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La-Z-Boy Incorporated (NYSE:LZB)
Q1 2019 Earnings Conference Call
Aug. 22, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to La-Z-Boy fiscal 2019 first quarter results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 from your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Kathy Liebmann, Director of Investor Relations and Corporate Communications. Please go ahead.

Kathy Liebmann -- Director, Investor Relations and Corporate Communications

Thanks, Rob, and good morning and thank you for joining us to discuss our fiscal 2019 first 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's going to begin today's call, Melinda will speak about the financials and turn the call back over to Kurt for his concluding remarks. We'll then open the call to questions. Slides will accompany this presentation through our webcast link, which will be available for one year.

Additionally, 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 won't 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're subject to numerous future risks and uncertainties and details in our regular FCC 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 Darrow -- Chairman, President, Chief Executive Officer

Thank you, Kathy, and good morning everyone. Yesterday afternoon we reported our results for the fiscal 2019 first quarter. As you can see from our press release, we've had a very busy summer. Sales increased 7.7%. Consolidated operating income increased 42%. Net income increased 57% and we generated $32.2 million in cash from operations and returned $13.6 million to our shareholders. In addition, the La-Z-Boy furniture gallery's network hosted its six consecutive increase in written same-store sales and our company-owned retail segment turned in a solid positive comp for deliver same-store sales. We also announced two exciting acquisitions both of which closed subsequent to quarter end. I am very proud of all the work our team accomplished this quarter.

Now let me speak to each operating segment. First, upholstery: for the quarter, the segment posted a 6.9% sales increase over the prior year driven by a higher price mix, increased unit volume, and the benefit of our first round of price increases. Operating margin was 8.1% down slightly from last year primarily due to raw material cost. We would expect to see the full benefit of our second round of price increases by the end of the second quarter. On the innovation front, Duo continues to sell extremely well and we believe the product line has great long-term potential. And the new reimagined Urban Attitudes collection launched at the April high point furniture market is beginning to hit retail floors.

Our early indications are that it will do very well particularly with the accompanying curated mix and matchable iClean fabrics, which give consumers peace of mind for the unexpected spill backed by a three-year warranty. To keep these new product introductions coming regularly, we are building a new innovation center at our Dayton, Tennessee campus, which is scheduled to be completed later this year. This state of the art facility has enabled us to attract additional excellent engineering talent to the company, which will ensure that R&D continues to play an important role in our future.

We are also making upgrades to the plant at our Dayton campus, our largest La-Z-Boy branded manufacturing facility encompassing 1.2 million square feet where we produce over 40% of the La-Z-Boy branded product. Now moving onto our retail segment. Our retail segment turned in a strong quarter with deliver same-store sales increasing 4.6% Sales for the segment increased 7.9% to 119 million and the operating margin more than doubled to 3.7% from 1.6% in last year's first quarter. The retail team continues to hone our strategy with respect to merchandising and product mix, pricing and marketing, as well as different staffing models.

With new analytics, data-driven changes translated to increased conversion in sales while design services and custom orders drove improvement in the average ticket. Digging in a bit more on the La-Z-Boy furniture gallery's network for the quarter, written same-store sales increased 3.1%, the sixth consecutive quarterly increase. The network's total written sales, including new stores, existing stores, and relocated stores operating for 12 full calendar months increased 4.3% during the quarter. While we are certainly pleased with these results, we are already preparing for Labor Day weekend, which kicks off the seasonally stronger fall selling season.

Our La-Z-Boy core consumer continues to demonstrate her preference to shop in-store, which provides us with the opportunity to sell design services with custom pieces and full room groups thereby increasing the average ticket. We, along with our independent dealers, will continue to selectively open new stores and relocate and remodel others when they are in compelling locations, improving the store system in terms of both the quantity, but most importantly, the quality of the stores. For the first quarter across the network, one new store was open, one was relocated, and three were remodeled, bringing our total store count to 351 with 137 in the new concept design format. For the second quarter, planned activity across the network includes three new stores and six remodels.

And for the full year, we are planning for 23 projects across the network with five net new stores. Also, the acquisition of the nine Arizona La-Z-Boy furniture gallery stores will further strengthen our integrated retail model where we earn a combined wholesale retail profit. Arizona is certainly a growing and vibrant market with one of the highest population growth rates in the nation. Of the nine stores we are acquiring, four are the highest sales volume stores in the 351 furniture galleries store network. The nine stores are profitable and will be immediately accretive to our earnings.

In the calendar year 2017, the Arizona group had combined revenues of $78 million. As we are already recording the wholesale volume, the stores will add approximately 40 million annually of sales volume to the company on a consolidated basis. Now, let's turn to case goods. Sales for fiscal 2019 first quarter were 28.4 million, up 11.3% from the prior year and the operating margin increased to 10.9% versus 10.7% last year. Case goods continue to deliver across all aspects of the business. With a regular cadence of relevant new transitional collections for today's consumer and an efficient supply chain in place, including support from our global trading company in Asia, the group is providing excellent service to customers through quick ship time and a high in-stock position on the best selling pieces. These factors have enabled the case good companies to garner more floor space and many of the retailers they service and drive a steady increase in sales.

Last August, we outlined a three-prong e-commerce strategy. The components included selling more of the company's products online through La-Z-Boy.com, Wayfair, and Amazon. The second is to leverage the strength of our supply chain to support other e-commerce brands. And the third is to invest in early stage furniture brands and companies with strong business models and a focus on selling directly to the consumers online, which is the fastest growing segment of the furniture industry. With the acquisition of Joybird, we have solidified the third pillar of our e-commerce initiatives. Joybird will provide us with a greater presence online and allow us to more easily and effectively reach millennial and Gen X consumers who often prefer the mid-century modern product and styling that Joybird offers. And the ability to shop through the online channel.

Further, as Joybird's growth has been constrained by limited capital and production capacities, we will combine our world-class supply chain including nationwide delivery capabilities with its current manufacturing operations. This will allow Joybird to accelerate expansion and better serve its customers, improving production speed and shortening delivery times all while lowering cost. It is truly a synergistic combination for both companies and we are excited about the expansion potential in the years ahead for our combined businesses. Founded by four individuals in 2014, Joybird has been an early winner in the lifestyle e-commerce segment growing to $55 million in annual sales in just four short years. They have built a great online shopping platform and have a significant e-commerce expertise in the retail arena. Joybird is one of the premier employers in the upholstery furniture e-commerce space and we believe it will continue to be a leader and provide long-term value to La-Z-Boy and our shareholders.

Melinda will provide some additional financial details in a few minutes. And finally, let me speak to a potentially significant headwind as we look at the remainder of the year, retaliatory duties, and tariffs. Our team is keeping a watchful eye on the developments and is working with our industry association, the American Home Furnishing Alliance and lobbying efforts. The association's position mirrors our in that these duties are not good for the consumer nor are they good for the majority of our industry. The retaliatory surtax went into effect on our product going into Canada in July and we are watching to see the impact that additional duty will have on our Canadian volume.

We are also monitoring the developments on the latest round of potential duties on goods imported from China. In the meantime, our global supply sourcing team is always working to diversify our supply chain, and we believe we are fairly well positioned to make sourcing and pricing changes if necessary. The latest round of proposed duties go into effect. Unfortunately, we do not have any further details to provide at this time, as it is obviously a fluid situation. I will now turn the call over to Melinda to review our financial performance.

Melinda Whittington -- Senior Vice President and Chief Financial Officer

Thanks, Kurt. Before beginning a discussion of our numbers, I would like to say I've had a great first few months at La-Z-Boy. It is truly an exciting time to be a part of this iconic company with a world-renowned brand as we write the next chapter of our history. Now, let me turn to the financials. For the first quarter of fiscal 2019, sales increased 7.7% from last year's first quarter to $384.7 million. Consolidated operating income increased 42% to $23.2 million. And consolidated operating margin increased to 6% from 4.6% last year. The company reported net income attributable to La-Z-Boy Incorporated of $18.3 million or $0.39 per diluted share versus $11.7 million or $0.24 per diluted share in the prior year period.

Compared to last year, first quarter of fiscal 2019 EPS reflects strong operating results as well as a $0.05 per share benefit for a lower tax rate due to tax reform. And a $0.03 per share benefit from currency gains in other income. Comparatively, the first quarter of 2018 EPS included a $0.03 per share benefit for an investment gain in other income. Our consolidated gross margin decreased 40 basis points in the first quarter of fiscal 2019 versus last year's first quarter, primarily due to raw material cost increases in the upholstery segment, higher freight cost for case goods, and changes in our upholstery product mix. As noted, we have taken two rounds of price increases in our upholstery products intended to offset raw material cost increases but we have not yet fully realized the benefit of the second round of increases. We expect to see the full benefit flow through by the end of the second quarter assuming raw materials cost stay at their same level.

By segment, gross margin for upholstery declined 110 basis points and case goods gross margin declined 40 basis points. Partially offsetting these declines was a 30 basis point improvement in gross margin for the retail segment. SGNA as a percent of sales improved 180 basis points in the first quarter of fiscal 2019 compared with the prior year period. Higher sales volume for the quarter allowed us to leverage fixed SGNA costs across all three businesses. Additionally, incentive compensation costs as a percent of sales were 50 basis points lower than in the first quarter of fiscal 2018. The decrease in incentive compensation costs relates primarily to a timing change within the year due to a change in the vesting schedules of certain equity awards. This will result in the expense being recognized over all of fiscal 2019 instead of recognizing the expense fully in only the first quarter.

As we look to the remainder of the year for SGNA, the combination of this change in timing plus expected stronger performance against our targets this year will drive an approximate 100 basis point increase in SGNA expense for the full fiscal 2019 year when compared with last year. You will recall that while we delivered strong results in fiscal 2018, we did not meet the stretch targets we had for ourselves. And as a result, we recognize significantly less incentive compensation expense in 2018 than we would have if we had achieved our performance target.

Presuming our results in 2019 meet our current expectations, our performance award achievements will be at a higher level than they were in fiscal 2018 and we will recognize the additional expense proportionately over the next three quarters of the year. Our effective tax rate for the first quarter of fiscal 2019 was 22.8% compared with 35.6% for the first quarter of fiscal 2018. Our effective tax rate varies from the 21% statutory rate primarily due to state taxes. Absent discrete adjustments, the effective tax rate for the first quarter of fiscal 2019 would have been 24.4%, slightly lower than our previously projected 25% to 26% as we have fine-tuned our implementation of the new tax rules.

Turning to the balance sheet, during the quarter we generated $32.2 million in cash from operating activities. We ended the first quarter of fiscal 2019 with $134.2 million in cash and cash equivalents, $31.6 million in investments to enhance returns on our cash and $2.4 million of restricted cash. During the quarter, we spent $7.9 million purchasing approximately 300,000 shares of stock in the open market under our existing authorized share repurchase program, which leaves 6.4 million shares of purchase availability under that authorization. We also paid 5.6 million in dividends.

Capital expenditures for the quarter were $15.9 million primarily related to our new innovation center in Dayton, Tennessee. We expect capital expenditures for the full fiscal 2019 year to be in the range of $50-60 million, higher than last year, due also to the construction of a new corporate office building and plant expansion for our England upholstery subsidiary, upgrades to our Dayton, Tennessee manufacturing facility, and the relocation of one of our regional distribution centers. 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 use operating cash flow to pay off the credit facility borrowings.

While on the topic of acquisitions, we closed the Joybird acquisition on July 30th, 2018 for a total of $75 million in guaranteed payments, which includes $50 million in upfront cash, $25 million spread annually over five years, and two future earn-out opportunities based on performance in fiscal 2021 and fiscal 2023. Of the initial 50 million payment, $7.5 million will be considered compensation expense because it is forfeitable proportionately upon the resignation of any of the four Joybird co-founders within the first two years and will therefore by amortized SGNA expense over the two-year period on a straight-line basis.

Additionally, we will record a contingent consideration liability for the estimated sale value of the two earn-out opportunities as of the date of acquisition as well as the first value of the acquired Joybird trade name, which will be amortized to SGNA expense over its useful life. We will record these purchase accounting entries plus the fair value measurements for acquired inventory and the goodwill acquired as part of the acquisition when we report our financial results for the second quarter. Joybird's results will be included in our corporate and other results.

In mid-August, we closed the acquisition of the nine La-Z-Boy furniture gallery stores from our Arizona-based independent dealer for approximately $40 million in cash. These stores will be included in our retail segment. We will record our initial purchase accounting entries including the fair value measurement for acquired inventory, the indefinite-lived reacquired right asset, and the goodwill acquired as part of the acquisition when we report the second quarter. With ownership of both acquisitions for roughly nine months, we expect to add approximately $80 million of incremental sales to the company for the fiscal year. Excluding purchase accounting adjustments, we expect the combined entities to begin to be slightly accretive to profit by the end of this year.

Separately, the purchase accounting for these transactions is in process and so our estimates are subject to change but we estimate these charges to be approximately $0.12 to $0.14 per diluted share for 2019 and 2020 and then begin to reduce after the first two years once we have completed the amortization of the $7.5 million of compensation expense over that period. As we look to the second quarter, I would remind you that last year's second quarter included a benefit of $0.02 per share for an insurance gain recorded in SGNA and a benefit of $0.03 per share for a discrete tax item.

For this year's second quarter, we expect to incur a charge of $0.04 to $0.06 per share for the purchase accounting adjustment, plus approximately $0.08 per share for the higher incentive compensation costs that I discussed earlier. All offset somewhat by a $0.05 per share benefit from the lower tax rate when compared to last year's second quarter. And now, I'll turn the call back over to Kurt for his concluding remarks.

Kurt Darrow -- Chairman, President, Chief Executive Officer

Thank you, Melinda. We were pleased to deliver such a great first quarter, which demonstrated the strength of our base business. And as we look out to the remainder of the year, absent the acquisition accounting adjustments Melinda just received and the possible issues relating to tariffs, I believe we are on track to deliver a solid performance. With a strong brand, vast distribution network, world-class supply chain, and two exciting acquisitions, we are poised for growth. I'm confident that these strengths, coupled with our strong balance sheet and the ongoing execution of our strategic dual growth strategy, will drive long-term returns for our shareholders. We thank you for your interest in La-Z-Boy Incorporated and we'll turn over the call to Kathy to provide the instructions for getting into the queue for questions. Kathy?

Questions and Answers:

Kathy Liebmann -- Director, Investor Relations and Corporate Communications

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

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 would like to remove your question from the queue. For participants that are using speaker equipment, it might be necessary to pick up your handset before pressing the * keys.

Our first question is coming from the line of Budd Bugatch with Raymond James. Please proceed with your questions.

Budd Bugatch -- Raymond James -- Analyst

Good morning. Congratulations on a good first quarter, the first quarter is always a challenge for La-Z-Boy so it's nice to see that. Let's address some of the revenue issues. I've been getting a number of questions from clients regarding the price increases, whether you could quantify if there had been any pull forward effect on the price increases, it might've impacted this quarter's revenues more than normally.

Kurt Darrow -- Chairman, President, Chief Executive Officer

Good morning, Budd. No, the answer to that question is there is not any pull forward. We've had two price increases back to back so probably with a six-month gap in between. The last one was taken on July 1st so we didn't see any of that. We would refer to the fact that we did have a little stronger backlog at the end of the year when we went into April.

As we said in our last quarterly call that there was nothing fundamentally different in our business and we were confident about our pace of business. But no, it was just -- our sales don't go up straight-line, they have ebbs and flows based on the economy, based on retail promotions, based on holidays, and everything came together this quarter but nothing to do with pricing as best we can tell.

Budd Bugatch -- Raymond James -- Analyst

Okay. And I did see in, I think upholstery if I calculated right; you had a 1.5% unit gain? And better than that number, there was mix in the -- if I looked at the NDNA properly. Can you tell us in the retail segments where the strength lies? You've now sort of consolidated these very significant Arizona stores. Where did the strength from retail come from in terms of the written business?

Kurt Darrow -- Chairman, President, Chief Executive Officer

So I think our comment there, Budd, would be the business was pretty consistent throughout the quarter. You being an ex-retailer know that there are a number of levers you pull with merchandising, pricing, marketing, staffing, etcetera, and we have continued to try to find the right balance for us. And we try some things, sometimes they work, sometimes they don't. We pivot and do all that. No one magical thing.

I would say that our retail teams with their emphasis on in-home and custom are doing a great job in trying to satisfy the customer and giving her very many options and being different in the marketplace in that regard. That is where the higher tickets and higher margins are coming from because of higher percentage of our business in those two categories. But no one thing stands out, it's a combination of a lot of changes that we've been doing over time to have this kind of result.

Budd Bugatch -- Raymond James -- Analyst

You've talked about, historically, the efficacy of getting in the home. What percentage of sales right now are coming from those design operations?

Kurt Darrow -- Chairman, President, Chief Executive Officer

I can't give you a real good number on the entire system, Budd, but I think with our own retail business it's in the high 30s. And the other great part about it is the close rate once you get into the home is about 90%. It's a process to make sure that the customer wants that service, make the appointments, build her trust, do all that, but once you're in the home and establish that relationship good things happen.

The most important thing about our in-home design is we have a much more satisfied customer. She really doesn't want to buy just an item of furniture; she wants a beautifully decorated room. And the odds of her coming back and shopping with us more often increases exponentially when we do a professional in-home design job.

Budd Bugatch -- Raymond James -- Analyst

Okay. A couple of more questions, if I could. Thank you, by the way, for the additional disclosure on sales in the queue. I appreciate that. But the accounting is getting trickier as a lot of these new pronouncements are having to be factored into a company's financials. One question I had, again, I don't quite understand, was in the corporate side.

You had a $3.2 million improvement in that that had came from a number of things, including that incentive compensation. That worked out to be about $0.05 a share if my math is correct for the quarter benefit. A.) is that correct, Melinda? And, B.) is that where we get the additional expense that has to be amortized over the other three quarters?

Melinda Whittington -- Senior Vice President and Chief Financial Officer

Yes, your estimate's a little high there as far as how much of that is the comp piece. But we've got two things going on as we look at the rest of the year. The first one is simply the accounting for timing and changes in how the equity awards vest -- changes in time and how the equity awards vest. So that piece, you saw the benefit in the first quarter and that will play back and so net to the year there will be no impact. But of course, you'll see that load balance over the year. The second piece then is -- and that's where we've called out that we expect to see our SGNA uptick 100 basis points for the total fiscal year compared to last year. And the biggest driver there is our compensation expense relative to primarily bonus type activity.

So you'll remember, end of last year, Kurt might've talked about the fact that we really didn't hit the bonus levels that we had anticipated to, even though we had delivered strong results for the year and certainly relative to our competition. We didn't hit the stretching targets that we had set for ourselves. And so, we've ended up realizing a fairly significant reduction in bonus compensation through the back half of last year. We anticipate this year delivering results more in-line with our plan and so, therefore, we would expect to see that bonus compensation increase back up to a more going level this year. So that's why we've called out in aggregate, we expect to see SGNA expense up about 100 basis points for the entire fiscal.

Budd Bugatch -- Raymond James -- Analyst

Okay, and that's versus the reported numbers or an adjusted number? How do we look at that SGNA?

Melinda Whittington -- Senior Vice President and Chief Financial Officer

Versus reported.

Budd Bugatch -- Raymond James -- Analyst

Okay. And finally, from me, you called out the fact that the new acquisitions are slightly accretive excluding the purchase accounting adjustments. I assume those purchase accounting adjustments are the ones you refer to. Do we -- if we did the math right, I think the EBIT on place majority of our acquisition looks like it's probably not positive at least as we can early tell. And also, are you planning to call out those purchase accounting adjustments and show non-GAAP results in the future periods including those accounting adjustments?

Melinda Whittington -- Senior Vice President and Chief Financial Officer

Certainly. Given the magnitude of the purchase accounting adjustments, we do intend to be clear on those impacts, whether or not we'll go as far as non-GAAP, still TBD but we'll make sure you understand those impacts going forward. As far as then, it will really be the underlying operations excluding purchase accounting adjustments. We've been clear that Arizona is an established business and profitable, even as we bring it into our company directly. Joybird is actually doing very well as far as being on a path to profitability but is still early stage company.

And so, when we think about everything in aggregate, including some of the implementation costs that will occur, and taking advantage of the synergies that we'll be able to deliver to these businesses. We're looking at turning to an overall profitability level across all of those pieces, excluding purchase accounting adjustments, by the end of the year. But I don't see those in aggregate excluding purchase accounting adjustments really moving the needle for this fiscal on profitability.

Operator

Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your questions.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Hi, good morning, Kurt, Melinda, and Kathy. Let me add my congratulations on the strong start to the year and the acquisition of Joybird; it feels like a nice strategic partner for you to be owning here. I wanted just to zoom in on some of the dynamics behind margins. And I guess first, just to follow up on Budd's question about the incentive comp.

So I guess if I'm doing the math here right, 100 basis points from incentive comp year-over-year looks like about a $0.28 headwind to earnings for the year on a tax-effected basis. And I think, as you disclosed in the queue, you had about $0.03 of savings year-over-year on the incentive comps. Does that set up that the next three quarters ahead we have something in the range of a $0.30 headwind year-over-year if I'm doing the math right?

Melinda Whittington -- Senior Vice President and Chief Financial Officer

$0.28 for the entire fiscal. We get to 100% for the entire fiscal. And I think your $0.28 is about right.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Okay, great. And then on the margin front, I think we were all very encouraged to see the gross margin down 35 basis points in the first quarter considering what's going on with input prices. I guess; can you help us think about what the underlying product's margins looked like in 1Q? And maybe how much gross margin benefited from how strong the sales were in the quarter?

Kurt Darrow -- Chairman, President, Chief Executive Officer

I think there's a combination. Let me go back to, Brad, just to give you some other context. I mean, last year we believe we delivered core tile performance with our results but our expectations were even higher than that in the beginning of the year. So we disclosed last year in our 10K that we paid out a 42% bonus last year to management. Our intention is to try not to repeat that and so when you just do the math on accruing at 100% bonus or better, if we continue to do that, that's where you get the delta. I don't want anybody to think that the compensation -- that we all got a bunch of big raises and things are different. It's all about -- I'm trying to align our rewards systems with our performance and that's where you get that delta.

Now, going back to your question. We had units, we had price, and we had mix all in that sales growth this quarter and we did so more motion furniture as a percentage than we did recliners, which obviously carries a higher selling price. But the gross margins on our product lines don't change that much. There's not a lot of movement in that. I don't think there's anything by product category that would stand out. Obviously, Duo is becoming a higher percentage of our sales as we launch two more styles of that last April. But there isn't anything that would give you any more clarity on any product line or margin by category.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Gotcha, OK. I guess where I'm going with this is, you talked about the price increases should be offsetting the raw material increases that you're seeing. So I guess, as we move into Q2 as it relates to the raw material prices, do you think we're past the worst of things and the rate of headwinds should continue to mitigate here?

Kurt Darrow -- Chairman, President, Chief Executive Officer

That's our intention and that's what we had planned for but the market is -- there's increases coming on container freight from China, there's transportation challenges within our country, and every month or so we see fluctuation. But our plan would that we would get to a point by the end of the second quarter that our pricing pass through would get us back to even with the raw material increases that we experienced over the past year.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Gotcha, OK. And just on the tariff side of things, can you help give us a little bit more color on how much of the components that you put into your products look like they're subject to the Chinese tariffs?

Kurt Darrow -- Chairman, President, Chief Executive Officer

I would start, Brad, with the retaliatory tariff that went into effect from Canada on July 1st, is a 10% across the board, all finished goods going from the US up to Canada carries a 10% tariff. The next round was primarily focused on actuators, so depending on how much power you manufacture and where the supply comes from, that is another challenge that goes into effect at the end of this month. The big one is phase three and it's pretty much a tariff on anything in the future business coming in from China. It's on fabrics, it's on leather, and it's on finished goods.

What really has the industry perplexed is, we understand products that can be bought in both countries and whether or not there's fair trade going on, but there is very minimal supply of fabrics and leathers in this country that the industry can buy. And most of it comes from China. And there is no offset to do anything different. The first two are not insurmountable, the third one is gonna have the price of furniture across the board be challenged.

I don't know if it's all gonna go into effect, don't know exactly what all the lobbying and testimony is going to be. But our industry, as a percentage of the volume, is in the top tier of the tariff effect if everything goes through. We just have a watchful eye, we have our plans to what we would or wouldn't do based on that. But the third tariff one is the big unknown at this point.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Kurt, if it's 10% tariff on these products you're importing, can you help to frame up at all what portion of your costs to get sold could be exposed in a worst-case scenario? A quarter of it? Would that be a reasonable guestimate?

Kurt Darrow -- Chairman, President, Chief Executive Officer

It would be all of it, Brad because it's mostly all the fabrics and all the leathers. So that would affect every single product we buy that comes from China. And the majority -- not just our supply, but the industry's supply is there. And yes, we do have that number, I wouldn't mind telling you but I don't want to tell our competition.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Well maybe coming at it another way, it's not all of cost of goods sold that's subject to the tariffs? It would just be the components you're purchasing from over there.

Kurt Darrow -- Chairman, President, Chief Executive Officer

And it could be on finished goods. So if you import case goods or if you do some other things from China, fortunately, most of our case goods come from Vietnam. And I don't know early on that you would rush and do a lot of different sourcing immediately because probably by the time you got things moved maybe they will settle the tariff debate. It's kind of just an unknown that's out of our control and we don't want to be in that position.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Gotcha. I appreciate all that. Maybe I could just squeeze one or two more in on Joybird. I guess from an operation standpoint, could you just help us think about maybe how you might integrate Joybird with décor business, do you think you might see some of the Joybird products on La-Z-Boy store floors or vice versa with some of the La-Z-Boy products? How are you thinking about integrating the two businesses?

Kurt Darrow -- Chairman, President, Chief Executive Officer

There's two different integration paths, Brad. One is on the supply chain side; they're trying to service the country from their facility in Tijuana so you can imagine there's a lot of excessive freight cost to be able to do that. When we assist them by manufacturing some of their product in our plants and make it nationwide and help them with delivery and have some product in our RDCs for immediate delivery to the customer. All of that is gonna benefit them and also our cost of material is different than theirs and there will be a benefit as well as that.

On the front side, our strategic bet here to start with is, this is a new customer for us, a younger customer that the La-Z-Boy line isn't strong in. and it's in a channel that is not for a brick and mortar retailer, that we're not doing the percentage of business that we think we should. So we want to see what the run rate is of that path before we start doing a lot of other things. We have no plans to put La-Z-Boy chairs on Joybird's website or put them in our stores immediately. What will happen a few years from now, who knows, but these four gentlemen that founded that company doubled their business every year with very limited capital and very limited production capabilities.

We want to see when the throttle's wide open what this can do. So we're probably not gonna interfere with that pathway for any time being unless the Joybird folks have an idea that they think would be beneficial. But we just think there's a lot of room to run yet on their core idea of providing this different styling in a different way to a customer that appreciates that.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Very helpful. Thanks for answering all the questions and congrats again on the strong momentum at the start of the year.

Operator

The next question comes from the line of Dillard Watt with Stifel. Please proceed with your questions.

Dillard Watt -- Stifel -- Analyst

Thanks, good morning, and my congratulations as well. Obviously, a lot has already been asked so I'll just a couple quick ones here. Kurt, I know you talked a little bit about margins being more or less similar across the products but I think you did have -- you called out 50 basis points of headwind from mix in the upholstery segment. Can you help me out with that a little bit?

Kurt Darrow -- Chairman, President, Chief Executive Officer

So that refers to the change we have in selling more motion and probably more stationary as a percentage that our recliners. There's a dual-edged sword here. Selling their major upholstery and major motion adds to our sales volume but as an aggregate as the category, the margins aren't quite as good as what we make on recliners.

But it's what the customer's asking for and what she is looking to us for so that's the direction we take her. But there is a slight margin differential between our recliner business and the rest of our business. Not major, but enough that we called it out to give some more clarity.

Dillard Watt -- Stifel -- Analyst

Okay, great. That's about what I thought but wanted to just make sure. On the retail side, you guys have a ton going on now with acquisitions and all that. Just any movement or loosening in your ability to find leases in some of the bigger markets? I assume there really hasn't been too much of a change there and you have your hands full anyway. But just thought I'd ask the question.

Kurt Darrow -- Chairman, President, Chief Executive Officer

It's a good question, Dillard, and obviously, unfortunately, some peoples challenges with closing all the stores and available real estate is an opportunity for us and we're seeing some of it. One of the problems, limitations that we have is that our stores are 15-17,000 feet and a lot of the boxes that are becoming available are 40,000 feet. Toys R Us has some great locations are the country but they're just way too big for it to work for us.

So we're working for that and the other thing is that we've got over the next three years, we've got a number of leases that we have that are coming up for reconsideration. So we will be making a lot of moves in the next three years to improve our real estate portfolio. It may not translate to a ton of new stores but it will probably put us in better locations at cheaper rents given the situation out there in the market. So that's an opportunity we have to look forward to. Both ourselves and our dealers are being opportunistic.

And as we said on the prepared remarks, we're trying to run this tightrope of a balanced approach to not only the quantity of the stores but the quality of the stores. We want the customer to have a great experience and shop in an inspiring environment and some of our stores have aged to the point that maybe we don't always deliver that. So we're trying to balance the two things together and continue to improve the network every quarter.

Dillard Watt -- Stifel -- Analyst

Okay, thanks. And then lastly, back on the upholstery sales. I guess we had a question on pull forward and you saying that's not really much of an issue but it still did outperform both the retail business and the written orders by a good margin. I know you said you had some backlog that you were catching up on. Did the independent networks or independent retailers maybe outperform or any other reasons on the delta there?

Kurt Darrow -- Chairman, President, Chief Executive Officer

Well, I just think -- to make sure everybody understands, we talk a lot about our own retail, we talk about the La-Z-Boy store network and its impact on our business and all. But when you look at the overall company, not just the La-Z-Boy brand, with all of our companies and all of our categories and everything like that. As much as we are very proud of our store business, it represents in the low 40s as a percentage of our business.

So we do 60% of our business with a number of great retailers throughout North America who have comfort studios with us or major position. So we work as hard with those partners as we do with our furniture gallery partners and sometimes we have great positions with our customers, and sometimes we're trying to earn a bigger position. So I think that's one of the beauties of our distribution philosophy is that not only do we have this solid and vast store network, we have all these other customers that we can either grow or shrink with based on how we combine.

There is not a one-to-one correlation between our same stores written for the network and extends exactly what our delivery business is gonna be for the overall upholstery business because there's a number of other factors. Obviously, we didn't do the almost 7% growth with just the furniture galleries during the quarter. Our other customers helped us achieve that goal equally.

Dillard Watt -- Stifel -- Analyst

Understood. Just trying to ask maybe a different way. Was there anyone or two discrete items that occurred in that remaining 60% or is that just a little bit here and there?

Kurt Darrow -- Chairman, President, Chief Executive Officer

I think, Dillard, if there was a one or two discrete item that made the difference we would call it out. You'd have to do a lot of business with us to make a difference in a $300 million quarter on upholstery. Somebody would have to grow $30 million. I'd like to find that person but he didn't exist last quarter. It was the whole tied listing.

Dillard Watt -- Stifel -- Analyst

Understood. Thank you for all the details today.

Operator

Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Please proceed with your question.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Yes, good morning and thank you for taking the question. So, obviously, you did very well in the July quarter so congrats on that. But it is your seasonally smallest quarter. And Kurt, I know you mentioned that the business throughout the course of the years ago some ebbs and flows. You also mentioned that you are doing a better job of honing and processes and tactics in the retail segment. Can you help us understand as to how we should think about organic sales growth for the rest of fiscal '19?

Kurt Darrow -- Chairman, President, Chief Executive Officer

I don't have any better crystal ball than you do. And with the potential tariff thing out there, consumers buying habits and everything, we have our own targets that we're striving for and we think we've found some things that'll help our business grow above last year. But to give you a target, we don't give guidance, but to give you really any insight in the balance of the year with so many moving parts -- whatever I would give you, I know I would be wrong. So I'm not gonna help you with that question.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Okay, figured I would ask anyway. The processes and tactics that you've talked about for the retail segment. Without giving too much as far as -- can you give us maybe some examples as to what you did differently in the July quarter versus previously?

Kurt Darrow -- Chairman, President, Chief Executive Officer

I tried to address that earlier, Anthony, that there's seven or eight things that go into the mix about the product offerings we have, the promotions we run, the quality of our sales staff, the percentage of our in-home business, again there is not one or two silver bullets. A combination of listening more to the customer, making some adjustments on the things we do, holding our team more accountable, there's all kinds of things and it all happened to work this quarter.

Do I say that we found the magic and it's gonna be like this every quarter? No. We aren't to that level to declare that but our team works very hard every day to make improvement. And they've found some things that change the needle a little bit and we're pleased with that but that is not necessarily a predictive index for the future.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it, that's very helpful. So now it's been about a year since you announced your three-pronged e-commerce strategy. Can you give us a sense as to your exposure to online -- meaning, sales through La-Z-Boy.com, Wayfair, Amazon, where is that business now overall? The online exposure obviously excluding Joybird.

Kurt Darrow -- Chairman, President, Chief Executive Officer

I think our comment there, Anthony, would be that we said about a year ago what our strategy was and we've delivered on that. We started selling on Amazon six months ago; we were already selling Wayfair, a little more than a year ago we invested in a couple start-ups. And now, with the completion of Joybird, the acquisition of Joybird, we've kind of fulfilled our initial thoughts of what we wanted to do. And now it's a matter of maturing all those businesses, growing with them, getting to understand how we can be more effective.

We're probably not gonna give you a number right now in that but obviously, in a lot of these places we're on the ground floor. And I think we have a lot of potential. We need to now -- and I think we said in the beginning, maybe not all these thoughts of ours or all the things we did would all be winners. And so, we now have to see where the needle moves and which part of that business has got the most upside. And that's where we'll invest some more. But right now, we are happy that in the first year of what we said we would do we got it all done and are looking forward to that segment of online players making a solid contribution to our future.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. And lastly, do you have a timeframe you can share with us as to when you expect to complete the integration process of Joybird?

Kurt Darrow -- Chairman, President, Chief Executive Officer

I would say that it depends on a lot of things. There's system things, getting new product launch, but I think as we get through the next six months or so we will have a lot of the integration done. Maybe not all of it but -- I can assure you Joybird wants to move faster than La-Z-Boy is used to doing so we've got that extra pressure.

What we don't want to do is rush something and disappoint the customer, not deliver the same experience that Joybird has built with their customer base, so we're gonna be a little cautious but it is a high priority because we believe percentage wise Joybird should be the highest growth business we have here in the next couple years.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Thank you very much and best of luck.

Operator

Our next question is from the line of Brett Hendrickson with Nokomis Capital.

Brett Hendrickson -- Nokomis Capital -- Analyst

Hi Kurt, thanks for taking my question. I just wanted to go back to Budd's question. Can you all hear me by the way?

Okay, great. He was mentioning -- and I just wanted a clarification -- but I think he was looking at the segment detail that you guys provide and said OK, the corporate expense was down 3.2 million. So was that all from just the change in how the timing of the incentive competition accrual? And I think you guys said that's a bit high. I just wanted a little more detail. So is that implying it's 2.5-3 million of incentive comp change? I'm just trying to get a sense of how specific the comp change was.

Melinda Whittington -- Senior Vice President and Chief Financial Officer

Yeah. It is the most significant driver so it's not the full 3 million but the most significant driver.

Brett Hendrickson -- Nokomis Capital -- Analyst

Okay. Do you have any more detail just because it's a pretty big number when we look at how your operating income improved year-over-year? And I don't want to take anything away from all of y'alls hard work but maybe is it -- what other -- I think you said there's the Hong Kong improvement and the commission that your Hong Kong dealers are getting paid. So it was basically those two only items, right?

Melinda Whittington -- Senior Vice President and Chief Financial Officer

Exactly. Those were the only items in the corporate side of things. And I think the key point being, if you think about SGNA overall, from a sheer sales growth gives you leverage, obviously. So you see the improvement on SGA as a percent of sales and then importantly, though, we do expect to see SGNA 100 basis points higher on the entire fiscal due to -- through the quarters you'll see the timing effect of that compensation item but then also as we bring bonuses. Assuming continued performance as we bring bonuses back up to the level that we would expect to be able to earn and deliver this year.

Kurt Darrow -- Chairman, President, Chief Executive Officer

So there's a change in timing on how we recognize this expense and there's an expectation of a different performance level this year that earned out a lot more than last year.

Brett Hendrickson -- Nokomis Capital -- Analyst

And Kurt, by the way, I appreciate. A lot of other companies even when they have a year that's maybe softer than they think they should've had they still pay out nearly 100% of target bonus. I appreciate you guys not doing that and keeping yourself to a high standard. So congrats on being different than most of corporate America. I'll let you run.

Kurt Darrow -- Chairman, President, Chief Executive Officer

We're very transparent.

Operator

The next question is from the line of Kincade Webster with Solas Capital.

Kincade Webster -- Solas Capital -- Analyst

Hi, good morning, and thanks for taking my question. I just had a quick one. You notice for about the past two years that ring comps have outpaced delivered comps. Did anything in particular sort of contribute to that trend reversing this quarter?

Kurt Darrow -- Chairman, President, Chief Executive Officer

So with us, you have to remember there's always a backlog and from the time you order the furniture, it can be four to six weeks before you receive it. So it's not like you want to go get it today, you get it tomorrow, although we do have a lot of products in stock you can get in one week. That's always the factor; the factor is always the lag time of the backlog and the seasonality and when the holidays are. There's never a one-to-one correlation. Now, there will be over a longer period of time. If you look at a year, it would get a lot closer that the written would mirror the delivered. But quarter-to-quarter, there can be fluctuation.

Kincade Webster -- Solas Capital -- Analyst

Well, I guess just to get a little bit more specific. I mean it seemed like for a pretty extended period of time over the past two years it was where the written were outpacing the delivered. So I guess there was nothing outside of just timing and kind of one-time things that would've contributed to that reversing pretty materially this quarter?

Kurt Darrow -- Chairman, President, Chief Executive Officer

Well, the written was up this quarter in our company-owned segment but actually, the momentum started before we went into the quarter that got it all delivered out during the quarter. And just again, for clarification purposes, we'll repeat what we said numerous times. We provide the same stores written sales for the entire 351 store network because we think that is the best indicator of the pace of business throughout the country that we can place our hands on. And then we provide the delivered same-store sales for the 150+ stores that we own.

And we're not always tracking the same written same-store sales number as our independent dealers. Some quarters we're behind them and some quarters like this one we were ahead of them. It changes based on various performances and various things that happened around the country. I'm afraid at times we may have confused people with this but we're trying to give them as much insight as we can on what the future may hold based on the past 90 days written business.

Kincade Webster -- Solas Capital -- Analyst

That's helpful, thank you. And I guess just one follow-up. For the Arizona acquisition, I guess do those get switched straight into the comp base for the company owned retail segment? Or are they kept outside?

Kurt Darrow -- Chairman, President, Chief Executive Officer

The question as on their comp?

Kincade Webster -- Solas Capital -- Analyst

Or do they get put straight into your comparable store base pretty much for Q2?

Kurt Darrow -- Chairman, President, Chief Executive Officer

No, we would treat them like anybody else until we own something for a year and have 12 months of history, even though we have their history from before if there wasn't in our number, they won't be in the same store sales for us for the balance of the year until the anniversary of the date we purchased them.

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: 66 minutes

Call participants:

Kathy Liebmann -- Director, Investor Relations and Corporate Communications

Kurt Darrow -- Chairman, President, Chief Executive Officer

Melinda Whittington -- Senior Vice President and Chief Financial Officer

Budd Bugatch -- Raymond James -- Analyst

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Dillard Watt -- Stifel -- Analyst

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Brett Hendrickson -- Nokomis Capital -- Analyst

Kincade Webster -- Solas Capital -- Analyst

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