are important to us. Our primary focus is manufacturing and selling custom upholstered furniture. Our case goods offerings play a crucial role in enhancing the upholstery experience, allowing us to serve consumers with complete room solutions, especially in our design sales. Even in our branded spaces and Comfort Studios with strategic partners, having the right case goods is essential to support our upholstery efforts. However, owning the complete design and creation of the case goods is not our core strength, nor do we excel in winning customers with our wholesale case goods business. We believe there are better avenues for that. We are enthusiastic about reimagining that area, acknowledging the challenges that come with change, but we are dedicated to providing the right case goods products in our stores to improve the upholstery experience in a more efficient manner, while also ensuring we have a competitive edge in design.

Operator, Operator

Your next question is from Brad Thomas with KeyBanc Capital Markets.

Taylor Zick, Analyst

This is Taylor Zick speaking on behalf of Brad. Melinda, you provided some useful insights on trends during the quarter and mentioned that November was somewhat mixed. If I remember correctly, last year the industry experienced increased demand in November after the election. Considering that the comparable month was stronger, how are you approaching underlying demand trends as you prepare for your fiscal third quarter?

Melinda Whittington, Board Chair, President and CEO

Yes. Yes, you're spot on. First of all, if you just look at the consumer, they are challenged, and demand remains choppy, so we need to be agile and prudent as we deal with that. You're absolutely right that the comparison period from post-election last year is a challenging one. And so again, that's kind of why we are navigating this in a prudent way and looking to make sure that we are efficient in how we're executing but doing everything we can to reach those consumers that are out there and driving the strongest absolute results that we can.

Taylor Zick, Analyst

Got you. I wanted to follow up on what you're observing in the market regarding promotions and your thoughts on promotional intensity for the rest of this quarter and into 2026 as the industry appears to be stabilizing.

Melinda Whittington, Board Chair, President and CEO

Yes. To begin with the supply side, as Taylor mentioned, our pricing has remained relatively low, in the single digits. This puts us in a strong position. In contrast, other suppliers and manufacturers have raised their prices significantly, which will impact overall business costs. We're seeing price increases in the double digits, and this is becoming quite common. While it takes time for these changes to reach the end consumer, we are definitely observing the effects. Looking back to Labor Day, which was the last major event for the industry, we noticed sharper, deeper pricing strategies aimed at attracting customers. While we didn't see an overall increase in bigger discounts, there was a significant uptick in attention-grabbing activities compared to Memorial Day. The marketplace is quite active, and we are working hard to attract traffic and provide opportunities for increasingly cost-conscious consumers to enhance their homes with our brand. At the same time, we acknowledge the differentiated spending patterns in this K-shaped economy. We're still witnessing strong design sales, with consumers coming in ready to invest in complete room upgrades and premium items like leather and power options. Navigating this environment requires careful precision.

Taylor Zick, Analyst

Yes. That's great. I appreciate the color. Maybe if I can sneak one in for Taylor. Taylor, you made commentary that capital this year and fiscal '26 would be tilted more towards reinvestment. As you eye up this exit of these non-core businesses, how are you thinking about capital allocation into 2026 between reinvestments and maybe some return to shareholders?

Taylor Luebke, SVP and CFO

Yes. Good question, Taylor. So right now, it’s a little early to comment on any change in our capital allocation for the year. We're thrilled with where we're at for this year. As we mentioned, we think our best use of cash when it's prudently reinvested back in the business. Last year was a little tilted towards shareholders. Right now, it's a little bit back in the business with this acquisition as well as CapEx on our distribution transformation and new store standup. So right now, we're still working through these exits on those businesses that Melinda had mentioned. Any new information as we progress through that, we will share on capital decisions. But I am thrilled actually with our level of investment back to the business and very pleased to once again return a double-digit increase to our dividend, the fifth consecutive year on which I think speaks a testament to our strong financial footing and confidence in our business moving forward.

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, everyone. Melinda, Taylor, and I will be in our offices to take any follow-up calls. Thanks, and have a great holiday.

Operator, Operator

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