Fool contributor Rich Smith recently tapped the brain of Kurt Darrow, CEO of Motley Fool Income Investor recommendation La-Z-Boy (NYSE:LZB), for answers to some important shareholder questions. This interview has been edited for length and clarity.
Rich Smith: Kurt, everyone knows La-Z-Boy, the chair, but can you give us a thumbnail sketch of La-Z-Boy, the company?
Kurt Darrow: La-Z-Boy Incorporated is one of the world's leading residential furniture producers, marketing furniture for every room of the home. It operates in three segments: upholstery, casegoods, and retail. Our upholstery brands include La-Z-Boy, Bauhaus, and England. La-Z-Boy is North America's largest single manufacturer of upholstered furniture and the world's leading producer of reclining chairs.
Our casegoods brands include Kincaid, American Drew, Hammary, and Lea (La-Z-Boy Kidz). ... And as of the fiscal 2007 third quarter, in our company-owned retail segment, we own 72 of the 340 Furniture Galleries stores in North America.
RS: In 2005, you plunged feet first into the retail business, adding 21 La-Z-Boy Furniture Galleries stores to your existing base of company-owned stores. Today, you've got more than 60 stores. Why was La-Z-Boy tempted into the retail game?
KD: We have been associated with the retail business for about 30 years as a result of our La-Z-Boy Furniture Galleries store network. Today, retail has become increasingly important and is an integral part of our company's long-term strategy. Through an increased presence, we are building a strong foundation for La-Z-Boy's future as there has been a dramatic shift in retail distribution with the percentage of furniture sold through both traditional furniture stores and department stores shrinking over the past five or six years. As a result, proprietary distribution has become more important in terms of ensuring that we achieve significant penetration in the major markets in which we operate.
Additionally, with the La-Z-Boy brand the strongest in the industry, the La-Z-Boy Furniture Galleries stores give the consumer that brand experience. ... When the consumer shops in our stores, we are focused on providing her with an easy, pleasant, and professional shopping experience. Our salespeople have a breadth of product knowledge, we offer complimentary in-home design assistance, and importantly, we give the consumer vast choice and customization with quick delivery. That is a key differentiator for us.
RS: La-Z-Boy is perhaps the most recognized name in the entire furniture industry. When I told my wife -- who has nothing to do with stocks -- that I'd be speaking with the head of the world's most famous furniture maker, she guessed La-Z-Boy without batting an eye. In your view, how important is name recognition in this business, and how do you achieve it?
KD: The strength of the La-Z-Boy brand is unparalleled in the furniture industry and is extremely important, especially as the sector becomes increasingly more fragmented and consumers' shopping patterns continue to change. Our brand has been built over 80 years and is associated with comfort, quality, durability, and trust. Our team consistently works to maintain and capitalize on the value of the brand and its relevance to the consumer.
RS: In the '80s, Detroit automakers such as Ford (NYSE:F) and GM (NYSE:GM) got knocked around pretty hard for allegedly following a policy of "planned obsolescence" -- essentially, building products with the intention that they'd break within X number of years and have to be replaced. How does a company like La-Z-Boy balance the need to build a reputation for quality products against the desire of making repeat sales to customers as those products wear out?
KD: We do not compromise quality and are proud to offer a lifetime warranty on our mechanisms -- there is no "planned obsolescence." In fact, to demonstrate the quality of our recliner's mechanism to the consumer, our La-Z-Boy Furniture Galleries stores display a recliner that is only half upholstered. The other half allows the consumer to see what's inside -- its construction and operation -- because not all recliners are created equal. We know it's difficult for the consumer to understand that, so the cutaway chair helps to show the various differences and the quality the consumer is purchasing when buying a La-Z-Boy.
Additionally, because we are primarily an upholstery company, we are more clearly associated with the "fashion" side of the business. Over the years, colors change and upholstery gets worn and those changes are natural drivers of product replacement. Our objective is to have a customer for life and, since our upholstered furniture is in the most visible part of the home, the living room or family room, we hope they come back to us when they are redecorating.
RS: Speaking of product quality, the lead analyst for Income Investor, James Early, recently regaled our members with this little story about La-Z-Boy. Apparently, in November of last year, in Walnut Creek, California, a husband and wife were having a spat, and the wife decided to end the argument by shooting her husband -- through the back of his La-Z-Boy recliner. The recliner was so solid that it slowed down the bullet sufficiently that the husband was only wounded superficially, and survived. Any plans to use this incident in your marketing?
KD: We are pleased the chair offered him protection, although this story will not be included in our marketing strategy.
RS: La-Z-Boy routinely spends about $15 million per year on research and development (R&D). Can you give us a glimpse into the inner workings of the company and talk a bit about what kinds of things a furniture maker "researches" and "develops?" Perhaps tell us about an upcoming attraction?
Current Income Investor subscribers can read the full text of our interview with Kurt Darrow by clicking here. Not yet a subscriber? Click here for a free 30-day trial, which gives you access to the rest of the interview, all the Income Investor stock recommendations, and the companies advisor James Early likes for new money.
Rich Smith does not own any of the companies mentioned in this article. The Fool's disclosure policy, like a La-Z-Boy recliner, is strong enough to stop a speeding bullet.
