MONROE, Mich. – Coming off another strong three months in its fiscal 2021 second quarter, La-Z-Boy’s focus is positioning manufacturing capacity to catch up with record-level backlogs that ongoing high consumer demand keeps pushing higher.
President and CEO Kurt Darrow and CFO Melinda Whittington discussed the company’s strategy with analysts during a conference call with investors. La-Z-Boy looks to its current production initiatives – acquisitions are an option down the road – for future growth, but also to meet the more pressing immediate challenge of turning backlogs into delivered sales.
“Our current backlog for the La-Z-Boy branded business is five times what it was at the end of Q2 last year, and we are quoting lead times of 16 weeks to 26 weeks depending on product category, which also include an estimate of the delivery time to the ultimate customer,” Darrow said, noting three immediate steps the company is taking to address capacity.
First, La-Z-Boy has added manufacturing cells and additional weekend shifts at its domestic upholstery plants.
“Secondly, we have temporarily reactivated a portion of our Newton, Miss., assembly plant to service select geographics,” Darrow said. “We have also added manufacturing cells … at our cut-and-sew center in Mexico, allowing us to tap into a new labor pool.”
Third, La-Z-Boy has leased a 200,000-square-foot facility in Mexico just south of the border from Yuma, Ariz. Production should begin in December with full operation by the end of next year’s calendar first half.
The Mexico facility will be primarily an assembly operation that’s the first step in a long-term strategic plan designed to improve service to the Western United States.
La-Z-Boy’s capex through its fiscal first half stands at around $15 million – mostly machinery, equipment and upgrades to its Dayton factory and store investments – but that figure should more than double, even triple, to $40 million to $45 million by the end of fiscal 2021, according to CFO Melinda Whittington, “although spending will be largely dependent on economic conditions, continued business recovery and liquidity trends.
“Our spending for the year will include upgrades to upholstery manufacturing facilities and costs for the new production capacity in Mexico, technology upgrades and improvements to several retail stores,” she continued.
The conference call included other takeaways related to capacity.
Production disruption of TDI, a major chemical ingredient of foam used in furniture, has impacted the entire industry in recent months. Darrow put a number on that impact in the second quarter, noting that while backlogs grew to record levels even as sales dipped by low single digits.
“This was primarily the result of lower delivery unit volume as our ongoing efforts to significantly increase our production capacity to meet demand were offset by a temporary supply shortage of foam, which reduced sales by more than 2%,” he said.
The foam shortage prevented La-Z-Boy from full utilization of its existing upholstery manufacturing capacity for almost two weeks during the second quarter.
“We have recently learned of new issues with foam supply in November, which will again temporarily limit our ability to maximize output in the third quarter,” Darrow said, adding that while likely temporary in nature, the entire industry will be affected by the shortage.
‘Tip of the spear?’
With its investments in production such as extended hours and new facilities, Darrow said La-Z-Boy should have the capacity to produce $530 million in goods during its fiscal fourth quarter, “but it is all dependent on the global supply chain.”
“And maybe, we don’t know, but maybe the foam is just the tip of the spear – lots of challenges with containers, with lots of costs going up,” he continued. “There is going to be huge pressure on demand from Christmas to Chinese New Year.
“And so what were are capable of and what we will be able to do (is) based on how all of our partners support us … and we haven’t had any hiccups to date other than the (foam) issue, but there is still some uncertainty,” he said. “So we just don’t want to get over our skis here and assume everything is going to be perfect.”