Taylor Zick

Taylor Zick of KeyBanc Capital Markets asked Melinda Whittington for insights into the cadence of sales trends during the third quarter, specifically comparing underlying trends to the second quarter, considering prior year improvements and recent January impacts. He also asked Taylor Luebke to elaborate on the puts and takes for the fourth quarter's 7.5%-9% operating margin guidance, which implies a decline despite a higher retail mix and strategic actions, beyond the known pressures from the distribution and home delivery redesign.

Answer

Melinda Whittington, Board Chair, President, and CEO, characterized the consumer environment as choppy, noting January was the strongest month for same-store sales until weather impacts, and highlighted positive President's Day trends in the fourth quarter. Taylor Luebke, SVP and CFO, affirmed confidence in the business's growth and margin potential, attributing near-term margin pressures to challenged traffic causing deleveraging on fixed costs. He reiterated that long-term margin improvements are expected from strategic initiatives (75-100 basis points) and the distribution project (50 basis points).

Taylor Zick inquired about the cadence of consumer trends during the third quarter, specifically comparing underlying trends to the second quarter, considering prior year improvements and January impacts.

Answer

Melinda Whittington (Board Chair, President, and CEO) noted the consumer remains choppy with a bifurcated market. She highlighted that Q3 was positive over two years, with January being the strongest month for same-store sales until weather impacts. She also mentioned positive President's Day trends in Q4 but maintained a prudent outlook due to consumer pinch. Taylor Luebke (SVP and CFO) added that they don't believe furniture sales were lost, only delayed.

Taylor Zick inquired about the cadence of sales trends during the third quarter and into the fourth, the factors influencing the Q4 operating margin guidance, and the progress of strategic retail partnerships.

Answer

CEO Melinda Whittington confirmed sales strength across all three months of the quarter, particularly during the holidays, but noted that early February traffic was less robust. CFO Taylor Luebke detailed that Q4 margin guidance reflects sustained progress in the core North American wholesale business and Joybird's breakeven performance, offset by headwinds from the international business transition and short-term costs from opening new stores. Melinda Whittington also highlighted the success of strategic partnerships like Rooms To Go and the expansion of the Furniture Row relationship, which increase the brand's share of voice.

Taylor Zick inquired about the underlying trends in retail written orders during the second fiscal quarter, noting the reported deceleration in monthly trends, and also asked about the sustainability of gross margins for the upcoming third and fourth fiscal quarters.

Answer

SVP, CFO, and Treasurer Matthew J. McNulty explained that retail written orders decreased sequentially each month in Q2, averaging an 18% decline, with October being stronger before deceleration due to the government shutdown and tough prior-year comparisons. Chairman, President, and CEO M. Farooq Kathwari confirmed positive written order growth in January. Regarding gross margins, Mr. Kathwari expressed optimism about maintaining them due to extensive work in talent, technology, retail network, manufacturing, and logistics, while acknowledging volume's importance.

Taylor Zick inquired about the underlying trends in retail written orders during the second quarter, specifically how monthly trends decelerated due to difficult comparisons, and asked for insights into the contract business post-government shutdown. Additionally, Zick questioned the sustainability of the company's strong gross margins looking into Q3 and Q4.

Answer

SVP, CFO, and Treasurer Matt McNulty detailed that retail written orders decreased sequentially each month in Q2, averaging an 18% decline, impacted by the government shutdown and tough prior-year comparisons, but noted positive written order growth in January. Chairman, President, and CEO Farooq Kathwari confirmed contract orders stopped during the shutdown but are now returning, albeit slightly lower than last year but growing weekly. Kathwari expressed confidence in maintaining strong gross margins due to operational efficiencies from talent and technology, acknowledging volume's importance.

Taylor Zick, on for Brad Thomas, inquired about the cadence of written orders during the quarter, the potential impact of future tariffs on the company's North American manufacturing base, and the expected lag effect of Federal Reserve rate cuts on business recovery.

Answer

Chairman, President and CEO Farooq Kathwari responded that written orders were relatively stable throughout the quarter without significant month-to-month fluctuations. He highlighted that having 75% of manufacturing in North America provides a significant advantage and insulation from potential overseas tariffs and freight volatility. Regarding economic recovery, Mr. Kathwari expressed cautious optimism, stating that the company is well-positioned due to its strong marketing, technology-driven efficiencies, and the normalization of business after the COVID-related backlog surge.