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La-Z-Boy Incorporated (NYSE:LZB)
Q2 2018 Earnings Conference Call
Nov. 29, 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 Incorporated Fiscal 2019 Second Quarter Results Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kathy Liebmann, Director of Investor Relations and Corporate Communications. Thank you. You may begin.

Kathy Liebmann -- Director, Investor Relations and Corporate Communications

Thank you, Michelle. Good morning and thank you for joining us to discuss our fiscal 2019 second-quarter results. With us today are Kurt Darrow, La-Z-Boy's Chairman, President, and Chief Executive Officer, and Melinda Whittington, Senior Vice President and Chief Financial Officer. Kurt will open and close the call, and Melinda will speak to the financials midway through. We will then open the call to questions. Slides will accompany this presentation, and you may view them through our webcast link, which will be available for one year, and the telephone replay of the call will be available for one week beginning this afternoon.

These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles to communicate with investors about the company's current operations and future prospects. We will make forward-looking statements during this call, so I will repeat our usual Safe Harbor remarks. While these statements reflect the best judgements 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. Yesterday afternoon, we reported our results for the fiscal 2019 second quarter. We posted a double-digit consolidated sales increase of 12%, fueled by solid base business growth and the consolidation of our recent acquisitions. Sales in our Upholstery business grew 4%, the La-Z-Boy Furniture Gallery's network posted its seventh consecutive increase for written same-store sales, and the company's owned retail segment turned in a solid 4% positive comp for delivered same-store sales.

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

We are presenting our results on both a GAAP and non-GAAP basis to better help you understand the underlying business trends excluding purchase accounting adjustments on the acquisitions, which Melinda will go into great detail later on. As such, our GAAP operating margin was 6.5% for the quarter and 7.3% on a non-GAAP basis. Importantly, we are delivering top-quartile operating margins for the wholesale furniture industry, with our results exhibiting the power of our brands, world-class supply chain, and our integrated retail model even as we weather high input costs and tariff uncertainty. Additionally, we continue to make strategic investments across the business to strengthen our operations and drive long-term results.

Finally, over the past 12 months, we generated $111 million in cash from operating activities and returned $60 million to shareholders through dividends and share purchases. And yesterday, our board of directors voted to increase our quarterly dividend to shareholders to $0.13 per share, representing an 8% increase. We are proud of what we have accomplished to date and believe we are well positioned for continued long-term success.

For the quarter, the Upholstery segment posted a 4% sales increase over the prior period, driven by favorable changes in product mix, higher selling prices, and the additional price increase related to raw materials. GAAP operating margin was 10.1% and 10.2% on a non-GAAP basis, up from last quarter's non-GAAP 8.2% margin, but slightly down from last year's second quarter. As expected, we exited the second quarter with our increased pricing to cover raw materials inflation fully executed, but pricing benefits were offset by changes in product mix and other inflationary pressures in our supply chain, including procurement, manufacturing operations, and logistics, as well as some costs associated with the relocation of one of our major retail distribution centers.

Importantly, for the La-Z-Boy-branded wholesale business, in the quarter, sales grew across all channels throughout North America. This includes the La-Z-Boy Furniture Gallery network, which represents approximately 40% of the sales in the Upholstery segment, our Comfort Studio partners, who have a store-within-a-store format, major accounts, and our general dealers.

On the marketing side, we recently announced Kristen Bell will serve as our new brand ambassador for the La-Z-Boy Live Life Comfortably campaign beginning this spring. The campaign features a mix of celebrity style, humor, and unexpected La-Z-Boy furniture, and aims to educate consumers that we make far more than the iconic recliner invented more than 90 years ago. Spanning television, print, and online, the campaign has driven significant sales growth for La-Z-Boy across a wide range of product categories, including stationary sofas, sectionals, occasional chairs, and home accents. With an authentic personality, engaging sense of humor, huge focus on family, and the fact that she already has La-Z-Boy furniture in her home, Kristen will be a great fit for us, and we expect her to continue to elevate the brand.

In other exciting news for the La-Z-Boy business, last week, Newsweek Magazine named La-Z-Boy "America's No. 1 Best Customer Service Provider" in the Furniture Retail category. Newsweek notes more Americans are employed in the retail sector than any other, highlighting the importance for companies to nurture their relationships with consumers. We are proud of our Comfort Care team, as well as our partnership with a vast array of dealers who take great care of the consumer and have been recognized for their dedication and consistent focus on customer service.

On the product side, Duo continues to sell extremely well, as does the new reimagined Urban Attitudes collection launched last April. We produced two commercials to support this launch, which features curated mix of iClean fabrics. As we head into the upcoming busy holiday period, the first Urban Attitudes commercial was launched earlier this month through a coordinated, multi-channel strategy. The second will launch in February.

Now moving on to our Retail segment, our Retail segment turned in another strong quarter as the team continues to fine-tune its execution strategies. For the quarter, sales increased 19.7% and delivered same-store sales increased 4%. GAAP accounting margin improved to 4.7% and non-GAAP operating margin increased to 5.4% from 3.6% in last year's quarter. And, excluding all the Arizona results, purchase accounting, and operating profit, core retail business operating margin increased. The performance was driven by better conversion, increased design sales, and custom orders, which led to an average ticket that exceeds $2,000.00.

Performance for the period was also driven by the Arizona stores, which contributed the lion's share of the $16.8 million of incremental sales from acquired stores. The nine La-Z-Boy Furniture Gallery stores are the highest-performing stores in the network and have not missed a beat since we acquired them. Our retail leadership team is working alongside the Arizona team to better understand their approach to the business, which has led to excellent results so that we may leverage some of these learnings across the rest of our network.

Written same-store sales for the 353 La-Z-Boy Furniture Galleries network increased 4.4% for the quarter, the seventh consecutive quarterly increase. Total written sales -- including new stores, existing stores, and relocated stores operating for 12 full calendar months -- increased 5.6% during the quarter. We continue to see the core La-Z-Boy consumer demonstrating her preference to shop in-store, providing us with the opportunity to increase the average ticket through design services, custom orders, and the sale of complete room groups. We are focused on elevating the quality of our store program, and for fiscal '19, we have 22 total projects planned.

Now, let us turn to our Case Goods business. Sales for the 2019 second quarter were $31.4 million, up 11.8% from the prior period, and the operating margin increased to 12% versus 11.8% last year. For each of the last four quarters, this segment has delivered double-digit sales growth with an average operating margin above 10%. New product collections are on point and resonating with consumers. Early indications are that Kincaid's Trails collection and American Drew's Vista collection, both of which were introduced last April, have recently reached retail floors and are meeting with early success. On the supply chain side, we have 95% in-stock position across all SKUs, which is allowing us to provide excellent service to the customer and garnering additional floor space with our retail partners.

Now, let's turn to Joybird, our recently acquired e-commerce business. We are very pleased with our early days of owning this exciting company. Joybird, with a direct-to-consumer model, is a key pillar of our e-commerce strategy and has its thumb on the pulse of the e-commerce consumer, which will allow us to pivot to the younger group they are servicing, made up of mostly millennials and Gen-Xers through a different channel, while leveraging the La-Z-Boy supply chain.

Joybird has had amazing success in four years' time, growing to $55 million in sales in the trailing 12 months pre-acquisition, and for the second quarter of this fiscal year, they contributed $18.5 million in sales to our results. We have already seen significant improvements in the capacity and cost structure of Joybird's Tijuana plant due to support from La-Z-Boy's supply chain team and new equipment repurposed through other La-Z-Boy facilities. In addition, as we further integrate Joybird and begin manufacturing its upholstered furniture at existing La-Z-Boy plants, Joybird's production capacity will increase and will more easily meet the strong and growing demand it is generating, leveraging the fixed-cost structure of those plants.

We are still working through our growth strategy for Joybird, including how high is up, on what timing, and what investment will be needed to fuel that growth, but we do believe over time, Joybird can be a several-hundred-million-dollar revenue business for us. We are very excited by this potential and the many synergies on which to capitalize.

Last but not least, before turning over the call to Melinda, I will take a few minutes to address tariffs. For La-Z-Boy, we believe we have a strong strategic advantage in the marketplace based on our U.S. upholstered manufacturing footprint and the structure of our global supply chain with respect to procurement. Thus far, we have experienced the additional cost of a tariff implemented beginning in June on actuators, a component used in all of our power products, followed by the 10% tariff on goods coming from China that was implemented in September, which impacts the upholstery component of our products, both fabric and leather.

The majority of fabric and leather production is now based in China, with little infrastructure left in the U.S. to support furniture manufacturing, and therefore highly susceptible to tariffs, without many sourcing alternatives. However, for the La-Z-Boy Upholstery business, about two-thirds of our upholstery fabric travels to our facility in Mexico, where it is cut and sewn into kits, ready for assembly in our U.S.-based factories. Given our manufacturing structure, these materials are not subject to the Chinese tariffs.

So, how does this translate to our customers? In short, tariffs will push up the cost of furniture, but we are well positioned within the industry. We are passing the combined tariffs through a surcharge that increased our prices roughly 2% on our upholstered La-Z-Boy business and about 3% on our upholstered units that contain the power features. Additionally, for Case Goods, we have an all-import model, with the majority of our wood furniture sourced from Vietnam, so these goods also will not be subject to tariffs. Of course, the saga could continue with the 10% tariff potentially going to 25% come January. We are mindful of the potential impact to demand elasticity or possible shift in mix, and are working through various strategies to mitigate those potential scenarios to the extent possible. I will now turn over the call to Melinda to review our current financials.

Melinda D. Whittington -- Senior Vice President and Chief Financial Officer

Thanks, Kurt. Let me begin by again noting that this quarter, we moved to presenting both GAAP and non-GAAP numbers, which exclude purchase accounting adjustments required by GAAP, for our acquisitions. We believe this approach makes it easier for investors to see the performance of our core underlying businesses. Our acquisitions this quarter included the Arizona stores and an additional store in Massachusetts, which are included in our Retail segment, and Joybird, which is reflected in Corporate and Other, as detailed in our 10-Q. For consistency, we have adjusted prior periods similarly for the impact of purchase accounting from prior acquisitions.

For this year's second quarter, we recorded $3.9 million or $0.06 per share in purchase accounting charges, composed of four items: The amortization of $7.5 million of the initial payment for Joybird -- which, for accounting purposes, is considered compensation expense and will be amortized over two years -- the amortization of the fair value of the Joybird trade name, which will be amortized over an eight-year useful life, minor interest expense charged over a five-year period on the $25 million of future guaranteed payments, and incremental expense recognized upon the sale of inventory acquired at fair value, which will be recognized over several quarters.

As we noted last quarter, we expect these items to total $0.12-0.14 per diluted share in fiscal 2019. Going forward, in addition to these items, we may also have impacts to our GAAP earnings for changes in the fair value of the Joybird-contingent consideration liability. Recall there are two future earn-out opportunities based on Joybird's financial performance in fiscal 2021 and 2023. The range of contingent considerations is $0-65 million, and therefore, the quarterly valuation of this obligation could vary widely, dependent on Joybird's financial success over the next five years. Remember, a reminder that all of our purchase accounting estimates are preliminary and subject to change within the first 12 months of the acquisitions under U.S. GAAP. A full reconciliation of GAAP to non-GAAP is included at the back of our press release. The tables are also included in the Appendix section at the end of our conference call slides.

As Kurt noted earlier, we are pleased with the operating performance of both Joybird and the Arizona stores, as they have joined the La-Z-Boy family this quarter. They are on track to meet our internal expectations for the balance of the year, and we continue to expect the combined entities to be slightly accretive to non-GAAP earnings by the end of fiscal 2019.

And now, on to our review of our enterprise numbers for second quarter. Sales increased 11.7% versus prior-year quarter to $439 million. GAAP consolidated operating income was $28.5 million. Excluding purchase accounting charges, non-GAAP consolidated operating income was $32 million versus $35 million in last year's quarter. Consolidated operating margin on a GAAP basis was 6.5%, and non-GAAP consolidated operating margin was 7.3% versus 8.9% last year. GAAP earnings per diluted share for fiscal 2019 second quarter were $0.42 versus $0.47 in the prior-year period. Non-GAAP EPS was $0.48 per diluted share in the current quarter, consistent with fiscal 2018 second quarter.

As a reminder for comparability, this quarter benefited from $0.05 per share of lower income taxes, as tax reform had not yet been enacted as of the end of our second quarter last year, while fiscal 2018's second quarter included a $0.02-per-share benefit from an insurance gain and a $0.03-per-share benefit for discrete tax items. Also, this year's second quarter included higher incentive compensation costs for performance-based awards and timing of equity vesting, as expected, but partially offsetting this was a benefit from the valuation of a small pool of stock-based compensation awards, reflecting the change in our stock price during our second quarter. In total, these items equated to $0.05 per share in additional compensation costs versus last year's comparable quarter.

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

As Kurt mentioned earlier, our Upholstery segment margin was impacted by increased costs and changes to our product mix, which were offset somewhat by higher selling prices. Continued increases in freight costs pressured the gross margin in our Case Goods segment, and the Retail segment gross margin was essentially flat on a non-GAAP basis, but declined on a GAAP basis due to purchase accounting adjustments on inventory.

GAAP SG&A as a percent of sales increased 250 basis points in the second quarter of fiscal 2019 compared to the prior-year period. Non-GAAP SG&A increased 240 basis points, adjusted for the acquisition-related costs for Joybird that are classified as compensation expense. Within SG&A, advertising expense was 100 basis points higher for the quarter, primarily related to the consolidation of Joybird, which, as an online retailer, incurs higher advertising expenses than our other business.

Incentive compensation costs as a percent of sales were 60 basis points higher than the prior-year quarter for the reasons I just outlined. And finally, last year's second-quarter SG&A included a $1.7 million insurance gain related to the fire at our England corporate office, and this negatively impacts the quarter-over-quarter comparison by 40 basis points.

Our effective tax rate for the second quarter of fiscal 2019 was 22.9% compared with 30.8% for the second quarter of fiscal 2018, reflecting the impact of tax reform. Our effective tax rate varies from the 21% statutory rate primarily due to state taxes. Absent discrete adjustments, the effective tax rate in the second quarter of fiscal 2019 would have been 24.7%.

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

We ended the second quarter of fiscal 2019 with $93.9 million in cash and cash equivalents, $29.8 million in investments to enhance returns on our cash, and $2 million in restricted cash. During the quarter, we used $85.6 million to fund the Joybird and La-Z-Boy Furniture Galleries store acquisitions, with $7.5 million reported as a use of operating cash and $78.1 million reported as a use of investing cash on the cash flow statement. We also invested $11 million in capital, primarily related to our new innovation center in Dayton, Tennessee, upgrades to our Dayton manufacturing facility, and expansion of the England plant, and construction of its new corporate office building. For the full fiscal year, we have refined our estimate to expect capital expenditures to be in the range of $45-50 million.

During the quarter, we paid $5.7 million in dividends and spent $3.7 million purchasing 100,000 shares of stock in the open market under our existing authorized share repurchase program. This leaves 6.3 million shares of purchase availability under that authorization. Our capital allocation priorities remain to invest in the business to drive growth, and then provide returns to shareholders with our dividends and discretionary share buybacks. We funded the Joybird acquisition with cash on hand and used our credit facility to fund the Arizona acquisition. We expect to pay down the revolver in increments over time using operating cash flow.

Finally, as we look at the third quarter, I would remind you that last year's third quarter included a $0.20-per-share net charge related to tax reform and $0.06-per-share charge related to a legal settlement. Also, for this year's third quarter, we expect to incur a charge of $0.03-0.04 per share for the purchase accounting adjustments, plus approximately $0.08 per share for higher incentive compensation costs, consistent with our discussions last quarter. And now, I'll turn the call back over to Kurt.

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

Thank you, Melinda. As our industry faces some of the highest input costs in history and the uncertainty of tariffs, we are proud to have consistently delivered top-quartile operating results. Moving forward, I believe La-Z-Boy Incorporated is well positioned to continue to perform at a very high level. With the strength of our brand, our vibrant store system, our vast distribution network, diversified global supply chain, and our strong balance sheet, as well as the exciting prospects for the Joybird business, we are confident we will drive long-term growth and returns to shareholders. We thank you very much for your interest in La-Z-Boy Incorporated, and I will now turn over the call to Kathy to provide the instructions for getting into the queue.

Questions and Answers:

Kathy Liebmann -- Director, Investor Relations and Corporate Communications

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

Operator

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

Budd Bugatch -- Raymond James -- Managing Director

Good morning, Kurt, good morning, Melinda, good morning, Kathy. Congratulations on the second quarter and getting Joybird and Arizona off and running. Can you talk a little bit about -- on Joybird, just go back over where you are in the integration? Have you started manufacturing any of that product yet? Maybe give us a little bit of color on maybe what its operating results were in the quarter.

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

The first thing we've done, Budd, is to help them make their own Tijuana plant that was part of the acquisition more efficient, and so, our La-Z-Boy supply chain team spent a lot of time with them, relaying out their plant, looking at some of the product flow through the plant, and we've provided some automated cutting equipment in the plant to ramp up their capacity, and I think the Tijuana plant probably has...60-80% more capacity itself now than it did prior to the acquisition. So, that's the first thing.

The second thing is we have not yet started making the product in our plants, although we're ready to do so. We're having -- as you would expect -- a little bit of systems issue to be sure that it's integrated into our financial systems, and our ordering systems, and all that. We expect to have that taken care of mid-December, and after the first of the year, we will be shipping selected styles -- mostly some of their higher runners -- we will be shipping those out of the La-Z-Boy plants in January. So, great cooperation between the two teams, we're all learning a lot of things from each other, and my strong position is that having manufacturing capacity as we head into '19 is not going to be a problem for Joybird.

Budd Bugatch -- Raymond James -- Managing Director

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

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

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

Budd Bugatch -- Raymond James -- Managing Director

Okay. Melinda, on SG&A, it grew in the quarter for, obviously, the acquisitions and other things, about $25 million or so year over year. How do we get to a run rate for modeling purposes that we can do?

Melinda D. Whittington -- Senior Vice President and Chief Financial Officer

I think what you see in SG&A now is more consistent with the run rate for the rest of the year because we now have Joybird, and obviously, its financial statements look a little bit different -- stronger gross margin, more SG&A investment -- so, layer on that. We've talked about the fact that the comp expense will be higher throughout the balance of the year. I think the rates that you see in Q2 look more like what you'll see for the balance of the year, pretty consistent with what we had called out earlier on our expectations. You just have a little more visibility now into how the acquisitions impact each of those line items.

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

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

Budd Bugatch -- Raymond James -- Managing Director

Okay. You gave us for third quarter $0.03-0.04 for purchase accounting and an $0.08 incentive comp, either for the year or for the fourth quarter. What do those look like for modeling purposes as well?

Melinda D. Whittington -- Senior Vice President and Chief Financial Officer

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

Budd Bugatch -- Raymond James -- Managing Director

Last for me -- there was a 90-basis-point difference in the margin for Upholstered segment, I think, year over year. You called out, obviously, the increased cost and mix issue. If you could take costs out of that, what would the margin in Upholstery have been? You measure that with your variance analysis, I'm sure.

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

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

Budd Bugatch -- Raymond James -- Managing Director

Well, you take the cost delta, the increased cost, or what the -- what the cost over price recovery...costs you in that quarter. What was the delta?

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

I would tell you, Budd, that it wasn't until later in the quarter that all the price increases went through, and so, we didn't have a full quarter of the prices, but now, headed into the third quarter, we do. But, we also -- we don't get any margin on tariffs. The tariffs -- when they're enacted, you don't have much time to react, so you have a backlog for a while that you're not charging for the tariffs, and that comes in. We've had transportation increases, like everybody, and actually, we gave some additional compensation to our drivers so we didn't lose any, which is very competitive. So, there's still a little cost creeping going on.

We opened a distribution center and moved our big distribution center in Washington, D.C., and that cost us about $0.5 million, so there's a number of puts and takes -- nothing that's alarming -- but we're also trying to manage -- and, these are all judgments that you make at various times the price elasticity of furniture in saying, "So, what's the worst-case scenario?" A little margin drop or a volume drop, where you don't get the fixed pickup from the plants and all, so we're navigating through that as all this happens. We're pretty positive about our competitive advantage on tariffs, and we're not China-centric, so we're putting all in the formula and trying to do what we think is right for our customers and right for us, so we've still got some moving pieces and are balancing out what happens the balance of the year.

Budd Bugatch -- Raymond James -- Managing Director

Okay, thank you very much. Good luck on the third and fourth quarters.

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

Thank you, Budd.

Melinda D. Whittington -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Brad Thomas -- KeyBanc Capital Markets -- Managing Director

Hey, thanks. Good morning and congrats on the nice results in the quarter here.

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

Thanks, Brad.

Brad Thomas -- KeyBanc Capital Markets -- Managing Director

I wanted to talk a little bit more about the cadence of the business, and the price increases that you're putting through, and how that's all been affecting demand and may affect demand going forward. Starting with the price increases, where do we stand here today in terms of what your customers are paying versus about a year ago? How much are prices up?

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

Well, it depends on which customers that you're talking about. Obviously, there's more price and, frankly, currency differences heading into Canada, and they have a retaliatory tariff on U.S. goods coming up to Canada of about 10%, and also, the other price increases, but I'd go back even farther, Brad. Tariffs by itself is -- those price increases -- for us, since our competitive advantage -- is not unmanageable, but it comes on the previous 18 months of a bunch of raw material increases that we've passed on, so the cumulative effect of this -- particularly if it goes to 25% -- is the broader concern for the industry, and I don't have all the numbers in front of me of each compounding price increase that we've taken, Brad, but I'm pretty sure in the U.S., it's more than 10% on our cost, but then, we also have taken increases on freight and everything. There is definitely inflation in the industry.

Brad Thomas -- KeyBanc Capital Markets -- Managing Director

And so, as we think about the strong comp, for example -- the strong 4.4% comp you did that really is particularly impressive given the tougher comparison last year, how much of that is coming because prices were moving up, and do you think there's any demand pull-forward that you saw because price increases were coming? How are you thinking about that?

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

No, we haven't seen much demand pull-forward, and our dealers -- and obviously, to get that result, our customers -- are accepting these increases and dealing with it. We've seen some changes in the mix of people maybe gravitating to some more value-oriented products or people. In our business, you can buy a little less expensive cover on a frame and some of that change-around, but we'll have a much better picture of the movement in our mix and margin here as we get through the holidays and have a little more volume, but there is some ebb and flow here that's not an exact science.

Brad Thomas -- KeyBanc Capital Markets -- Managing Director

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

Melinda D. Whittington -- Senior Vice President and Chief Financial Officer

I'll take that one. We feel pretty good about how Joybird is progressing, as we mentioned, and it's on track with initial expectations. What we've said before is that across the two acquisitions, we expected to be exiting the year with them profitable in aggregate -- not enough to move the needle, but profitable on a non-GAAP basis -- and we're still on track for that. You can see in our disclosures on the Q that if you look at Joybird as part of Corporate and Other, we're not talking about huge dollars.

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

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

I would add -- unless something happens with the economy and all -- that our expectation is that next year, the Joybird business will be profitable, but as Melinda said... We'll be making their product here starting in January, so we'll be making a margin like we do in our integrated retail and our wholesale plants, so we have the decision, and it'll ebb and flow. How much do we want to juice the volume and how much profit do we want to make on that? If we're making a strong profit in manufacturing the furniture, we may be more apt to push the volume side of it in the beginning. So, we'll let you know as we go around what our intention is as this thing plays out some more.

Brad Thomas -- KeyBanc Capital Markets -- Managing Director

Great. Thanks so much, and congratulations again.

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

Thank you, Brad.

Melinda D. Whittington -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Once again, as a reminder, if you'd like to ask a question, please press *1 on your telephone keypad. Our next question comes from the line of Anthony Lebiedzinski of Sidoti and Company. Please proceed with your question.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Good morning, and thank you for taking the question. I just wanted to follow up on Joybird. You mentioned that you are spending more money on advertising. Is this a strategy that you expect to continue, at least in the near term?

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

I think the comment, Anthony, was they spend more money on advertising as compared to the rest of our business because that's the business -- that's their real SG&A, is to push the digital component of their transaction. And, it's like all your advertising expenses. You're trying to spend and then grade how you did. Did you get the projected results on that spend? What do you do? And, we're just -- I think they're entering a new area. They always were running this business with a governor on it because they had capacity constraints, and now, with the vast improvement in their Tijuana plant and us getting ready to make it, they're not going to have that, so they don't have to worry about pushing the volume side higher, and to do that, they may spend more marketing dollars, but will get the commensurate benefit of more volume.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got it. Thanks for the explanation. As far as the potential 25% tariff is concerned, when you look at your product segments, where do you think you have the most pricing elasticity compared to where it is today [inaudible]?

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

I don't look at our business segments having any more or less product elasticity. I think because our overall tariff percentage is going to be so low compared to somebody that has a higher percentage of their business in China, I think we'll be in an advantageous position. Remember, 80%-plus of our case goods come from Vietnam, all of our bedroom and dining room, and only one-third of our fabric and leathers are going to have a tariff, and that is on the kit price, not the finished good price. So, we have very little finished good products coming from China. We have some leather sofas, but we have very little as a percentage of sales that are going to take the entire increase in tariff. So, while I'm not a huge fan of tariffs, I think we are as well positioned as anybody else in the industry.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

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

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

That's a great question, Anthony. I will tell you our strategy, and we're always open to reconsider some things, but we certainly have had the ability to cut and sew everything we do for our La-Z-Boy Upholstery business in Mexico. We have chosen -- based on our risk mitigation -- to leave a portion -- the one-third portion -- with our other suppliers around the world because we don't want to put all of our eggs in the supply chain in one country and one facility, and then something happens there, and we don't have any other partners we can work with to meet the demand of our Upholstery business if something would go wrong. So, could we do it all? Yes. Would that be a good thing if there was some other challenge that happened in our Mexico facility? We don't think so, and we think the strategy we've laid out to hedge a little to keep some in China is proper at this time, but we continue to evaluate that.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got it. Lastly, any comments on the Black Friday weekend?

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

It's a little early to get all the data in and the feedback from our broad array of customers, but I can tell you that our company-owned retail had a strong same-store sale in November, consistent with what we've reported this last quarter, and we were pleased with the performance of that segment of our business, but we don't have the intelligence on all of our other retail partners.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

All right. Thank you, and the best of luck.

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

Thank you.

Melinda D. Whittington -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

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

Kathy Liebmann -- Director, Investor Relations and Corporate Communications

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

Operator

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

Duration: 47 minutes

Call participants:

Kathy Liebmann -- Director, Investor Relations and Corporate Communications

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

Melinda D. Whittington -- Senior Vice President and Chief Financial Officer

Budd Bugatch -- Raymond James -- Managing Director

Brad Thomas -- KeyBanc Capital Markets -- Managing Director

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

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