La-Z-Boy Inc (LZB) 2003 Q3 法說會逐字稿

OPERATOR Good morning, my name is Sandra and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the La-Z-Boy, Incorporated third quarter operating results conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' 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 one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Stegeman You may begin your conference.

Thank you Sandra, good morning, I'm Mark Stegeman, Treasure of La-Z-Boy, Incorporated, and I want to thank you for joining the third quarter conference call this morning. With us on a call today will be Gerry Kiser La-Z-Boy’s President and CEO and David Risley La-Z-Boy’s Chief Financial Officer, additionally we have Pat Northern our Chairman with us this morning. The purpose of today’s call is to discuss La-Z-Boy’s financial result for the third quarter current fiscal year which ends this April. As usual, Gerry will and Dave will begin with 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. Then after everyone has had a chance to ask his or her initial questions, we'll entertain additional questions from anyone. We'll try to end the call today by noon, but we will go beyond that if there are still questions remaining. The call is being web cast 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 the primary vehicles for providing guidance to and communicating with the investors and the investment community about the current

operations and future prospects of La-Z-Boy, Incorporated. Finally, we will be making forward-looking statements during this call. I'll repeat our 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 SEC, and they may differ materially from actual results due to a variety of factor. We undertake no obligation to update any forward-looking statements made during this call. And with that, let me now introduce our President and Chief Executive Officer, Gerry Kiser.

Thanks, Mark, and good morning, folks. I'd also like to welcome you to our third quarter conference call. I hope you've had a chance to look over the numbers for the January quarter for the first nine months of fiscal 2003. The news release went out last night along with our Form 10-Q. The quarter we just completed was a tough one. It was tough because of the weak business climate, and it was tough because we were going up against some pretty strong numbers a year ago in our upholstery businesses. Upholstery currently counts for slightly more than three-quarters of our total revenues. But I'm pleased that despite the quarter's tough sales comparisons, we were able to maintain our margins nicely. That was true even in casegoods the wood part of our business, where we experienced continuing sales erosion versus the prior year.

In the face of a less than robust top line, I think this strong margin performance demonstrates just how much progress we've made over the past 18 months. I also think it indicated how well positioned we are to participate in our industries [Inaudible] recovery. I want to talk this morning about the sales trends we've been seeing and some of the factors behind those numbers. I'd also like to update you on the proprietary distribution system, which is one of the company's unique strengths and a major competitive advantage for us moving forward. David Risley will then cover the financial highlights, as usual, and following Dave's remarks, we'll open it up for your questions. Let me start first with casegoods, which currently accounts for slightly less than one-quarter of our sales. Casegoods sales for the quarter were down 15%, excluding Pilliod, which we divested in November of 2001, casegoods sales for the quarter were down 13%. And through the first nine months, casegoods volume declined 14% in total and 9% excluding Pilliod.

As we said in our news release, this was disappointing, especially in view of pretty good sales cops turned in by a number of other public US furniture manufacturers for their most recent quarters. There are number of reasons for our seeming loss of casegoods market share. One obvious reason is our January quarter compared to the December or November accounting quarters of most of our competitors, typically, December and January are relatively slow months for the main stream furniture business in contrast for the home accessories business which has a holiday buying season.

I'm not aware of anyone in our industry who will tell you with a straight face that their business was better in December and January than it was in October and November. A second reason relates to the fact as, I'm sure most of you know, upper, middle priced, and high-priced casegoods have been a particularly difficult business to be in recently. We believe this is a function of extreme consumer caution if you would by a weak economy and a sagging stock market in combination with a large increase in casegoods product choices available today at retail. Many of these new casegoods offerings are imported, and some are being imported directly by large retailers by passing U.S. manufacturers entirely , and prices have been

coming down or, more accurately, the consumers being given the opportunity to buy more casegoods bang for the same buck. La-Z-Boys higher priced casegoods line have definitely been affected by this phenomenon recording the largest percentage sales declines among all our various companies. When I refer to the higher priced casegoods [Inaudible] I'm primarily talking about American Drew, Kincaid, and Pennsylvania House.

This pattern of higher-end weakness also held true in the upholstery segment. But since most of our upholstery lines are moderate to medium-priced the overall sales impact in upholstery has been minimal. Although we conducted a normal amount of sales promotion last quarter. We avoid promoting aggressively just to try and drive incremental business at the expensive margins and the casegoods executives overall did a good job of managing their inventories. So we weren't confronted at the end of the quarter with a need to clean out a lot of stale inventory at bargain prices. Dave will comment on grater detail on inventories in a little while. However, I would like to point out this quarter several of our casegoods companies built some inventory and new product lines that were introduced at last April's international home furnishing market and in summer. Whenever you introduce a new group, shipments evitabley take longer than you expect to begin flowing smoothly, especially when sourcing from offshore. And you just can't ship bedroom suits without the beds or dining room suits without the tables . Finally our casegood business stop selling some less profitable accounts, and this also penalized our quarterly volume to a small degree.

Overall, I'd say while we were disappointed by the casegoods sales decline, we believe we're on the right track. Our blended casegoods strategy combines imports with domestically made product to provide our dealers and consumers with high style and high value, and we believe strongly that this is the right long-term approach. And as I said a moment ago, the margins here have been extremely satisfying in light of the top- line shortfall. What we're focusing on now is developing strong, new product lines and successfully remerchandising some of our existing lines.

We continue to selectively emphasize proprietary distribution and brand building in the casegoods area. Lea's La-Z-Boy youth collection display program continued to grow during the quarter. Nearly 50 new grand openings brought the total number of in-store La-Z-Boy youth displays to 285 sales [Inaudible] at quarter end. Many of our youth furniture dealers have been waiting for stock on the new Lea products introduced at the April and the October markets to officially open their new La-Z-Boy youth displays, and that began happening during the January quarter. As we stated in our press release, we were not happy with our essentially flat upholstery sales for the quarter, and we were quite pleased with the quarter's 30 basis point operating margin improvement.

Overall, I'd have to say it was a decent quarter for our upholstery businesses. As I mentioned earlier, upholstery accounted for just a shade over 75% of our total sales in the latest quarter. The Upholstery Group's top line performance was affected by combination of the weaker retail environment that we've all been reading and hearing so much about and some very good comparable sales gains we enjoyed in our January '02 quarter.

And keep in mind that was a period when many others in our industry were still reporting flat or negative sales comps. On this later point our Upholstery group excluding the [Inaudible] discontinued [HickoryMark] brand had a 7% year-over-year sales gain in the January 2002 quarter . Bauhaus in England were particularly strong and are moderately [Inaudible] category, while La-Z-Boy Residential had an excellent quarter in the medium priced category. We pointed out in the news release at the time that same-story sales of the mostly independently owned La-Z-Boy furniture gallery stores had rise on 16-plus percent to the January '02 quarter. Although there's no direct correlation between these retail sales numbers and our wholesale shipments, this indicates just how strong a comparable sales period we were going up against in this year's third quarter. We don't yet have the January '03 retail numbers, but for the December '02 calendar quarter, same -store sales of the La-Z-Boy furniture gallery system were down 4.4% when compared against those very strong year earlier figures.

Total, system-wide sales for the La-Z-Boy furniture galleries for the December '02 calendar quarter increased about 4%, including all the newly-opened stores. Speaking of the stores, I want to again emphasize how pleased we are with the new generation format, which we began rolling out in late June 2001. At the end of our January quarter, 39 of our 310 stores featured the new generation format including six of our 29 company-owned stores. During the quarter, we opened five new generation format stores in Chicago. Bloomingdale, Illinois; Louisville, Kentucky; [Inaudible], Maryland store which is [Inaudible] store in the DC area. Columbus, Ohio; And Seattle, Washington. One of these new stores set a new sales record riding $1.7m in new business during its first 30 days in operation. We also relocated stores in Manchester, Missouri, another company's owned store, and Springfield, Missouri, and remodeled our Toledo Ohio store to the new generation format.

We also closed three older locations resulting in a net addition in our system of two stores during the quarter. What we're finding as we gain experience in building out the new generation store system is that we can carry the concept through in a broader range of store widths, depths and ceiling heights. This allows us to greatly improve the traffic flow in locations where that would have been previously very difficult to achieve. Also displaying some new strength north of the border, the Calgary store we opened last August was one of the seven new Canadian furniture gallery stores that we opened in calendar 2002. The Calgary store and the new stores we opened in Vancouver and Edmonton all represented second stores for those markets.

[Inaudible] recently visited our newly remodeled Toledo store. We had excellent traffic at least on the day I was there, and I'm still not sure who was more excited about the new look and feel of the store, the customers or the employees. It literally is a whole new world in terms of a furniture shopping experience, and we're convinced it's a shopping experience that will translate into big future dividends for our consumers and store owners, as well as, ultimately, La-Z-Boy shareholders. Current on schedule for April '03 quarter are six additional new generation furniture gallery stores, two in Texas, one each in Michigan, California, Florida, and Pennsylvania. We're also planning to remodel stores in Albuquerque, New Mexico, and Grand Rapids.

And of course we will continue to selectively close older less productive location as we upgrade and strengthen our system. During the January quarter, our England upholstery business added another 11 custom comfort centered galleries to its independently owned and operated proprietary to distribution network. At the end of the quarter, there were 125 England custom comfort center location in operation with a combined dedicated retail floor space of right at 500,000 square feet. Also, I'd like to mention that both Bauhaus U.S.A. and Sam Moore enjoyed nice sells increases during the most recent quarter, compared to their year earlier period as well.

Although the contract or commercial part of our business continues to account for less than 10% of total sales, I wanted to comment generally on it. Our contract companies span both of our business segments. La-Z-Boy contract provides seating for the small office market and the specialty healthcare market, while America of Martinsville provides primarily case foods to the hospitality healthcare and government markets. AS we have noted in the past we've gotten hit with a double whammy in this area with the [Inaudible] and hospitality markets currently in their worst decline in decades.

This is been due to the U.S. economic recession and bursting of the dotcom and telecom bubbles in the late 90’s and the short fall off of in the travel, and consequently in the lodging industry's business since 9/11 and continued threats of terrorism. We are actively managing both of these contract furniture businesses in a difficult environment and believe they are well positioned when the basics of those industries start to improve. Unfortunately, we don't expect quick rebounds either for office furniture or for the lodging business. I would just wrap my remarks by saying that business is erratic, choppy, and unpredictable, above all other variables, consumer confidence will most likely continue to play the leading role in our industry 's near-term fortunes. Need less to say Iraq is a major near-term uncertainty, and North Korea isn't that far behind in the opinion of some.

Moreover, the recently heightened U.S. terrorist alert isn't doing a lot to make people more upbeat at the moment either. Add to that a depressed U.S. stock market which is negatively impacting demand for higher-end furniture among the upscale consumer along with other upscale consumer items and you get quite a bit of discomfort and uncertainty in the marketplace right now. We'll manage through these uncertainties along with everyone else and wait to enjoy the inevitable rebound that we believe is on the way. In the meantime, we've made a lot of progress at La-Z-Boy, and we're planning to make a Holt more. Dave.

Thank you, Gerry. I don't need to go through the financials in detail, as you already have the information from last night's press release, and our 10-Q was also filed last night. I'm just going to go over a few of the highlights. And as Gerry said, this is a very touch quarter for us. In mid January we notified the street that we would be at the low end of the guidance range, since the consensus was at the high end. We felt the difference was too large to let you hang out there. Please do not interpret or assume, however, that that will be a regular quarter and pre-quarter end occurrence. We will continue to be forthright with you but we don't intend to micro manage everyone's estimates.

In regards to the sales activities, Gerry pretty well covered that subject. Relative to margins -- to the gross margins, they were down slightly for the quarter, and reflect the impact of the lower volume and the impact that that had on our manufacturing cost absorption. SG&A, however, continues to be reduced and not just as a result of the change in the amortization. We continue to look for ways to reduce the cost structure and, yet, increase the value of what we do spend. We have not slashed our selling expenses or advertising costs to get there . Operating margin increased to 7.7% from 7.3 after adjust adjusting for the amortization -- after adjusting for amortization in the Pilliod divestiture. You should remember however the third fiscal quarter is the second worst quarter performing quarter. In terms of priority, our second quarters are best, followed by the fourth, then third, and then first. The tax rate was slightly adjusted for the quarter to bring our year-to-date rate down to 38% from 38.25. And the result from the change in our state tax mix, as we are getting closer to knowing what actual results will be.

EPS was 41 cents for the quarter which compares to 38 cents after adjusting for the discontinued amortization in the divestiture of Pilliod last year. As several of you have noticed, inventories were up almost $25m from the same period last year. Certainly the sales decline provides a partial answer, but the main reason is that inventories at the same time last year were lower than normal. If you remember, the May through October period of 2001 was a very slow, depressed period, and everyone had kind of reduced their inventories. With the rebound that started to begin in the November-December time frame, the business inventories were even further reduced. The opposite is true this year. We had adequate inventories going into the period and then there was a fall of in volume. Additionally, all of the increase is in imported finished casegoods where the decline in sales was the largest.

Goods were ordered when the sales outlook was brighter. As we continued to increase our percentage of mix of imported casegoods, you could expect the inventories would normally rise in order to maintain our delivery capability. Domestically produced inventories are currently at desired levels and, therefore, inventory levels alone will not adversely affect the fourth-quarter absorption. An ex CAPEX was 7m for the quarter and 26m year-to-date. We could expect to finish this year in the $32-36m range. As announced in mid December, we completed a private placement debt offering of $86min 7-10 year notes with fixed rates of 4.56% and 5.25%. Treasure rates are at 40 year lows and with NAIC-one rating we were able to negotiate very favorable rate spreads.

This transaction has allowed us to broaden our borrowing base as well as stagger our maturities. As we discussed at the last conference call, we intend to maintain our debt to total capitalization ratio in the mid 20's, and now we have an appropriate fixed-rate portion of our debt structure. Our total debt to cap rate at the end of the quarter was 27.1. We generated 20m in net operating cash flow during the quarter and almost 78m for the first nine months and used all of it and more for our stock repurchase program. We repurchased $21m worth of stock in the quarter and 113m in the first nine months. And this was done in part, again, to get the debt to cap ratio up into the mid 20's.

Repurchases 4.5m shares in this year's first nine months or about 7.5% of the total shares outstanding and 5.1m shares remain available under the existing purchase authorization at the end of the period. As I said previously, we don't have any set program or commitment to repurchase any specific number of shares. We have -- additionally, we have a long history of dividends and yesterday announce a quarterly dividend of 10 cents per share giving a dividend yield of 2%.

As Gerry started at the -- stated -- excuse me -- at the end of his comments, the economy is in a more uncertain state today than perhaps any time in our recent memory and consumers are very unsettled and cautious. Coupled with the increasingly difficult upholstery comps for last year when upholstery was up 12% in the fourth quarter, we are now expecting our fourth quarter sales for this coming quarter to be down in the middle-single digit percentage point range. This guidance does exclude the impact of HickoryMark. Accordingly, we have provided an EPS guidance range of 43to 48 cents for the fiscal fourth quarter, which would put the year at about $1.65 to $1.70. We are in the midst of the fourth quarter -- excuse me -- our fiscal '04 budget process, and, so, we are not yet ready to comment on the next fiscal year, but we will do so when we report our year-end results. With that I'd like to turn it back to Mark.

Okay. Sandrarks could you please review the instructions for asking a questions.

At this time I'd like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster.

Our first question comes from Margaret Wylynn.

Good morning folks.

Good morning.

Congratulations, I guess was a good quarter given the environment. Would you Spend a minute talking about the gross margin. I guess because you were building inventory maybe it would have been a bit higher. How are you actually gaining margin on the imports of the finished goods, just kind of walk us thru. I expected it a little higher.

Well, we're transitioning as we've talked about in the past to more casegoods in the quarter -- excuse me -- over time, and we'll be somewhere in that 25-30% before too long and, you know, it goes from there. The gross margin is also impacted on the upholstery side in terms of plan efficiencies. Again, going back to last year, upholstery was going up, inventories were down. We had a lot of production in the plants at that time.

Did you take on the down days over the holidays.

Yes, we did. We normally are down through the holidays.

But did you take any extra?

Yes, we took some additional days in several of the casegoods factors. Plus we lost several days in the North Carolina, Virginia area because of snow and weather.

Okay.

A couple of days in one of our plants got hit by tornados, as well.

I heard about that in Tupelo.

Thankfully nobody was hurt, we weren’t down for very long.

Okay, so that might have closed some of margin [Inaudible] comeback to you next quarter.

We weren't terribly concerned with the differential though.

I'm trying to model it I guess going forward. What kind of premium are you realizing on the product that you're directly importing?

Well, most of that, as an average, is probably running in the 30-40% gross margin neighborhood.

Okay. And, so, that should be helping lift it a little bit going forward.

Yes.

Okay. Do we have a goal of inventory sales or inventory turns.

Well, the inventory turns for the quarter were annualized at 5.4 turns which were down slightly from a prior quarter.

Yeah.

And I'd think that we'd continue to push the Casegoods Group up and we should really stay somewhere north of six turns. We're not experiencing the kind of turns right now on the casegoods side that we would expect.

Okay. And just remind us how much of your sales are through dedicated distribution or [Inaudible] distribution right now?

Overall of the total is about 40%.

Okay. And as you increase the number of stores, is your inventory carry going to have increase as well?

I don't think so. I don't think that's more closely tied of the upholstery segments, and with that being, you know, produced to sold orders, I think there would be more of an impact from an importing situation as compared to, really, the distribution efforts.

Okay. And just the last question. Is business picking up at all over the last couple of weeks?

It's spotty. You know, I haven't seen anything that would indicate that we've made any kind of a turn at this stage.

Okay. Thanks, guys.

Thank you.

Your next question comes from Jason Putman (ph).

Good morning, Jason.

Just a follow-up on what Margaret just asked. It seems sales trends would have weakened. Seems only a month ago you provided guidance for the fourth quarter and for the year, and you're cutting that by about 5 cents. So, I mean, what's really changed in the last three weeks that caused you to lower guidance again?

I guess I saw nervousness about the things that are taking place in the world. You know, if you look at some of Mr. Green span's comments yesterday, you know, there's just a tremendous amount of uncertainty out there and trying to predict what's going to happen over the next 60 to 90 days is becoming more and more difficult. And I think we're trying to take a conservative approach, not knowing, you know, where we're really headed. I don't think anything has gotten, you know, necessarily gotten worse. We started seeing things slow down at retail, as we said earlier, in mid December, and that has continued. We've just not seen the strength in any of our companies that would indicate that we're making a significant turn.

Okay. You said in your comments -- I believe you said you stopped selling some profitable accounts open the casegoods side. Could you give us a little bit more color on that.

Some non-profitable accounts. Some folk’s that we have questioned for some time whether we should be doing business with because of the way they tried leverage their size and expectations, and we can't achieve the objectives we have set out there unless we have a partnership with people and it's a win/win situation for both our customers and ourselves. So, you know, we've made some decision there is that are tough decisions especially in light of the current business decisions, but it's those kinds of things that you've got to address if you're going to hit your

objectives .

So this would be like a regional retailer that's importing product directly and they want similar pricing from you and it just isn't possible to do?

Yeah, it would be probably some of the bigger regional guys who, you know, may make that commitment or that decision.

Okay. And then next question is on cash. Looks like your debt to cap is pretty much he at a level that you're pretty comfortable with. What is your, you know, aptitude for, you know, acquisitions at this point? It doesn't seem like that really makes sense. So I wanted appear that, you know, share purchases would likely continue.

That's accurate. There's nothing on our horizon as far as a burning desire to make an acquisition. I think we feel like if we have any voids in our current product mix that we can take care of those in our existing companies. And, so, we will continue to use, you know, our free cash flow, probably, to repurchase shares or other requirements.

Okay. Sure. And then just quickly, how much was outstanding on the resolver at the end of the quarter?

70m.

Thanks guys.

Your next question comes from Joel Havard.

Got morning, guys.

Good morning, Joel.

Pat, Gerry, I'm going to get you to wax philosophical for a minute.

Gerry you've talked a lot in the past about your operating margin targets. Looks like you guys have dean lot, though Dave suggested there was more to do here on the cost side. But do you have any top-line initiates that can initiatives in what can take place in a very challenging demand environment or do we really kind of have to wait for the consumer to just to get a sentiment shift?

Joel, like we've said in the past when we talked to most of you, we don't want to drive top-line growth at the expense of margins. But like anything else in life, I guess balance is a key. And at some point in type, there's a diminishing return when you're not covering overhead absorption and not utilizing capacity. So, yes, we have started a few additional initiatives to try to drive some additional business by being aggressive on some select items that may, from a merchandising perspective today, be a little bit out of kilter with some of the products that are coming in from offshore. And some of this that we've started in the last three or four weeks gives us an indication that we are seeing some pickup in those groups where we're selectively promoting some products. So, yeah, we understand and I guess some of the comments I've had to our division presidents and business unit operating heads is you can only save your way into so much, and at some point in time you've got to sell your way out of the current situation we're in.

And I think, to some degree, that's where we are today, that we've got to sell our way out of this particular situation. As a follow-up to what Dave has said, though, I do thing there are some continuing opportunities from a cost-cutting perspective. Some of the things that we were beginning to put in place during the third quarter have not come to fruition yet. We are in the process of taking down another wood factor that was a casegoods-producing facility that has the capacity to produce $25-35m in volume. We're converting that facility to a dimension and supply operation that will supply both plywood and hardwood to the entire company and will reduce the head community that headcount in that operation slightly in excess of 100 employees. So that really begins to utilize the capacity there. And as we've talked about, as we continue to make this transition on the wood side of our business and look really to more fully integrate that business, there are certainly additional cost savings that we can generate in that area.

Gerry, on the promotional side, I assume that that's all residential, of course. Is that sort of groups or products across the various company labels, or is it focused more in one area of the business?

It's not focused to any particular, you know, area. We have needs in most all of the operating units generate more business.

Sure. Okay. And if I can get a follow-up , then, with Dave. Working capital requirements, are we seeing more seasonal effect here, or is this really a baseline for the higher level of imports?

Well, there's a little bit of a mix, I think , Joel. Certainly, at this time, you're getting some seasonal pickup and our low point will be at the end -- generally, is at the end of the year when inventories come down headed into the slower summer months. But -- and then you've got the mix of having more imported goods as a normal course of things. So I'm not terribly unhappy with where we are from a working capital standpoint, but we certainly have room to improve some of our processes. As we speed our delivery capability over time, certainly that will help us bring down inventories.

Good.

I think we've managed our receivables very well, you know, and I think we can make some improvements in inventory.

All right. I was really just wanting to make sure that we shouldn't look for a further increase as imports continue to grow as part of the mix. A final part, just if you could elaborate on Jason's question, you gave the resolver balance. Where is the current position on the private placement and wherever the RB balance is left.

We brought in the 86m. Is that what you want to know?

Is that the total balance under the private placement?

We have another 35m that was previously placed a few years ago.

All right. And then another 30 or so in the RBs.

Right.

Thanks guys.

And now we have a staggered maturity schedule, too, which really helps us.

Thank you.

Welcome.

Your next question comes from Laura Champine (ph).

Good morning.

Morning Laura.

Got a question about imported fully finished upholstered form the Far East. Which is I am just starting to see is [inequality], if you were to take a guess about the industry as a whole, what percentage of U.S. shipments do you think are fully finished from the Far East and if it's immaterial now, do you expect it to become material? And how large could that segment become as part of the market here?

Laura, I think today is pretty negligible. I think it's probably -- you know, pull a number out of the sky. Probably less than 2% to think that it will continue. I definitely think that we will continue to see it increase. I think there are folks that are looking at opportunities other than just cutting zone, and I think there will be some additional finished product that will be coming this direction as these folks continue to build capacity with an over-capacity issue on the upholstery side, probably, as well as the wood side, we'll see folks coming after, you know, some of our markets.

And your strategy to compete with that continues to be strong proprietary distribution, better delivery, that sort of thing?

I think there are certain things that we can control that are in our own hands, and certainly service and quality and compressing the manufacturing and delivery cycle, those are all things that we have influence over that we can continue to supply. As I said earlier, you know, good product and value and do it in a timely fashion, and we will also look at those opportunities that present themselves for a blended strategy of looking if it makes sense to do additional cut and sewn leather products and anything else that will contribute to the overall objectives.

Thank you.

Your next question comes from Keith Youth.

Thanks. Gerry, just kind of building on the previous questions the low margin business that looks like we kind of walked away from, is

that more of moving out of unprofitable retailers or just limiting the number of skews at that locations? Which is the bigger driver.

It's not total abandoning that segment of the market.

On a retailer by retailer basis.

It's probably, you know, we'll like to maintain, certainly, where we are today with most of those folks and not give that up. Of course, it is increasingly difficult as some of them make their decision to change -- change their business model, we see a fairly significant move at promoting and driving lower prices that doesn't necessarily fit in our overall mix. But, you know, we probably -- have there been a few that we've made a decision that a particular company can't sell and sell profitably, and then there's some that we probably, you know, have given up some floor space because we weren't willing to meet some of the concessions that they would like to have.

Okay. Is this going to be something that we're going to see for the next couple of quarters, or was this a one-time issue?

Well, hopefully, as maybe we take a look at some of the things that we're doing and go through another market, we can do some repositioning and remerchandising of some of our products that keep us, you know, competitive. But, on the other hand, I think we feel like that, probably, our biggest chance for continued growth is continue to look at expanding our proprietary distribution and also the additional business that we can generate with more independent dealers.

Okay. And when you make one of these decisions, is it on a brand-by-brand-type decision, or will it be for all the La-Z-Boy brands together.

It's on a brand-by-brand basis at this stage.

Thank you.

At this time, I'd like to remind everyone, in order to ask a question, please press star, then the number one on your telephone key pad. Your final question comes from John Baugh.

Thank you, good morning.

Hi John.

Can you comment, you said your high end upholstery business has weakness. Does that include leather, or was that just a specific fabric?

That's more specific to the individual brands. You know, Pennsylvania has this [Inaudible] upholstery, Kincaid has upholstery. Certainly Clayton marks is Marcus is more in line with those price points. So as it relates to those companies those are probably closer to $1,000 up for a sofa, there's more pressure there are in the middle-price points. So, you know, and I think that tracks alone with that consumer that would also be in the market in the same, you know, casegoods price points.

And can you comment on any initiatives you have in the cut and sew area, what you're doing currently, what you might be doing a year out?

Well, today that number is probably in the neighborhood of 35-40% of what we're producing that's coming in either in cut leather or fabricated into cut and sew kits. And I would envision that continuing to grow. And, you know, we have continued to grow the leather side of our business. It's certainly for significant today than it's ever been, and we'll continue to do whatever we need to do to be competitive in that area.

I am sorry, the 35-40% is in leather only or all.

Leather only.

What initiatives do you have, if any, on the fabric cut and sew.

Well, we're still looking at that. I don't know, today, that that makes a lot of sense. You know, you have to cut leather hides one at a time. You can still stack fabric as long as you get volume. Our average lace size is still in the double digits, and you have automated equipment. So it's not nearly as labor-intense to either cut or sew or fabric, as leather is more labor-intense to both cut and sew than fabric is. But we'll certainly look at any opportunities that present itself. You know, there may be some high -- high-priced fabric’s that you can achieve looks at lower costs that we would take a look at going forward.

But the math just doesn't work right now in terms of cut and sew?

It's not attractive as it is on the leather side. That's for sure.

Just maybe a question for David F we were looking at flat sales going forward for the next 12 months, what, if any, leverage of SG&A is a percentage of that revenue would you expect?

You're asking whether or not the SG&A could come down yet?

Yeah. You know, obviously, you have to assume a sales level, and I'm just throwing out, you know, what if it's flat? Do you get any leverage in SG&A in a flat revenue environment.

That includes our sales initiatives, so that would depend to some extent on our sales initiatives. But let’s say for the G&A portion of it, we have some things that we want to look at and are working toward to continue to work on that element of it. I think probably the biggest unknown that you might have in there would be healthcare costs. Of course, that hits go to G&A as well as your factory costs. But that -- it's sort of outside our range of control, if you will.

Okay. So maybe some leverage, but not much, would be your -- I don't want to put words in your mouth.

I certainly wouldn't put a number on it at this point.

Okay. Thank you very much. Good luck.

Thanks.

I would just like to -- your final question will come from Margaret Whelan.

Margaret ?

Sorry. Just remind us, how many Asia manufacturers are you working with now and how are you controlling your brand and protecting it?

Well, we're working with too many, but we're, again, implementing a more integrated sourcing function today and trying to become certainly more important with fewer people. For example, you know, we have found some people who we think do an extremely good job in solid wood, and it makes sense, from that perspective, to try to source any solid wood product that we have out of that -- out of that one facility. And if we are more important to that particular vendor , then there's going to be less chance of our product showing up, you know, with other -- with other -- with someone else's name on it somewhere.

Or even with your name on it, but not sold for you?

Right.

Okay. And how responsive are they when you go over and ask to take over maybe half of their capacity? Are they willing to do that?

I think today F anyone would commit to taking over half capacity, you better have the orders ready because I don't think there's enough capacity that most any of them would jump at that opportunity.

Definitely. Thanks.

Uh-huh .

Ladies and gentlemen, thank you for participating in today’s La-Z-Boy third-quarter operating results conference call. This call will be available for replay beginning at 2: 00 p.m. eastern standard time today through 11: 59 p.m. eastern standard time on Feb. 19, 2003. The conference I.D. number is 754-1970. Again the conference I.D. number for the replay is 7541970.