La-Z-Boy Incorporated (LZB) Q4 2018 Earnings Conference Call Transcript

La-Z-Boy Incorporated (LZB -0.12%)
Q4 2018 Earnings Conference Call
June 20, 2018, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the La-Z-Boy Fiscal 2018 Fourth Quarter/Year End Results Conference Call. At this time, all participants will be in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kathy Liebmann, Director, Investor Relations and Corporate Communications. Please go ahead.

Kathy Liebmann -- Director, Investor Relations and Corporate Communications

Thank you, Rob. Good morning and thank you for joining us to discuss our fiscal 2018 fourth-quarter and year-end results. With us this morning are Kurt Darrow, La-Z-Boy's Chairman, President, and Chief Executive Officer, Mike Riccio, our Chief Financial Officer, and Melinda Whittington, Senior Vice President, and who will become CFO of La-Z-Boy Incorporated tomorrow. Kurt will begin today's call, and then Mike will speak about the financials before turning the call back to Kurt for his concluding remarks. We will then open the call to questions. A telephone replay of the call will be available for one week beginning this afternoon. Slides will accompany this presentation and are available for viewing through our webcast link.

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 judgments 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?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Thank you, Kathy, and good morning, everyone. This morning, I am delighted to welcome Melinda Whittington to our team. Melinda brings with her excellent experience and expertise with more than 25 years as a financial professional in the consumer products arena. She is a leader with a proven track record of operational excellence and she will be an asset to our organization as well as a great fit for our culture. I look forward to working with her and I am confident you will enjoy getting to know her and working with her as well.

At the same time, it's with mixed emotions that we say goodbye to Mike. He has been a great partner and advocate of La-Z-Boy, playing a pivotal role in helping transform the company during his tenure. While his contributions were many over his 12 years as CFO, his lasting legacy will be the work he did to strengthen our balance sheet. With a philosophy of financial conservatism and discipline, Mike leaves us in an excellent financial position, one that will enable us to invest in our future and weather inevitable economic cycles. I have the highest regard for Mike as a colleague, as a leader, and a friend, and I thank him for his many contributions to La-Z-Boy and wish him all the best in his retirement. Mike will step down as CFO at the end of today and Melinda will become our new CFO as of tomorrow.

So now, let me turn to the business at hand. By now, you have all had the opportunity to see our results for fiscal 2018 and the fourth quarter, which we released late yesterday afternoon. All in all, it was a solid year where we maintained top-quartile profitability performance within the furniture industry. I will take a step back for a moment to provide some perspective on our company in terms of how we approach the business and how we are executing a dual growth strategy: First, to capture more share with our core customer, and second, to expand our business with younger consumers who exhibit different shopping characteristics and patterns.

For the past nine decades, our commitment to provide innovative, stylish, and high-quality products and services to the consumer has not wavered, and while the face of La-Z-Boy may look different today, our priority is to invest in the company, build on our strengths, take calculated risks, develop strategic advantages in a dynamic marketplace, and position the company for long-term financial success.

Our consistent, strong cash generation allows for that, and at the same time, provides the opportunity to venture into new areas. In fiscal 2018, we engaged in four large capital projects across the company, primarily designed to enhance our operations and competitive positioning. We also strengthened the La-Z-Boy Furniture Galleries store network by adding stores and upgrading others into the new design format. Finally, we unveiled a multifaceted internet strategy that ensures flexibility in the e-commerce world and allows for participation in the consumer shift to digital shopping and purchasing.

Before reviewing the quarter, I will run through a few highlights for the full fiscal 2018 year. Consolidated sales increased 4.2% and our consolidated operating margin was 8.2%, driven by solid performance in all three business segments. Earnings per diluted share for fiscal '18 were $1.67 versus $1.73 in the prior year. The two main call-outs that make the comparisons between fiscal '18 and fiscal '17 somewhat challenging are the inflationary pressures from raw materials and tax reform.

We generated $116 million in cash from operating activities and returned $79 million to shareholders through share repurchases and an increased dividend. Additionally, written same-store sales for the La-Z-Boy Furniture Galleries store network increased 2.3%, reflecting increases in all four quarters throughout the year. We ended fiscal 2018 with a strong balance sheet, access to lines of credit, and virtually no debt, providing us with the financial flexibility to continue to invest in the business and to drive long-term growth, profitability, and returns to our shareholders.

Now, let me review the quarter and each operating segment. First, Upholstery. For the quarter, on a slight increase in sales in the Upholstery segment, we delivered a solid operating margin of 12.8%. There is still a lot of noise across the industry with respect to raw material inflation, particularly for foam, lumber, and steel, and we are not immune to it. Transportation costs have also become an issue. At this point, we believe we have appropriately balanced cost inputs and selling prices while remaining sensitive to offering consumers innovative quality products at compelling price points. In addition to the drag on our margin from these inflationary pressures, unit volume was marginally lower than the previous year, and that also negatively impacted our margin for the period.

On the product side, Power continues to be a growing category and our Duo line is outpacing expectation, already becoming a significant collection. And, at the April high point market, we introduced what we are terming as a reimagined Urban Attitudes collection with a new set of frame styles that can easily be mixed and matched to provide a foolproof decorating experience for the consumer. It also features a curated collection of iClean's performance fabrics to simplify design. Urban Attitudes has been very successful for us over the past few years, and this refreshed collection was well received by dealers. We look forward to it reaching the retail floors this fall, supported by a comprehensive and integrated marketing campaign.

Our new innovation center at our Dayton, Tennessee campus is scheduled to open this summer and is a testament to our commitment to remain the industry's most innovative manufacturer. This year, we established a formalized process to ensure a regular cadence of innovative product introductions. This helps keep the La-Z-Boy name at the forefront in consumers' minds when they think about furniture that is not only great-looking and comfortable but offers all the bells and whistles they want. This process will be supported by the new innovation center, where our engineering and manufacturing teams are working side by side to develop, test, refine, and bring exciting and progressive new products like Duo to the market.

Supply chain excellence has been a hallmark of our Upholstery platform, both in terms of procurement and also our day-to-day manufacturing. And, as our sales and marketing teams work to drive sales across all product category and channels, we will also benefit as we gain further traction with Duo, renewed interest in Urban Attitudes, and momentum with other product categories. We will be able to further leverage the fixed cost structure of our plants with the additional volume.

England, our upholstery company, with a unique manufacturing and distribution process which allows it to ship orders in 21 days or less, is working to expand its footprint across the United States. In February, we began construction on its main plant to add some 87,000 square feet of manufacturing space to support the volume growth England has experienced over the last several years. Additionally, we broke ground on the site for their new corporate office building to replace the one we lost in a fire a year ago May. The new England corporate office, as well as the innovation center, are expected to be LEED-certified, just like our world headquarters is today.

Last summer, we unveiled an e-commerce strategy that includes three components, with the first to sell more La-Z-Boy furniture online. We have made a number of enhancements to La-Z-Boy.com to further engage the consumer and provide meaningful information. However, research and anecdotal evidence tells us that many of our core customers still prefer to shop in-store, touch and feel the furniture, and avail themselves to all the services offered onsite, including free in-home design services. As we have noted in the past, this is our preference, too, as we have the opportunity to sell a full room group of furniture and increase the average ticket.

That said, it is imperative to provide a best-in-class site and experience to the consumer, and we continue to see an increase in traffic to La-Z-Boy.com and believe it is providing increased traffic to the La-Z-Boy Furniture Galleries store system as well as all of our La-Z-Boy dealers. In addition to selling La-Z-Boy furniture on La-Z-Boy.com and on Wayfair, we launched a test program with Amazon in late February.

While many La-Z-Boy consumers seem to prefer to shop in a retail outlet, one of our objectives is to increase sales with the younger customers, many of whom prefer to shop online. Since the La-Z-Boy brand does not have the same appeal to the Gen X or the millennial consumer as much as our core customer, we need to go after this consumer group through other means.

The second component of our e-commerce strategy is to leverage the strength of our world-class supply chain to support other e-commerce brands, as it provides a powerful combination of efficiency, customization ability, and speed-to-market advantages. We have been engaged in this endeavor for more than a year and are looking for additional opportunities to leverage our amazing supply chain.

Finally, we are investing in early stage furniture brands and companies with strong business models and a focus on selling directly to consumers online. While e-commerce is a small part of our business today, we believe it has the potential to play a more significant role in the future. We are investing and taking action with these various opportunities using a portfolio approach to determine what will work well and provide value ahead, and we will make appropriate adjustments as we move forward.

With respect to our store buildout program, we completed the five years in our 4-4-5 moniker. While we did not make the first "4," meaning the 400-store target by Year 5, I'm happing to report that while many retailers across North America are closing locations, we are doing just the opposite. The La-Z-Boy Furniture Galleries store system is vibrant and growing and is a key element of our expansive strategy, and the company -- along with our independent dealer base -- will continue to open stores in pursuit of the 400-store target.

The main delay in reaching our target by Year 5 of the 4-4-5 was principally a result of real estate challenges in certain markets, such as New York, Boston, and Miami, as we were unwilling to compromise our store evaluation process and operating metrics. Our objective continues to be to build a $1.6 billion retail business through the store network, and we believe we can achieve that level over time with our improved store performance even if we have fewer stores than our original plan.

Across the network, 20 projects were completed in fiscal 2018, including new stores, relocations, and remodels, and in the fourth quarter, two stores were opened, two stores were closed, and one was relocated. This activity significantly upgraded the store network by moving stores into better locations and remodeling the older stores. We ended fiscal 2018 with 350 La-Z-Boy Furniture Galleries stores across North America, with 132 in the new design format. For fiscal '19, we are planning for approximately 24 projects to be completed and expect to end the year with 355 stores in total with about 154 stores in the new design concept format.

For the fourth quarter of fiscal '18, written same-store sales for the Furniture Galleries network increased 3.9% on top of a 2.4% increase in last year's fourth quarter. This marks the fifth consecutive quarter of written same-store sales increases for the network. For the full 2018 fiscal year, same-store written sales for the network increased 2.3%.

Now, let me turn to our Case Goods business. Sales for fiscal fourth quarter '18 were $30.6 million, an increase of 17.5% from last year's fourth-quarter revenue of $26 million. The operating margin for the segment increased to 9.2% versus 7.8% in the comparable period in fiscal 2017. And, for the full year, the segment achieved an operating margin of 10.5% versus 8.6% in fiscal 2017.

With an all-import model, our supply chain team has done an excellent job in flowing product from overseas to ensure we have a high in-stock position on our best-sellers as well as most of our other inventory, allowing us to ship product quickly to our dealers, typically in as little as five days from the time we receive an order. This has enabled us to gain floor space with many existing dealers and open new accounts with other retailers. Additionally, our product lineup is as compelling as it's been in the last decade, featuring more transitional styling that is more appealing to today's customers, who tend to live in less formal spaces.

The April market Kincaid introduced Trails, a nature-inspired collection made of solid oak, solid steel bar, and top-grain leather, playing to the consumer's love of the outdoors and growing interest in organic products. This collection was met with overwhelming positive response by dealers, and we look forward to it reaching retail floors in the fall. We are very pleased with the trajectory of our Case Goods business, which is well positioned for growth and market share gains as it continues to leverage supply chain excellence and domestic distribution capabilities to provide the excellent service to our customers with its beautifully designed collection.

And now, moving to Retail, while most of you are very familiar with our integrated retail strategy, some of you on today's call may be new to our story, so the benefit of this strategy bears repeating. Sales through our company-owned La-Z-Boy Furniture Galleries store provide the company with the greatest level of profitability due to our integrated retail model, where we benefit from the combined margin, earning a profit on both the wholesale and retail sales at the same time. Additionally, as the Retail business becomes a larger portion of our overall business, we will benefit from its increased size, capturing more of the profit on sales of our product. Sales in the fiscal fourth quarter increased 3% to $121 million versus the prior year. On the core 138 stores included in last year's fourth quarter, delivered sales decreased 1.1% compared with a decrease of 8.2% in the prior period.

The segment's operating margin increased to 6.6% for the 2018 fourth quarter, the highest of all four quarters throughout the year. While traffic was down for the period, consistent with other retailers, we know that a large percentage of our consumers are interfacing with us on our website before setting out to shop and retail locations, and for the period, our conversion was positive. When consumers enter our stores, they are able to take advantage of all the services we offer, which makes for a better shopping experience and typically results in a more satisfied consumer. For the quarter, increased custom orders and design sales drove an increase in the average ticket.

For the fourth quarter, the company opened one new La-Z-Boy Furniture Gallery store and closed two, and for fiscal '18, the company opened six new stores, closed four, and acquired one from an independent dealer, bringing our company-owned store count to 146, of which 58 are in the new design concept. With two new store openings, two closures, and three remodels planned for fiscal '19, our store count is projected to remain the same at 146 at the end of next year. I will now turn over the call to Mike for him to review our financials. Michael?

Louis M. Riccio -- Chief Financial Officer

Thank you, Kurt. I will quickly review our numbers for the fourth quarter since Kurt already spoke about our performance by segment. Sales for the fiscal 2018 fourth quarter were $420 million, up 1.8% from $413 million in last year's fourth quarter. Consolidated operating income increased 5% to $45.7 million and the consolidated operating margin increased to 10.9%. The company reported net income attributable to La-Z-Boy Incorporated of $34 million or $0.72 per diluted share versus $28 million or $0.57 per diluted share in the prior-year period. The current-year quarter included a $0.06 per share benefit related to tax reform.

Consolidated sales for the fiscal 2018 full year were $1.58 billion, an increase of 4.2%. For the year, consolidated operating income declined to $129 million from $133 million in fiscal 2017, and the consolidated operating margin was 8.2% versus 8.8% last year. The company reported net income attributable to La-Z-Boy Incorporated of $81 million or $1.67 per diluted share for fiscal 2018, compared with fiscal 2017 net income of $86 million or $1.73 per share. The reduction for the current-year period was primarily due to tax reform charges.

Our consolidated gross margin decreased 0.8 percentage points in fiscal 2018, primarily the result of the decline in the Upholstery segment's gross margin stemming from the raw material price increases that Kurt mentioned earlier. The gross margin in the Case Goods segment increased 0.2 percentage points for the year due to increased volume and a shift in our product mix to newer, higher-margin collections, which was offset somewhat by higher freight expense on imported product.

In our Retail segment, the gross margin declined 0.2 percentage points for the year. Offsetting some of the inflationary pressures to our gross margin was an improvement of 0.2 percentage points in fiscal 2018 due to the change in our consolidated sales mix, as Retail now comprises a higher percentage of our overall business and carries a higher gross margin compared to the Wholesale segments. Additionally, fiscal 2017 included a 0.2-percentage-point benefit related to a favorable legal settlement.

SG&A as a percent of sales decreased 0.2 percentage points in fiscal 2018 compared with fiscal 2017, primarily as a result of lower incentive compensation expense, which was 0.4 percentage points lower in fiscal 2018 compared with fiscal 2017 due to our consolidated financial performance in fiscal 2017 being below our incentive-based targets for the year. Additionally, we benefited from favorable absorption of fixed SG&A costs on higher sales and a reduction in discretionary spending. Partially offsetting these items was the impact of the previously announced legal settlement, which increased SG&A expense as a percent of sales by 0.3 percentage points for '18 versus '17. With the announced settlement, which resolved all of our past and future obligations at issue in the litigation, we recognized an additional charge of $4.1 million in the third quarter of fiscal 2018.

As I noted a moment ago, our Retail business became a larger component of our consolidated sales. Our SG&A as a percent of sales will also increase, as Retail carries a higher level of SG&A compared to the Wholesale businesses. Over the year, this accounted for a 0.3 percentage point increase in our consolidated SG&A expense.

Now, turning to the balance sheet, during the quarter, we generated $25 million in cash from operating activities, and for the year, we generated $116 million. We ended fiscal 2018 with $135 million in cash and cash equivalents, $34 million in investments that enhance returns on our cash, and $2.4 million in restricted cash. For fiscal 2017, our capital allocation included share buybacks, dividends, capital expenditures, and cash used for acquisitions.

For the full fiscal year, we spent $57 million to purchase 2 million shares, including 400,000 shares in the fourth quarter. This leaves 6.7 million shares in the program authorized for purchase, or approximately 14% of the total outstanding shares. Based on cash flows and other capital needs to invest in the business to drive growth, we plan to continue to be opportunistic in the market with respect to buyback activity. We also paid $22 million in dividends, returning a total of $79 million to shareholders when combined with our share purchases.

During the fiscal year, we also invested almost $16.5 million when we finalized our payment for the U.K. and Ireland business early in the year and acquired one La-Z-Boy Furniture Gallery store. We will continue to use our cash prudently during fiscal 2019, with our first priority to invest in the business to drive growth, the second to pay our dividend, and depending on how much we spend on the first two, the third will be to buy shares back. Capital expenditures for fiscal 2018 were $36.3 million compared with $20.3 million for fiscal 2017. Capital expenditures were higher in fiscal 2018, primarily due to the construction of our new innovation center.

Our effective tax rate for continuing operations was 36.7% for fiscal 2018 compared with 33.5% for fiscal 2017. As we reported in the third quarter, on December 22nd, 2017, the Tax Cuts and Jobs Act -- as we call, the Tax Act -- was enacted into law. Most of its provisions are effective for tax years beginning on or after January 1st, 2018. Because we are a fiscal-year U.S. taxpayer, the majority of the provisions, such as elimination of the domestic manufacturing deduction, new taxes on certain foreign-sourced income, and new limitations on certain business deductions, will begin applying to us in fiscal 2019.

For fiscal 2018, the most significant impacts include the lower U.S. federal corporate income tax rate applied to our fiscal 2018, a revaluing of our U.S. net deferred taxes, and a new transition tax on the deemed repatriation of certain foreign earnings. The phasing in of the lower corporate statutory income tax rate resulted in a blended federal rate of 30.4% for fiscal 2018 compared with the previous 35%. The federal statutory tax rate will be reduced to 21% in subsequent fiscal years.

We recorded a charge of $5.5 million in fiscal 2018 reflecting the net effect of the Tax Act. This included a $10 million for the remeasurement of certain deferred taxes and related amounts, a provisional $0.2 million of income tax expense for the estimated effects of the transition tax, and a benefit of $4.7 million primarily related to the lower blended federal statutory tax rate. The change from the third quarter is primarily due to the adjustments to the transition tax and fourth-quarter earnings at a lower blended federal rate.

In December of 2017, the Securities and Exchange Commission staff issued guidance which provides that companies that have not completed their accounting for the effects of the Tax Act should include a provisional amount based on their reasonable estimates in their financial statements, with final adjustments not to extend beyond one year of the enactment date. As of April 28th, 2018, we have not completed our accounting for all the tax effects of the Tax Act. However, we made reasonable estimates to report provisional adjustments during fiscal 2018. We may alter our estimates as we continue to finalize calculations and review further guidance that may be issued.

Impacting our effective tax rate for fiscal 2018 in addition to the above items related to the Tax Act was a net tax benefit of $2.4 million, primarily from research and development credits related to the amended prior-year tax returns and the release of valuation allowances relating to certain U.S. state deferred tax assets and state income tax credits. Absent discrete adjustments, the effective tax rate in fiscal 2018 would have been 30.6%.

Before turning the call back to Kurt, I'd like to go through a few items that are important for fiscal year 2019. Raw material economics: While Kurt spoke of our quest to balance cost inputs with selling prices depending on the timing of various supply contracts, there may be some timing differences to deal with through the summer period. As we move into the early fall, we believe these differences will settle out, and we will be in equilibrium providing we do not continue to face rising costs from this point forward.

Capital expenditures: We expect total capital expenditures for fiscal 2019 to be in the range of $55 million to $65 million, higher in the fiscal 2018 due to the construction of the new corporate office building and plant expansion for our England subsidiary, plant upgrades to our manufacturing facility in Dayton, Tennessee, and the relocation of one of our regional distribution centers, all of which we anticipate being completed by the end of this fiscal year.

Sales for the fiscal 2019 first quarter: As a reminder, our first quarter is typically the weakest in terms of sales and earnings due to a general slowdown throughout the furniture industry related to the summer period. As a result of this, the majority of our manufacturing facilities will close for a week in July for vacation and maintenance. With lower volume during the period in addition to the one week without production and shipments, we historically convert at a lower rate during the first quarter.

I would like to thank all of you for your interest in and support of La-Z-Boy over the years. It has indeed been a pleasure to work with you. I believe we have built a great business here at La-Z-Boy and that this company will continue to grow and prosper. While I look forward to my retirement, I will certainly miss many aspects of my day-to-day here and be watching the company closely to see how it evolves. And, of course, it goes without saying I wish Melinda all the best in her new role as CFO of La-Z-Boy. And now, I'll turn the call back to Kurt for his concluding remarks.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Thank you, Mike, and good luck. I, too, see a promising future for La-Z-Boy. We are playing the long game and are making prudent and strategic investments across the company to ensure it continues to evolve in a dynamic marketplace. A solid balance sheet and consistent cash flows are enabling us to invest in our brand and our global supply chain, which we believe are key to long-term success while providing the ability to pursue a multidimensional e-commerce strategy to capture a new and younger customer.

In this changing environment, our leadership team challenges itself every day to drive growth, continue to create innovative products, and gain market share by leveraging our supply chain in support of such endeavors. I'm invigorated by what is yet to come and I'm confident in this company's long-term prospects as we capitalize on our strong legacy of innovation and our uncompromising commitment to evolve and meet the challenges in a changing world. We want to thank you for your interest in La-Z-Boy Incorporated, and we'll turn over the call to Kathy to provide some instructions for getting into the queue for our questions. Kathy?

Questions and Answers:

Kathy Liebmann -- Director, Investor Relations and Corporate Communications

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

Operator

Thank you, Kathy. If you'd like to ask a question today, please press *1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to remove your questions from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing *. One moment, please, while we poll for questions. Thank you. The first question today comes from the line of Bobby Griffin with Raymond James. Please proceed with your question.

Bobby Griffin -- Raymond James and Associates -- Analyst

Good morning, guys. I appreciate you taking my questions. And, Mike, congrats on the retirement. It's been a pleasure to work with you and wish you nothing but the best going forward.

Louis M. Riccio -- Chief Financial Officer

Thanks, Bobby.

Bobby Griffin -- Raymond James and Associates -- Analyst

I just wanted to quickly follow up on some of the raw material comments. Maybe just to help us understand, what are the current trends that you're seeing in some of those items, like steel and foam? Has it finally started to level out where we can then understand as you play a little bit of the pricing catch-up, the back half will look a little better, or is the trajectory still kind of inflationary if we think about it on the graph?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

You have to quantify this, Bobby, as to what we know today. We have had to take -- over the last 12 months -- two price increases because of the inflationary pressures, particularly on steel, lumber, and foam, the last one of which went into effect June 1st. And, should nothing else change, we believe by the second quarter of fiscal '19, we should be at that equilibrium, but as soon as I say that, we are now also faced with some challenges on tariffs and have no clear path to know whether or not the raw material increases have topped out. We have no indication that we've got anything coming in the future that we haven't planned on, but we really didn't expect the second round of increases last fall, either, so we'll just have to see what happens. You really can't get ahead of it; you have to wait until you deal with the raw materials, and then decide how much you pass on and how much you keep.

Bobby Griffin -- Raymond James and Associates -- Analyst

Okay, that's helpful. The tariff issue -- is that potentially on some of the Canadian tariffs for your business that's up there?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Yeah, there's a tariff of approximately 10% being enacted on all furniture coming from America going into Canada, and then, we learned late last week that there is the potential to have a tariff on the actuators that are coming from China that are used in most of the industry's power products.

Bobby Griffin -- Raymond James and Associates -- Analyst

Okay, appreciate that.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

And then, there's the announcement of a plan for more tariffs coming, so it is an uncertain time as far as our cost inputs.

Bobby Griffin -- Raymond James and Associates -- Analyst

Okay, thank you. And then, lastly for me, was there some delivery impact or maybe written orders late in the quarter? Because the written order business during the quarter was fairly strong; the delivered business wasn't quite as strong, so I was just curious if there's any timing issues there. I noticed in the 10-K that the backlog was up pretty nicely in Upholstery.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

We have seen a steady increased progression. You saw that written sales was almost 4% for the network in Q4 and the average for the year was about 2.7%, so there was some acceleration, and these are all -- there's always a little bit of timing issues because of the way the backlog and our predominance of custom orders work, but nothing significant, and that gap will close over time because eventually, the increased written business gets delivered, so we would expect most of that to get delivered out in the first quarter.

Bobby Griffin -- Raymond James and Associates -- Analyst

I appreciate you guys taking my questions, and best of luck in the next fiscal year.

Operator

Our next question is coming from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Brad Thomas -- KeyBanc Capital Markets -- Director

Hi, good morning, everyone, and Melinda, welcome to the team, and Mike, let me add my best wishes to you as you move into retirement as well. I've really enjoyed working with you.

Louis M. Riccio -- Chief Financial Officer

Thanks, Brad.

Brad Thomas -- KeyBanc Capital Markets -- Director

I wanted to follow up on Bobby's last question just about the sales trends and was particularly encouraged by the same-store sales results. I think 3.9% is the strongest in two and a half years. So, echoing Bobby's comment, I was a little surprised that the total revenues in Upholstery didn't clock in quite as strong. Can you give us a little more color about what you're seeing from some of the national and independent dealers of La-Z-Boy and how you're expecting that side of the business to grow as we look to the year ahead?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

So, my response to that, Brad, is it's... Our sales do not go up linearly every quarter. So, in this environment, we had a little over 4% growth for the year. Last quarter, we had a 6% growth. This quarter, it was 2%. The average is around that 4%. We would anticipate -- given our recent sales increases and what you see of what was written in the fourth quarter, we would anticipate our first-quarter deliveries to be better than flat in Upholstery. So, it's mostly just the ebb and flow of holidays, inventory, markets, things of that nature, but we're pretty happy with the year at 4% and think there's nothing fundamentally different, and you would see an improved number there in the first quarter.

Brad Thomas -- KeyBanc Capital Markets -- Director

That's helpful. Thank you, Kurt. And then, with respect to the outlook for gross margin, with the price increase that you put through June 1st, is it set up where if 1Q plays out similar to 4Q, where the rate of gross margin decline would moderate in 1Q -- still be down, but moderate -- and then, do you think you could be back closer to flat in Q2, or are there still too many headwinds out there with freight and some other factors?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

So, in our planning, Brad, our gross margin -- I think -- got as high as 40%, and I think we were at 39 and something in the fourth quarter. So, that's not a big gap, and the two things that would drive that is more volume through the plants to pick up absorption, and then the pricing versus -- the raw material pricing versus the selling price. So, I don't think we're that far apart, and in the furniture industry, our gross margins are pretty respectable even at this level, but in our planning, it was to not only take the price increase on the actual cost, but actually to have our margin pick up as well. So, if it was a perfect world, nothing changed, we got volume at or above the previous year, yes, our margin should be back to where we -- our historical high, but I wouldn't expect it to grow a whole hell of a lot beyond that.

Brad Thomas -- KeyBanc Capital Markets -- Director

Great, that's very helpful color. I appreciate it. Thank you all very much.

Operator

And, a reminder: To ask a question today, you may press *1 from your telephone keypad. The next question is coming from the line of Anthony Lebiedzinski with Sidoti and Company. Please proceed with your questions.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Good morning and thank you for taking the questions. Mike, certainly, enjoy your retirement -- I'm sure you're looking forward to it -- and welcome aboard, Melinda, to the La-Z-Boy team.

Melinda D. Whittington -- Senior Vice President

Thank you

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

So, first, I just wanted to ask -- as far as -- obviously, you are dealing with inflation. You have increased your prices to offset these raw material prices going up. What is your expectation as far as unit volume? Do you think it will decline again, or do you think it could flatten out? Just wondering about what your expectation for unit volume in light of these price increases that you're taking.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

So, we're not planning on a one-for-one relationship between pricing going up, volume going down. We still have opportunities with a number of our different channels of distribution, expanded channels of distribution, the internet business, same-store sales at the La-Z-Boy stores. We're not planning on a unit reduction, but the honest question, Anthony, is it all depends on how the consumer reacts. So, the industry has been faced with these inflationary pressures, and the cost of furniture is up X amount, and no one will know how she reacts to that until we go through the next three or six months. So, stay tuned for that, but certainly, it's not our plan to go backwards in units.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got it.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

And, if we get the next hurdle of more tariffs, that's another thing we'll have to take into our pricing element.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Understood. And, as far as your SG&A, there was a commentary in the 10-K that you reduced your discretionary SG&A spending. I was wondering if there are additional levers that you can pull to better manage SG&A.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

So, I think we manage SG&A really well, and there's always discretionary spending you can do. We try not to do much of it that affects our customers or our employees, but we examine every expenditure we make and try to do that. On the other hand, part of the reduction in our SG&A, particularly in the fourth quarter, was even though we had a good year at La-Z-Boy, we had higher expectations. And so, we did not achieve the 100% level of our payouts and our compensation, so that had an impact on lower SG&A. That is not our plan for next year. Our plan is to make that up. So, if you see SG&A go up next year and it's primarily in the comp area, we'll be happy to defend that.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got it, OK. And so, as far as the incentive compensation, was that all reversed in the fourth quarter? I was just wondering about how that flowed throughout the year because typically, your fourth quarter does have higher SG&A, and it was close to $5 million lower than a year ago.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

So, we look at it every quarter, we look at our forecast, we look what we have reserved and planned, and we make adjustments as we go. Being the fourth quarter, it always is our largest quarter. It has a little more impact, and on some of the things, you don't know the final answers on certain targets at the end of the year, but no, we watch that number and make adjustments throughout the whole year.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got it, OK. And, last question, longer-term -- so, obviously, store traffic continues to be an issue for all brick-and-mortar retailers. So, when you look at your store base between your dealer stores and your company stores, is your expectation to more or less keep it flat for the next few years? Just wondering how we should think about that. Thank you.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Our response to that, Anthony, would be that our traffic is consistent with most other retailers in the country right now. The customer is using the internet a lot more for information and to make choices. She's visiting less stores, and that phenomenon is not going to change, but the customers that do come into the stores have a higher propensity to buy because they've done their research and they've chosen La-Z-Boy as one of the places they want to visit and buy. So, we watch the combination of traffic, ticket, and conversion, and our traffic was down in the fourth quarter, and we still had same-store sales of 4%. So, I think that's a good indicator of the things we're trying to do to keep growing our business.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Okay, thank you, and best of luck.

Operator

Our next question is a follow-up from the line of Bobby Griffin with Raymond James. Please proceed with your question.

Budd Bugatch -- Raymond James and Associates -- Managing Director

Actually, it's the old guy. It's Budd, back in for Bobby on this one. So, Mike, I just wanted to also wish you the best going forward, so, good luck on that, and Melinda, welcome to the fray of the investors of La-Z-Boy.

Melinda D. Whittington -- Senior Vice President

Thank you.

Louis M. Riccio -- Chief Financial Officer

Thanks, Budd.

Budd Bugatch -- Raymond James and Associates -- Managing Director

Mike and Kurt, I do have a few follow-up questions that I'd like to ask, and I think Anthony talked a little bit about it and you talked a little bit about it, Kurt, in explaining the corporate overhead in the fourth quarter -- at least, as we can do the numbers with the publicly available data -- looks like it was down about $4 million year over year. Is that pretty much all the reversal of the accrual of incentive comp? You also talked in your script about some discretionary expenses. Can you quantify the dollars of how they impacted the fourth quarter?

Louis M. Riccio -- Chief Financial Officer

Budd, I would say that probably three-quarters of the reduction in corporate was related to either stock comp or performance comp. The rest of it is just ebbs and flows of our expenses, of us just trying to maintain some things, maybe some projects that we delayed into the summer or something. So, there's nothing -- I think it's the lowest it was going to be for the quarter, so I don't expect it to stay that low.

As Kurt has talked about, our IT and the work that we do to make sure that we're staying ahead of the game on that and not getting behind the 8 ball -- we're going to continue to keep investing in that. Not that we're going to have a huge expense over what we've been spending, but we're going to stay pretty consistent on that. So, we don't expect it to stay down there, but as Kurt mentioned to Anthony, we will continue to look at every expenditure and make sure that we're spending money on things that are enhancing the customers' experience and looking at our employees as well.

Budd Bugatch -- Raymond James and Associates -- Managing Director

We're rooting for you to make the incentive comp. We would like to see that. I think it would benefit everybody. Raw materials -- you normally give us a dollar amount, and I know it's a lens that's pretty cloudy because of all the moving parts, but knowing what you know today, what's the dollar impact of raw material increases year over year for the new fiscal year?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

I don't... Budd, I don't have that number off the top of my head, and because of the flow of when various price increases come in -- so, I would say that I think we took at least half, maybe a little more, of all the price increases in last fiscal year, but we have another 40%-plus here to flush through here in the first four or five months of the new year. So, we took a price increase June 1st that we haven't seen any benefit from yet, but we will, and we'll get the full benefit in Q2. And, the magnitude of it was similar to the first one because --

Budd Bugatch -- Raymond James and Associates -- Managing Director

How much was that, Kurt? I don't think we knew the --

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Again, I don't have those right off the top of my head, but I think... I kind of know what the price increase values were, but not the actual raw material costs. We can get that for you and let you know.

Budd Bugatch -- Raymond James and Associates -- Managing Director

That would be great. I think you said you'd be in equilibrium, so if we know that the percentage price increase is, theoretically, we can probably get an idea of the dollar amount of the raw material increases. I think you also said that units were down slightly in the fourth quarter. Can you quantify that? I think you were talking about Upholstery if I remember right.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

We quantified in the 10-K that our Upholstery units for the entire year were down around 2%.

Budd Bugatch -- Raymond James and Associates -- Managing Director

And, in the fourth quarter, we don't get the quarterly breakout in the 10-K.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

You want it weekly?

Budd Bugatch -- Raymond James and Associates -- Managing Director

If you can... No, but quarter -- we'd love you to file a 10-Q for the fourth quarter as well.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

I'm sure! I think it was pretty much consistent throughout the year. The fourth quarter wasn't a... The fourth quarter a year ago was up 6% on a comparable basis, so I don't think there's anything alarming about it. As I answered on the first question, we were up 6% in the third quarter, we were up 4% for the year. I don't think we'll be flat in the first quarter of next year on the Upholstery business, so it's just the ebb and flow of the way the business has been.

Budd Bugatch -- Raymond James and Associates -- Managing Director

Sure. And, look, your Upholstery margins are spectacular anyway, so we understand that. We're just --

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Thank you for recognizing that.

Budd Bugatch -- Raymond James and Associates -- Managing Director

I always have. You and I both know that's the crown jewel of La-Z-Boy, always has been, and they are spectacular, but we have a job to do, and unfortunately, we look at it that way as well. A lot of noise in the industry recently about the China situation. Obviously, you're now situated with stuff over which you have no control. There's been -- at least, from those of us who watch it -- a price war between some of the Chinese importers that has led to a lot of disruption for some of the manufacturers. I think you probably felt a little bit in motion. What's the situation with that today? Where is that going? Is there likely to be any administrative action as a result of that?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Well, I can't comment, Budd, on what we may or may not do, or what the upholstered furniture companies may do. I think we're all watching with a keen interest on what's going on in bedding, and I think the article in Furniture Today last week was that there were 4 million more inexpensive mattresses shipped into the U.S. last year, and I think at prices that make some of us gasp at what they are. So, there's a lot of talk about the bedding industry taking some action, and I think it would be appropriate. And so, we're going to see what the outcome of that is and determine what our next steps could be as an industry.

Budd Bugatch -- Raymond James and Associates -- Managing Director

And then, your China partner, I think, has also made some other relationship. How is that relationship working for you?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Our relationship in China is very strong. There's over 250 La-Z-Boy stores now in mainland China, and they are aggressively buying up some other companies in Europe and in China for manufacturing, so they are on an aggressive acquisition mode, and as far as we can tell, they're buying some very quality companies, some of which we use as suppliers, too. So, on an overall basis, our partnership has gotten even tighter with things they have done from an acquisition standpoint.

Budd Bugatch -- Raymond James and Associates -- Managing Director

And, was your China business up in the fourth quarter?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Again, I don't have that in front of me --

Louis M. Riccio -- Chief Financial Officer

We only get the royalty from that. We don't get the sales from that.

Budd Bugatch -- Raymond James and Associates -- Managing Director

Okay, that's correct. I understand that. Okay, finally for me, we though CapEx was going to come in a bit higher in the fourth quarter. Was that just the timing, and is that somewhat related to the expected increase in CapEx in fiscal '19?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Yeah, that's pretty much it, but some of our projects -- I think the England office or their plant or something -- they had so much rain in the spring, we couldn't pour the foundation in the time we wanted to do it.

Louis M. Riccio -- Chief Financial Officer

With the innovation center, we got put off until May or June to pay for it.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Most of our projects are a little behind their timelines, not due to anything other than weather and timing. Plus, our projects -- our major spends are all in the state of Tennessee, and Tennessee is a hot state right now for growth and manufacturing jobs, and it's challenging to get contractors to work on buildings and all, so it's just taking a little longer, but they're great projects, they're going to be a great asset to the company when they're finished, but a lot of them are having a 60- or 90-day delay.

Louis M. Riccio -- Chief Financial Officer

Right, and that is some of the carry-over on why our number for '19 is a little larger.

Budd Bugatch -- Raymond James and Associates -- Managing Director

Got it. Thank you very much. Mike, again, best of luck. Kurt, best of luck to you. Melinda, welcome again. I look forward to seeing the innovation center and maybe the new offices of England if you'll allow us to come visit at some point in time.

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

You're always welcome, Budd.

Budd Bugatch -- Raymond James and Associates -- Managing Director

Thank you, sir. Thank you, gentlemen and lady. Thank you very much.

Operator

Our final question today comes from the line of Matt Kupersmith with Iron Compass. Please go ahead with your question.

Matt Kupersmith -- Iron Compass -- Partner

Hi, thanks for taking the question. If I look at the last six quarters, I observe that the written comp is consistently positive and the delivered comp for each of those last six quarters is down. Can you just explain how that divergence can exist over that period of time, and then, more broadly discuss how you think investors should use each of those two metrics?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Great question. There are two different metrics, and that's why you can't run the math succinctly. We believe for investors, giving you the written same-store sales for the entire network of stores -- which is 350, which includes the 146 we own and all of the dealers that we have that own La-Z-Boy stores -- that's an accumulation of their written business every quarter, which they report to us. We think that is the best leading indicator of what's going on in our business since the La-Z-Boy stores represent almost half of the La-Z-Boy branded business. Okay? The other number we give you is the delivered sales -- not the written, the delivered sales -- of the same stores that we owned a year ago. So, comp sales delivered on the 146 stores that we own. So, there's timing differences. One is all dealers, one is just our dealers. I think over time, they have a way of leveling out, but any given quarter, there could be a three- or four-point differential.

Matt Kupersmith -- Iron Compass -- Partner

Okay. But, over six quarters, there's been a pretty material differential. Does that imply that your company-owned stores are consistently doing worse than your dealer-owned stores?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

I would say they're not doing as well. I wouldn't say they're doing consistently worse. So, they are slightly -- we've said they're running a couple of points behind what our independent dealers do. One of the issues for us is that over time, we've had to take back a lot of the markets that weren't performing well and start over, and that's one of the reasons our performance hasn't been quite as well as the independent dealers, and the longevity of a number of the families that we have that own the La-Z-Boy stores in these markets for years and years is a benefit they have that works to their advantage. But, we keep closing that gap. We don't think it's going to last forever, but right now, there is a couple of points' difference between the independent dealers and the stores that we operate.

Louis M. Riccio -- Chief Financial Officer

We have some markets that do well and some that we're working, so it's not all even, even across our markets.

Matt Kupersmith -- Iron Compass -- Partner

Is it possible to give the delivered comp for your whole network, to be consistent?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

No. We don't own them, they're not part of our public numbers, they have different fiscal years, they have all kinds -- that is not possible or probable.

Matt Kupersmith -- Iron Compass -- Partner

Do you have those numbers, though?

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

We get annual financial statements from our customers, but we don't get into that level of detail with independent dealers who aren't connected to the company.

Louis M. Riccio -- Chief Financial Officer

We do not have that information.

Matt Kupersmith -- Iron Compass -- Partner

Okay, thank you.

Operator

Thank you. Ladies and gentlemen, this will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.

Duration: 61 minutes

Call participants:

Kathy Liebmann -- Director, Investor Relations and Corporate Communications

Kurt L. Darrow -- Chairman, President, and Chief Executive Officer

Louis M. Riccio -- Chief Financial Officer

Melinda D. Whittington -- Senior Vice President

Bobby Griffin -- Raymond James and Associates -- Analyst

Brad Thomas -- KeyBanc Capital Markets -- Director

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Budd Bugatch -- Raymond James and Associates -- Managing Director

Matt Kupersmith -- Iron Compass -- Partner

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