Darrow: La-Z-Boy poised to prosper
By Larry Thomas -- Furniture Today, February 18, 2008
Monroe, Mich. — When Kurt Darrow became CEO of La-Z-Boy about 4½ years ago, the company was getting two-thirds of its upholstery fabric from three large U.S. suppliers.
Most of its case goods were produced at more than a half-dozen domestic factories.
And bankruptcy news wasn't dominating the industry headlines.
Yes, things have changed in the relatively short time Darrow has been at the helm. But he says the bellwether company is also in the midst of dramatic changes that will put La-Z-Boy in a position for a strong rebound as the industry climbs out of its sales slump.
"I hate to see the industry go through this pain, but when the consumer returns and the market improves ... we will be one of the benefactors," Darrow said.
During a wide-ranging interview at La-Z-Boy's corporate headquarters here, Darrow said the current slump is particularly vexing because it has dragged on for more than a year and it's still not clear if it has hit bottom.
"We're planning on tough sledding for the foreseeable future," he said. "I don't think anybody knows where we are in the housing cycle. There's just a glut of unsold homes, and it's going to take some time to work through that."
He said many consumers believe their home is worth less today that it was a year ago, so they are reluctant to invest more money in it — especially when it comes to buying furniture.
"They say furniture is a postponable purchase," Darrow said, repeating an industry axiom. "Consumers are proving it right now."
He said the company essentially is finished with the overhaul of the wholesale side of its business, and pointed to the improving operating profit margins as evidence the changes are working.
The closing of numerous domestic factories, the sale of well-known brands such as Pennsylvania House and Clayton Marcus, and several other asset sales were difficult decisions that put hundreds of people out of work, Darrow said, but he insisted they were right decisions strategically.
And now, with just three case goods brands (Kincaid, Hammary and Lea Inds./American Drew) and three upholstery brands (Bauhaus, England and La-Z-Boy), he says the company is more manageable.
"Most importantly, they are all profitable," said Darrow. "We are very comfortable where we are."
At one time, the company had 14 brands under its umbrella. Management was often "pulled in 14 different directions" and spent a disproportionate amount of time on matters not connected to the powerful La-Z-Boy brand, he said.
"To be candid ... it took our eye off the ball a bit with La-Z-Boy," he said. Now, he said, "We want to make sure that La-Z-Boy comes first and foremost in everything we do going forward."
That mantra includes La-Z-Boy's problem-plagued, company-owned stores, which have repeatedly incurred operating losses that have dragged down — and in some quarters, wiped out — earnings.
The company has been struggling to integrate the warehousing and computer systems of the 70 corporate stores, while simultaneously upgrading and expanding the number of stores in several key markets.
Darrow acknowledged the challenges have been daunting, but he remains confident the problems can be fixed.
"(La-Z-Boy) stores remain a cornerstone of our distribution. We've got to prove that we can run them as well as our independent dealers."
Virtually all the company-owned locations are in major markets such as Chicago, Boston, Philadelphia, Washington and South Florida. And that means expensive real estate for the best locations and high advertising costs.
Those costs, he explained, need to be spread over a larger store base in each market, but the current sales slump has put a damper on expansion plans. Planned build-outs in the Chicago and Philadelphia markets have been slowed, for example, and a similar plan has been postponed indefinitely in South Florida — one of the hardest-hit housing markets.
"As we measure our performance against our best performing independent stores, we're right in line on most measurements. Where we are out of line is occupancy costs," he said. "In a number of our markets, we don't have enough stores."
One reason Darrow is confident the retail operations can be turned around is the company's track record in the Washington market, where La-Z-Boy acquired seven stores from the owners of Reliable Furniture in 1998, when now-defunct Heilig-Meyers was acquiring the rest of Reliable.
That year, the D.C.-area stores generated about $20 million in sales. But five years later, there were 18 La-Z-Boy Furniture Galleries stretching from Baltimore to Tidewater Virginia generating $100 million in annual sales.
Since then, Darrow said the company has acquired stores in major markets that were "undercapitalized and underdeveloped." The markets were too important to abandon, and the company didn't think it could find an independent operator with the financial and management wherewithal to open eight to 12 stores. (Most independent dealers own 3 to 5 locations.)
"In most of our major markets, the only way we are going to achieve our market penetration objectives is through our store program," said Darrow.
In the long run, he believes the improved performance of the retail division will boost earnings as well as La-Z-Boy's stock price, which went into free fall last year. Shares briefly topped $14 in February 2007 before skidding to below $6 per share in November. The stock has made a slight rebound of late, topping $8 per share.
The plummeting stock price resulted in a dividend yield exceeding 7% on some trading days, and led to speculation in the financial press that the dividend payout would be cut or the company would be subject to a takeover bid.
Darrow, who has been a La-Z-Boy board member since he became CEO, said the board reviews the dividend policy every 90 days. He would not speculate on whether a cut was imminent.
He was more direct about takeover speculation, however, saying that no merger talks have taken place.
"Obviously, when a stock gets cheaper and cheaper, it raises speculation," he said. "But there haven't been any conversations at our (board) level. We are trying to manage the business within the structure we have today."
Darrow's confidence in the company — and perhaps his skill as an investor — was demonstrated by his recent purchase of an additional 15,000 La-Z-Boy shares, boosting his personal holdings to more than 189,000 shares.
According to a filing with the Securities and Exchange Commission, he made the purchase at an average price of $5.46 per share on Nov. 30, when the share price was near a 52-week low.
"I definitely believe it's a very good long-term investment," he said.
