Leon's Furniture (TSX:LNF) Q3 2026 Earnings Call

0:00 Good morning everyone and welcome to LFL Group's third quarter 2026 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If any research analysts would like to ask a question during this time, simply press star followed by number 1 on your telephone keypad. If you would like to withdraw your question, press star 2. Thank you. I would now like to turn the conference over to Jonathan Ross, Investor Relations for LFL Group. Please go ahead.

0:42 Thank you. Good day everyone and welcome to LFL Group's third quarter 2026 conference call and webcast. LFL's third quarter 2026 financial results were released yesterday. The press release, financial statements, and management's discussion and analysis are available on CR Plus 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's discussion and analysis and annual information form, which provide additional detail on the risks and uncertainties that could affect future results.

1:35 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?

2:09 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 on 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 at an increase of 4, taken full ownership of our Edmonton Distribution Centre and continued to buy back shares. In this environment Our team executed with discipline across the business. System-wide sales were down 0.8% with same-store sales down 1.2%.

2:55 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 business. Appliances return to growth in the quarter with sales 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, deeper on our best sellers, enhanced presentation in our stores and marketing that does a better job of telling customers what comes with the purchase from delivery and hallway to installation.

3:41 That is how we build every category, one 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 came in later. 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 intentions.

4:38 and our salespeople convert that intent to the right product, the right add-on and the right solution. In the commercial channel sales group, the housing market continues to remain weak so that growth is shared and much of its business that became available when a large competitor exited the market. In August, we said that exit 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 four new locations. Two are Leon's corporate stores in Ontario. Cornwall is a new store. Brockville converted from a franchise store to a corporate store. Two are franchise stores, the Leon's in Kinloch, Prince Edward Island, and a brick in Kindersley, Saskatchewan.

5:26 We also celebrated the grand reopening of a newly built Leon's store in Welland, the birthplace of the brand. That brings us to 304 stores. We expect to open two new 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, and Comparison Ease in the fourth quarter. We are planning the balance of the year prudently.

6:11 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, the scale to source directly and secure advantage 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.

6:56 Victor, over to you. Thanks Mike and good morning everyone. I'll start with the third quarter walkthrough, 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 carried 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.

7:44 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 nine months we are within a few basis points of last year.

8:30 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, a cost 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 30th, we closed the sale of the former Brickhead 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 74 cents up from 65 cents last year.

9:27 Excluding the gain and the small legal settlement in last year's quarter, normalized adjusted net income was $41.9 million and normalized adjusted diluted EPS was 61 cents compared with $43.9 million and 64 cents 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 1st 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.

10:19 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 a 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.

11:06 On margin, our objective for the year has not changed, hold the rate close to last year. Fuel remains the main pressure and delivery expense, and we will manage the rest of the cost base with the same discipline you saw this quarter. Our re-initiative remains an important strategic priority. Timing continues to be guided by marketing conditions and regulatory approvals, and we'll share updates when appropriate. With that, I'll turn it back to Mike.

11:34 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 held 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. We will now begin the analyst question and answer session.

12:19 To join the question queue you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone please pick up your handset before pressing any keys. To withdraw your question please press star then 2. We will pause for a moment as callers join the queue. The first question today comes from Ahmed Abdullah with National Bank of Canada.

12:51 Please go ahead. Yeah, good morning and thanks for taking my question. 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 to be a recovery into fourth quarter?

13:14 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 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.

13:49 Okay, that's fair. And just touching on this supply chain and potential normalization timeline, 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?

14:06 Great question and thanks for the question. I think we're seeing some of the normalization come back. A perfect example is the launch of our Shaq O'Neal furniture that we launched in May of last year. It well overshot our forecast and it's taken this long to get the product back in, which is a reason why we haven't been able to advertise it heavily over the last three 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's specific lanes where a lot of our case goods come from. There's Ho Chi Minh where some of the shack comes from and some of our sofas. And so the restriction is really a lane by lane kind of allocation. And so we're seeing some of that ease, but we are still seeing the spot rate about three times what our contract rate is.

14:55 And given our business, we write it today and we deliver it tomorrow. Anything that's sold or on the water, were very cautious about preserving our margin framework and not necessarily bringing it in unless it's on our contract rate.

15:09 Yeah, Ahmed, I would also layer in that the inventory challenges in the quarter weren't necessarily just limited to furniture. Appliances, we were up on 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 in furniture for us, but we also saw some of that in appliances as well.

15:44 Okay, now that's helpful. And just my last question would be, you know, 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?

16:03 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 Leon 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 Canada. So I would say it's twofold. It's the competitor that went out.

16:49 it's a little bit of applying to Canada 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 out definitely in the commercial business.

17:10 Okay, thanks for the call. I'll cue back up. The next question comes from Martin Landry with Stifel. Please go ahead.

17:21 Hi, good morning guys. I just want to understand the inventory issues that you've had. Do you think that this resulted in sales lost because customers found that delivery times were too long or these sales have just been delayed and pushed into Q4?

17:48 Hey, Maureen, it's a great question. Look, you know, there's definitely an opportunity cost of not having all of the right inventory that, you know, especially when it comes to our best sellers and being able to feature that. There's an opportunity cost to that. I think, you know, what Mike alluded to and what's more important for us is having the right inventory at the right cost and being able to provide the right value proposition to our customers. And that's how it entirely fits within our margin framework. when you think about furniture over the last two years you know despite even before you consider the inventory challenges in the quarter we're still up five percent on a two-year stock basis and what we've seen historically is whenever we have the right inventory and we're able to feature it at you know at our value proposition we get 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?

18:49 Yes. Do we think it's lost sales that we'll never get back? No. It's just timing, and we believe over time with the right inventory and the right value proposition, we'll get our share back there.

19:04 Okay. And just to be clear, when did the situation improve? Was it in October? Is it in November? Just to have a little bit of an idea of... how it impacts Q4?

19:19 Yeah, so, you know, a lot of the inventory we were expecting to receive at the end of, you know, 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 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 inventory delay impact is not going to be as meaningful as Q3, but there's still an impact there that we're still navigating.

19:56 How are you approaching the Black Friday selling period? Do you intend to carry special promotions? or increase the promotional activity versus last year. Just trying to understand a little bit how you're attacking this important selling period.

20:18 Yeah, we're definitely, we're a high-low retailer, Martin, so we're going to attack it like we normally do, which is go after it 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 thing 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 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.

21:11 Super. Okay, thank you and best of luck. Thank you. As a reminder, to ask a question, please press star then 1 to join the question queue. The next question comes from Ty Collin with CIBC. Please go ahead.

21:31 Hey, morning, Mike and Victor. Thanks for taking my questions. Mike, I just wanted to return to your comments around the consumer. Have you seen any change in behavior that you'd highlight, I guess, since later this summer when fuel prices kind of spiked up again and rates started to move up in Canada? And maybe just, you know, some comments on how things kind of progressed through the Q3 quarter and into the start of Q4.

21:58 Hey, Ty, thanks for the question. Yeah, I don't think much has changed with the consumer. We're still seeing, you know, from the good, better, best in the premium sector, we're seeing the customers still spending money. Customers still trading down from the mid-price point. There's still some pressure in the large discretionary spend. And so not much has changed as it relates to the consumer. I think the only thing that has changed is this thing continues to be prolonged and goes into next year. there's just continued strain on the disposable income customers have, which is why we're seeing the customers are waiting for that value proposition. And when we do deliver on that value prop, we're seeing positive results. So I don't think much has changed. I think there's still a pullback from the consumer.

22:47 You still see the segment spending money and we think we're still gaining market share.

22:52 Yeah, and just to build on that, I totally agree with Mike there, Ty. I will say there is, I mean, if you kind of look throughout the year, you know, there was some momentum towards the end of Q2 and into Q3 as the geopolitical situation, gas prices were trending down. I think the consumer was feeling a little bit better, and then the geopolitical situation got worse, gas prices started trending up. So there is something to your point around you know through if we look at it throughout the whole year it's been pretty consistent the consumer has challenged it but there's been peaks and valleys through the cycle and there's some correlation to for sure to the macro and to consumer confidence and I think as gas prices go up consumer confidence goes down and that naturally creates a further pullback from the consumer.

23:44 Okay that's that's really really helpful color there and then I Given the importance of financing to your business, I mean, how are you thinking about, you know, the impact of entering a rate cycle here in Canada? I mean, how does that impact your ability to write finance sales and what kind of sensitivity would you expect to see to a, you know, 50 to 100 basis point increase in short rates?

24:11 Yeah, look, I mean, for this year, it's not a concern. I think we always use financing as a pretty strong lever. Even in a higher rate environment, we put our foot on the gas in financing. There's different ways to approach it, different types of programs, shorter term, longer term. So there's different ways to slice it, but we value our financing program. It's a lever that we pulled in Q3. Our financing penetration is up, and we saw some good sales momentum there as a result. With rates going up, it won't impact us this year. There's typically a 90-day delay in terms of the way our relationship works with our partner. Into next year, we'll talk a little bit more about that in 2027 in terms of the puts and takes into next year. There's certainly a little bit of an impact there from a cost perspective that we'll obviously look to offset in other ways.

25:05 Okay, great. Thanks for the comments. All the best. Thank you. The next question comes from Jim Byrne with Acumen Capital. Please go ahead.

25:17 Yeah, good morning, guys. I just wanted to maybe just touch on the mattress category. I know it had been a pocket of strength here for most of the year. It sounded like it kind of continued into Q3. Maybe just comments around Q3 and then what you're seeing here for Q4 on the mattress side.

25:35 Yeah, it's definitely something that we're aggressive about. you know the brick division just launched a new mattress which is partnering with the sketcher brand and so we are definitely looking to further sales and market share in that category and with different you know different offerings but definitely putting our foot on the gas from a marketing perspective as well as an assortment perspective we do believe that you know one of the big things was looking at our assortment and the gap as we had said in previous quarters in the premium brand and we're still seeing that premium brand, some good green shoots come out of that from the sales increase.

26:17 Okay, thanks, Link. And then, Victor, maybe just can you help us understand or clarify some of the cash flows here for the quarter? You mentioned everything happened on October 1st, so just kind of cash out the door and cash in from the event today. Distribution Center.

26:36 Yeah, no, absolutely. So both our acquisition of the remaining 50% of the new DC we didn't own, so that cash flow went out in October 1st. Also, our sale of the old Edmunds DC, that cash came in on October 1st. So net net will obviously be a cash outflow. Just, you know, we didn't totally offset the acquisition there. and then there's also timing of inventory payments. So we'll be paying out more working capital and more working capital movements in Q4 than in Q3, just with the delay in inventory receipts. So that's kind of, hopefully that helps you think about that. Yeah, that's helpful. Thanks guys.

27:24 The next question comes from Rylan Conrad with RBC Capital Markets. Please go ahead.

27:32 Yeah, thanks. Good morning. Maybe to start, you know, in the past couple of years, you've been seeing some really good momentum from this assortment strategy across furniture and now mattress. So just curious if there's any maybe opportunities to apply a similar playbook to appliances going forward, or is that maybe not as possible just given differences in the category dynamics?

27:55 No, we have been looking at it with appliances as well. We've started, you know, shrinking the assortment and going deeper on the products that we believe are kind of the core assortment. And, you know, from a different brand perspective, Leon's has really put the foot on the gas from, you know, offering free installation, free haul away. And so within each of the divisions, they have different tactics that they're using to help drive appliance sales. And we're seeing, you know, we're winning in that category as well. So we're going to continue with, you know, kind of a lens to all the categories that we're in and how we can augment the assortment, how we can structure the assortment so that we're better in stock on our best sellers so that we can decrease the time between written and delivered.

28:43 Okay, great. And then you briefly touched on it, but just the penetration of financing, like what are you seeing in your stores this year relative to maybe normalized historical levels? are price-conscious consumers using financing more just on these larger ticket items?

29:04 Yeah, it's a good question. I think, again, our penetration has been relatively consistent, I would say, throughout the year, and then we saw it pick up in Q3. And I think one of the things we talked about in Q2 was we were seeing pressure on average unit, price average basket, and we zoned in on that as a management team and one of our levers is obviously our salespeople in our stores, our financing program and we were able to, through that, you know, we were able to drive incremental average basket and I think that's where the financing program helps and it just, in a value conscious environment where you can defer payments and, you know, for us obviously it's off balance sheet, it's an attractive option it's attractive for our customer base and it's our sales people are seeing success with it so again it's we haven't it's not like penetration is going up massively but it's moving up incrementally and it's helping us on average baskets so net net it's a positive for the consumer and positive for us.

30:10 Got it, appreciate the color and then just finally for me on the central distribution in Ontario. I believe you've got a second test initiative underway. So any updates there would be great.

30:24 Yeah, Rylan, we'll have more on that probably in our next fall in 2027. I think, you know, with the test, with the commercial side of the business this year and one of our competitors going out of business, we essentially have to absorb and bring in more inventory related to commercial appliances. And so we had to pivot a little bit off of our test and we kind of reshuffled some of the inventory around our facilities to accommodate that. So we had to pause our test this year on centralized distribution. We're going to pick that back up in 2027. It's definitely still a key priority for us and we continue to do work from a capacity perspective. Not only to obviously run a test but to basically assess how much more incremental capacity we need to absorb vacating some of the warehouses over time in Ontario.

31:23 So that work continues. We'll pick that test back up in 2027, but that's kind of where we're at with it.

31:32 Got it. Thanks, guys. There are no further questions at this time. This concludes today's conference call. Thank you for participating and have a pleasant day.