La-Z-Boy Inc (LZB) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the La-Z-Boy Incorporated first quarter 2007 conference call. (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 Incorporated. Thank you, Mr. Stegeman; you may begin.

Thank you, Diego. 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 2007 first-quarter results.

Present on the call today are Kurt Darrow, La-Z-Boy's President and Chief Executive Officer, Mike Riccio, our Chief Financial Officer, and Patrick Norton, our Chairman. Kurt will begin with some prepared remarks, and then we will open the call to questions. We would ask that you please limit yourself 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 obligation to update any forward-looking statements made during this call.

And with that, let me turn over the call to Kurt Darrow, La-Z-Boy's President and Chief Executive Officer.

Thank you, Mark. Good morning, everyone, and thank you for joining us this morning.

As you all know, the marketplace remains a challenge, but we were very active during this period in making a number of strategic moves to better align our operating units with our business model and longer-term strategy.

During the quarter we sold our American in Martinsville operation, combined our Clayton Marcus and Pennsylvania House companies into one operating entity within the casegoods operations, and purchased six stores in the Southeastern Florida market. I will discuss each of these actions in more detail as I take you through each segment.

When we gave our guidance last quarter, which included results for American of Martinsville, we said we remain concerned about macroeconomic conditions, their effect on consumer spending, and the housing market. And with gas prices and interest rates remaining high, we have seen weakness across the board in the furniture business.

With that said, we are pleased that in what is typically our slowest quarter due to seasonality factors, we were able to generate respectable margins in our wholesale business on flat volume in upholstery and significantly lower volume in casegoods, which underscores the progress we have made in establishing a more efficient cost structure.

In the quarter, we paid down debt and repurchased shares using cash from the sale of American of Martinsville and proceeds from the sale of several retail properties. We also started to expense stock options this quarter, which had a $0.01 effect on earnings per share.

Now let me take you through each of our business segments.

First, upholstery. For the quarter, sales were relatively flat compared with last year's first quarter, although our operating margins improved to 5.8 from 4.9. And the La-Z-Boy branded business and England continued to perform at a higher level than our smaller companies.

During the period we worked through the backlog we have been carrying since the foam shortage and are filling orders faster as we enter the typically stronger Fall selling season in an improved position with respect to service.

And we've been able to work through the fabric issues that affected us last quarter as well. The fabric industry in both the U.S. and Asia is going through rapid change, with the Asians becoming more significant players and the domestic manufacturers altering their business models to become more competitive. Because it will be sometime before things settle down, we have established a dedicated team, split between the U.S. and Asia, to procure fabric as the supply chain shifts.

Looking ahead, our focus is to drive topline growth and perform within our annual target margin range of 8 to 10%. With the strongest brand in the furniture industry, an aggressive plan to build out proprietary stores and to expand other distribution channels, and ongoing consumer research to ensure we are meeting consumer needs, we are confident that we will be well positioned when the softness in our sector dissipates.

On the margin side of the equation, there remains additional opportunity for improvement as we increase the integration of global sourcing and our facilities continue a conversion to the (indiscernible) production process.

Now let's turn our attention to casegoods. Our sales this quarter were off significantly, some 16%. Our margins, however, were essentially flat year-over-year at 3.8%, demonstrating the success we have had in making changes to this business model. Our priority for the casegoods segment is to generate momentum at the topline, which will allow us to fully realize the strength of our import model.

We made two announcements in the last two weeks that impacted our casegoods segment. First, we sold our hospitality company, American of Martinsville, for 33.2 million, resulting in a gain of 1.3 million net of tax. As I've talked about in the past, American of Martinsville is a great company and a leader in its sector, but it was not core to our strategy as a residential furniture company. And given the cyclicality of this business, the timing to sell was right.

We also announced that we combined Clayton Marcus and Pennsylvania House into one operating company. These two companies operate at the higher end of the market, with a similar product line focus and similar customer basis.

With these synergies, we will leverage the best marketing, merchandising and manufacturing within each, and will improve our product offering to our dealers and consumers. Additionally, the new entity will benefit from combining a number of back-office operations that will make the entire enterprise more efficient.

Although we have established a better operating platform, we continue to look for ways to become more efficient, while focusing on growing our business to further improve our profitability in the segment. Each of our casegood companies remain focused on designing innovative and stylish furniture at competitive price points to appeal to a broader base of consumers.

Next I will discuss our retail segment, where we posted a significant loss for the quarter on sales of 52.2 million. As we've discussed in the last several conference calls, we are confident in our ability to right this business and made some sequential improvement this quarter on reduced volume. Importantly, we have an excellent management team in place and a solid plan and strategy to turn the business around and make it profitable. We continue to execute on our strategy of relocating stores and opening additional stores in markets where we are underpenetrated. And while this is a lengthy process, an expanded store presence is a key element of our longer-term strategy.

Furniture retailing will indeed eventually strengthen across the board, and we are taking the necessary steps to ensure we will be well positioned to service our customers. As I mentioned last quarter, on its own, we project this business to turn in a 3 to 5% operating margin. However, longer term, our retail operation signifies more to us than the margin contribution it alone will provide, as it is very meaningful for the wholesale side of our business, where we achieve much higher operating margins.

Overall, as the environment for our business continues to go through change, we remain committed to building a stronger foundation for our company by strengthening our brands and our proprietary retail distribution.

This quarter we purchased the Southeastern Florida market, which included six stores, and announced that we would exit the New York market -- the Rochester market in New York in October, where we have two stores and a warehouse.

Southeastern Florida is a growing market with excellent demographics, and we have the opportunity to expand by opening new stores, by relocating and converting others into the New Generation format. In a short period of time we'll increase our store count from six to eight in Southeastern Florida.

In addition to increasing the number of company-owned stores in our markets to achieve critical mass, we are also working to reduce our costs and strengthen our margins in this segment. As an example, we are in the process of consolidating warehousing facilities. And, by the end of this quarter, in addition to closing the Rochester facility, we will have consolidated four other warehouses, which alone will vastly improve our cost structure, inventory flow and availability.

Additionally we are expanding the offerings of services in our stores, which leads to higher ticket sales and drives margin. A prime driver of this is our in-home design program. When our customers engage -- when our customers engage a designer to take advantage of our in-home design services, the ticket generated is typically considerably higher than if that customer made a purchase without the in-home design assistance.

Our plan to increase our number of New Generation stores is aggressive for fiscal '07, and increasing the number of stores in the new format will make a significant difference, as these stores typically generate approximately 25% more revenue per square foot, on top of generating greater revenue overall due to their increased size.

Of the 68 company-owned stores today, only 31 are in the new format. By the end of our fiscal year, we plan to have 48 in the New Generation format, which will represent approximately 70% of the 70-plus stores we will own at year-end. For the second quarter the Company plans to add five stores, two which will be new and three locations and/or conversions.

We are executing on our retail strategy and expect to make incremental progress in this segment in the second half of the year. In terms of operating the business at a respectable level, we expect it will take another 18 to 24 months.

Now moving to the balance sheet. During the quarter we sold a piece of undeveloped land in connection with our acquisition of the Southeastern Florida market, and executed a sale on leaseback on three properties, which in total netted approximately $21 million in proceeds from the disposal of these assets.

One sale and leaseback in the proceeds -- one sale and leaseback was a VIE property, where we exercised a $3 million option to buy, and this purchase is reflected in our CapEx for the quarter. Without this, our CapEx for the quarter was approximately $7 million, which is in line with our original forecast of 25 to 28 million for the full year.

During the quarter we reduced our debt by some $23 million and, over the course of the last year, we have reduced by it by 58.4 million, leaving us at quarter-end with a debt to cap ratio of 24.2. We also repurchased approximately 290,000 shares during the period at an average price of 12.77, and have approximately 5.6 million shares remaining in our repurchase program.

Looking ahead to our second quarter, we continue to see inconsistency at the retail level. We expect sales for the fiscal '07 second quarter to be up in the mid single-digits compared with last year's second quarter, and we would expect earnings per share to be in the range of $0.11 to $0.15, including up to a $0.02 charge for stock option expense, compared with last year's loss of $0.12, which included an after-tax restructuring charge of $0.10.

It's important to note that last year's second quarter was unusual, given the shortage of polyurethane foam during the quarter. Additionally, for your modeling purposes, numbers for AOM need to be removed from all calculations going forward.

We appreciate you being with us this morning and participating in our call, and I will turn things back to Mark Stegeman to begin the question-and-answer period.

Thanks, Kurt. We'll begin the question-and-answer period now. I would ask again, if you could just limit yourself to one question and, if you need to, a follow-up. Diego, could you quickly review the instructions for getting into the queue to ask questions?

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

What were the cut-and-sewn sales of both leather and fabric as a percentage of upholstery sales for the quarter? And also, where do you see that for the full year?

I think our cut-and-sew percentage was probably in the 25 to 30% range for the quarter, and don't expect it to be materially higher as we go forward. We're trying to balance the amount of cut-and-sew for commodity product with our custom order product that we do for in-home design services. So the blend of one-third/two-thirds of volume that we've settled in is probably what we're going to be operating at here for the balance of the year.

Budd Bugatch, Raymond James.

This is Todd Scholl in for Budd. I guess my question is with regards to the sale of the American of Martinsville, what portion of the [Verdamenmint] proceeds are you going to receive, if any?

We indicated in some of our footnotes that we have an arrangement for the [Verdamen] money on a sliding scale going forward. I don't have the exact particulars in front of me, but I think you can glean it from our filing of where we are at. To clarify, we did not give up all of our rights to the [Verd] money in that transaction.

Susan Maklari, UBS.

The magnitude of the sales decline in the casegoods segment was much worse than we had expected. Can you just talk a little bit about the trend during the quarter and what happened there?

The trends during the quarter, Susan, from an order standpoint, improved slightly as the quarter went on. But early in the quarter the orders -- the order trend was reflected in our performance numbers. Our observation on the difficulty with retail at the present time is the majority of our casegood companies service medium-sized and smaller dealers. And we think our performance is reflective of what is happening in the areas of the country today with business. Because so many of the top 100 dealers are going direct on casegoods, we are doing a lot of business with what I would call the mid-tier and lower-tier dealers, which are still very, very important to us, but I think they're having a more difficult time competing in this environment than some of the top dealers in the country.

On the upholstery side, you noted that some of your branded businesses are doing better than your non-branded ones. Are you seeing any similar trends in your casegoods side of the business?

Our comment was that both our La-Z-Boy brand business and the England business are better than the balance of our upholstery companies. And on the casegoods side, we do have some similarities of ones performing better than others. But probably our biggest -- the company that has the most pressure on it still in our casegoods segment would be Pennsylvania House.

Dennis McGill, Credit Suisse.

My first question just has to do with the company-owned stores. I think in the past you've said the long-term goal was to own maybe 20 to 25% of those, and it seems like you're already within that range. Are you willing to own more going forward, or is that going to hold?

I would answer that as a two-part answer. We have plenty on our plate right now in terms of fixing the businesses that we have acquired, getting the right management team built, getting the right infrastructure built, getting the right systems developed. So, our appetite to do anything immediate, unless perhaps it was a contiguous market which would help our overall penetration, is not real strong.

On the flip side, should we get to the point where we are performing at an acceptable level in this business, and if there are other places that we thought were underperforming and we weren't getting our market share out of other markets, that would certainly be an option. But it is not in our immediate plans to add more stores -- more markets to our retail segment.

Was the catalyst for the Florida stores underperformance from the stores, or is that a market that you've been wanting to get into?

It was primarily the latter, and it's a market where we are really only on the north side of the market and have nothing in the Miami/Dade County area, so there's lots of opportunity for expansion. And our former partner wasn't able to do the expansion, and we felt it was the right thing to do for us.

Those stores are profitable?

We've only had them here for like four weeks of the first quarter, so it's hard to make a judgment. But, obviously, we think there's some great opportunity there or we wouldn't have gone ahead and taken them on.

Changing the subject a little bit, you had talked about some mix on the upholstery business to lower price recliners in the quarter. Is that something that you've seen in other periods, where maybe there's that kind of uncertainty? Do you think it's a quarter anomaly, or is the buyer starting to feel the pressure of interest rates and gas prices and so forth, in your opinion, and that's something we're going to see continue?

That's a very good question, and we typically see some of that in the summer months, and then the balance of our business between major upholstery and recliners tends to go back to traditional levels in the Fall. And we're seeing that in our incoming order rate, that it was probably more of a one-quarter blip than it is a long-term trend, but it is certainly something we are mindful of and watching.

Joel Havard, BB&T Capital Markets.

Kurt, with your comments in the release last night about backlog having been worked down, and what looks like still sort of a struggling per-store performance from the retail arm, where are you gaining your confidence for the forecast for Q2?

Joel, I'm not sure that our forecast was that confident and that aggressive. We are still seeing inconsistency in the retail area, but we will get a seasonal lift in September, October, November in business. The question is, a lift from what level and how robust will it be? And again, as we work on tighter and tighter backlogs, our view into the future out eight, 12, 15 weeks is difficult for us to quantify. So we are looking at our historic performance, we're looking at our trend lines, and we made the best judgment we can about what we think the next quarter will bring.

Fair enough. My follow-up would be a little bit of a sidestep here, and maybe it's more for Mike, about within retail, where you might characterize where the Company is with regards to -- let's call it fixed overhead in retail versus fix-up costs. I know you just added Florida, but if we take Chicago or some of the previous markets, how far along are they now?

We said last call that we have -- of our eight markets, that we have two or three of them that are fairly mature. There's some background noise on somebody's phone that we're getting through the -- okay. There were two or three markets that were fairly mature in from a store standpoint, there's two or three that we are right at the tipping point, and there's two or three that we're still underwater on. And I would say that we have things to do in all three areas, in terms of more topline, better margins, and continuing to take out the costs, which we're making an aggressive move in this quarter by closing the warehouses. And within a year's time, we believe we'll have everybody on the same IT system, which will then help us take out another layer of costs that we have now today because of duplication.

How many of these other properties can be pushed into the sale/leaseback, or just an outright asset sale over the next, say, 12 -- or this fiscal year?

We don't -- we're leasing a majority of our assets in the retail. We had a couple that we did own that we looked at selling and leasing back. We'll continue to look at those opportunities if they come about, but we lease the majority of our properties at the present time.

So we don't need to look for some more of these sort of unusual gains as a matter of fact?

And the gains -- we're talking about the proceeds only. The gains don't go -- you have to amortize those gains over the future lease life that we have, so the gains are immaterial to the financials. But we don't see a lot of unusual cash coming through our cash flow on this item alone.

There's only eight owned stores today, for the company-owned.

Laura Champine, Morgan Keegan.

Just sort of a follow-on to Joel's first question, that with the comp down systemwide 5.5% -- and it looks like your inventories are down pretty substantially year-over-year at the end of the quarter as well -- how do I flesh that out with your revenue guidance for up mid single-digits and improved service levels?

Let me try to walk you through that. First of all, our guidance is up, primarily because a year ago -- and it was primarily in October -- we had the foam problem when we had to restrict production. So, we're going up against a very unusual comparison in last year's second quarter.

Number two, our inventories on our balance sheet show them to be about flat with last year. But the inventories from AOM came out of our balance sheet, which was about, I think, $12 million

About 20 million.

About $20 million. So our inventories are up 12 to $15 million on a run basis.

We're up about 18 million altogether in our inventory.

And that is a result of us getting positioned for the Fall, of us having more cut-and-sewn sets on hand, of us having our bestsellers in stock, ready to go, and the fact that, particularly on the casegoods side, we did not meet our anticipated sales volume for the quarter, so we had a little build in inventory in casegoods as well.

Just as a follow-on, as you grow this retail business, eventually how big do you think it gets as a percentage of total company revenues?

We've been fairly consistent in saying that as we grow this proprietary store system, and we think we can grow it over the next couple of years to probably 400 stores, we wouldn't anticipate the Company owning more than 100 of the 400 stores. And even that 100 number probably can be accomplished without us taking on any new markets.

So 20 to 25% of the stores over time would probably be owned by the Company, and we probably would do a little higher percentage of volume than that, because we own the stores in the largest markets and need to have the kind of performance that's a little bit higher than the average in order to be profitable. But we don't see it getting beyond those ratios of 20, 25% of the total.

John Baugh, Stifel Nicolaus.

Back on the retail, I think you made a comment that it's going to take 18 to 24 months to get there, and I guess there being 3% to 5% EBIT. I want to be clear that that's what you're saying. And along the way, you're closing some warehouses; it sounds like that'll begin to impact the P&L positively in the third fiscal quarter. And then a year from now, roughly, the elimination of the duplicate IT will be another step. Just kind of curious as to -- you're on a roughly 7 million EBIT loss per quarter in retail. what's a progression likely [to] be from the current 3% to 5% EBIT 24 months out?

Good question. We would anticipate, as we've said, to see some meaningful improvement in the second half of our fiscal year. We would have some of these costs wrung out from the warehouses. We would be in the period of time where there would be considerably more volume in the third quarter, based on seasonality.

And the other thing that we've been challenged with is we've been repositioning a lot of stores. We've been closing a lot of stores. We've been cleaning up a lot of inventory that has hurt our margins, our gross margins. We think a lot of that is behind us. So I think we'll make some significant steps in the second half of this fiscal year, and then continue to make incremental steps as we go into '08 until we get it on a basis where we believe it should be long-term.

When do you think you might break even, as a follow-up to that? Any guess?

I would say the 18-month period would probably be the target that would be on our horizon right now. If we could get a little more volume, if the economy helps us at all during the next 18 months, that may be a little earlier. If it's not as good, it could be a little later. But it's -- that's probably the timeline of getting it to where we need to break even.

Jerry Epperson, Ferris Baker Watts.

Kurt and Mark, is La-Z-Boy going to take public stance on this bill before Congress on redefining cut-and-sewn covers that's being pushed by the textile industry?

We are working with our trade association, and we are working with -- in cooperation with the other upholstery manufacturers in the industry to study what is out there to try to analyze the position we should take. And anything we would do would most likely be in unison with that group.

But no public position yet?

We haven't taken a public position yet.

Todd Schwartzman, Sidoti & Co.

Looking long term, can you talk about your desire or willingness to possibly roll into the La-Z-Boy brand some or all of the non-branded upholstery companies?

That's a very good question. And right now, with the exception of Clayton Marcus, all of our non-branded companies sell a portion of their line and we merchandise a portion of their line into the La-Z-Boy store system. Sam Moore sells us the decorative wood chairs that we use to round out our assortment in the stores. Bauhaus sells some leather and starting sofas to our stores, as well as England. So all of them are supplying portions of our product line to give us a well-balanced offering to the consumer in the La-Z-Boy store system. All that product is branded La-Z-Boy, all that product is sold at La-Z-Boy, but it is manufactured from some of our non-branded companies.

No plans to do away -- to maintain the manufacturing presence, but to rebrand the companies, the subsidiaries?

Not at this time. We have plenty of manufacturing capacity in the residential -- the La-Z-Boy side to be mindful of as well. So there is not anything on the horizon that would say that we would brand everything La-Z-Boy and move away from the various customers and markets our other companies serve with their uniqueness.

Dennis McGill, Credit Suisse.

Just one more. Realizing you don't have the final numbers from the July month on the retail stores, any sense on whether July and August so far have stabilized relative to that decline of 5.5% for the calendar quarter, or have things gotten better or worse?

We don't have our numbers in yet from July. We get them in from our independent dealers as well as our company-owned, and it takes a while to assimilate them. So we don't have a read on -- specifically on July or the early August trends. Anecdotally I would say it probably isn't widely different than what we've been experiencing, but I don't have any hard numbers on that at the time.

(OPERATOR INSTRUCTIONS).

I think we're all done, Diego. Thank you very much for joining us today.

This concludes today's conference. Thank you all for your participation.