Leon's Furniture Limited (LNF) Earnings Call Transcript

Good morning, everyone, and welcome to LFL Group's Third Quarter 2026 Conference Call. [Operator Instructions] I would now like to turn the conference over to Jonathan Rose, Investor Relations for LFL Group. Please go ahead.

Thank you. Good day, everyone, and welcome to LFL Group's Third Quarter 2026 Conference Call and Webcast. LFL third quarter 2026 financial results were released yesterday. The press release, financial statements and management's discussion and analysis are available on SEDAR+ and on our website at lflgroup.ca. Joining me on the call today are Mike Walsh, President and Chief Executive Officer; and Victor Diab, Chief Financial Officer. Today's discussion includes forward-looking statements. These statements are based on management's current assumptions and beliefs and are subject to risks, uncertainties and other factors that could cause actual results to differ materially from these assumptions and beliefs. We encourage listeners to refer to the risk factors outlined in our management discussion and analysis and annual information form, which provide additional detail on the risks and uncertainties that could affect future results. This call also includes non-IFRS financial measures. Definitions, reconciliations and related disclosures for these measures can be found in the management's discussion and analysis and press release issued yesterday. Forward-looking statements made during this call are current as of today, and LFL Group disclaims any intention or obligation to update or revise them, except as required by applicable law. All financial figures discussed today are in Canadian dollars unless otherwise noted. With that, I'll turn the call over to Mike Walsh. Mike?

Good morning, everyone, and thank you for joining us. Third quarter looked much like the first half of the year from a macro perspective. Broadly, consumers remain cautious and value-focused with continued pressure market-wide and large discretionary purchases. We were comparing against a very strong third quarter last year. We have managed through markets like this before, and we keep investing through them. This year, we have opened 8 stores and an increase of for taking full ownership of our Edmonton distribution center and continue to buy back shares. In this environment, our team executed with discipline across the business. System-wide sales were down 0.8% and with same-store sales down 1.2%. Victor will take you through the drivers in more detail. Our priority is to remain squarely positioned against the value that Canadians are looking for, keep gaining share in our core categories and turn that execution into profitability. Category performance was mixed during the quarter, and that is consistent with our portfolio approach to the business. Appliances returned to growth in the quarter which builds up in both our retail and commercial channels. On the retail side, that reflects a year of work on improving how we go to market in the category, a tighter assortment, depronor bestsellers, enhanced presentation in our stores and marketing that does a better job of telling customers what comes with the purchase from delivery and Holloway installation. That is how we build every category, 1 at a time around what that category needs and we did it while some of our vendors were working through supply chain challenges of their own mattresses where that work started earlier, grew again our third consecutive quarter of growth in the category. Furniture sales were lower against 11.2% growth we posted in the category last year. That is the comparison we knew we were facing. On top of it, as we flagged on our last call, certain shipping lanes tightened, which led to some inventory delays. Some of what we planned to receive payment leader that held back deliveries and because we couldn't feature our best sellers, the way we normally would, it affected written sales as well. Supporting all of our categories, online sessions grew strongly and e-commerce sales were up. Our digital platform is increasingly a research and qualification engine, drawing customers into our stores with clear purchase intent. And our salespeople convert that intention to the right product, the right add-ons and the right solution. In the commercial channel, sales grew. The housing market continues to remain weak, so that growth is shared and much of this business that became available when a large competitor exited the work. In August, we said that would create opportunities over time, and we are starting to see some of it, though it is still very early days. On the store network, we continue to expand at a measured pace. During the quarter, we opened 4 new locations, 2 early on corporate stores in Ontario. Cornwall is a new store, Brockville converted from a franchise store to a corporate store, 2 are franchise stores, the Leon and Kim LaFrence Edward Island and a brick in hinders lease Saskatchewan. We also celebrated the grand reopening of a newly built Leon store in Welin,the birthplace of the brand. That brings us to 304 stores. We expect to continue franchise stores in the fourth quarter. We'll give you more color on our plans for 2027 on our February call. Looking ahead, the consumer remains cautious, consistent with what we have seen all year on large discretionary purchases. Our plans are built around the key promotional events in the fourth quarter. On the things we can control, we are in good shape. Our inventory position is better than it was at the end of the third quarter in comparison as in the fourth quarter. We are planning the balance of the year prudently. Our focus remains on coming out of this cycle stronger than we went in. The fundamentals that drive this business have not changed, trusted banners coast to coast, to scale to source directly and secure advantaged pricing, one of the largest final mile delivery networks in the country and a balance sheet that gives us flexibility through the cycle. These are durable advantages and they matter most when the market is soft. Before I turn it over to Victor, I want to recognize our associates across the country. Periods like this ask a lot of our people in our stores, on our trucks, in our warehouses and on the phone with our customers. This quarter asked them to adapt and once again, they delivered. Victor, over to you.

Thanks, Mike, and good morning, everyone. I'll start with the third quarter walk-through, then move to the balance sheet and capital allocation and close with a few considerations for the fourth quarter. Revenue for the quarter was $672.8 million, down 0.9% year-over-year. Growth in appliance and mattress sales was offset by a 5.6% decline in furniture. On Furniture that reflects the comparison against 11.2% growth last year and the lower inventory we carry because of the inventory delays Mike described. Average unit price was higher in the quarter. Part of that was deliberate. We worked to move it up through our salespeople and our financing programs and financing penetration improved from the second quarter. Retail delivered units were lower driven by furniture. Excluding furniture, overall units were up. Gross profit margin was 44.52%, essentially flat year-over-year. Furniture is our highest-margin category, and it was a smaller share of sales this quarter so mix pressured the rate as we expected. That was largely offset by improved margin rates in furniture, appliances and electronics and by increased revenue from our higher-margin insurance and delivery service offerings. Part of the furniture rate improvement reflects that we were less promotional in the category given our inventory position. One of our objectives going into the year was consistency on rate and through 9 months, we are within a few basis points of last year. I think that is a really strong margin story given the mix and the overall environment. SG&A as a percentage of revenue was 35.76%, an increase of 25 basis points over the third quarter of 2025. The increase reflects higher last mile delivery costs due to fuel increases across the whole sector is carrying and fixed cost deleverage on lower revenue. On a dollar basis, expenses were slightly down year-over-year, which reflects the cost discipline we maintained through the quarter. Turning to earnings. On September 30, we closed the sale of the former Brick at office and distribution center in Edmonton for $21.4 million, which produced a $12.5 million gain in other income. Including that gain, adjusted net income was $51.2 million and adjusted diluted EPS was $0.74 and up from $0.65 last year. Excluding the gains and the small legal settlement in last year's quarter, normalized adjusted net income was $41.9 million and normalized adjusted diluted EPS was $0.61 compared with $43.9 million and $0.64 last year. That is the cleaner comparison of the underlying business. Turning to the balance sheet. We ended the quarter with $622.5 million in unrestricted liquidity, including cash, marketable securities and our undrawn revolver. On Edmonton, the $21.4 million came in on October 1, and the same day we paid the remaining balance of approximately $42 million for the other half of our current distribution center, so both will show up and fourth quarter cash flow. Our liquidity continues to be a strategic asset. It gives us the flexibility to invest in the business, navigate volatility and act opportunistically. Our approach to capital allocation has not changed. We prioritize reinvestment in the business where we see attractive returns, maintain a strong balance sheet and return capital to shareholders over time primarily through our regular dividend. We are also attuned to returning more to shareholders when it makes sense. We were also active under NCIB repurchasing approximately 120,000 shares for approximately $2.9 million during the fourth quarter. Looking ahead, a few considerations for the fourth quarter. Shipping delays in certain lanes are continuing into the quarter, and our teams are managing through them to keep product flowing for the holiday season. On margin, our objective for the year has not changed holder rate cost to last year. On costs, fuel remains the main pressure in delivery expense and we will manage the rest of the cost base with the same discipline you saw this quarter. Our REIT initiative remains an important strategic priority. Timing continues to be guided by market conditions and regulatory approval and we'll share updates when appropriate. With that, I'll turn it back to Mike.

Thanks, Victor. To wrap up, the third quarter was a demanding one for the consumer and our top line reflected that. We cannot change the market, but our execution in that market was strong. We helped gross margin flat, kept costs down, grew in appliances, mattresses and commercial. We head into our most important selling season with a clear plan, and we know our customers respond when the value is there. We're operating from a position of strength, and we are confident in our ability to keep building long-term value for our shareholders. Thank you to our shareholders for their continued support. And with that, we'll be happy to take your questions.

[Operator Instructions] The first question today comes from Ahmed Abdullah with National Bank of Canada.

So just touching on the deferral there of sales due to inventory. Can you perhaps quantify the furniture sales that were held back because of the inventory delays in the third quarter? And how much you expect that will be a recovery into fourth quarter?

Ahmed, thanks for the question. I would say the best way to kind of get at that is look at the growth in customer deposits quarter-over-quarter, Q3 last year versus Q3 this year. That wouldn't necessarily all be growth from just the shift in as a result of inventory delays. I would say, approximately north of 50% would be inventory delays. The rest would be growth in our written business and just timing of getting written delivered. So that's kind of the best way to get at that number.

Okay. That's fair. And just touching on the supply chain and potential normalization time line, what's kind of driving these inventory delays and -- do you have any confidence as to when you expect normalization to start to come back?

Great question, and thanks for the question. I think we're seeing some of the normalization come back example is the launch of our tackle furniture that we launched in May of last year. It well overshot our forecast, and it's taken us long to get the product back in which is a reason why we haven't been able to advertise it heavily over the last 3 months. And so we're back in a good in-stock position in that particular product line. I would say it's not all lanes that have been restricted. There are specific lanes, Peter Gaden where a lot of our case goods come from. There's Hochman where some of the shock comes from and some of our sofas. -- so the restriction is really a lane-by-lane kind of allocation. So we're seeing some of that ease, but we are still seeing the spot rate about 3x what our contract rate is. And given our business, we write it today and we deliver it tomorrow, anything that's sold or on the water, we're very cautious about preserving our margin framework and not necessarily bringing it in unless it's on our contract rate.

Yes. I would also layer in that the inventory challenges in the quarter weren't necessarily just limited to furniture. Appliances, we were up in the quarter despite our vendor base experiencing some challenges as well, very similar geopolitical type of challenges in terms of them being able to get their product out in time and then delivering it to their customer base, including us. So it is a multi-category type impact. It's just more pronounced and furniture for us, but we also saw some of that in appliances as well.

Okay. No, that's helpful. And just my last question would be your commercial appliance rebound is encouraging here. Can you give us a bit more color? Was that driven by deliveries against existing projects? Or are you actually seeing kind of stronger new builder orders? And how does your project pipeline look into next year?

Great question. So our pipeline, a lot of the projects that we're delivering now, their pipeline started back 18 to 24 months. Some of it's from a competitor going out of business, and we said the last quarter that we're going to see that over the next 12 to 18 months. We're getting a little bit of it now, and it's still going to be the next 12 to 18 months. And I would say the other key thing was when we moved Appliance Canada, which was only in Ontario, moved it into the on-store in Richmond, B.C., so they could take advantage of some of their customers in Western Canada. That has helped out a lot. And we're looking at some other locations in Western Canada for appliance Cabins. So I would say it's twofold. The competitor that went out -- it's a little bit of appliance Candida. And some of it's just timing. A lot of these construction projects get moved from quarter-to-quarter. And so we saw some increase in the third quarter. And so it's helped us definitely in the commercial business.

The next question comes from Martin Landry with Stifel.

I just want to understand the inventory issues that you've had, do you think that this resulted in sales lost because customers were found that delivery times were too long? Or these sales have just been delayed and pushed into Q4?

Martin a great question. Look, there's definitely an opportunity cost. I've not having all of the right inventory that especially when it comes to our best sellers and being able to feature that, there's an opportunity cost to that. I think what Mike alluded to and what's more important for us as having the right inventory at the right cost and being able to provide the right value proposition to our customers. And that kind of -- that's how it entirely fits within our margin framework. When you think about furniture over the last 2 years, despite even before you consider the inventory challenges in the quarter, we're still up 5% on a 2-year stack basis. And what we've seen historically is whenever we have the right inventory, and we're able to feature that at our value proposition, we get the sales momentum that we're expecting, and we've seen that over the cycles over and over again, and we've seen it in appliances and mattresses this year. So was there an opportunity cost on the quarter from a written sales perspective? Yes. Do we think it's lost sales that will never get back. No. It's just timing, and we believe over time with the right inventory proposition -- with the right inventory and the right value proposition, we'll get our share back there.

Okay. And just to be clear, when did the situation improved? Was it in October? Is it in November? Just to have a little bit of an idea of how it impacts Q4.

Yes. So a lot of the inventory we were expecting to receive at the end of -- in Q3, we received in October. So we're feeling like we're in a better inventory position now. We just have to be mindful of that supply chain delays continue. And so some of the inventory we're expecting to receive in the back half of Q4 may end up getting pushed to Q1. Net-net, we feel like the impact is not going to be the inventory delay impact is not going to be as meaningful as Q3, but there's still an impact there that we're still navigating.

Okay. And how are you approaching the Black Friday selling period? Do you -- are you -- do you intend to carry special promotions or increased promotional activity versus last year? Just trying to understand a little bit how you're attacking this important selling period.

Yes. We're definitely -- we're a high-low retailer Martin. So we're going to attack it like we normally do, which is go operate aggressively I wouldn't say that our spend is going to be an increase over last year, but we do have special buys. We do bring in drop in products. We do bring in things that are necessary in our assortment to create some excitement in our stores. And definitely, as you know, Black Friday starts a little bit earlier than Black Friday, and it's probably more of a mostly November things. So we're really encouraged by the promotional activity we have. And again, November becomes the biggest month. It's the make or break it for the quarter. And so we are seeing when we do have our big events, the customers come out. They're spending the money. And so we're encouraged by the promotional activity we've set up for the fourth quarter.