Kathy Liebmann - IR Kurt Darrow - Chairman, President & CEO Melinda Whittington - SVP & CFO.

Budd Bugatch - Raymond James & Associates Bradley Thomas - KeyBanc Capital Markets Anthony Lebiedzinski - Sidoti & Company.

Greetings and welcome to the La-Z-Boy Incorporated Fiscal 2019 Second Quarter Results Call. At this time, all participants are in a listen-only-mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kathy Liebmann, Director of Investor Relations and Corporate Communications. Thank you, you may begin..

Thanks, Michelle. Good morning and thank you for joining us to discuss our fiscal 2019 second quarter results. With us today are Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer; and Melinda Whittington, Senior Vice President and Chief Financial Officer.

Kurt will open and close the call, and Melinda will speak to 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.

These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles to communicate with investors about the company's current operations and future prospects. We will make forward-looking statements during this call, so I will repeat our usual Safe Harbor remark.

While these statements reflect the best judgment of management at the present time, they are subject to numerous future risks and uncertainties as detailed in our regular SEC filings and they may differ materially from actual results due to a wide range of factors.

We undertake no obligation to update any forward-looking statements made during this call. And with that, let me turn over the call to Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer.

Kurt?.

Thank you, Kathy, and good morning. Yesterday afternoon we reported our results for the fiscal 2019 second quarter. We posted a double-digit consolidated sales increase of 12% fueled by solid base business growth and the consolidation of our recent acquisitions.

Sales in our Upholstery business grew 4%, the La-Z-Boy furniture galleries network posted it's 7th consecutive increase for written same-store sales, and the company's owned retail segment turned in a solid 4% positive comp for delivered same-store sales.

Beyond this solid base we are pleased with the early performance of our two recent acquisitions; Joybird, an e-commerce retailer and manufacture of upholstered furniture, and the Arizona based La-Z-Boy furniture gallery stores. I will speak in more detail about both of them in a few minutes.

We are presenting our results on both a GAAP and non-GAAP basis to better help you understand the underlying business trends excluding purchase accounting adjustments on the acquisitions which Melinda will go into great detail later on. As such, our GAAP operating margin was 6.5% for the quarter, and 7.3% on a non-GAAP basis.

Importantly, we are delivering top quartile operating margins for the wholesale furniture industry with our results exhibiting the power of our brands, world-class supply chain, and our integrated retail model even as we weather high input costs and tariff uncertainty.

Additionally, we continue to make strategic investments across the business to strengthen our operations and drive long-term results. Finally, over the past 12 months we generated $111 million in cash from operating activities and returned $60 million to shareholders through dividends and share purchases.

And yesterday our Board of Directors voted to increase our quarterly dividend to shareholders to $0.13 per share, representing an 8% increase. We are proud of what we have accomplished to-date and believe we are well positioned for continued long-term success.

For the quarter, the upholstery segment posted a 4% sales increase over the prior period driven by favorable changes in product mix, higher selling prices, and the additional price increase related to raw materials.

GAAP operating margin was 10.1% and 10.2% on a non-GAAP basis up from last year's non-GAAP -- last quarter's non-GAAP 8.2% margin but slightly down from last year's second quarter.

As expected, we exited the second quarter with our increased pricing to cover raw materials inflation fully executed, but pricing benefits were offset by changes in product mix and other inflationary pressures and our supply chain including procurement, manufacturing operations, and logistics, as well as some costs associated with the relocation of one of our major retail distribution centers.

And importantly, for the La-Z-Boy branded wholesale business, in the quarter sales grew across all channels throughout North America.

This includes the La-Z-Boy furniture gallery network which represents approximately 40% of the sales in the upholstery segment, our comfort studio partners who have a store within a store format, major accounts and our general dealers.

On the marketing side, we recently announced Kristen Bell will serve as our new brand ambassador for the La-Z-Boy Live Life Comfortably campaign beginning this spring.

The campaign features a mix of celebrity-style, humor and unexpected La-Z-Boy furniture, and aims to educate consumers that we make far more than the iconic recliner invented more than 90 years ago.

Spanning television, print and online, the campaign has driven significant sales growth for La-Z-Boy across a wide range of product categories, including stationary sofas, sectionals, occasional chairs and home accents.

With an authentic personality, engaging sense of humor, huge focus on family, and the fact that she already has La-Z-Boy furniture in her home, Kristen will be a great fit for us and we expect her to continue to elevate the brand.

And other exciting news for the La-Z-Boy business; last week Newsweek magazine named La-Z-Boy America's number one best customer service provider in the furniture retail category. Newsweek notes more Americans are employed in the retail sector than any other, highlighting the importance for companies to nurture their relationships with consumers.

We are proud of our comfort care team, as well as our partnership with a vast array of dealers who take great care of the consumer, and have been recognized for their dedication and consistent focus on customer service. On the product side, Duo continues to sell extremely well as does the new reimagine Urban Attitudes collection launched last April.

We've produced two commercial to support this launch which features curated mix of iClean fabrics. As we head into the upcoming busy holiday period, the first Urban Attitudes commercial was launched earlier this month through a coordinated multi-channel strategy, the second will launch in February.

Now moving on to our retail segment; our retail segment turned in another strong quarter as the team continues to fine tune it's execution strategies. For the quarter, sales increased 19.7% and delivered same-store sales increased 4%.

GAAP accounting margin improved to 4.7% and non-GAAP operating margin increased to 5.4% from 3.6% in last year's quarter.

And excluding all of the Arizona results, purchase accounting and operating profit, core retail business operating margin increased; the performance was driven by better conversion, increased design sales and custom orders which led to an average ticket that exceeds $2000.

Performance for the period was also driven by the Arizona stores which contributed the lion share of the $16.8 million incremental sales from acquired stores. The 9 La-Z-Boy furniture gallery stores are the highest performing stores in the network that have not missed a beat since we acquired them.

Our retail leadership team is working alongside the Arizona team to better understand their approach to the business which has led to excellent results so that we may leverage some of these learning's across the rest of our network.

Written same-store sales for the 353 La-Z-Boy furniture galleries network increased 4.4% for the quarter, the 7th consecutive quarterly increase. Total written sales including new stores, existing stores and relocated stores operating for a 12 full month calendar -- for 12 full calendar months increased 5.6% during the quarter.

We continue to see the core La-Z-Boy consumer demonstrating her preference to shop in-store, providing us with the opportunity to increase the average ticket through design services, custom orders, and the sale of complete room groups. We are focused on elevating the quality of our store program, and for fiscal '19 we have 22 total projects planned.

Now let us turn to our Casegoods business. Sales for the 2019 second quarter were $331.4 million, up 11.8% from the prior period and the operating margin increased to 12% versus 11.8% last year. For each of the last four quarters this segment has delivered double-digit sales growth with an average operating margin above 10%.

New product collections are on point and resonating with consumers. Early indications are that Kinkaid’s [Trails] [ph] collection and American Drew's Vista collection, both of which were introduced last April have recently reached retail floors and are meeting with early success.

On a supply chain side, we have 95% in-stock position across all SKUs which is allowing us to provide excellent service to the customer and garnering additional floor space with our retail partners. Now let's turn to Joybird, our recently acquired e-commerce business. We are very pleased with our early days of owning this exciting company.

Joybird with a direct-to-consumer model is the key pillar of our e-commerce strategy, and has it's slum [ph] on the pulse of the e-commerce consumer which will allow us to pivot to the younger group they are servicing made up of mostly millennials and GenX-er's [ph] through a different channel while leveraging the La-Z-Boy supply chain.

Joybird has had amazing success in four years' time going to $55 million in sales in the trailing 12 months pre-acquisition. And for the second quarter of this fiscal year, they contributed $18.5 million in sales to our results.

We have already seen significant improvements in the capacity and cost structure of Joybird's Tijuana plant to support from La-Z-Boy supply chain team and new equipment repurpose through other La-Z-Boy facilities.

In addition, as we further integrate Joybird and begin manufacturing it's upholstered furniture at existing La-Z-Boy plants, Joybird's production capacity will increase and it will more easily meet the strong and growing demand it is generating leveraging the fixed cost structure of those plants.

We are still working through our growth strategy for Joybird including how high it's up and on what timing and what investment will be needed to fuel that growth. But we do believe overtime Joybird can be a several $100 million revenue business for us. We are very excited about it's potential and the many synergies and which to capitalize.

And last but not least, before turning over the call to Melinda, I will take a few minutes to address tariffs. For La-Z-Boy, we believe we have a strong strategic advantage in the marketplace based on our U.S. upholstered manufacturing footprint, and the structure of our global supply chain with respect to procurement.

Thus far we have experienced the additional cost of a tariff implemented beginning in June on actuators, a component used in all of our power product followed by the 10% tariff on goods coming from China that was implemented in September which impacts the upholstery component of our products, both fabric and leather.

The majority of fabric and leather production is now based in China with little infrastructure left in the U.S. to support furniture manufacturing, and therefore highly susceptible to tariffs without many sourcing alternatives.

However, for the La-Z-Boy upholstered business, about two-thirds of our upholstery fabric travels to our facility in Mexico where it is cut and sewn into kits ready for assembly in our U.S. based factories. Given our manufacturing structure, these materials are not subject to the Chinese tariffs.

So how does this translate to our customers? In short, tariffs will push up the cost of furniture but we are well positioned within the industry. We are passing the combined tariffs through a surcharge that increased our prices roughly 2% on our upholstered La-Z-Boy business, and about 3% on our upholstered units that contain the power features.

Additionally, for Casegoods, we have an all-import model with the majority of our wood furniture sourced from Vietnam, though these goods also will not be subject to tariffs. Of course the saga could continue with the 10% tariff potentially going to 25% come January.

We are mindful of the potential impact to demand elasticity or possible shift in mix, and are working through various strategies to mitigate those potential scenarios to the extent possible. I will now turn over the call to Melinda to review our current financials..

Thanks, Kurt. Let me begin by again noting that this quarter we move to presenting both, GAAP and non-GAAP numbers which exclude purchase accounting adjustments required by GAAP for our acquisitions. We believe this approach makes it easier for investors to see the performance of our core underlying businesses.

Our acquisitions this quarter included the Arizona stores, and then additional store in Massachusetts which are included in our retail segment, and Joybird which is reflected in corporate and other as detailed in our 10-Q. For consistency, we have adjusted prior periods similarly for the impact of purchase accounting from prior acquisitions.

For this year's second quarter, we recorded $3.9 million or $0.06 per share in purchase accounting charges composed of four items.

The amortization of $7.5 million of the initial payment for Joybird which for accounting purposes is considered compensation expense and will be amortized over two years; the amortization of the fair value of the Joybird trade name which will be amortized over an 8-year useful life; minor interest expense charged over a 5-year period on the $25 million of future guaranteed payments; and incremental expense recognized upon the sale of inventory acquired at fair value which will be recognized over several quarters.

As we noted last quarter, we expect these items to total $0.12 to $0.14 per diluted share in fiscal 2019. Going forward, in addition to these items, we may also have impacts to our GAAP earnings for changes in the fair value of the Joybird contingent consideration liability.

Recall, there are two future earnout opportunities based on Joybird's financial performance in fiscal 2021 and 2023. The range of contingent consideration is zero to $65 million, and therefore, the quarterly valuation of this obligation could vary widely dependent on Joybird's financial success over the next five years.

Remember, a reminder that all of our purchase accounting estimates are preliminary and subject to change within the first 12 months of the acquisitions under U.S. GAAP. A full reconciliation of GAAP to non-GAAP is included at the back of our press release; the tables are also included in the appendix section at the end of our conference call slides.

As Kurt noted earlier, we are pleased with the operating performance of both Joybird and the Arizona stores as they have joined the La-Z-Boy family this quarter.

They are on-track to meet our internal expectations for the balance of the year, and we continue to expect the combined entities to be slightly accretive to non-GAAP earnings by the end of fiscal 2019.

And now onto a review of our enterprise numbers for second quarter; sales increased 11.7% versus prior year -- versus prior year quarter to $439 million, GAAP consolidated operating income was $28.5 million. Excluding purchase accounting charges non-GAAP consolidated operating income was $32 million versus $35 million in last year's quarter.

Consolidated operating margin on a GAAP basis was 6.5%, and non-GAAP consolidated operating margin was 7.3% versus 8.9% last year. GAAP earnings per diluted share for fiscal 2019 second quarter were $0.42 versus $0.47 in the prior year period. Non-GAAP EPS was $0.48 per diluted share in the current quarter, consistent with fiscal 2018 second quarter.

As a reminder for comparability, this quarter benefited from $0.05 per share of lower income taxes as tax reform had not yet been enacted as of the end of our second quarter last year. While fiscal 2018 second quarter included a $0.02 per share benefit from an insurance gain and a $0.03 per share benefit for discrete tax items.

Also, this year's second quarter included higher incentive compensation costs for performance based awards and timing of equity vesting, as expected, but partially offsetting this was the benefit from evaluation of a small pool of stock-based compensation awards reflecting the change in our stock price during the second quarter.

In total, these items equated to $0.05 per share in additional compensation costs versus last year's comparable quarter.

Our consolidated GAAP gross margin increased 30 basis points in the second quarter of fiscal 2019 versus last year's second quarter and non-GAAP gross margin increased 90 basis points, primarily due to the operating contributions from Joybird which carries a higher gross margin than our wholesale businesses.

Offsetting this was a declining gross margin for all three of our reportable segments. As Kurt mentioned earlier, our upholstery segment margin was impacted by increased costs and changes to our product mix which were offset somewhat by higher selling prices.

Continued increases in freight cost pressure to gross margin in our Casegood segment, and the retail segment gross margin was essentially flat on a non-GAAP basis but declined on a GAAP basis due to purchase accounting adjustments on inventory.

GAAP SG&A as a percent of sales increased 250 basis points in the second quarter of fiscal 2019 compared to the prior year period, non-GAAP SG&A increased 240 basis points adjusted for the acquisition-related costs for Joybird that are classified as compensation expense.

Within SG&A advertising expense was 100 basis points higher for the quarter, primarily related to the consolidation of Joybird which as an online retailer incurs higher advertising expenses than our other businesses.

Incentive compensation costs as a percent of sales were 60 basis points higher than the prior year quarter for the reasons I just outlined.

And finally, last year's second quarter SG&A included a $1.7 million insurance gain related to the fire at our England corporate office, and this negatively impacts the quarter-over-quarter comparison by 40 basis points.

Our effective tax rate for the second quarter of fiscal 2019 was 22.9% compared to a 30.8% for the second quarter of fiscal 2018 reflecting the impact of tax reform. Our effective tax rate varies from the 21% statutory rate primarily due to state taxes.

Absent discrete adjustments, the effective tax rate in the second quarter of fiscal 2019 would have been 24.7%.

Turning to the balance sheet; during the quarter we generated $13.9 million in cash from operating activities which includes the reduction in operating cash flow for the $7.5 million portion of the Joybird purchased price considered as compensation expense. In addition, our pension contribution in the quarter was $5 million higher than last year.

We ended the second quarter of fiscal 2019 with $93.9 million in cash and cash equivalents, $29.8 million in investments to enhance returns on our cash, and $2 million in restricted cash.

During the quarter, we used $85.6 million to find the Joybird and La-Z-Boy furniture gallery store acquisitions, with $7.5 million reported as a use of operating cash, and $78.1 million reported as a use of investing cash on the cash flow statement.

We also invested $11 million in capital primarily related to our new innovation center in Dayton, Tennessee, upgrades to our Dayton manufacturing facility, and expansion of the England plant and construction of it's new corporate office building.

For the full fiscal year we have refined our estimate to expect capital expenditures to be in the range of $45 million to $50 million.

During the quarter, we paid $5.7 million in dividends and spent $3.7 million purchasing a 100,000 shares of stock in the open market under our existing authorized share repurchase program; this leaves $6.3 million shares of purchase availability under that authorization.

Our capital allocation priorities remain to invest in the business to drive growth and then provide returns to shareholders with our dividends and discretionary share buyback. We funded the Joybird acquisition with cash-on-hand and used our credit facility to fund the Arizona acquisition.

We expect to paydown the revolver in increments overtime using operating cash flow. Finally, as we look at the third quarter, I would remind you that last year's third quarter included a $0.20 per share net charge related to tax reform, and $0.06 per share charge related to a legal settlement.

Also, for this year's third quarter, we expect to incur a charge of $0.03 to $0.04 per share for the purchase accounting adjustments, plus approximately $0.08 per share for higher incentive compensation costs consistent with our discussions last quarter. And now, I'll turn the call back over to Kurt..

Thank you, Melinda. As our industry faces some of the highest input costs in history and the uncertainty of tariffs, we are proud to have consistently delivered top quartile operating results.

Moving forward, I believe La-Z-Boy Incorporated is well positioned to continue to perform at a very high level, with the strength of our brand, our vibrant store system, our vast distribution network, diversified global supply chain, and our strong balance sheet, as well as the exciting prospects for the Joybird business; we are confident we will drive long-term growth and returns to shareholders.

We thank you very much for your interest in La-Z-Boy Incorporated. And I will now turn over the call to Kathy to provide the instructions for getting into the queue..

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

[Operator Instructions] Our first question comes from the line of Budd Bugatch with Raymond James..

Congratulations on the [cash flow] [ph].

Can you talk a little bit about -- on Joybird, just go back over where you are in the integration; have you started manufacturing any of that product yet? And maybe give us a little bit of color on maybe what it's operating results were in the quarter?.

The first thing we've done Budd is to help them make their own Tijuana plant that was part of the acquisition more efficient.

And so our La-Z-Boy supply chain team has spent a lot of time with them relaying out their plant, looking at some of the products flow-through the plant, we've provided some automated cutting equipment in the plant and ramp-up their capacity.

And I think the Tijuana plant probably has 60% to 80% more capacity itself now than it did prior to the acquisition; so that's the first thing. The second thing is, we have not yet started making the product in our plants although we're ready to do so.

We're having -- as you would expect, a little bit of systems issue to be sure that it's integrated into our financial systems and our ordering systems and all that, we expect to have that taken care of mid-December, and after the first of the year we will be shipping selected styles, mostly some of their higher runners, we will be shipping those out of the La-Z-Boy plants in January.

So great cooperation between the two teams, we're all learning a lot of things from each other. And my strong position is that having manufacturing capacity as we head into 2019 is not going to be a problem for Joybird..

And they did $18.5 million this quarter; I know it wasn't on your books but what kind of growth did that represent for them year-over-year?.

Well, if you take the $55 million which was their past 12 -- when we bought them, their past 12 months run rate; so that's a run rate of $13.5 million, $14 million at tops, so I would compare that to the $18.5 million..

And Melinda on SG&A, it grew in the quarter for obviously the acquisitions and other things about what $25 million or so year-over-year.

How do we get to kind of a run rate for modeling purposes that we can do?.

I think what you see in SG&A now is more consistent with the run rate for the rest of the year because we now have Joybird, and obviously, it's financial statements look a little bit different -- stronger gross margin, more SG&A investment; so layer on that we've talked about the fact that the comp expense will be higher throughout the balance of the year.

The only -- so I think the rates that you see in Q2 looks more like what you'll see for the balance of the year, pretty consistent with what we had called out earlier on our expectations, so just have little more visibility now into how the acquisitions impact each of those line items..

And Budd, you'd see also with the Arizona purchase that now retail is an even higher percentage of our overall mix, and retail carries a little bit higher SG&A; so that's playing into that formula as well..

Okay. You talked a little bit, gave us for third quarter of $0.03 to $0.04 for purchase accounting and an $0.08 incentive comp either for the year or for the fourth quarter.

What do those look like for modeling purposes as well?.

So consistent with what we said last quarter, we see $0.08 for the remaining quarter, so, both third and fourth on the comp side of things. Purchase accounting; we've called $0.12 to $0.14 on the year, so $0.06 of that came through this quarter, so that leaves, call it, $0.03 to $0.04 for the next two quarters..

There was a 90 basis point difference in the margin for upholstered segment, I think, year-over-year you've called out, obviously, the increased cost and mix issue. If you could take costs out of that, what would the margin in Upholstery have been? I know you've measured that on your variance analysis, I'm sure..

I'm not sure when you say 'when you take the cost of out it.'.

Well, I mean to tell you the cost delta, the increased cost, or what the cost over price recovery costs you in that quarter. What was the delta for….

I would tell you, Budd, that it wasn't until later in the quarter that all the price increases went through, and so, we didn't have a full quarter of the prices, but now, headed into the third quarter, we do.

But, we also -- we don't get any margin on tariffs, the tariffs when they're enacted, you don't have much time to react, so you have a backlog for a while that you're not charging for the tariffs, and that comes in.

We've had transportation increases, like everybody, and actually, we gave some additional compensation to our drivers, so we didn't lose any, which is very competitive. So, there is a little of still little bit cost creeping going on.

We opened a distribution center and moved our big distribution center in Washington D.C., and that cost us about $0.5 million.

So there is a number of puts and takes, nothing that is alarming but we're also trying to manage -- and these are all judgments that you make at various times, the price elasticity of furniture in saying, 'So, what's the worst-case scenario?' A little margin drop or a volume drop, where you don't get the fixed pickup from the plants and all.

So we're navigating through that as all this happens.

We're pretty positive about our competitive advantage on tariffs, and that we're not China-centric, so we're putting all into the formula and trying to do what we think is right for our customers and right for us, so we've still got some moving pieces and are balancing out what happens to the balance of the year..

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets..

Congrats on the nice results in the quarter here. I wanted to just talk a little bit more about the cadence of the business and the price increases that you're putting through, and how if at all that's all been affecting demand and may affect demand going forward.

I guess, just starting with the price increases, where do we stand here today in terms of what your customers are paying versus about a year ago? How much are prices up?.

Well, it depends on which customers that you're talking about. Obviously, there is more price and quite frankly, currency differences heading into Canada, and they have a retaliatory tariff on U.S. goods coming up to Canada of about 10%, and also, the other price increases, but I'd go back even further, Brad.

Tariffs by itself is -- those price increases for us since our competitive advantage is not unmanageable, but it comes on the previous 18 months of a bunch of raw material increases that we've passed on; so the cumulative effect of this, and particularly if it goes to 25% is the broader concern I think for the industry.

And I don't have all the numbers in front of me of each compounding price increase that we've taken, Brad, but I'm pretty sure in the U.S. it's more than 10% on our cost, so -- but then we also have taken increases on freight and everything. So, there is definitely inflation in the industry..

And so as we think about the strong comp, for example, the strong 4.4% comp you did, that really is particularly impressive given the tougher comparison last year.

How much of that is coming because prices were moving up? And do you think there is any demand pull-forward that you saw maybe because price increases were coming? How are you thinking about that?.

No, we haven't seen much demand pull-forward, and our dealers -- and obviously, to get that result, our customers are accepting these increases and dealing with it. We've seen some changes in the mix of people maybe gravitating to some more value-oriented products or people.

In our business, you can buy a little less expensive cover on a frame and some of that change-around, but we'll have a much better picture of the movement in our mix and margin here as we get through the holidays and have a little more volume, but there is some ebb and flow here that's not an exact science..

And then on the Joybird side, I was hoping to just ask about their margins and their profitability, and if we strip out the purchase accounting side of things, could you just talk a little bit about how quickly you could ramp some of the synergies and efficiencies that you all are bringing to the table here? And at what point that might move to being more of maybe a breakeven business? And at what point you might be able to find some further opportunities to reinvest in more marketing or something like that, even at a breakeven rate; how are you thinking about the margins there?.

I'll take that one. We feel pretty good about how Joybird is progressing, as we mentioned, and it's on-track with initial expectations.

What we've said before is that across the two acquisitions, we expected to be exiting the year with them in aggregate profitable, not enough to move the needle but profitable on a non-GAAP basis and we're still on-track for that.

You can see in our disclosures in the Q that -- if you look at Joybird as part of corporate and other, that there -- we're not talking about huge dollars that business is losing even today.

So we feel good about the trajectory there, we certainly see profitability certainly in the reasonably near-term as businesses go, but as we talked before -- Kurt mentioned that we're looking at how high is up for that business, and so the opportunity for us will be to decide how much we want to invest back into that business to fuel it because it's obviously a higher growth opportunity for us and we want to make sure we're appropriately leveraging that, but without being a big drag on the total company..

And I would add, unless something happens with the economy and all of that our expectation is that next year the Joybird business will be profitable, but as Melinda said, so -- and we'll be making their product here starting in January; so we'll be making a margin like we do on our integrated retail and our wholesale plants, and so then we have the decision, and it will ebb and flow.

How much do we want to use the volume or how much profit do we want to make on that? If we're making a strong profit in manufacturing the furniture, we may be more apt to push the volume side of it in the beginning. So, we'll kind of let you know as we go around what our intention is as this thing plays out some more..

[Operator Instructions] Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company..

So, I just wanted to follow-up on Joybird.

So as mentioned that you are spending more money on advertising; is this a strategy that you expect to continue, at least in the near-term?.

So I think the comment Anthony was, they spend more money on advertising as compared to the rest of our business because that's the business -- that's their real SG&A, it is to push the digital component of their transaction.

And you know, it's like all your advertising expenses, you're trying to spend and then grade how you did, did you get the projected results on that spend? What do you do? And we're just -- I think they're entering a new area that they always were running this business with a governor on it because they had capacity constraints, and now with the vast improvement in their Tijuana plant and us getting ready to make it, they're not going to have that, so they don't have to worry about pushing the volume side higher, and to do that, they may spend more marketing dollars but will get to the commensurate benefit of more volume..

As far as the potential 25% tariff is concerned, when you look at your product segments, so where do you think you have the most pricing elasticity and where [indiscernible]?.

I don't look at our business segments having any more or less product elasticity. I think because our overall tariff percentage is going to be so low compared to somebody that has a higher percentage of their business in China, I think we'll be in an advantageous position.

Remember, 80% plus of our Casegoods come from Vietnam, all of our bedroom and dining room; and only one-third of our fabric and leathers are going to have a tariff, and that is on the kit price, not the finished good price. So we have very little finished good products coming from China.

We have some leather sofas, but we have very little as a percentage of sales that are going to take the entire increase in tariff. So while I'm not a huge fan of tariffs, I think we are as well positioned as anybody else in the industry..

So the two-thirds that are going for Mexico -- is that as good as it gets or is there an opportunity to get even more of those fabric and leathers to Mexico for cutting?.

That's a great question, Anthony. I will tell you our strategy and we're always open to reconsider some things, but we certainly have had the ability to cut and sew everything we do for our La-Z-Boy upholstery business in Mexico.

We have chosen based on our risk mitigation to leave a portion -- the one-third portion -- with our other suppliers around the world because we don't want to put all of our eggs in the supply chain in one country and one facility, and then something happens there and we don't have any other partners we can work with to meet the demand of our upholstery business if something would go wrong.

So, could we do it all? Yes. Would that be a good thing if there was some other challenge that happened in our Mexico facility? We don't think so, and we think the strategy we've laid out to hedge a little, to keep some in China is proper at this time but we continue to evaluate that..

And lastly, any comments on the Black Friday weekend?.

It's a little early to get all the data in and the feedback from our broad array of customers, but I can tell you that our company-owned retail had a strong same-store sale in November, consistent with what we've reported this last quarter.

And we were pleased with the performance of that segment of our business, but we don't have the intelligence on all of our other retail partners..

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks..

Thank you for being on the call today. If you have any follow-up questions, please get in touch with me, and I'll review whatever you need. Have a great day. Thank you. Bye, bye..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day..