La-Z-Boy Inc (LZB) 2004 Q4 法說會逐字稿

Good morning. My name is Taylor, and I will be your conference facilitator today. At this time I would like to welcome everyone to the fourth-quarter operating results conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Mark Stegeman, Treasurer of La-Z-Boy, Incorporated. You may begin.

Thank you, Taylor. Good morning. I am Mark Stegeman, Treasurer of La-Z-Boy, Incorporated. Thank you for joining us on our fiscal 2004 fourth quarter and yearend conference call. Present on today's call are Kurt Darrow, La-Z-Boy's President and CEO; Pat Norton, our Chairman; and David Risley, our Chief Financial Officer, who is joining us from a remote location.

Today's subject is La-Z-Boy's fourth quarter and year-end fiscal 2004 operating results. As usual, Kurt and Dave will begin with some prepared remarks. We will try to end the call today by noon, but will be happy to extend beyond that if you still have unanswered questions.

This call is being webcast live and a replay will be available on our website this afternoon. A telephone replay of the call will also be available for a week, beginning early this afternoon.

These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles for providing guidance to and communicating with investors and the investment community about the Company's current operations and future prospects. We will be making forward-looking statements during this call, so I will repeat our usual caveat. While these statements reflect the best judgment of management at the present time, they are subject to numerous future risks and uncertainties as detailed in our regular filings with the SEC, and they may differ materially from actual results due to a wide range of factors. We undertake no obligation to update any forward-looking statements made during this call.

And with that, let me introduce La-Z-Boy's President and Chief Executive Officer, Kurt Darrow. Kurt?

Good morning. Thank you, Mark. We appreciate you joining us today for our 2004 fiscal year-end conference call, a year that we are pleased to see behind us. I will provide an overview of our operating results, an update on our key strategy and business conditions, as well as an outlook for the first quarter. I will then turn it over to David Risley, our Chief Financial Officer, for a more detailed review of our financial statements.

First, let me touch on our fourth-quarter operating results. After taking into consideration $1.07 for FAS 142, 16 cents for FIN 46 and 1 cent for the case good restructuring that is now complete, our results came in at the upper end of the guidance we provided in mid January. Though these results are lower than we would like them to be, we made tangible progress in getting our Company back on a growth track. As a result, we are confident that the steps we have taken to refocus the Company and capitalize on our core marketing and distribution strengths are making a difference. However, these are substantial changes that don't happen overnight, so we do appreciate your patience.

For the fourth quarter, sales were up about 1 percent from last year's quarter and earnings per share came in at 44 cents before the non-cash charge for the intangible write-off, the effect of a consolidated accounting change and restructuring. Again, this is at the upper end of our 40 to 45 cent guidance range.

Fourth-quarter sales in our upholstery segment were up almost five percent, resulting from a renewed focus on market share improvement, effective marketing promotions and the shipment of several new product lines during the quarter. This continued the strengthening sales trends we achieved last quarter in this segment of our business.

Case good sales dollars for the quarter were down 11.5 percent. Without the impact of our hospitality business, residential case good sales would have been off 9.8 percent for the quarter. The continued weakness in the hospitality market is starting to show signs of having hit bottom. However, the lead-time for new hospitality business maturation is a longer cycle than it is in our residential business.

For the year, we have been encouraged by the progressively improving trend line in our upholstery business. We started fiscal '04 with some difficult comparisons in year-over-year terms, but have steadily improved our performance in each succeeding quarter. In the first quarter of '04, sales were down 8 percent versus fiscal '03's first quarter. We were down 7 percent in the second quarter, flat in the third quarter and now up almost 5 percent in the fourth quarter, certainly a progression in the positive direction and one we will build on heading into next year.

In addition, though we don't break it down separately, our La-Z-Boy residential orders have been showing an even stronger trend line. The trends in our case good orders are improving, and we have been gaining momentum over the last eight weeks. While the reports at retail have remained mixed over the last several weeks, we continue to make strides in improving our market share position with the majority of our companies.

Now a couple of comments on our operating margins. Our overall operating margin for the quarter before the write-down of intangibles and restructuring was 6.9 percent, down from 8 percent a year earlier. This decrease was largely the result of weaker-than-anticipated sales leading to less than optimal capacity utilization. Additionally, we continue to feel the effects from the significant case good plant closures we have taken over the past couple of years, with about one million in restructuring expense or about a penny a share in the current quarter. We also have incurred greater expenses as we open new company-owned retail stores, which require upfront employee training and hiring expenses, heavier startup advertising costs and other one-time investments.

Finally, we have seen substantial material price increases, continued price competition and discounting pressures in the marketplace. We are increasingly better positioned today to respond to these challenges than we were a year ago, and therefore the impact is considerably less than it might have been.

On that note, as I have mentioned before, we have aggressively managed capacity on the case good side of our business and are down to five case goods facilities for our six case good brands. With the uncertainties surrounding the antidumping petition (ph) on Chinese bedroom furniture, we will delay any further plant rationalization until the result of the antidumping action is fully known. We are prepared with various strategies, depending on the impact of the possible tariffs on bedroom furniture.

In fact, we are focused on aggressively growing our revenues to better utilize domestic case good capacity we have remaining. Our case good managers are very proactively and constantly evaluating their collections and are bringing exciting new products to the marketplace based on the mix of global and domestic sourcing for their particular situation.

Just to review where we are today, we have two companies that are essentially importing 100 percent of their product lines with our four other case good companies using a blended strategy. In total, we are importing about 40 percent of our case good product line and domestically producing the other 60 percent. Our hospitality business distorts our imported percentages because the majority of their product is domestically produced due to that industry's service aspect.

By embracing a blended strategy, we do not have all of our eggs in one sourcing basket and we can be quicker to react to changes in demand as business ebbs and flows over the ever-changing geopolitical landscape. That being said, we feel we can produce a certain amount of our solid wood furniture, hospitality and some youth product competitively in the United States and continue to believe this blended strategy is prudent and effective given the current conditions.

Now I would like to spend some time outlining the key areas we are concentrating on to drive our growth in revenues.

We recently finished up the April market, and I am happy to tell you it was one of the more positive markets we can remember in many years from both the retailer and manufacturers' perspective. The retailers we met with were more bullish on their business than they have been in some time based on their first-quarter sales results, the increased traffic levels at the stores and the continuing pent-up demand for furniture that exists as a result of the housing boom.

At La-Z-Boy residential, we had great success with our recliner category in helping our retailers differentiate La-Z-Boy from the our competition. It was the largest introduction of new recliner models that we have had in years, including a new category based on the demand for softer-sitting, larger-scale recliners. These recliners were very heavily bought across our customer base, and we believe that as a result, we have increased our exposure on our dealers' floors across all of our distribution channels.

We also expanded our Todd Oldham by La-Z-Boy collection with over 50 new fabrics, several new frames and significantly more accessories. The response to this collection has been overwhelming over the past six months, with over 240 million impressions generated through our PR efforts in newspapers and magazines such as the Chicago Tribune, the Washington Post, the New York Times, Business Week and Time Magazine. In fact, Metropolitan Home called it, "the most exciting collection to ever hit the mainstream furniture market." Based on that visibility and the national marketing campaign which kicked off in April, we landed a large number of new placements at market on the Todd Oldham collection.

Our transitional-look company Bauhaus continues to steadily grow its business, and they introduced a number of very well-received groups at market. Their high-style, value-priced upholstery is appealing to a wide array of major retailers. Pennsylvania House had one of the most significant introductions of the overall market with its Summer Retreat collection. As a result, we gained a substantial number of placements. In fact, Pennsylvania House gained a record number of new customers.

These are continuing examples of each of our companies truly reengineering themselves by examining all of their processes and products, then making the necessary changes needed to become more important to our dealers and their consumers.

Finally, Kincaid also had a strong market, with particular success coming from the introduction of Carriage House, a traditionally-designed collection.

Now let me turn to the branded side of the business. We have repeatedly said that the strongest asset this company has is our La-Z-Boy brand and core to that brand's heritage is the recliner. We have put substantial energy and efforts behind educating the consumer that not all recliners are created equal and that ours is indeed better. The core element of that effort is a comprehensive new point-of-sale program that highlights the significant differences that exist between the La-Z-Boy recliner and all others. These differentiating program materials have been requested by virtually every single dealer in our system. Combined with the new product I mentioned earlier and a more comprehensive leather program, this renewed focus on our branded business has led to higher recliner order rates than we have seen in quite some time.

In our partnership with all of our retailers, we are also working to drive more customers to their stores through our promotional efforts. We launched our great rebate event in February, which provided rebates direct to consumers from both us and our retail partners. This promotion was different than others we have done in the past in that we did not provide sell-in discounts on product to the dealers. All of the effort of the promotion went towards having the consumer pull product through our retailers. We had the highest participation in this program that we have seen in years and the sell-through was also reported as being very effective through all of our distribution channels.

Going forward, we have coupled consumer-focused promotions, such as the rebate event, together with compelling retail-driven activities in a comprehensive promotional calendar which will develop more effective long-term marketing plans with our dealers and help them to better promote their business.

I would now like to spend a few minutes on the La-Z-Boy Furniture Gallery stores.

First of all, we have been involved with a one-brand retailing system since 1975. We started out with stand-alone showcase shops ranging from 3500 to 5000 square feet, and initially they averaged considerably less than $100 per square foot. We then expanded our product offerings to a broad line of upholstered product and opened the first 13,500-square-foot La-Z-Boy Furniture Gallery stores in 1990. Those stores started out averaging $113 a foot in 1990 and grew to over $238 per square feet over the next ten years.

Then, in 2001, we took all the lessons we had learned at retail over the last 25 years, all of the experience we had gained from implementing different programs, and rolled out our new-generation Furniture Galleries format. Averaging 15,500 square feet in size, the new-generation stores are outperforming the original format stores by almost 25 percent and our top five stores are currently averaging over $10 million each in annual sales. So we continue to raise the bar higher and higher by sharing these successes and learning from our partnership with our retailers.

In fiscal 2004 we opened 22 new-generation Furniture Galleries, bringing our total to 68 in the new format out of our 324 stores. We plan on having at least 40 more in the new format by the end of fiscal '05, with roughly half of those being new stores and the remainder being remodels or relocations of existing older format stores. In the first quarter of '05, we expect to open 11 new-gen format stores.

I mentioned on our last call that our position on retail involvement at La-Z-Boy was changing. Ideally, we want the owners of these stores to be good merchants, strong supporters of the La-Z-Boy brand and highly focused on maximizing the potential of their store locations and individual markets. When this is not happening, however, we are taking the steps necessary to ensure that our potential is maximized at the retail level in the best interests of our shareholders and our consumers.

We also discussed last quarter that we are willing to take on store ownership ourselves where necessary to achieve our market penetration targets in major metropolitan areas. This quarter we acquired four La-Z-Boy Furniture Gallery stores in the Baltimore market and have already opened a new store in this market in Columbia, Maryland. This gives us 14 stores in the Baltimore-Washington corridor, which, when combined, is the second-largest home furnishings market in North America. Since we already had a major presence in Washington, D.C., we were able to leverage our existing infrastructure into that market. With this acquisition, we now have 36 company-owned retail stores.

My primary point is that we understand what the important drivers are at retail and have an organization in place to support and continually work to improve its performance. We do the same thing with our in-store galleries and our general dealer partners -- listen to the customer and make continuous improvements. We're not just interested in only growing our Furniture Galleries proprietary store system; we want to also continue the growth of our general dealer base at rates above the industry average.

I mentioned earlier our position on the antidumping action and how we'll respond accordingly depending on the level of tariffs which could be levied. Recently, we have had numerous questions about the different dynamics between the case good and upholstery business as it relates to import pressures. We would like to share with you our point of view on that topic.

First of all, there is the issue of speed to market, and no matter how fast you can make it on the other side of the water, it still has to come across, which normally takes four weeks or longer. Secondly, freight as a percentage of the cost of a mid-price-point sofa is considerably different than that of a $1000 bedroom offering. And lastly, we are all about giving the customer design choices, which is difficult to deliver in a timely manner from offshore.

With that being said, we are aggressively integrating global sources into our upholstery business where it makes sense and adds value to the customer. For example, we are doing a significant amount of business with cut-and-sewn leather out of both Asia and South America. We will continue to remain competitive in upholstery, regardless of how the global market develops.

Though we are very happy that fiscal 2004 is now at an end, we are equally excited to be entering a new year. In fiscal year 2005, we believe we will begin to see our strategy and our focus on growth bear fruit. Our brand strength, which is absolutely unequaled in our industry, combined with exciting new products and the best distribution system in the furniture business, are incredible competitive advantages which we will increasingly utilize to grow this business.

Additionally, I want to point out that our Board of Directors have confidence in our long-term strategy and vision, and as a result, have increased our dividend 10 percent to 11 cents per share. We have paid a dividend each year since going public in 1972 and have consistently raised the dividend over the years.

Finally, in terms of our guidance, we do need the economy to cooperate, and although the recent employment numbers have been encouraging, we are now faced with record high energy costs and the prospects of rising interest rates. Consumers still appear to be cautious in their view of the economy. With that being said, we have seen our incoming order rate improve progressively since the beginning of the year and into May, particularly in our upholstery segment. We currently expect our July first-quarter sales to be up in the low single-digit range compared to the prior-year period, and we anticipated reported earnings to be in the range of 8 to 12 cents per diluted share in the first quarter of fiscal 2005. This would include up to 2 cents per share for the potential losses from VIEs, which Dave will discuss in more detail. This would compare to the 11 cents we earned per diluted share in fiscal 2004's first quarter, which included a 7 cent restructuring charge.

Again, I want to thank you for being with us today on our fourth-quarter conference call, and I am pleased to turn things over to Dave Risley, our CFO, for further comment on our financial results. David?

Thanks, Kurt. The quarter and full-year results are somewhat complex as a result of all the special items.

First of all, we had the previously announced write-down of intangibles of 71.9 million pretax or $1.07 for the quarter but only $1.04 for the year. The 3 cent differential results from the differing number of average shares in the two periods. The majority of the write-down, 60.6 million, is related to case goods business, as you would expect. And of that, half was related to the hospitality business. The remaining 11.3 million was attributable to an upholstery unit.

The Company first adopted FASB 142, Goodwill and Other Intangible Assets, at the beginning of fiscal '03 and took a cumulative charge of 59.8 million or $1.04 a share at that time. Our annual review required at the end of '03 maintained that valuation. With the continuing case good declines in volumes in '04, the valuations required a further write-down. At this point, there is no remaining goodwill on any case goods company, but we still have about 19 million of trade-name intangible value related to three of the companies. While we cannot guarantee it, we don't expect any near-term write-down of these values. The remaining goodwill and intangible values on the books in total relate to thriving entities.

Restructuring charges in '04 were 12 cents for the year and 1 cent for the quarter. This effort related to the case goods group, wherein we closed plants in Morristown, Tennessee and Monroe, North Carolina, as well as combining certain support and management functions. These efforts helped us to continue to keep pace with balancing import and domestic production. As Kurt indicated, we have no near-term actions to take until the full impact of the antidumping results have been evaluated.

Lastly, we had a cumulative-effect non-cash charge for the adoption of FIN 46, Consolidation of Variable Interest Entities, totaling 8.3 million net of tax or 16 cents per share. This pronouncement was in reaction to the Enron debacle. In layman's terms, this requires us to consolidate any entity with which we do business wherein we might have more "skin in the game" than they do, regardless of what the legal ownership may be. Ford, as an example, had to consolidate several suppliers in which it only had a minority interest, as well as 160 independent auto dealerships. In our case, we have several independent dealers, i.e., we have no equity interest wherein we have provided extended credit, made direct loans and/or guaranteed certain loans or leases. Under our prior accounting method, we provided adequate reserves for the collectibility and/or guarantee payouts and also fully disclosed all our contingent liabilities and exposures related to these dealers. FIN 46 now requires that we fully consolidate these entities.

In addition to the cumulative-effect charge, there is a schedule attached to the press release that reflects the net impact to the balance sheet. Going forward, the P&L will fully reflect their sales and expenses as well.

Net of all the above, earnings for the quarter and the year would have been 44 cents and $1.21 per share respectively. As Kurt has indicated, we are not pleased with this performance. In a nutshell, the decline in margins can be attributed to, one, lower-than-expected sales; two, under-utilization of facilities, particularly in case goods; three, material price increases, especially of late in steel, plywood, cherry hardwoods, foam and transportation cost; four, inability to pass along price increases -- although price increases were announced at the last market, they won't go into effect until our second fiscal quarter; five, additional advertising and promotional expenses which were used to drive volumes; and six, the rising proportion of retail to our total operation. As you are well aware, retail carries a different gross margin and SG&A structure, as well as a lower return-on-sales ratio. The plus side of that equation is that normally the return on invested capital is higher.

The tax rate for the quarter and the year is distorted somewhat by the impact of the intangible write-down and the adoption of FIN 46. Exclusive of those, the rate was 38 percent for both periods.

Cash flow from operations for the year was a strong 133 million as a result of working capital performance. CapEx hit 31.6 million and total repurchases were 3.4 million shares at a cost of $72.5 million. Due to the intangible write-down, the cumulative-effect adjustment and the consolidation of our VIEs, our debt to total cap ratio now stands at the high end of our target range at 30 percent.

As to future guidance, we will continue to go out only one quarter at a time. As Kurt already indicated, we expect a modest increase in volume for the first fiscal (ph) quarter, which is also, I might add, our seasonally lowest period for the year and includes plant shutdown at most of our facilities for summer vacation. You can expect an increase in upholstery with a continuing decline in case goods, but at a decreasing rate. Margins will still be somewhat depressed for the reasons that I have previously stated. Expected EPS will be an 8 to 12 cents range, which includes up to a potential 2-cent loss from the impact of consolidating those VIEs. For modeling purposes, capital expenditures for '05 will be in the 30 to $35 million range, consistent with the last couple of years. Depreciation should approximate 30 million. And the tax rate should remain steady at 38 percent. You can also expect that our share repurchases will be used, but only to manage our debt-to-cap ratio back to the mid 20 percent range.

And that's all I have. Thanks. Mark, back to you.

What I would like to do is reemphasize that in the interest of giving everybody an opportunity to ask a question, if you would just ask one question, and then after we get around to everyone we can circle back if you have an additional one after that.

Taylor, could you please review the instructions for asking questions?

(OPERATOR INSTRUCTIONS). Budd Bugatch.

I am curious on FIN 46, which has been an area of interest of mine for awhile. You said several dealers. Can you give us the number of dealers; also the date of their statements, how you are getting them, what the currency of their statements are since you have to consolidate private entities that you don't have, as you said, equity ownership of? And what is annualized rate of sales from those companies? And finally, I look at the long-term asset reversal of about $12.5 million. I take it that might be notes payable. Just maybe if you could give us a little more color on that?

Yes, I'll respond to that, Budd. Your last part of that is right on. That is the reversal of some of those long-term loan arrangements.

We have in the half-dozen range number of dealers involved. This pronouncement came out a little over a year ago and then was revised again this last year, and everybody has still been working on it, trying to get interpretations to it. The information that we have comes from all of our dealers involved. Obviously, they are U.S. dealerships, so we're talking in dollars obviously. The financial statements would be -- in the relative near-term, there is a lag period involved of anywhere up to four months. As time goes forward, we may be able to narrow that gap, but they are independent dealers, and they have to provide that information to us. We have an obligation, obviously, under our reporting requirements, as well as our auditors, to ensure that those numbers are reasonably accurate. That is our job, to take care of that. We have to eliminate our inter-company profit and inventory. We have to evaluate the quality of their financial statements. We have to get footnote information from them and compile it.

Because this is fairly new to us, and while we know certainly what our sales to them are, we have not really tracked probably as closely as maybe we could their seasonal sales of their sales. So we are a little bit naive, I guess, or not as bright as we could be at this point in time to predict accurately what their seasonal business will be from quarter to quarter. That certainly is something that we will be able to correct here in the very near future as we gather more information, and that is one reason why we have the 2-cent loss in our projection as a reasonable range for expectation.

Not all of the dealers involved are in fact losing money. We have good, strong relationships with these dealers. We still have a positive relationship, and we will move forward accordingly. Hopefully, that answers your question.

Just a follow-up. Again, the six dealers -- how many stores do they represent? And with $21 million, or almost $22 million, of receivables, I would assume that those receivables would be paid in 90 days kind of time frame, maybe 180 at the worst. It would be somewhere between 50 to $90 million worth of your sales to them. Is that what that represents?

No, not necessarily. Again, if you go back to the definition that I went through, there has been extended credit there.

(Multiple speakers) the notes, David?

Well, for certain dealers, as well as some direct loans and guarantees. This has been built up over time and, like I say, we have provided adequate reserve in our financial statements for these at all times. The calculation of FIN 46 is very complicated, if you've gone through it. And like I say, we have to also take out our inter-company profit elimination.

I understand all that, but I'm just trying to figure out what is your sales level to these guys. How many stores does it represent? I don't think you answered that.

I didn't answer that, Budd. Off the top of my head I really don't know. We can get you that answer if we decide to disclose that. I'm not sure that we will yet.

And your sales to them? You're not disclosing that either?

Well, not at this time. We obviously will as we go forward and we gain experience with exactly how we expect those to kind of roll out on a quarter-to-quarter basis. This upcoming quarter is the lowest quarter of the year, of course, though.

Margaret Whelan.

I have so many questions, but it all just comes down to the margin. You're not taking costs out as quickly as you are seeing price deflation. Is that basically the problem on the manufacturing side?

That's a contributing factor.

Well, like I don't get it, because you're being efficient and you're spending all this money in advertising, but you're not really getting any return.

I think, Margaret, you have to step back. And one of the things we felt when the management change took place here six months ago was we had to get the Company back improving its market share, growing and get some momentum back in our business. We've done that and we have had some unusual things that have happened in this past year. But now that we have that firmly on a good foundation, I think you can see -- you'll start to see our margin improvements happening as we go forward.

But that doesn't explain the guidance.

Well, I think the guidance, Margaret, has been fairly explicit in terms of what is taking place with us right now. And particularly in this summer quarter, is the underutilization no matter what our volumes tended to be because it's a slow period in the market.

But it is due to seasonality? I mean, it's nothing new; your earnings power is still going to be down 30 percent versus last year. Year over year, it's the same thing.

I would say, Margaret, the biggest driver of that is we had raw material increases at an alarming rate in the last 60 days before the market started. We took our price increases at market, but we don't get the full effect of those till the second quarter.

What kind of price increases are we're talking about, what magnitude?

Well, we took different levels of price increases, depending on the different companies' position. So I would be in error of giving you a broad stroke on anything, but we certainly took price increases at the majority of our companies to counteract the raw material cost increases we have experienced.

We're hearing that some of your competitors are discounting as much as 10 percent on upholstery right now, though.

Excuse me? I didn't hear that.

We're hearing that some of your competitors are discounting by as much as 10 percent on their upholstery right now. So isn't it going to be hard for you to raise prices? Or you're not seeing that in the market?

Well, we took what we thought was a reasonable price increase, one that we needed and one that would still keep our products competitive. So we did not have a whole lot of push back on that from our perspective.

In terms of the dealers you're consolidating, what is their EBIT margin?

We would not disclose that. You can project it; it's collectively negative.

And in terms of good news, what are you spending? What did you spend 11 million on in the quarter and 35 for the year?

There is nothing unique in there, to be frank. There is equipment replacement. There's only one facility that's adding any physical space. That's our England subsidiary, but that is not a significant building. It's mostly just replacing the equipment, as well as some systems equipment and implementation.

We also spent a fair amount of money, Margaret, on an ERP implementation that we're doing at a couple divisions, some new fabric cutting machinery and we are building an additional facility at England to support some reorganization of their manufacturing and to support their bedding operation.

And that will be ongoing or you have done that already?

We've done the majority --

But you have spent money already?

We've done the majority of it already.

Charles Grom.

Good morning, guys. Just another question on the margins. If my math is correct, it looks like your EBIT margin for the first quarter is going to be about 2, 2.1 percent. I'm assuming, obviously, the bulk is going to be driven by gross profit margin pressures. And, like Margaret said, most of these issues are likely to persist, I think, even beyond the first quarter and maybe even into the second and third. I'm just trying to get a feel for what you guys are modeling internally for margins. Should we be thinking continuation of year-over-year margin declines in the second and third quarter again, or what are you guys thinking there?

I wouldn't think we would see the same degree of margin decline that we have experienced in the first quarter. As David mentioned, our first quarter has traditionally been substandard to the year. We take a lot of downtime, we have our vacations, and we don't fully absorb everything that we do in the succeeding quarters. So we are not looking at the same kind of margin degradation going forward after the first quarter.

Maybe a follow-up there -- which one of the six or seven issues that David outlined do you think will start to be relieved? Some of the raw material prices are probably going to increase year over year; you're probably going to have to continue to take some down days. What is going to get the margin to tick up there? It's got to be a little more than pricing power.

Well, I think the pricing power is one of the factors. The other issue is we need to be a little bit cautious here. Most of the materials that we have had increases in are somewhat commodities, and they ebb and flow pretty well. In fact, we have already seen going forward a little bit of backup in some of the pricing on plywood.

Now, on the flip side of that, steel prices are double what they were a year ago, and some of those things that really have rocketed up here in the last 90 days. But if history repeats itself, the ebb and flow of those kinds of raw material price increases have a way of changing as the year trends on.

And just one last question, if I could, just to kind of switch gears to the top of the P&L. I was a bit surprised to see you only guiding to a low-single-digit sales growth number, assuming that you're going against a negative 9.2 percent comp. What should we think here over the remainder of the year as comps get a little bit easier as you kind of turn through the year?

And if I could, for the first quarter, what is the mix going to be? Should we assume about a 6 percent upholstery gain and about an 8 percent decline in case goods? If you could just comment on that, I'd appreciate it.

The first part of your question relative to our sales gains, we think your estimation of the upholstery versus case goods is in the correct range. I'm not sure about giving guidance beyond where we are at here in the first quarter because retail business for the last five or six weeks has not been anything fantastic, and so it's hard for us to put any color on the future.

But you also made a comment that our comps get easier as the year goes on, and that is really not true. Our comps will get tougher because we had less of a decline as the year went on quarter over quarter.

Good luck.

Carlos Ribeiro.

Just a continuation on the margin questions. Can you quantify what the raw-material impact on the gross margin was this quarter, and maybe what your expectations are for the impact on the first quarter, just solely on raw materials?

That's a consolidation of a lot of different numbers. As Kurt indicated, steel was a factor. And we have more steel involved in a La-Z-Boy chair than probably any of our other products. So it's going to be higher for steel in La-Z-Boy than it will be in any of our other companies. Plywood hits most of our upholstery and doesn't impact our case goods. Cherry hardwoods, obviously, hits into our case goods and nobody else. So it's a hodgepodge there. I don't have a distinct, consolidated number for that.

If you were to take a look at the average raw material increase for your inputs, can you quantify that as opposed to just the basis-point impact on the margin?

You mean as a percent of our cost?

Correct.

Well, raw materials would typically be in the 40-to-45 percent range.

Okay. And can you just give us an update in terms of what your capacity utilization rates are for, specifically, each segment, case goods and upholstery?

The upholstery segment for the quarter -- it was pushing 90 percent, and in our case goods segment it was in the mid 60s.

Todd Schwartzmann.

Looking at the upholstery sales for the quarter, $434 million, what was the mix? How much of that was leather, how much of that was fabric? And also, what were those percentages a year ago?

Well, it's hard -- I can give you some ranges, but it varies within companies. Certain of our companies are not involved in leather to any significant degree; others are very much involved in it. I would say on an overall basis, our leather as a percentage of our business is in the 17-to-18 percent range. And that's probably up 3 or 4 points from a year ago.

And as far as offshore sourcing, you had given the number on the case goods side -- I believe it was 40 percent of the total. What about upholstery? If you want to include the cut-and-sewn, certainly, how much of the upholstery segment is being sourced right now?

Well, again, we are not trying to be evasive. But we want to give accurate information. What we told you in our remarks was that 40 percent of our case goods is imported, but that's finished goods. Now, we import a lot of components for all types of products worldwide. We import rocker blocks, we import bun feet (ph), we do all kinds of things. And for us to give you a number on that -- what we typically report is the amount of finished goods that we import, and that's why the numbers -- and so we import today very few finished good upholstery pieces across the world, but we import a lot of sourced materials.

And particularly cut-and-sewn leather.

Yes.

Last question on SG&A -- Mike (ph), you had given the reasons earlier. But year over year, the SG&A increase was about 8 percent in Q4. I'm just wondering if you could talk a little bit about continuance of that trend, whether we should expect similar gains for the remainder of fiscal '05?

Well, there's two issues there, one of which I alluded to in terms of as our retail grows, retail has a substantially higher SG&A structure, obviously. Their cost structure outside of the cost of the product is all SG&A. And if you even look at industry averages, SG&A percentage is right around 40 percent. So to the extent that retail increases in our volume, it has some impact on that number.

We also had a number of internal initiatives that are -- I don't want to imply that they are one-time, but we have some ebb and flows of initiatives that sometimes will hit SG&A as opposed to cost of sales, for example. And while there's no one item in there in particular, there were a number of projects that we spent some money on that had an addedimpact to it.

Overall, that is certainly a number that we monitor very closely and try to make sure that every dollar spent brings more than a dollar worth of value. But the timing is not always the same. You have to spend a dollar today to get more than a dollar tomorrow, but the dollar today gets recorded.

So a mid-single-digit percentage increase would be more -- would you say that would be more likely than 8 percent for '05?

Yes; I think that is probably more accurate, but I would caution you again to what David said is -- that to the degree we put in more retail into our Company, the distortion of that number is going to be -- we're going to have to provide some more clarity to that downstream.

Laura Champine.

Can you break out unit growth in Q4?

Well, we can, but I don't think that's something we want to disclose at this particular time. We certainly track that, as a true measurement of our performance, but it's not something that we want to make public.

Can you talk about it directionally, just in the sense of is unit growth higher than dollar growth or is it lower?

I think on an overall basis, our unit growth is a little bit lower because of the increasing percentage of leather. But there's not a huge spread between them percentage-wise. And that's just for upholstery, Laura.

I'm sorry? So just for upholstery, I can think of unit growth as lower than dollar growth, but I shouldn't apply that same thinking on the case goods side?

It's hard to do the case goods units because you've got beds, you've got dressers, you have pieces that aren't homogeneous.

And just one quick follow-up. You may have mentioned it and I didn't hear it, but can you give a blended raw materials price increase that you experienced in Q4 or what you expect in Q1?

I wouldn't want to project that, to tell you the truth, no. I don't think we can accurately do that for you, Laura.

Can you talk about Q4 -- what your blended raw material price increase was?

No. I think we tried to answer that question previously. And it's different for each company. We have not put together a consolidated impact on that.

Joel Havard.

I'm going to try to sneak in here with two different questions, as well. First of all, Kurt, you talked about the range of strategic options that you all thought about post the DOC's decision. Could you give us a little indication of that range? In other words, is it every -- does it go as far as divestiture? Does it come all the way back to increasing investment in the divisions?

Well, I think partially it would be premature for me, Joel, to comment on the depth of degree that you're indicating. But suffice it to say that we have got excess capacity. We have a number of partners in China -- and this is going to be a specific group by specific company by specific partner in China situation. I think the great thing for us is we have tremendous flexibility when the dust settles as to what moves need to be made after there is some more clarity to this issue. And we also have a number of partners outside of China that make case goods for us today, as well. So having a blended strategy leaves us in a position to maneuver, I think, appropriately.

Okay. I'm not trying to put you in a corner or make a decision yet, Kurt. I'm just trying to get a sense of, have you as a board and senior management really looked at each of those decision points and modeled what the impact might be from this nearest or easiest decision to those outlying decisions?

Yes, we have. We've looked at all possible situations.

All right. Fair enough. I just -- it's encouraging for us to know that you have run the scenarios.

And, David, if you could maybe clarify just a little bit your thoughts on the debts and cash flow as it relates to the repurchase effort? Did you say that you didn't want to increase debt?

No; I said we will manage our ratio back down toward the mid-20 range. So with a higher ratio right now, you could probably expect we'll be at a lower buyback ratio for a period of time.

So it's cash-flow-oriented repurchase for awhile?

That's correct.

Greg Halter.

Good morning; Elliott Schlang. Could you indicate what additional special charges you might anticipate over the next year or so? For many years, the Company avoided special charges, and now it seems one quarter after another you are plagued with them. Do you feel this will be the end, or is there a probability that others may be coming up in the coming year?

Elliott, if you could help give us some clarity on the government's changes of accounting rules or the SEC's position on those things, then we could give you a more clear answer. But truly, we have a little bit of a moving target with the FIN 46. The way we understand it today, certain of our dealers could be included in that going forward, certain of them could drop out. It's a quarter-by-quarter situation. So we're into some uncharted waters here as far as the things that we are being required to comment on that are new for us.

But as far as internally generated restructurings or closings or other charges, any comment there?

I think our clarity on that issue would be post the anti-dumping situation. And again, to comment on that would be premature. But if there's any more of that to do, it would be in that segment. And we're not prepared to talk about that today.

And for the year ended, do you have any feel yet on what your market share would be in any of the various major categories? Or do you have any feel generally as to whether in case goods or in upholstery items you gained or lost market share?

I would tell you, Elliott, that the first part of your question is that it's getting increasingly tough to get accurate numbers on our industry as much as our industry is changing. When our industry used to be primarily American manufacturers and it was primarily traditional retailers, I think the industry had some pretty good numbers. But now, with our products being sold through mass merchants, through the Wal-Mart-type distributions or the Internet, the retail numbers get clouded. And with all the import people, to get a true number on the market itself, I think, is difficult.

With that being said, I think we are beginning to gain back some market share on the upholstery side of the ledger, and I think we are still giving up market share to some degree on the case goods side.

And two other quickies, if I may. On your advertising expense, can you be specific as to what you paid in the year ended or for the quarter? And how effectively do you monitor the utilization of those expenses? In other words, with those heavy expenditures, is it really worthwhile, given the sales increase of under 1 percent in the most recent quarter?

Well, you have to realize one of the other things that has been driving that, Elliott, is the retail advertising that's being done by our company-owned stores is now put into our numbers, which makes that percentage seem a little different.

Can you give us the number that was in the most recent quarter? The advertising expense?

I don't have the quarter with me. But I think our advertising expense year over year was up about 7, 7.5 percent.

And last, what are your internal goals on margins? As you look out -- and I'm not talking about next quarter or maybe even the coming year. But on an intermediate-term, 3-to-5-year basis, what margins will you determine for yourselves as being successful?

Well, I think that would depend, Elliott, on how our business model breaks out long-term, how much of our business is in the upholstery side and how much of it is in the case goods side. We think we have a little better margin opportunity in upholstery today than exists in case goods. So depending on how those two businesses grow would have a net effect on how our ending margin would appear.

Is it realistic to expect your record margins to return at some point, or are those days just gone?

Well, if you go back to when Mr. Knabusch, Sr., was running the Company, the founder, and that we only made recliners -- I'm not sure we'll see those margins again. But if you're talking about the margins that we experienced three or four years ago, I don't think there's any reason we can't get back to those levels.

John Baugh.

Just quickly on the American of Martinsville, what does the order book look like there? What does the backlog look like? Is there any sign of hope from your seat -- not from the external world, hotel vacancy rates, but from what you are seeing?

Now, Joe, you know better than to try to have us talk about each of our companies outside of our segments.

Well, I gave it a shot, anyway.

(laughter) And what we have said in our release and our public information, that we're seeing less of a decline. But when people finally decide to invest capital in new hotels and refurbishings, then that doesn't happen in 30 days. So there has to be the investment coming back in that industry in order to have business mature in a reasonable timeframe. And we're starting to see some of that.

Are you running into competition that's sourced product in that industry?

We're running into a little. But I think everybody is pretty much, right now, on the fence, waiting for the decision of the anti-dumping. I think there's a hesitation from some of the huge players to commit for things out six months from now to a year from now on pricing and not know what it could be if it was sourced internationally.

And then just quickly, on your new La-Z-Boy stores -- and I'll take the corporate-owned ones -- do you make money on those in the first year? I know you have startup expenses. And I am asking that question maybe from two perspectives -- one, just on a pure retail; in other words, backing out your wholesale -- or you can answer by including your wholesale. What kind of returns are you seeing in year one in the new-generation stores?

Well, we see very good returns in most cases in the new-generation stores. And yes, they do turn a positive profit in the first year. I think the thing that needs to be understood is that in our retail division as a whole, a lot of the stores that we have taken back or purchased in the last few years, and some of what we will be doing going forward -- one of the reasons we're ending up with them is that they haven't been performing the way they should.

So I don't think it's any dissimilar to some other of our competitors in the industry. Most of the things that the manufacturers are doing, if it's not brand-new retail in underpenetrated markets, is taking dealers who aren't performing, who aren't making a profit, and feeling that we can do better than that.

(OPERATOR INSTRUCTIONS). Budd Bugatch.

I have a couple of follow-ups. Kurt, I think you said you acquired four stores this quarter?

That's correct.

In the cash flow statement, it shows $9.2 million of acquisitions. Was that just for the stores?

Well, it was part of those stores. And we also opened another store which the dealer had already started on in Columbia, Maryland as part of his licensed territory. So it was actually five stores, four of which he had, and one he was under construction with, which added to some of the expense.

So I take it you bought the assets, then?

Yes.

To get up to that size?

That's correct.

Okay, and lastly, with the size of the retail operation and now consolidating those VIEs, it seems to me you are getting awfully close to a segment on retail. Is that not correct? What I be wrong to read that?

Yes, you would be wrong to include the VIEs in that yet. There has not been clarification as to how VIEs need to fall into a segment. We will not have them included in either the upholstery or the case goods segment at this point in time.

I understand -- they are retail, and if you have your retail operation with your 36 stores, I would imagine -- how much square footage is involved in those 36 stores?

You could take an average of 13,500.

Okay, so that got me to somewhere around 450,000 to 500,000 square feet. That's about $100 million of retail volume or more when the VIEs -- I mean, you're getting awfully close, when you add those two together to get to a retail consolidation segment, right?

It's potentially there in the future, Budd; I don't disagree.

How far in the future?

Well, it has to exceed, generally, 10 percent of your total volume is usually the kind of the cutoff point.

I understand. I understand. Well, with the five stores you bought and a couple -- I mean, you are getting there. You're not far away.

We will --

And it might behoove you to kind of short-circuit some of these issues you have had to deal with today, because the operating statement is changing character, obviously. With all the accounting pronouncements and stuff, it might be to your advantage to actually do it sooner than later and be proactive on it.

We are not -- let's put it this way. We're actively discussing when and how and where and so forth.

But the bottom line is, Budd, that day will come. It's just a matter of when.

Yes, side one (ph) -- and so, to me, if you are a public company, you are better off doing it sooner than later and being proactive, because you have had lots of margin issue questions, which are natural with the changing face of raw materials and changing face of character of your company.

That's correct.

Charles Grom.

Quickly, guys, a while back, you used to provide same-store sales each quarter. Do you have a number for us for the fourth quarter? Either on the -- let me just clarify it. Either on the stores you own -- the 16(ph) stores you own, or on the entire store base?

I'm not sure that we have ever divulged on the stores that we own, but on a systemwide basis, I can tell you since the first of the year, calendar year to date, our stores are up in the range of 4.5 percent same-store.

In units or total sales?

That's same-store sales. They are up about 7 percent in total sales.

And then quickly, of the new-generation format stores, could you quantify what the before and after performance of these stores has been, either on a sales-per-square-foot, sales-per-store, or some kind of comp metric, so we can kind of see what you guys are doing at these stores and if the returns are justified here?

Well, as we mentioned in our comments, the stores are performing at about 20 to 25 percent higher volumes than the old stores. That's a combination of better locations, it's a combination of a little bit bigger size, and it's a combination of a better-designed store which facilitates more room sales as opposed to item sales. So the combination of the three are giving us a pretty good lift on the comp sales compared to the old format.

Thank you for participating in today's fourth-quarter operating results conference call. This call will be available for replay beginning at 2:15 PM Eastern Standard Time today through 11:59 PM Eastern Standard Time on June 4 (technical difficulty)