La-Z-Boy Inc (LZB) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the La-Z-Boy Inc. first-quarter 2006 conference call. At this time all parties are in a listen-only mode and there will be a question-and-answer session following the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Mark Stegeman, Treasurer of La-Z-Boy Inc.

Thank you, Megan. Good morning, I'm Mark Stegeman, Treasurer of La-Z-Boy. I would like to thank you all for joining us on this morning's call to discuss our fiscal 2006 first-quarter results. Present on the call are Kurt Darrow, La-Z-Boy's President and CEO; David Risley, our Chief Financial Officer; and Patrick Norton, our Chairman. Kurt will begin with a discussion of prepared remarks and then we will open the call to questions. We would ask that you please limit yourselves to one question at a time with a follow-up if necessary so that everyone will have an opportunity to ask questions. A telephone replay of the call will be available for a week beginning this afternoon.

These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles to provide guidance and to communicate with investors about the Company's current operations and future prospects. We will make forward-looking statements during this call, so I will repeat our usual Safe Harbor remark. 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 SEC filings. And they may differ materially from actual results due to a wide range of factors. We undertake no responsibility to update any forward-looking statements made during this call. And with that let me turn over the call to La-Z-Boy's President and Chief Executive Officer, Kurt Darrow. Kurt?

Thanks, Mark, and good morning and thank you for joining us today on our fiscal 2006 first-quarter conference call. My remarks this morning will address our results and what we experienced during the quarter, our ongoing strategy to move our business forward and, finally, a review of our current business conditions and what we see for our fiscal second quarter. But first, the quarter.

I will start by discussing where we fell short of our first-quarter guidance we gave in June when we announced our year-end numbers. At that time we said we remain cautiously optimistic about the industry's growth prospects for this year amid a backdrop of rising interest rates, escalating oil prices and geopolitical uncertainty. Oil continues to rise hitting new records, interest rates were raised for the 10th consecutive time since the Fed began its program in June of last year and the situation and Iraq continues.

While we have gained some top-line momentum over the past year, we were derailed somewhat this quarter by the characteristically slow pace in retail which was also experienced by others in the industry. Although personal income is up significantly year-over-year, we believe the promotions offered by the U.S. car manufacturers captured a significant share of spending this quarter with gasoline prices also playing a significant role.

While historically our first quarter is our weakest, the slowdown this quarter was unusually pronounced. However, we are pleased that even with flat volumes at the wholesale level we are making steady progress and year-over-year our profitability at the wholesale level was up substantially. Further impacting our results for the quarter were greater than anticipated expenses transitioning the 21 stores we acquired at the end of last year. These stores were in poor shape and unfortunately need time to be turned around.

In addition there was a significant amount of discontinued merchandise which needed to be moved through the system at substandard margins. We will also need to invest in updating information systems, adding to personnel and relocating or refurbishing stores. We believe acquiring the stores was the right move for us long-term as they are in key markets for us and, once the necessary changes and improvements are made, they should perform to our expectations.

And finally, VIEs were a slight drag on our performance for the quarter. In addition to adding a fourth VIE, the three existing ones that we expected to report breakeven results for the period actually lost a little money. They too were impacted by the slow retail environment. I'd like to emphasize, as we have in the past, that although we would prefer not to have any VIEs we are comfortable with those that we believe will be profitable on an annual basis and provide strategic value to our system.

Now I'd like to discuss some other highlights for the quarter. First, our La-Z-Boy Furniture Galleries system opened four new stores and closed two. One of the four new stores is company-owned bringing our total company-owned store count to 61 out of 336. As we've said in the past, we are committed to building out our La-Z-Boy network throughout North America with a target of 400 stores system wide by the end of calendar year 2007.

Second, we converted or relocated five stores (indiscernible). Our New Generation stores are an important part of our retail strategy and they have proven to generate more traffic, better sales volume and, importantly, higher average sales per square foot.

Third, we continue to see operating margins improved for casegoods. For the quarter our margin was 4.1% versus 0.5% in the comparable period last year and 2.1% last quarter. As we previously stated, our near-term objective is in the 4% to 6% operating profit range.

Fourth, now that are company-owned La-Z-Boy Furniture Galleries stores represent a more significant portion of our overall business we have aligned our management reporting structure accordingly. Beginning with this quarter results we have broadened our segment reporting to include three business lines -- upholstery, casegoods and retail -- and have restated last year's numbers to reflect the three segments. Importantly we believe this will give you better visibility and the transparency.

Before we move to the results and discuss each segment of the business I would like to reiterate the three elements of our business model to be used as a backdrop for the discussion. First, to remain the industry's leading marketer and manufacturer of upholstery; second, to be a marketer, distributor and importer of casegoods; and third, to be the leading proprietary furniture retailer with a strong focus on corporate ownership in North America's top 25 markets.

Turning to results. Year-over-year our consolidated sales for the quarter were flat. As I mentioned previously, our fiscal first quarter is our weakest. For the quarter weakness in retail was felt across the industry. Our earnings for the period were $0.06 versus a loss of $0.07 in the first quarter last year. Our operating margin for the period was 1.7%, principally due to the lack of retail volume for the period.

Going forward we expect our margins to improve and have targeted 8% to 10% for upholstery and 4% to 6% for casegoods, although we believe that in the longer-term our performance in casegoods can increase. For the retail segment we would expect 3% to 5% after our operations are streamlined and our markets are built out. Overall we are making steady progress transitioning and refining our operations so that we are able to improve our profitability.

Now moving to upholstery, for the quarter our profitability improved on essentially flat year-over-year sales. For the quarter our operating margin was 4.9% versus 4.2% in last year's first quarter. I would like to spend a few minutes here talking about what we're doing in our upholstery operations, but first I will reiterate that we have significant strength in this business and it comes from our brand. It is the strongest in the business and that strength, combined with lean manufacturing, an integrated marketing system and a solid distribution network gives us the platform from which to grow profitably and move our margins higher.

We continue to integrate Asian cut and so product as we are transforming our manufacturing and sourcing process into an efficient globally integrated system. Sourcing from Asia benefits us on the cost side while manufacturing in the U.S. gives us the speed to market needed to satisfy our customers. During the quarter we sourced both cut and so fabric and leather and it continues to grow as a percentage of our overall upholstery sales.

A quick comment here on raw materials. Although steel prices have increased slightly, poly, given its tie to oil, has gone up significantly and has more than offset the decrease in steel costs. We have held the price increases put through last year which helped to offset the overall rise in cost for raw materials. In summary, we feel good about our upholstery business and strategy. As the retail environment straightens and we continue to fine-tune our sourcing and manufacturing model we are confident that we can continue to achieve operating margins in the 8% to 10% range on an annual basis.

Turning to casegoods, our margin in this business continues to improve, demonstrating we are having success in transitioning this business to a model of marketing, distributing and importing. At this point approximately 65% of our product is coming from overseas and by fiscal year end we expect 75% of our residential casegoods to be imported. For the quarter our margin was 4.1% compared to 0.5% last year and 2.1% last quarter. We are making good steady progress against our near-term target of 4% to 6% and need more time and increased volume to move the needle further.

Although we moved Pennsylvania House production 100% overseas, that operation continued to impact results this quarter as it works off existing U.S. inventory. On the positive side, Pennsylvania House has received great reviews for a new collection that will begin to ship at the end of the current quarter. Additionally, the upturn in the hospitality business continues and we are seeing both margin and volume improvement at our American of Martinsville operation.

Overall we are confident that our casegoods business strategy and new operating platform positions us well from the competitive landscape. We have focused our productline to cater to relevant lifestyle categories with a good value proposition and we look forward to the October market. We have streamlined our sourcing in China with fewer suppliers so that we are an important client to each other. We have grown our proprietary distribution through additional in-store gallery programs and we have centralized our distribution and warehousing. We now have three remaining casegoods plants in the U.S. which at this time makes strategic sense to us.

While we're talking about casegoods it probably makes some sense to spend a moment talking about China as I just returned from a trip there to do some channel checks. In addition to meeting with suppliers to further strengthen the business and our relationships, we wanted to test the waters to see if there might be any repercussions from the wan revaluation and at this point we are comfortable that our Chinese suppliers will hold pricing at their current levels.

As we mentioned earlier, we have partnered with first-year producers and have narrowed our focus to six primary wood suppliers. In a few cases we represent 60% to 70% of their business which facilitates meaningful relationships to ensure service and quality. Furthermore, over the past two years we have put a team of 60 on the ground in China and are pleased with their ability to manage production while ensuring that quality and delivery times are consistently improved upon.

Now let's turn to retail. Although the environment has been exceedingly tough, we like this business and it is good for us long-term. We've been in this business for awhile, we understand it and our objective is to capitalize on the larger urban markets in which we operate by building out our store system. Critical mass will drive top-line growth and will enable us to reach our objective of a 3% to 5% operating margin.

As I mentioned when the call started, it was an unusually slow quarter at the retail level with volume across all of our markets particularly lower than we expected. That said, we remain committed to being the leading proprietary furniture retailer in North America and I will discuss more about our retail strategy later on. But initially I want to review the results for the quarter.

First, they were impacted by the greater than anticipated expenses associated with the acquisition of the 21 stores last quarter. These stores were in poor shape and in need of considerable work. As mentioned earlier, we needed to move merchandise at substandard margins and longer-term we still have some heavy lifting ahead of us as information systems need updating to improve operational efficiencies and stores need to be refurbished and/or relocated.

Second, our results were impacted by the opening of new stores that initially had little revenue to offset the startup costs. Third, it's important to note that when looking at our segmented results the two VIEs we now own have shifted their geography on the P&L and are now consolidated under retail providing no incremental volume. Another item of importance is that when we acquire stores, for example those in Chicago, we only receive the incremental retail markup as the wholesale component already existed in our overall numbers.

Looking forward we are confident we have the right business model in place to compete in today's competitive furniture environment. Again, our three prong strategy is to remain the industry's leading marketer and manufacturer of upholstery; secondly, to be a marketer, distributor and importer of casegoods; and finally, to be the leading furniture -- proprietary furniture retailer in North America.

In upholstery we have the most powerful brand name in the business with an integrated marketing system and distribution network that includes a combined manufacturing process with Asian sourcing where appropriate. In casegoods we have made excellent progress in transitioning our business and that progress is reflected in our operating results.

A would now like to spend a few moments on why we like retail and go through it from a strategic perspective. Although the retail environment is difficult, it is indeed a great business for us. We are committed to it and we can win at it. 60 of our stores are located in top markets where we can buildout our store program and achieve the critical mass necessary to achieve solid returns. The strength of our brand is unparalleled in the furniture space and retail is a natural extension of that brand, differentiating us from a commodity product. This is most definitely an offensive move for us.

Acquiring unprofitable VIEs is the right strategy for us as opposed to going dark in key markets. We were already there and, while we have to take some tough medicine to turn around those stores, we at least have a base from which to work, build and capitalize. We are building our management team and having company-owned stores allows us to stay close to the business, better understand it and the market and in turn strengthen the performance of all of our dealers.

This past April we held our proprietary dealer meeting in Las Vegas and rolled out our new Furniture Galleries Excellence Program. The program designed to give dealers best practices training, tools and benchmarks from which to measure their performance will strengthen operations at both our dealer and company-owned stores. For this fiscal year we will open 45 to 50 stores in the New Generation format, 20 to 25 will be new stores with the remainder being relocations or remodels.

In summary, we are going to compete effectively in this marketplace. We will provide greatly styled products that meet our customers’ needs at an attractive price backed up with great service. And we will grow our business profitably.

Before turning to our guidance I'd like to spend a brief moment on the balance sheet. For the quarter cash flow generated from operations was 19.8 million, total debt for the quarter was 219 million with a debt to cap ratio of 29.7%, down slightly from last quarter. Although our target for debt to cap is in the mid-20s, we were opportunistic in the quarter and repurchased 500,000 shares at an average price of 1449. We still have 6.2 million shares remaining in our repurchase program.

And finally, our guidance for the second quarter. While we have made steady progress in changing our business model, we remain somewhat concerned about the macroeconomic environment. We expect sales to be down in the low single digit range compared with last year's second quarter. We forecast earnings in the second quarter to be in the range of $0.17 to $0.21 per share versus $0.17 last year which included an after-tax restructuring charge of $0.01 per share, an extraordinary gain of $0.01 per share, and $0.05 relating to VIEs.

I also want to make sure that everyone is comparing apples-to-apples. In our fiscal year 2005 results we called out VIEs because they were not included as a separate item in our results for 2004. Many analysts then added the amount for VIEs back to our 2005 results for comparative purposes. For our second quarter of fiscal 2006 we want to make sure that you understand $0.17 was our net earnings after the VIE charge and will be consistent with how we are forecasting the second quarter of 2006.

Again, we appreciate you being on the call today and thanks for joining us. I'll now turn things back to Mark for the question-and-answer period.

Thanks, Kurt. We will begin the question-and-answer period now and I'd asked that everyone limit yourselves again to one question at a time so we can have everyone participate. Megan, will you quickly review the instructions for getting in the queue to ask questions?

(OPERATOR INSTRUCTIONS). Todd Schwartzman, Sidoti & Co.

What do you expect in the way of option expense for fiscal '06?

Stock options, if you look at the prior periods, have been about $0.01 to $0.02 per year. We would not expect that to be significantly different.

Joel Havard, BB&T Capital.

Good morning, everybody. I read the MD&A in the Q -- either I didn't find it or I'd ask you to put a little more color on the retail transition expense. Particularly if you could put some color on how much of it was inventory and what progress you may have made yet on the IT upgrades, etc.

In broad terms, Joel, the largest two components were the downward trend in same-store sales which didn't provide the volumes that we had planned for, and the second issue would have been the margin that we operated at for the quarter due to the amount of discontinued merchandise that we had to flush out through the system. We feel we've accomplished 75% to 80% of that target, but we took over some businesses that have been operating for a long, long time and had a fair amount of merchandise that we deemed as very stale and so we decided to take our hits in one quarter and kind of flushed the system. So those two elements, the volume and the margin because of the discontinued merchandise, were the most significant.

In terms of IT, we operate in eight different cities today and we probably have five or six different IT systems based on what other local business was operating on. We've got a lot of work to do to get on a consolidated system for our entire network and that's probably going to take us 12 to 18 months before we make any meaningful progress -- in other words having seven or eight of the cities on the same system, but that's certainly our target going forward.

John Baugh, Legg Mason.

My question was in the case goods -- Pennsylvania House. Where are you with the inventory flush there? Could you quantify what the impact was in Q1 and will it be more or less in Q2? And then continuing on the casegoods margin question, was the improvement year-over-year largely driven by AOM or residential or both? Just give us a flavor for which was more influential. Thank you.

That's more than one question -- all right, but it's in the same thing so we'll deal with it. The Pennsylvania House transition is going according to plan, it's just when you move a business of that nature from 80% domestically manufactured to 100% imported it takes some time. We're starting to receive sufficient quantities of imported goods here in the second quarter and we think the transition from the American-made goods to the Asian-made goods will be completed by the end of the quarter if not before. So we don't see that transition continuing to be a drag.

On the question about the improvement in the segment -- all of our companies, with the exception of Pennsylvania House, are improving and accomplishing the targets that were set out for us when we started the year. AOM is certainly having the biggest recovery, but from where it was it certainly has a long ways to go. But the other three casegoods companies, Drew & Lea, Kincaid and Hammary are both having improvements and have significantly changed their business model from last year. So we have one that's exceeding expectations a little bit, one that's below expectations and three that are doing just what we expected.

Charles Grom, J.P. Morgan.

Good morning. Your retail business lost more than $5 million in the quarter, what's the timeline to get this unit profitable and how long could it take? And along those lines, how much capital is going to be needed to refurbish these stores and put new systems in over the next 12 to 18 months? Thanks.

The question on the retail business probably has a couple of answers. One, the timeframe, the first quarter of the year, going through the summer months, is always going to be the worst performing quarter for the furniture business at retail and it was no exception for us at this point. To answer the question in terms of improvement, it's a market by market situation. In certain markets we have store density, we have some relative strength and we think we'll be able to turn the businesses around fairly shortly given if volume comes back at reasonable levels.

There are a couple of markets that were very underdeveloped and until we get three or four more stores in those markets we are going to have a difficulty in achieving the type of results we want. So we're not prepared this morning to put a time frame -- a specific time frame on when we're going to be at a level that's acceptable to us, although it is a key priority for us and we think because of the transition this quarter and the seasonality of it we've endured our worst performing quarter at the retail side.

As far as the capital issue is concerned, the stores are primarily leased, they are primarily -- it cost us about $300,000 to $500,000 to outfit a store. We're doing a lot of the stores on turnkey leases that cost us very little capital. So we don't look at the -- a huge capital investment in the stores outside of the operating leases and so we're not the least bit concerned that fixing the retail business is going to be a drain on our CapEx.

Ivy Zelman, Credit Suisse First Boston.

With respect to the retail business, looking at your disclosure, I don't know if you provide it, but looking at what your retail margin would be overall and then understanding what you just said, Kurt, with respect to some areas where you've got density and scale you're going to do better -- can you tell us where you are doing, in your mind, well in the retail business, what those margins look like and what the opportunity would be assuming you were able to accomplish where you have been successful?

The first question about where we have our strength, we have a very good business, a very solid business in the Baltimore, Washington, Virginia market. We have 19 stores in those markets, it's the most mature markets, it's one of the businesses we've owned the longest and we're pleased with its performance. And the other market that we have the highest density of stores is in Chicago where we have 14 and feel, while all the stores are not in the New Generation format and we don't have quite enough of them, we've got enough of a mass to make a difference.

We've said in the past and as far as our range of margins at retail and their costs we want to get the gross margins in the 44, 45, 46 range and keep the expenses at 4140 or below. That is what we're driving for. We are not releasing our margins by segment -- our gross margins by segment at this point, but that's the range of where we have to be to make it a viable business.

Susan Maklari, UBS.

Can you talk a little bit about any Labor Day promotions that you have planned given the weakness that we've seen at retail in the last few months? Just generally how your inventories are at the retail level?

Susan, we have our guns loaded for the Labor Day weekend. We have some aggressive promotions and we're in really good shape inventory wise to do business. But the reality is our industry can't do business in eight holidays a year and have it sustain. So while there's a lot of emphasis on the holiday weekends and we need to have strong sales over that, the more critical question is how much of that can be sustained after such huge promotional efforts for a weekend? And that's what we're concentrating on, knowing that we will certainly get a lift for the Labor Day holiday season.

Robert Rodriguez, First Pacific Advisors.

I'm just curious as to what type of a metric or guide are you using in terms of the repurchase of this common stock given obviously your low earning power and low return on capital to use justification to buy back stock right now?

There are a couple of reasons for that. Our capital requirements are pretty nominal, as you would imagine in this business. Casegoods (indiscernible) not being built, we have plenty of capacity in our upholstery business and retail doesn't take a lot of capital in that we lease the properties. We are a good producer of cash flow in our businesses even in poor times and we have set a debt to capital ratio of the mid '20s. With our stockprice being as low as it has been in recent times, we felt that even though we're not back in the mid '20s it was still an opportune time and we have I think a strong belief that it will be doing better in the future. And with the excess cash we decided to continue to buyback some stock.

Laura Champine, Morgan Keegan.

Good morning. You mentioned in the 10-Q a negative mix shift in the quarter. Can you give us unit growth by segment so we can get a better sense of that?

Laura, we think we're doing a fairly a good job of providing a lot of information about our business, about the -- we've added a third segment so there's clarity on where our business falls, but we have decided for competitive reasons not to reveal unit volumes in any of our business segments. We just don't think that would be a wise decision for us at this time.

John Emmerich (ph), Ironworks Capital.

One question and one follow-up, right Mark?

Correct.

How much of the $6 million negative swing year-over-year in the retail side was from the 21 acquired stores?

If you look back at our performance in retail last year, because now that we've broken out the segment we went back a year and showed you the results, you'll see that we were basically operating at a breakeven or slightly above breakeven at retail until the fourth quarter of last year when we acquired the stores. So a significant portion of the losses were because of the acquired stores and I would remind everyone that in last year's full year we lost $0.11 with our VIEs and now two of those are incorporated into our earnings. So that was a major portion of it. The other portion of it, our volume was down at our existing stores which also led to the financial results. So it was really a combination of the two, but certainly more significant with the stores we acquired than our base business.

(OPERATOR INSTRUCTIONS). Joel Havard, BB&T Capital Markets.

I want to make sure I understood the Q2 guidance of $0.17 to $0.21 includes -- what should I presume? -- a penny or two of continued VIE pressure?

We believe it will be slightly negative, Joel. We're not going to give a specific number, but certainly our guidance includes a negative number for VIEs.

Charles Grom, J.P. Morgan.

Just on trends, your written business was down about 1% to 2% at the end of the quarter. Could you speak to trends in August and if you could particularly touch on the casegoods business I'd appreciate it.

Our trends in our order business have not materially changed from the summer months. We are running in the flat to slightly down range that we ran in June and July and that is why we are cautious about our top-line growth for the quarter. Our casegoods as a segment is doing slightly better than the upholstery and the retail side and we expect for it to have some top-line growth during the quarter due to the more competitive platform there they're operating on. But all in all, August is continuing the same consistency that we saw in May, June and July.

(OPERATOR INSTRUCTIONS). John Emmerich, Ironworks Capital.

I got cut off before I could ask my follow-up, Mark. The follow-up was could you talk about -- you said what would you spend taking historic the New Generation model 300,000 to 500,000. What's the revenue and flowthrough on profits from the investment, if you will? What's the lift you get? And then could you repeat -- I didn't hear the schedule -- you said the number of stores, 20 to 25 new stores plus a number I missed on relocations and remodels. But what's the timing of that? When are you going to get that done and how do you do those without disruption, if you will? Do you try to do them in the lull like in August and in December or do you do it at nights when no one is around? I just wondered if you could walk through that.

I'll answer the second part of your question first. In terms of the stores, we've said that we will open between 45 and 50 stores on an annual basis, on a fiscal year basis that consist of 20 to 25 new stores and it also consists of 20 to 25 relocations or remodels and does not take into consideration perhaps half a dozen or so closed stores which has to come out of that net number.

The majority of the activity we have had so far has been in relocations because a lot of our dealers have decided that the market has moved slightly away from where they're operating and they've moved to a new location. So we're getting a lift in sales on both the new format of those stores and the superior locations they are moving to.

The remodels are difficult and most of our dealers have attempted to stay open during the remodeling and it works. For whatever reason the American consumer likes to the see things going on with buildings and feel that the values offered when people are redoing their floors are pretty good. So it gives a promotional opportunity as you redo your store. But it can be done and it's being done and very few of our stores have closed to go through the remodeling. Ideally they do it in the slowest time of the year so that they're ready for the fall season and we're seeing a lot of that happen right now. So by the time October rolls around they'll be ready to do business.

Susan Maklari, UBS.

You repurchased about half a million shares this quarter, how much of that was to offset some creep that you've seen from the third to the fourth quarter? And how should we think about share repurchases as we go through this year?

Susan, as we've said in the past, we're going to use our cash flow to pay dividends, to take care of the needs of the business and anything in excess we will make a determination between paying down debt and being opportunistic in the marketplace. So we're not committing to a certain number or certain dollar amount, but it's all a derivative of the cash that we're producing in the business and the needs of that and then the decision on what to do with the excess in terms of debt repayment and stock purchases.

Justin Maurer, Lord Abbett.

Kurt, how many VIEs are included in that number both last year and this year? Just want to get a sense of the two guys you acquired, how many stores of the total that encompassed.

There is a chart on that in the Q filing. I can't remember for sure. I think the number last year was six VIEs and this year it's down to four. The number of stores is slightly down. We added one of VIE to the system this quarter, but the two came out from last year, actually three came out from last year -- one was sold to an independent dealer and the other two are now into our retail division. So there was a reduction in the amount of VIEs in terms of the number of stores and the number of dealers.

Todd Schwartzman, Sidoti & Co.

What's the time frame and budget also for the IT upgrade? And are you waiting until you reach a certain number of stores to start the project?

Todd, in terms of the IT upgrade, we have a proprietary system that we've developed -- actually some of our independent dealers developed it in connection with a software company and we are refining that, working on that. We have that in three of our markets right now and we're not waiting on anything. We're rolling it out quickly. We're making some improvements to it. We don't see it as a significant capital expenditure because we've already bought the license right to the software. And so I do think though from a time frame to get it implemented in all of our locations and getting it operational and making the conversions and the limitations you have with human resources to get all that done, we're talking 18 to 24 months before we have a common system throughout all of our retail stores.

John Emmerich, Ironworks Capital.

You didn't answer the question about what the revenue and profit lift is when you've taken a store to the New Generation format.

Sorry, I missed that. Typically our New Generation stores are in -- to date have been a lot of them in the larger market. You have to quantify the size of the market for us to give you revenue targets. Obviously a store in Billings, Montana even though it's in the new format is not going to do the same as something in Fairfax, Virginia. But on average we're getting a 20% to 25% lift in the performance of the New Generation stores over the old ones. Under the old system on average our stores were in the 3 to 3.5 million range and with the New Generation stores they're in the 4 to 4.5 million range.

So it's a pretty significant lift not only from the new format but from people upgrading their locations from "B" locations to "A" locations and we think the majority of the New Generation stores will do in excess of $4 million.

Charles Grom, J.P. Morgan.

Last question here for me at least. On the retail stores, you own about 61 today. Going forward, either through continued VIE consolidation or buying some of the stores back from your independent dealers, what should we expect the debt balance to go to let's stay by the end of this year and over the next couple of years?

I'll speak to that question, Chuck, from a number standpoint of stores. In the nine markets that we're going to be involved with we believe there is the potential to have upwards of 90 stores in those markets. Now that's new stores and we have to relocate a number of stores and refurbish some. But we've said consistently here for the past six or nine months that by the time calendar year 2007 ends and we're pushing the 400 store target that we've established the Company will probably be involved with 90 or 95 of the stores.

To the extent that the VIEs would flip over to Company ownership, we've revealed how many stores are VIEs, at this point we believe that they will all be profitable on an ongoing basis for the year and don't have the intentions of making any moves in that direction. But having 20% to 25% of the stores being corporately owned is where we think we're going to end up.

John Emmerich, Ironworks Capital.

Sorry, you've answered all my questions. Thank you.

Gentlemen, it appears there are no further questions at this time. Do you have any closing comments?

Thank you for participating on today's call.

Thank you, ladies and gentlemen, for participating in today's teleconference. You may disconnect your lines at this time and have a wonderful day.