La-Z-Boy Inc (LZB) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the La-Z-Boy Incorporated second-quarter 2007 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow 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 Incorporated.

Thank you, Dan. Good morning. I am Mark Stegeman, Treasurer of La-Z-Boy. I'd like to thank you all for joining us on this morning's call to discuss our fiscal 2007 second-quarter results.

Present on the call today are Kurt Darrow, La-Z-Boy's President and Chief Executive Officer, and Mike Riccio, our Chief Financial Officer. Kurt will open today's call with some prepared remarks on the quarter and we will discuss the strategic direction of our business, and then Mike will spend a few moments speaking to the numbers in a little more detail. We will then open the call to 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.

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

Thank you, Mark. Good morning, everyone. We appreciate you joining us on our call to discuss our results for the fiscal '07 second quarter. As Mark mentioned, I will begin with an overview of our quarter and current business conditions. Then Mike Riccio, our CFO, will take you through the numbers in more detail, before I conclude with our prepared remarks and move to the question-and-answer period.

The retail environment remains a challenge, as all of you know from reading industry reports. Unfortunately, we have not been the exception. Both the industry struggle and ours is volume. And this quarter, our miss from the guidance we gave in August was almost entirely volume related.

That said, we are confident that the consumer will return to the marketplace, but until she does, our focus will continue to be on achieving operational excellence and offering an enticing value proposition to the consumer.

Accordingly, our strategic focus is on speed to market and our strategic advantage is customization. Furthermore, we are confident that with the unparalleled strength of our brand and our ability to offer the consumer vast choice, customization, and quick delivery, while at the same time giving her a pleasant and professional shopping experience, we indeed have a distinct competitive advantage.

Although we reported flat sales this quarter in both our Upholstery and Casegoods wholesale businesses, we continue to make progress with our operating margins, which demonstrates the efficiencies with which we are running our business. Our Retail segment, however, posted a significant loss, and I will take you through our detailed plans for that business in a few minutes.

First, let's turn to the wholesale side. In Upholstery, on essentially flat year-over-year sales, we improved our operating margin to 6.3% from 3.9% in last year's second quarter and sequentially up from 5.8% in this year's first quarter. Importantly, the La-Z-Boy brand continued to outperform our smaller, nonbranded companies, and this quarter registered a high single-digit sales increase.

With a strong focus on speed to market and customization, we continue to make our plants more efficient. We are about one-third of the way through our process of converting our branded manufacturing facilities to a cellular production process, which is a more cost-effective means of production and allows us to produce product faster and with better quality. It also allows us to reduce our working capital requirements to less work in process.

Additionally, we continue to increase our integration of global sourcing, including cut-and-sew kits, carved wooden legs, and other components. Our objective is to be able to deliver custom furniture in less than four weeks, and today we are moving quickly in that direction and are shipping about 45% of our orders in three weeks or less. And our objective is to deliver 100% of our custom orders in four weeks or less.

Paramount to our strategy is to grow our business through the broadening of our distribution, both through our proprietary store system and through other outlets as the traditional furniture distribution chain shifts. Additionally, key to increasing our top line is the ability to better understand the consumer and how she wants to buy furniture. We currently have a major consumer research study underway to ensure we are meeting customer needs. All of these initiatives, combined with a return to more normalized volumes, will us assist us in achieving our margin objectives in Upholstery.

Now let's turn to Casegoods. Although sales were off slightly from year-ago levels, our business rebounded from the first quarter. And at 4.8%, our operating margin increased significantly from 1.8% in last year's second quarter and sequentially from 3.8% in the first quarter.

Our Casegoods companies are also focused on getting product quickly to the consumer, and once we receive an order, we are able to deliver it in about two weeks 75% of the time. Because we have no backlog and carry inventory for immediate delivery, this segment's performance is dependent on daily retail activity. Each of our Casegoods companies is focused on innovation and product design to broaden its customer base and consequently improve their top line.

Now I would like to turn our attention to our Retail segment in order to discuss the progress we are making here, which has been somewhat masked by the challenges posed by volume this quarter. Before I go through our numbers, let me reiterate that we believe building our proprietary retail system is the only way to enhance our brand in what has become a highly fragmented and changing marketplace.

Keeping the brand prominent is the best way to secure a healthy, long-term future for this Company. It is indeed costly now, but the longer-term consequences of not doing it are more difficult to swallow than what we are experiencing. We are convinced our strategy is the right one, and we have a plan and target points to execute against.

For the quarter we posted a significant loss on sales of $52.5 million, which were up 6.6% year-over-year due to the additional stores in the system. Overall, the sluggish retail environment impacted our retail business to a greater extent than the wholesale business, given the high fixed cost structure that is currently in place. We are working diligently to address both the cost structure issues, as well as getting the appropriate penetration in each market to drive our volume.

We made substantive changes to our retail operation this quarter, including opening five new-generation stores, three brand new stores, and two relocations and/or conversions. We exited the Rochester, New York market, where we had two stores and a warehouse. We consolidated warehouses in both the Northeast region and the Tidewater/D.C. markets. In the Northeast, we consolidated three warehouses into one, and in D.C., we consolidated two warehouses into one. And we converting our IT system in the Northeast market to the operating system that we will be utilizing across this segment. This system will enable us to better manage our business with less cost and fewer people.

When we acquired these markets, we inherited multiple warehouses and multiple IT systems, which caused the business to run inefficiently. With the consolidation of the warehouses, for example, we will now have less inventory, but have greatly improved our in-stock position on our best sellers. As another example, we had multiple operating systems in our various markets, and in the Northeast market this quarter we transitioned to one.

Although there are onetime costs associated with making such significant changes, long-term they are the correct direction for this business. By centralizing the various systems and distribution centers throughout our Company-owned market, we can take some $5 million to $7 million in cost out of this business over the next 12 months.

Secondly, in our Retail operation, we have been up against a gross margin issue because of old import inventory conditions in the stores we acquired. We have had to run a number of GOBs and inventory reduction clearances, and as a result, our margins were pulled down. Now that we are through this process, the increase in our gross margins of approximately 300 to 400 basis points will convert to about a $6 million to $8 million annual improvement to the bottom line.

Between this amount and what we expect to take out in costs through the centralization of back office operations, we will at least be cash flow neutral, where the loss level no greater than the profit we are making on the wholesale side of the business. Then to get over the top, we need to increase our volume, and that is the third leg of our strategy, the buildout of our store system.

We need to achieve critical mass in the markets in which we operate. We acquired a number of underperforming stores in expensive markets, markets with excellent demographics, but we have to have critical mass to spread fixed costs. As you know, the infrastructure cost of doing business in a market is essentially the same whether you have three or eight stores. With eight, you can spread your fixed costs, such as warehousing, administration, and deliveries, over a larger base while garnering a better share of voice through advertising.

Also, additional stores in each market will not only increase the market's overall volume, but with additional advertising, it will drive more traffic into the already-existing stores.

Securing real estate for new stores and moving other stores is our biggest challenge in each market, as the process is long and expensive, but we will not settle for anything but a prime location. There are also onetime startup costs associated with opening new stores, and this quarter, those costs amounted to about $800,000.

Over the next 18 months, we plan to open 14 new stores and remodel or relocate 11 stores, which is a very aggressive expansion plan. Once we get through the process of opening so many stores, our run rate will look a lot different than it does today. And importantly, our Retail business is supporting $110 million worth of wholesale business; this is all in margin story.

Another point worth mentioning is that we have a proven Retail model with a lot of experience, as we have been managing a retail system for some 30 years and believe our brand will give us the strength to power through this difficult time.

I would also like to highlight that our overall system of more than 300 stores is healthy. Unfortunately, we now own most of the underperforming stores, but we are up to the task to fix them. As part of this process, this past September, we retained the Boston consulting group to critically evaluate our Company-owned retail system, and they are analyzing every facet of our business to validate our model. Importantly, they are comparing our system to the many successful dealers throughout our overall Furniture Galleries network so that we can all share best practices.

In the meantime, we are continuing to assemble a strong management team with a vision and the ability to execute, and are confident that expanding our store system is the right strategy to build the Company and establish a strong foundation for the future.

Now I would like to turn over the call to Mike Riccio, our Chief Financial Officer, who will take you through our numbers for the quarter. Mike?

Good morning, everyone, and thanks for being on today's call. I would like to give some clarity to the numbers for the quarter, as we had a lot of moving parts. First, as you have seen, our reported earnings per share for the quarter was $0.04. We had $0.02 of restructuring charges and our VIEs lost $0.04 this quarter versus $0.03 in last year's second quarter.

The restructuring charge was related to the onetime charges we took for closing the various warehouses, getting out of some of those leases, and severance expenses associated with those closings. The VIEs performance is reflective of the overall retail environment that we are all facing. If you total the VIEs and the restructuring effect on earnings per share, you can see that it was a $0.06 per share loss that was included in our numbers this quarter. We also had $0.01 of stock option expense this quarter.

Additionally, there was an increase in interest in investment and income that comprised the majority of our change in Other income. For modeling purposes going forward, I would advise you to use a 39% tax rate for the remainder of the year.

Turning to our balance sheet for a minute, normally, the level of working capital is highest in the second quarter, as we have more inventory and receivables. During the third quarter, we expect an additional amount of cash to be generated from reducing inventories and receivables, which will be used for operating expenses or paying down debt.

In terms of our share repurchases during the quarter, we did buy back approximately 250,000 shares at an average price of $12.98 in the beginning of the quarter. But once our debt-to-cap ratio moved beyond 25%, we determined it would be prudent to stop purchasing shares at that time.

I will now turn the call back to Kurt for his concluding remarks and will be available to answer any questions you may have on any specific line items. Kurt?

Thank you, Mike. I would like to leave you with a few closing comments before we move into the question-and-answer period. We are focused on five broad initiatives to improve our business and position the Company strategically for the future. First, in Retail, we are lowering our costs through the consolidation of distribution centers and operating systems and the reduction of administrative staff. This process is expected to be completed in 12 months.

Additionally, we are improving our gross margins and building out our store system to increase volume. In 18 months' time, we will have an additional 25 Company-owned stores in the new gen format. As these improvements begin to take hold, the earnings power of our Company will significantly change.

Second, we continue to evaluate our portfolio of companies, using a filter of size, profitability, and strategic alliance with the La-Z-Boy store system long-term to ensure the correct positioning of our Company. This is a continued ongoing process.

Third, the restructuring of our manufacturing operation is ongoing to ensure we maintain our competitiveness with Asian imports. The conversion to cellular production at our branded facilities is expected to be completed by the end of fiscal '08, and today, we are one-third of the way through that process.

Additionally, we test our competitiveness against imported upholstery every single quarter.

Fourth, speed to market is a strategic focus for us, with choice and customization an integral part of our model. We have taken a week out of the production cycle this year and we will continue to improve our performance with the objective of delivering 100% of custom orders in four weeks or less in a year's time frame.

And fifth, we are building a management team throughout the entire organization which will take this Company into the future. We are tapping the best people from within and outside the organization, individuals with strong expertise and skills in retailing, information technology, marketing, consumer research, and supply chain management. We are confident we have a winning strategy to position La-Z-Boy Incorporated for the future in what is a dynamic marketplace today.

Looking ahead to the third quarter, we continue to see a volatile retail environment, and are forecasting sales to be down in the mid-single-digit range compared with last year's third quarter of $477 million. We expect earnings per share to be in the range of $0.06 to $0.10, including up to a $0.01 charge for stock-option expense. Last year's third quarter earnings per share was $0.20, which included $0.01 in restructuring charges and $0.01 of discontinued operations.

We appreciate very much you being on the call and being with us this morning, and I will turn it back over to Mark to begin the question-and-answer period. Mark?

Thanks, Kurt. We will begin the question-and-answer period now. Dan, could you quickly review the instructions for getting in the queue to ask questions?

(OPERATOR INSTRUCTIONS) Budd Bugatch, Raymond James.

Just a couple of questions regarding Retail. I read the Q and the filings and I listened. Did I miss -- have you talked about the comparable store sales of either the system or in retail during the quarter or during the period you can measure?

In our press release, we talked about the overall store system sales for the calendar year third quarter. And they were down about 3.2% for the quarter. But that is all 335 La-Z-Boy stores throughout North America.

And are you going to start disclosing or can you start disclosing your comparable, now that you've got 68 stores, and that is something we should expect going forward?

I'm not sure. We are giving a lot of information about the system overall and the direction of our overall business. And we have not made a decision yet on whether we're going to break out our own store comps versus the system's comps. That is something we will take under advisement.

Okay. And help me understand the speed now with some of these changes, the new 18 stores. What is the quarterly outlook, how many stores do you think you'll have by the end of Q1 and by the end of fiscal year? I mean end of January, your Q3 end of the fiscal year.

We have -- I believe it is about nine Company-owned stores in the second half. Again, that is in our press release. We are going to open seven new gen stores in the quarter, in the third quarter. We're going to -- four of them will be brand-new; three will be relocations or conversions. And I think there's close to a similar number of that in the fourth quarter.

I think I gave you in my remarks the total store count that we're going to do over the next 12 months, which is fairly aggressive. And it is not that we are going into new markets. It is not that we are spreading our wings and trying to take on more than we can, but a number of the markets that we acquired were very underpenetrated from a store standpoint, and we have to get critical mass and share of voice in these markets.

As an example, we've talked a lot about we have four stores in Boston, and we believe in 12 months, we will have either eight or nine. So that is the kind of rapid run-up we're having. In the markets where we operate today, we have said consistently for the last six to nine months that we think we can have between 90 and 100 stores in those same markets. So that is where we're focusing our attention.

When you talk about the 300 point gain in margin, you talked about, I think, GOB sales as the impact. Are you talking also at Retail, the Retail gross margin was improved by that much as well?

What we are saying, Budd, is we've had a very difficult time working through the inventory conditions of the businesses we acquired, and we believe we are through that process. We saw nice improvement this quarter, sequentially every month in the improvement of our gross margins. And we think we have it up to a point now on a go-forward basis where we can operate at a level that is 300 to 400 points better than we have been operating.

And that's at Retail, Budd. We're referring to our Retail business there.

So, and we're looking at Q3 and your guidance implication, should we assume -- we assume the Retail loss margin gets better by 400 basis points or so? Would that be a reasonable assumption? Then how should we think about the Casegoods and the Upholstery Group in terms of margin? Should we have better or lesser margins --?

Well, you are ahead of us, Budd. I don't know that we want to start forecasting our margins by segment, but --.

I don't want you to stop for my account.

Yes, I know. We certainly, with the season we are in, being our third quarter should be our best volume season for Retail, and the improvements we made in the cost structure in the second quarter to the Retail business and the improvement in gross margins, certainly we should see some improvement.

But to give you any more clarity on that, you need to answer for me first what the consumer is going to do the next 75 days, and I can tell you exactly how are segments are going to perform. But we have certainly looked at each of them differently and made our best guesstimations at this point. But I don't know that I want to give any further clarity to that.

Okay, thank you very much.

Susan Maklari, UBS.

You've faced various raw material supply issues on the upholstery side of things. Can you just give us an update on where that stands and how we should be thinking about that in terms of the inventory situation that you are in?

I have learned one thing in this past year or so is that prices on raw materials don't come down as fast as they go up. And so when we had the big runups in the last two years in both steel and poly, while they have abated some from their high, high levels, they have not come down nearly to the degree they were before the runup happened.

We have not seen a whole lot of fluctuation in raw materials, and our bias is probably we're not going to see a whole lot over the next couple quarters. We have not been seeing any increases. We probably have a little bit of opportunity on plywood with the slowdown in housing and all. But it is nothing at this point that I would say is material, that is going to give us any additional wind behind our sail.

Okay, then you mentioned that third quarter is one of your strongest in terms of a volume perspective. Given what you're seeing on the demand side, do you still expect to see a sequential improvement in the volume level?

Our comment on volume was on the Retail segment. The volume -- our delivered sales and written sales in the Retail segment in our third quarter should be our highest retail, and it does not necessarily translate to our wholesale segment.

Okay. Then just one last question. Your receivables balance jumped on a sequential basis. Is there anything in there?

Typically, our receivable balances, because people are gearing up for the fall and placing more orders and the pace of business picks up, it typically flexes up in the second quarter and comes back down in the third and fourth quarter. If you looked historical at our ebb and flow, that is no different than what it has been for years.

As of last second quarter, being with the poly issue, we did not have that runup in the receivables that we normally would because we were out of poly the last two weeks of the quarter.

Okay, so that is why the year-over-year comp is (multiple speakers).

Yes, that is the differential in the year-over-year.

Okay, perfect. Thank you.

Todd Schwartzman, Sidoti & Company.

What, if anything, should we expect to see in the way of additional VIE consolidations through the end of fiscal 2008?

That is a process that we review every quarter. Our focus right now is to -- we're very close to having a couple of our VIEs become profitable and to have achieved the critical mass and get over the hump of covering their fixed expenses. So our hope is that while they would still remain VIEs, that they would at least be profitable VIEs and start moving in the right direction.

We do not have anything on the radar specifically, looking out the next 90 or 120 days, that we think is a huge risk. But I would in all candid say if retail business remains as tight as it is for an extended period of time, we would have to reevaluate that. But we believe that the work we did with acquiring the stores in the Retail division by the Company and establishing the four VIEs that we have, that we did the majority of the work we needed to do in that regard.

Thanks, Kurt.

Dennis McGill, Credit Suisse.

Kurt, you had talked about, I think, qualitatively in the past how the new generation stores perform relative to the older models. Can you kind of update us on that and put some numbers behind it?

Well, we have been talking about the new format store performing on average in the range of 15% to 20% better than the old format store. What we are seeing is a little better close rate, what we're seeing is a little higher transaction, a little higher ticket. What we are also seeing more in-home design work being done out of the new format.

But it is a combination. That lift in business, I need to quantify, is a combination of not only the design and the offerings and the new format, but in a lot of cases, our dealers and what we're doing with our own Company-owned stores, we're moving the physical location to better retail locations. So we believe it is the combination of the better retail locations and the look, feel, and design of the stores that is providing the lift.

On a straight remodel, depending on the quality of locations, you might not get that much lift. But we have conditions where that has happened. We have conditions where that has been a little less than that. But overall on the average, that 15% to 20% sales lift is holding pretty steady.

Okay. And that jump, is that immediately or does that persist for, say, 18 months later -- does the sales per square footage hold? Or is it more just the jump from the initial conversion?

It is normally the jump from the initial conversion, and then you would probably see a peaking and a maturing of that in 18 months. And you certainly would not get 20 again the next year.

I'm not necessarily saying that the increase would continue, but do you maintain the sales per square footage that you got from the initial conversion?

Well, to answer that question, I would say we were getting that until probably the last three or four months. But with the conditions at retail being what they are, that is off a little bit. But yes, historically, once they get the bump, they maintain that higher run rate consistently.

Okay. I think you mentioned this, but the stores that you opened in the quarter and the 14 you expect over the next 18 months, those are all in existing markets?

They are all in existing markets.

Okay. Any expectation on the independent side, whether you're going to be able to increase that base as well?

Well, the independents are still moving along in a very measured manner and continuing to open stores. We are going to open close to 50 new generation format stores this year, and that is either remodels, relocations, or brand-new stores. And our independent dealers are doing more than half of them.

So they are continuing on their process of moving forward with this plan, and we are pleased that we are above now 50% of all the stores being in the new format, and we continue to look to run that out to get all of them looking the same over the next three to four years.

Okay. Just one other thing that you had commented on, with the time of shipping on both the Upholstery and Casegoods side, can you give us some perspective about where that was maybe the last couple of years and what kind of improvement you've seen?

On the Upholstery side, I think we mentioned in the comments that in the last 18 months, we've taken a full week out of the process, which would be about a 25% improvement. And we think we can continue to improve on that. And we mentioned that 45% of the orders are in three weeks or less; I think we can get that up to 75% or 80%. And our overall goal is to get all the custom orders delivered in less than four weeks. So that is the improvement.

The Casegoods issue has been not as dramatic of an increase in the past year. Once we got converted to primarily an import model and we got our supply chain issues flowing correctly, our 75% in less than two weeks is kind of where we have been. We would hope to get that up a little bit. I don't think we will ever be -- because of the long lead times and the peculiarities with the number of SKUs that you have in groups -- I don't think we can get to 100% in less than two weeks. But I think we can push it up to the mid-80s here as we go forward.

How does the inventory position perform in an environment today where you're seeing the volume under such pressure on that import model? Can you dial it back fairly quickly or is that an inventory build in the making?

I'm glad you asked the question. I think our team did a very good job this quarter in not building inventory, even with the softer conditions. We've been working on that very hard. We are trying to manage our working capital as good stewards of the business.

But, no, there is a 12, 16, 18 week supply chain, and we readjust and look at orders every week. And if you start having -- if you plan for up business and you have a down trend, you can't rectify that overnight. But there are forecasting tools, there are relationships with our partners in China about delaying things some. And it has been an intense focus of our Company to make sure, even in tough times like this, that we do not let our inventories get out of balance and have that become a major problem.

Thanks again, Kurt.

Joel Havard, BB&T Capital Markets.

In wood -- I will preface that by saying in Retail, given that your results there were a little soft, I'd presume that Hammary probably did not have a gangbusters' type environment lately. The sequential lift in wood then, if that presumption is correct, is that a function of some of the initiatives that were underway, particularly at Lea, Pennsylvania House and Drew? Is this something that was reflected coming out of High Point or has this been longer in build, and what might those initiatives have been that you're benefiting from?

Joel, you don't only want segment information, you want me to give you the results of every single company?

Well, yes -- following in Budd's footsteps. I know you don't comment on segments per se. But again, if we are right to presume that Hammary sort of is a leading indicator at Retail, because it is so closely aligned to the Retail business now, clearly something is going better than we expected in the other wood businesses. And if you could just kind of hit the themes that is this a function of the better in-stock positions? What is going on that is giving you a little relief there?

I think, first of all, Joel, our wood business is directly proportionate to Retail. And I think our degradation in the first quarter was a very, very tough summer. I think the last quarter, it was not as bad as the summer; it still has not been as good. So that wood model, because it's all import, is going to ebb and flow directly to what is happening at Retail.

I do think we're done some things with styling, innovation, being more competitive with our wood business. We are in stock in a better position. So all that has helped.

I would tell you just -- and I'm not going to go any deeper than this -- but all of our wood companies participated in the improvement, both in volume and in margin improvement, all of them participated in that with the exception of Pennsylvania House, which we think will start improving to Group's performance now that this transition in management and combining the two companies together going forward. So it was across the board in all of our wood companies with the exception of one.

Well, that was the kind of color we were looking for.

On the Retail side, the store conversion issue -- is that fairly concentrated now? You did identify taking some steps along those lines and the expenses that came with it. Are we down to Chicago is the market that needs fixing as far as cleaning up the existing footprint? I'm not talking about rolling out the new or replacement units. Or is it still a little bit more broad spread than that?

Do you want to ask me about each individual store?

If you can send me a spreadsheet, that's fine.

Joel, I have been consistent about saying that certainly we are more fully developed and more penetrated in certain markets than others.

I will take certain, then.

We have said that the Washington, D.C. market, the Baltimore market, the St. Louis market, we have enough size and breadth there that that is not an issue. We have a few other markets that are in the middle. And I would tell you the markets that we are the least stored out in, the markets we have the most opportunity in, are Southern Florida and Boston.

So that gives you a level of granularity degree that they are not all in the same condition. Some are pretty much near completion and some, we have a lot of work to do. And that is where the concentration of stores are going to be over the next 18 months.

Got it. I better stop there. Thanks and good luck.

John Baugh, Stifel Nicolaus.

My question relates to -- I think it was bullet point 2, or maybe it was 3, about evaluating the portfolio of companies. Could you share with us -- are you using financial metrics to do that, like an EVA or an EBIT target or return on assets? Is it a brand analysis, i.e. it doesn't fit our Retail strategy? What kind of metrics or optics are you using to evaluate that?

I would first say that we have done a number of things. It is an ongoing part of our planning and strategic maneuvering. We made this distinct decision 18 months ago that we wanted to concentrate on the home. We sold our office seating business. We sold our hospitality business. We made a distinct decision that we only want to be in the top markets in the country, and that led to our decision to vacate the Rochester, New York retail market.

So we have been consistent, John, in moving in that direction. And as I said in my prepared remarks, we are using a filter of size and profitability, performance and strategic alliance with the long-term business model to continue to look at things in an objective manner.

So I do not really want to go into any more detail on how we are doing that, but it is an ongoing process and we do not believe that we're done with that process, but we look at that rigorously and are going to continue to move forward in that fashion.

Is there any -- the wood segment, Casegoods obviously is a blend of various business units, some doing better than others, I'm sure. But I am curious as to what sort of EBIT target -- and your margins are better -- but what sort of EBIT target on a consolidated, blended basis that you are targeting, obviously, in a better retail environment, and what it is going to take to get there. I assume it's volume, although there's very little fixed cost in this business now.

Well, I am not sure exactly what your question was. But we have given targets by segment of our operating margins, and I think those are still appropriate and that's still what we use to evaluate our opportunities and our challenges, and we're going to stay in that range with our three different businesses. And our business units, they know what those expectations are and they have to get into those levels long-term for us to consider them an integral part of our long-term future.

So what is the target again on Casegoods?

Our target on Upholstery has been in the 8% to 10% operating range on what we would hope would be normal volume. And our range in Casegoods has been 4% to 6%. And our range on the Retail business, once we have owned a market for 2, 2.5 years and got critical mass in those markets, our range is 3% to 5%.

And you can do the mathematics on how much business you think we're going to do in those segments, and ebb and flow that, and you can come up with your own model on where that leaves the entire Company. But we think right now those are the ranges -- and they have not changed in 18 months -- and those are the ranges in normal demand cycles that we are confident we can perform in.

Thank you.

Laura Champine, Morgan Keegan.

Kurt, you mentioned that every quarter you test for competitiveness versus Chinese imports. My guess is that you were referring to the upholstery side of the business. Can you walk us through how you do that?

We have a lot of relationships with a number of Chinese partners, Asian partners, both on the wood side and the upholstery side. We cost product. We send them prints on how to build products that we are making here in the U.S. We look at their all-in cost, the cost of transportation, the cost of money, the cost of obsolescence. And we continue to watch what their model is compared to what we are able to do domestically.

We challenge our own manufacturing group to understand what those costs are, understand what the gaps are, to be sure we're remaining as lean as possible. And it is just a good practice and a litmus test for us to be sure that we don't get caught behind the eight ball with a move over -- with Upholstery oversees to where we are late to react to that.

And given our model today of doing a high percentage of cut-and-sew, where the savings has been shared, given the cost of containers and the $100, $125 a sofa in freight costs that we do not incur, and given the fact that we do customization and we do almost 40% of our business through the La-Z-Boy Stores with special orders, which is not an easy model to replicate from Asia, right now, we think we are competitive and we have some things to offer that cannot be replicated in China easily today.

With that said, if somebody moves our cheese over the next six or nine months, we are prepared to do whatever it takes to make our organization competitive at retail. But right now, we think the posture we are on is the correct one.

Can you give sort of a ballpark percentage of your fabric that you are using cut-and-sew on today?

Laura, I would say on fabric -- if you take leather out -- I would say on fabric, we are probably using -- in all of our Upholstery divisions, we are probably using 30%, 35% of the total in cut-and-sew.

Great. Thank you.

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