La-Z-Boy Inc (LZB) 2003 Q2 法說會逐字稿

Good morning. My name is Jody and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the La-Z-Boy second quarter fiscal 2003 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 period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

Mr. Mark Stegeman, Treasurer of La-Z-Boy Incorporated, sir, you may begin your conference.

Thank you, Jody. Good morning. I'm Mark Stegeman, Treasurer of La-Z-Boy and I want to thank you for joining our second quarter conference call this morning.

With us on our call today will be Gerry Kiser, La-Z-Boy's President and CEO and Dave Risley, La-Z-Boy's Chief Financial Officer. Our Chairman, Pat Norton, is also with us this morning.

The purpose of today's call is to discuss La-Z-Boy's financial results for the second quarter of our current fiscal year which ends next April.

As usual Jerry and Dave will begin with some prepared remarks about the quarter's performance, the current business environment and what we see ahead for our industry and our company. We ask that you please limit yourself to one initial question and one follow-up and then, after everyone has had a chance to ask his or her initial questions, we'll entertain additional questions from anyone. We will try to end the call by 9:00 but will go beyond that if there are still questions remaining at that point.

The call is being webcast live and a replay will be available on our website beginning this afternoon. A telephone replay of the call will also be available beginning early this afternoon and will remain available for the following week through next Tuesday. These regular quarterly investor conference calls are one of our primary vehicles for providing guidance to and communicating with investors and the investment community about the current operations and future prospects of La-Z-Boy, Incorporated.

Finally we'll be making forward-looking statements during this call. I'll repeat out usual comment that these statements reflect the best judgment of management at the present time; however, they are subject to certain risks and uncertainties as detailed in our regular filings with the S.E.C and may differ materially from actual results due to a variety of factors. We undertake no obligation to update any forward-looking statements made during this call. With that, let me now introduce our President and Chief Executive Officer, Gerry Kiser.

Thanks, Mark, and good morning.

Thank you for joining us to review La-Z-Boy's October second quarter and first half results which we released this last night. We are doing this quarter's conference call earlier than usual, this morning, in order to avoid conflicting with an event that many of you are involved in.

As usual I'm going to leave the discussion of the financials to Dave Risley but I do want to emphasize that we are very pleased with the continued margin improvement in our latest quarter. Especially since we did see some decelaration in our sales momentum which I will discuss shortly.

I believe the latest quarter's margins, particularly in casegoods, represents the fruit of the major restructuring actions we've undertaken during the past two years. As we said in our news release, we expect our profit improvement momentum to continue in the quarters immediately ahead as the result of an intense focus on market improvement and we anticipate this margin improvement even though our sales growth during the next two quarters is currently expected to be only flat to slightly up.

In my remarks this morning I want to concentrate on the current business environment, the West Coast port situation and an update on our proprietary distribution system which is arguably one of the best in our industry. Following my comments and after Dave Risley reviews the financials, we will address any questions you may have.

Now to the current tone of business. Most of you know that business in the furniture industry has softened substantially in the last few months. Calendar 2002 got off to an extremely promising start following the furniture industry recession of 2000 and 2001 and with U.S. housing activity continuing to thrive in spite of the national recession, in large part due to the plunging Stock Market and the lowest mortgage rates in decades, our industry seemed to be solidly embarked on a healthy, fundamentals driven recovery by a funny thing happened. The housing sector turned out to be just about the only sustainably strong segment of the U.S. economy.

But contrary to past experience this time around there was a serious disconnect between housing activity and residential furniture sales and that disconnect was consumer confidence. A variety of recent economic indicators has suggested that the current economic recovery may be in danger of stalling out. With the economy then dropping back into a so-called double-dip recession.

These indicators include U.S. employment figures which have remained weak despite the recovery, corporate profits which have continued to come in mostly below expectations, retail sales which have generally been lackluster to disappointing, several key measures and reports suggesting that the nation's manufacturing sector has started slowing again or even contracting and the once all-powerful technology sector.

Not that long ago, technology was widely expected to transport the American economy to previously undreamed of heights. But this major sector has remained mired in a near depression perpetuated by a combination of weak consumer demand and anemic corporate technology spending. When you add the uncertainties surrounding a possible war with Iraq to this list, it isn't surprising to see the U.S. consumer confidence has plunged to a nine-year low according to the conference Board's most recent monthly report.

The federal reserve boards recent interest rate cut of 50 basis points suggest to many Fed watchers that our central bankers are very concerned about the current state of the U.S. economy and prepared to take whatever action is needed to jump start the recovery and promote renewed economic growth.

At the moment uncertainty over near term direction and a pace of the economy is at a peek and attempting to predict the future, always a hazardous occupation, is much more difficult than normal. Predictably the furniture business has mirrored the broad forces at work in our economy, the strong surge in furniture demand this spring flattened out during the summer months and since then despite a very good Labor Day weekend for our industry, business has gone flattish again.

The trends at La-Z-Boy that we talked about in recent quarters have continued with our upholstery business holding up mush better than our casegoods or wood furniture business but the pace in upholstery has also moderated relative to where it had been earlier this year. Our consolidated sales were up 1% of the October quarter and at not quite 5% for the first six months.

But after adjusting for Pilliod which we divested not quite a year ago and HickoryMark where we recently ceased operations and the five retail stores we acquired in Boston and Kansas City, our consolidated sales were up 3.6% for the quarter and 8% for the first half. Upholstery sales were up an adjusted 8.5% for the quarter and rose 13.1% for the six months.

Given the current business climate, we feel these are very respectable increases. But the case goods segment is where we really felt some pressure, excluding Pilliod, casegood sales were down 10% for the quarter and off 7.5% for the first half. With the contract hospitality market continuing to be particularly weak on a year-over-over basis.

One of the things we are doing to address this is strengthening the dedicated distribution of several of our casegoods companies which I'll comment on in a minute. But, I'll repeat that, regardless of the top line, the substantial market improvement we achieved in both of our business segments this quarter is most encouraging. We strongly believe La-Z-Boy is on the right road, headed in the right direction and very well positioned to successfully deal with whatever future curve balls the economy may throw at us.

Now the West Coast port situation. There's been a lot of talk in our industry about the impact of the West Coast ports following the ten-day longshoreman strike. The stacking up of unloaded vessels at the ports and President Bush's injunction under the Taft-Hartley Act which expires next January.

The bottom line, the good news is that this situation didn't materially effect La-Z-Boy for a number of reasons. Primarily our heavy mix of upholstery, about 3/4ths of total sales in the latest quarter and our blended strategy of combining imports with domestically produced products. The dock strike itself had a very minor impact on our October quarter sales, less than $2 million. Effecting two of our casegoods companies, new product introductions which they had been hoping to ship during October. The strike delayed some La-Z-Boy youth collection grand openings due to the unavailablety of Lee's extremely popular Jessica McClintock youth furniture line.

To this point shippers have not increased fees to the East coast but they've talked about a possible surcharge of $1,000 per container. We are currently using about 300 containers a month so that could represent a significant, though very manageable cost increase for us.

I'm sure anyone who has been listening to our conference calls for a while is probably getting tired of hearing me say this, but I'm going to say it again and, again because it is extremely important since it provides us with a huge edge over our competition. We have arguably the fastest growing proprietary distribution system in our industry and we're working as hard as we know how to make that system even stronger and better than it already is.

I recently heard one of our competitors say they plan to have over 400 stand-alone stores in place by the year 2006. And that those stores will be doing something on the order of $1.75 billion in retail sales at that point. I would note that we already have 308 stand-alone La-Z-Boy Furniture Gallery Stores open today and these stores are already doing over a billion dollars aa year at retail all under the La-Z-Boy banner today.

We are planning to aggressively expand this network just as fast as we can in a disciplined and controlled manner. We expect to add 45-50 new generation furniture gallery stores to our existing system through a combination of new stores and remodels. We'll also continue to move existing furniture gallery stores to more productive locations. And, needless to say, we'll also be closing some of the old stores.

Our furniture gallery stores sales comps have slowed along with the industry but they're still running well ahead of the competition from everything we can see. We don't have detailed data for October yet, but September quarter same-store sales were up 2.3% and in the slow industry environment that characterized the July-September period, we feel this was a very solid performance.

Traffic and business at our 14 Washington, D.C. area company-owned stores was hurt by the October sniper attacks. Sales have picked back up in these locations since the arrest of the two sniper suspects. We estimate the attacks cost us something on the order of $1 million in lost sales at those stores for the month of October.

In addition to our 308 mostly independently-owned La-Z-Boy furniture gallery stores, we also have 319 in store La-Z-Boy furniture galleries. Together these 627 retail outlets represent almost 6 million square feet of retail selling space dedicated exclusively to promoting and merchandising the La-Z-Boy brand.

The healthy growth of our flagship La-Z-Boy upholstery division reported during the second quarter and first half was due to a combination of the sales growth of furniture gallery stores that have been open for a year or more as well as to the addition of new furniture gallery stores, stores open less than a full year. The growth of our proprietary in-store La-Z-Boy furniture galleries, sales of our independent La-Z-Boy dealers and some recent inventory build in our furniture gallery store system.

My only point here is to emphasize that while the same-store sales numbers we cite to you each quarter have a major bearing on the La-Z-Boy upholstery division's underlying level of business, there are a number of other factors involved as well. We now have 36 of our new generation furniture gallery stores which we talked about in prior calls up and running.

The first of these larger newly formatted stores opened in late June of 2001 in Sterling, Virginia. So far the new stores have significantly exceeded our initial expectations. Traffic at the new stores has increased anywhere from 18-20% over our old store average primarily due to better locations.

Sales dollars per square foot have jumped 25-30% on average compared to the old format furniture gallery stores and the average sales ticket has been running 15-20% higher. So we're very excited about our new generation store program. During the October quarter we opened 12 new generation furniture gallery stores. This included six in Canada and our first one in Michigan, La-Z-Boy's home state.

We also remodeled our Greensboro, North Carolina store which I'll comment on further. Relocated the store in Montgomery, Alabama, and closed one location for a net increase of eleven stores during the quarter. Over the rest of the fiscal year we anticipate adding another ten new generation stores and we'll also continue closing some of the older locations.

Our first new generation store remodel in Greensboro reopened for business during September well before the October international home furnishings market. We bussed many of our dealer owners out to the store during the market. They were extremely impressed and excited about the new look and feel of the store and we received numerous new store reformat commitments as a direct result. We were able to redo the Greensboro store at a relatively low cost using the same foot print as the old store and it was only closed for one week during the remodeling.

Based upon the 25% increase in business that the new layout has initially generated, the store's owner will see a relatively quick payback of the remodeling cost. The Greensboro remodel has given us some great experience in adapting the basic new generation format to a smaller foot print and we anticipate remodeling about 20-25 stores a year. We will also continue to selectively close older stores.

A little about our other proprietary distribution. We have a substantial amount of dedicated distribution in our other business units as well primarily through in-store galleries or the so-called store within a store and when you combine that with the La-Z-Boy upholstery division's proprietary system, La-Z-Boy incorporated is truly a force to be reckoned with in this industry.

In addition to major proprietary in-store gallery programs at Clayton Marcus and Englander which we talked about in the past, there have been several recent developments worth noting with regard to our other proprietary distribution. In the upholstry area, Sam Moore has agreed to provide La-Z-Boy with a selection of stationary, fashion forward, exposed wood upholstered chairs which will all carry the La-Z-Boy label. Sam Moore's flair for high-end frame styling at reasonable prices is expected to be a major selling point with our consumers and the chairs will nicely compliment the existing La-Z-Boy product line. Six inline Sam Moore chairs, three styles with companion ottomans were selected for presentation to La-Z-Boy furniture galleries, in-store galleries and independent dealers at the October market. Existing styles were selected to ensure a smooth launch and reliable production efficiencies.

Future style introductions are intended to be unique and proprietary in nature and will not be duplicated within Sam Moore's line. We were extremely pleased with the initial acceptance of this new program and, as a result, several new proprietary style additions are on tap for the upcoming April market in 2003. This is an excellent example of the type of synergistic win-win situation between our various businesses that we are continually seeking.

As I mentioned earlier, several of our casegoods companies are working to increase their dedicated distribution and I want to comment briefly on this program as well. Pennsylvania House is focusing on substantially beefing up it's in-store collector's gallery program over the next three years by opening new gallery accounts and redoing existing collector's galleries displays to increase square footage and merchandising effectiveness.

Management goals for this effort include specific targets for numbers and new accounts, gains in gallery floor space, increases in gallery sales per square foot and improved gallery profitability. These efforts are benefitting from a revamped Pennsylvania House product line led by the successful new Americans Traditions collection introduced last April. This 50-plus piece grouping of bedroom, dining room and occasional furniture features relaxed American casual styling crafted predominantly of locally harvested black cherry lumber.

A test marketing program in cooperation with 250 participating Pennsylvania House dealers focusing on American Traditions will run through the end of November. This highly visible campaign features 30-second TV commercials and four-page inserts in Country Living and Victoria Magazine. Pennsylvania House's first appearance in up scale shelter magazines in a number of years.

The company anticipates continuing this stepped-up marketing effort and other high profile shelter magazines and with other product lines to elevate consumer awareness throughout its marketing territory. At the October market Pennsylvania house introduces ed another successful collection, European Traditions, which also features black cherry and consists of 50 pieces of bed room, living room and occasional furniture.

This new group will reach dealer show rooms next spring to another strong wave of consumer advertising. Between the two markets the company brought out a very successful Louis Philippe style fill in line to round out it's dealer sales floors. The overall reaction to Lea's La-Z-Boy youth collection program has been extremely positive. The company has thus far signed over 150 dealers and interest in the program continues to grow.

As I mentioned earlier, the interruption of initial shipments of Lea's all-time best selling, Jessica McClintock youth furniture line by the West Coast port situation, has delayed a few La-Z-Boy youth collection grand openings but this has had no appreciatable dampening effect on dealer enthusiasm. Lea's designer is currently working to finalize displays of a number of significant new La-Z-Boy youth collection accounts and the company is preparing to offer video footage of it's top-selling lines to support the advertising effects of its La-Z-Boy Youth Collection dealers.

During the October quarter, Kincaid opened two new smaller stand-alone stores, both of them in conjuct with La-Z-Boy furniture gallery stores. One of the new stores is located in Montgomery, Alabama and one in Canada.

There are two other new Kincaid home furnishing stores in process along with 14 new in-store Kincaid furniture galleries. Currently our sales through all of these dedicated channels represent about 40% of our total volume. It continues to be our intention and our goal to increase this percentage further as we move forward.

Now I'd like to turn things over to Dave to get into some of the specifics of the financials.

Thank you, Jerry.

I really don't need to go through the financials in detail as you have most of the information from the press release. Unfortunately, our 10-Q will not be filed today as government offices including the S.E.C. were closed yesterday in honor of Veteran's Day. I'm just going to cover a few highlights.

Needless to say we are extremely pleased with first quarter earnings performance and our EPS of 50 cents. We came in at the high side of our estimate in spite of the sales being lower than we had initially expected.

As Jerry mentioned, we believe this shows you the success of having improved our operating margins in our business through our restructurings that have been taking place over the last year and a half.

Let's take a look at the two segments. The comparables are now starting to become much more challenging and we are happy with our upholstery sales which were up about 10% excluding the five retail stores we acquired which obviously increased sales and the existing of the HickoryMark brand. Particularly strong performances came out of La-Z-Boy, Sam Moore and because Baha. That was led, of course, by the La-Z-Boy brand name products. Particularly those through our proprietary system which had store sales increases - smae store sales increases in both August and September.

As Jerry mentioned, we don't have the numbers yet for October but I want to make sure everybody understands what these same-store sales mean and how they impact us.

First these numbers are reported to us on a calendar month basis and are generally not due in until the 10th of the month. So generally, when we do report these results, the same-store sales data will be on a calendar quarter basis rather than our fiscal quarter basis.

Also these numbers come from our independent furniture gallery dealers as well as ourcompany-owned stores but our company-owned stores only represent about 10% of the total store sales. Secondly this data represents what takes place at our mostly independent-owned retail store system and does not mirror our results. It doesn't reflect the impact of new store openings nor does it reveal the inventory changes within the retail system.

As Jerry indicated earlier, our store sales for the September calendar quarter were up 2.3% but our total reported retail sales increase for the system was up 7% reflecting the impact of the new stores. Additionally there was some small build in our inventory which helped our overall sales. Relative to margins. As I mentioned in last quarter, our expectation was to move beyond the 10% threshold in the upholstery group and this quarter we broke through that mark. Overall we continue to see improvement in capacity utilizations and are benefitting from the collaborative basis of this group as Jerry just mentioned with the Sam Moore project.

On a casegoods side, volume was down 10% including Pilliod. Contract hospitality portion of this business, like the sector in total, continues to have meaningful double-digit declines as occupancy continues to struggle. The hospitality industry reports that -- continues to forecast a rebound in this sector to occur in late 2003 or early 2004. We are hopeful that with interest rates now at 40-year historical lows when occupancy rates do pick up significantly projects will be undertaken.

With our leading position in that sector and with the restructuring efforts taken to date, we are poised to take advantage of that business upturn. The residentail portion of the casegood business continues to struggle as higher price points, multiple piece sales continued to be weak.

As Jerry discussed, the consumer confidence at nine-year lows, the looming war with Iraq, we expect that this portion of our business will continue to be challenged. The really good news, however, is that the margins here continue to improve almost 8% for the quarter. We truly are recognizing the benefit of our casegoods restructuring and as the volumes recover in this business we really expect to be able to take advantage of it.

SG&A for the quarter, while it's down in percentage was relatively flat on a comparable basis for the prior year when you exclude the amortization expense.

Relative to the tax rate we have a 38.25 rate and we expect that that rate will continue for the balance of the year. Again, this rate is lower than last year's rate primarily as a result of elimination of goodwill amortization.

CAP-X for the quarter, well under $10 million. We still expect that capital for the full fiscal year will be in the $35-40 million range. As mentioned last quarter, we expected our debt level to rise this quarter and it did by $60 million. It brings our total debt to cap ratio to 26.1%. We are very comfortable with that new level of debt but would not expect it to exceed a ratio of 30%.

Historically, in our second quarter, our lowest generation cash quarter and - cash generation quarter, excuse me, and therefore part of the reason for the increase. Most importantly we did buy 1.9 million shares of our stock for $45 million. Over the last 12 months, we've repurchased 4.8 million shares of our stock for $123 million.

We still have 6 million shares remaining available under our repurchase authorization and we will continue to be active in the market with the amount and timing clearly dependent on a number of factors. However, there is no set program or commitment to repurchase any specific number of shares.

As to future guidance, if must be remembered that business really picked up last fall, continued through Memorial Day but as Jerry indicated since then, business has, in fact, slowed. You put that together, it makes our comparables going forward much more tougher. Accordingly, we are projecting sales to be flat or slightly up excluding the impacts of Pilliod and HickoryMark. EPS for the third quarter ending next January is estimated to be in the 40-45 cent per share range and the full year we still expect to be at $1.70-$1.80 and that concludes my remarks.

With that, Jody, if you want to review instructions for asking questions.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jason Putnam.

Hi, good morning, guys.

Good morning, Jason.

First question, I guess I want to review in more detail the sales outlook going forward. I guess can you talk a little bit about trends, sounds like sales decelerated throughout the quarter, especially after Labor Day. Can you give us an update and maybe your guess where same-store sales are tracking now?

As we mentioned, certainly after September 11th of 2001, we began to see a fairly significant uptick in our incoming order volume in business last spring was pretty darn good. In fact, we built order backlog and we were able then, in early summer to run and run somewhat off of that partiular backlog.

But we really began to see orders slow again in late July, during the August time frame and when we would normally expect to see that uptick or up swing in business in September, October did not really materialize to the degree that we would have normally expected.

We still feel extremely good about the number of new stores that we've opened being able to open 12 new stores during the quarter and bringing those online in the time frame we are bringing those on board we think can contribute over the last half of the year. We are going up against much stronger comprables especially in the upholstery group as we enter into the last six months of our fiscal year.

So we think at this stage, unless there's some significant improvement in consumer confidence that we've got to really manage our business accordingly and make sure that we're controlling the expense side, the inventory side of our business and maintain our margins based on relatively flat sales.

And just looking at the third quarter, I know you've invested Pilliod in the third quarter last year, what type of impact is that going to linger on in this third quarter since it should be the last quarter you have that negative comparison?

Should help us, really. We won't have that drain of-the Pilliod numbers from a margin perspective. We'll be taking certainly the sales numbers out as we move that in November of last year.

Okay, but you don't have a dollar amount on how much or maybe I can get that offline later?

I can get that or Mark can get that back to you. I don't have that number off the tip of my tongue.

Okay then, just one quick follow-up on margins.

You guys did a great job on margins and especially with the sales environment, I guess it's particularly surprising. You're obviously confident over the next two quarters that margins can remain at these levels or improve slightly. What gives you that confidence? Is it just the shift in imports? Some of your costs programs? A little bit more detail there, please?

We are reaping the benefits of this restructuring program that we put in place over the last two years.

When we started this effort, we had 22,500 employees. Today we have less than 18,000 employees, in effect generating the same type of revenue.

Part of that is certainly the cost-savings and process improvements that we've been able to generate and don't feel like we have tapped all of those at this stage. And the mix, certainly as we have continued to increase the blend of the amount of off shore product that we're bringing in. So we think the combination of all of those certainly give us a good opportunity to continue to show the improvement that we feel is there on the margin side. But it would sure be nice to get a little pickup on the revenue side as well to help those efforts.

Sure. Thank you.

Your next question comes from Margaret Waylon.

Good morning.

Hi, Margaret.

Gerry, just a follow-up on the first question about the profit margins. It says in your press release you expect margin to continue but if I put in these higher margins in the second quarter we would far exceed-your estimate range? So, where -

Really, year-over-over as compared rather than quarter-over-quarter.

I just wanted to clarify that. And will you just break out the store accounts, the number that are company owned? Did you own these stores in Boston or open them and what's the kind of program there and also how responsive are the store owners to opening stores at the moment?

We currently have now a company-owned stores, 28 with the last ones that we've acquired in Boston and Kansas City.

The Boston market, we had a situation where we had an owner who was ready to get out of that particular business. We think there's huge potential there for additional locations, additional growth in that market so we are looking forward at aggressively pursuing those opportunities. At this stage, we still feel very good about our ability to open 20-25 stores a year and remodel another 25 or so-so we should really be able to bring at least 40-45 new generation concept stores online on an annual basis at this stage.

And do you envision owning more of those stores yourself or having them owned by independants?

Probably at this stage, we're still formulating what our overall philosophy should be. You know, we're not interested probably in owning a two or three-store market where we can find that individual entrepreneur who has the wherewithal to make the investment that in some of the more major urban areas that will require anywhere from 6 to 10 or 12 stores to get our coverage and get our job done. We will probably be active in taking ownership position in those markets.

Okay. Thank you.

Your next question comes from Richard Diamond.

Yes, good morning. On casegoods, if you could provide a little bit more granularty.

Could you discuss what price points there was weakness and what was your impression of October sales. Did casegoods deteriorate in October, you know, gut feel, or were they flat or, you know, slightly up within the treds?

We're still really working against the higher dollar ticket item with casegoods as we stated on numerous occasions.

It's much easier to invest in an item like a sofa, sofa loveseat, chair, and most of our casegoods units other than Lea are at the upper end of the middle price point. So it's not uncommon for us to have a $6,000 bedroom suite or $6-$10,000 dining room suite out there, so really with consumer confidence where it is today, making that decision to purchase multiple items that are going into an area of the home that are much less visible than say a high traffic area like a den, family room, living room situation and that, I think bodes well for us with 75% of our volume during the quarter coming from the upholstery end of the business.

October was certainly not any better on the casegoods side.-If anything, it was probably relatively flat. We did get impacted by a couple of million dollars of product we couldn't ship that was scheduled to come in from off shore that we should be able to pick up in the November time frame and move.

So those sales really aren't lost as much as they are sort of shifted?

Right. Time is lost forever but the sales aren't.

Okay.

Just last question, you know there's been a lot of housing formation, at what point do people decide they want new living rooms or dining rooms for the first time house or that move-up house? How do you think this plays out because at some point people are going to want to use the various rooms in their homes.

I think it bodes well for the industry and for us in particular that this pent up demand is continuing to be created.

Yeah, you know, folks especially when they are either moving up or moving into a new home and they wait until they get that mortgage payment under their belt for 6-9 months but only going to go so long, especially say in a living room/ family room, sitting on a lawn chair or some other form of seating, they may wait a little longer on a formal dining room but they're going to want to get that new upholstery product in there in a reasonable length of time. We still feel pretty good and are pleased that the housing market has remained as strong as it has through this current turndown.

Thank you, very much.

Your next question comes from Joel Havard.

Good morning, guys.

Good morning, Joel.

A couple of questions, Jerry. I'll start with you.

You said earlier in your comment that the pace at the upholstery operation was moderating. Could you - would you characterize that as a function of price points or everything but the La-Z-Boy stores or partly at the stores and partly other - how would you balance that?

It's been a combination but certainly the higher-end units, the Clayton Marcuses of the world who do sell much higher-priced product have felt more of the impact or the effects than say La-Z-Boy has felt.

We have seen really from last September some moderation but not nearly to the degree as La-Z-Boy as some of the other numbers would indicate. Okay. I guess that's the one we'll spend our time trying to get our arms around. Well, I think, again, as I said earlier,certainly bringing these 12 new stores on stream, bringing the proposed 11 or 12 stores on over the next six months, really our Canadian operation has seen a pickup in their business, and quite frankly, their lead times have gotten extended a bit and we are making some of those products in our residential plants in the U.S. to supplement that so it's a nice situation that we've been able to shift some of that load around and take advantage of the capacity where we have it.

What kind of capacity utilizaion do you think you all are at with the residential upholstery business?

We are still today probably in that 90-92% range.

Alright. Good. Dave, one for you.

I'm sure you're happy to see your operators keep as tight a rein as they did in working capital, do you think you can keep as a percent of sales in the second half or allow a bit more?

I think this should be the high point on that in the near term. I think as we shift mix in the casegoods side, you would probably expect to see a little bit of an upswing in inventories on that side.

Doesn't sound like you're looking for that for a little while yet.

No, I wouldn't think so.

Thanks, guys. Congratulations.

Your next question comes from Keith Hughes.

Thank you. Gerry on the casegoods side, if we look at noncontract casegoods, how was pricing in the quarter?

Relativly stable. We are not aggressively doing anything from a discounting perspective. We don't see the need at this stage just to swap business down the stream and take that hit on the margin side. We may pick a few items here or there or groups to aggressively promote, but we're still pretty well in line with where we have been.

Okay. Thank you.

At this time I would like to remind everyone, in order to ask a question, please press star, then the number 1 on the telephone keypad. Your final question comes from Pam Singleton.

Good morning, everyone. Just an easy one, Jerry. Since 60% of your business is nondedicated, I guess. Can you give us an idea of the feel for inventory in the forward pipeline and then just finally what your goal would be over the next couple of years for dedicated volume for La-Z-Boy overall?

Well, no doubt, I think there has been a slight build of inventory at retail in general as folks anticipated improved business conditions in the fall and they didn't materialize to that significant degree. The dynamics of our industry today, though, is that the retailer doesn't do a whole lot of inventorying and most of our casegoods operations can deliver goods in 10-12 days given the order so I don't think it's a huge build out there.

Jerry, do you think there will be an intensification of special promotions, say, in the early part of next year to move the inventories and generate more business?

I can't speak for the industry in general. I think that we would be somewhat careful.

We typically have on an annual basis some promotions, Pennsylvania House always has one as they get into that February time frame and certainly after Christmas between February and mid - March is the second best dining room season as we move toward Easter and American Drew and Pennsylvania House are still both very heavily concentrated into the dining room side of the business. We will try to take advantage of that. I don't think over the more than an ordinary situation with us from that standpoint.

And just finally, how do you see the 40-60% mix between independent or furniture stores and your own dedicated space shifting?

Well, I think that it's our intentions to continue to grow our proprietary or dedicated floor space and continue to become more significant with independents out there. I don't know that I have a crystal ball on a percentage but we can safely say that percentage of proprietary distribution is going to continue to increase.

And just one quick one for Dave. Have you bought any stock since the end of the second quarter?

I don't think we can answer that question, to tell you the truth. We do disclose that on an quarterly basis.

Thanks, very much.

Thank you.

Your final question comes from Brian Gordon.

Good morning. I'm sitting in for Bud Bugach who, unfortunately, is on the road and couldn't be on the call this morning. When you look at your casegoods side of the business, what percent is imports versus a year ago and where do you think that should go in the next couple of years?

We continue to say that that percentage will increase. Again, I don't know that I have a set percentage in mind.

Today we're probably, in relation to our casegoods volume, not in relation to the corporate volume, we're in that 20-30% range. You know, we're making a dedicated effort to improve our processes and our facilities and be as competitive as we can be and keep as much of those nonlabor-value-added type products that are straight forward in our own facilities. Certainly over a period of time I can see it move in 50/50 and maybe even higher than that downstream.

And what kind of capacity utilization are your domestic plans running at right now?

No more than, as a total corporate picture, no more than the mid-80s.

Thank you, very much.

Thank you for participating in today's La-Z-Boy, Inc. conference call. This call will be available for replay beginning at 12:00 P.M. Eastern standard time today through 11:59 P.M., Eastern standard time on Tuesday November 19, 2002. The conference I.D. number for the replay is 6158197. Again the conference I.D. number for the replay is 6158197. The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

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