La-Z-Boy Inc (LZB) 2007 Q4 法說會逐字稿

Greetings ladies and gentlemen and welcome to the La-Z-Boy Inc. fourth-quarter and full-year fiscal 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, Ms. Kathy Liebmann, Director of Investor Relations for La-Z-Boy Inc. Thank you, you may begin.

Good morning everyone and thank you for joining us on this morning's call to discuss our fiscal 2007 fourth-quarter and year-end 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 year and will discuss the strategic direction of our business and Mike will speak to the numbers in more detail. We will then open the call to questions.

A telephone replay of the call will be available for one 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 remarks.

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. Kurt?

Thank you, Kathy. Good morning everyone and thank you for joining us on our call to discuss our fiscal 2007 fourth-quarter and full-year results. As Kathy mentioned, I will begin with an overview of our quarter and year as well as an update on current business conditions. Then Mike will take you through the numbers in more detail before I conclude with our prepared remarks and move to the question-and-answer period.

As you continue to hear from the other public companies in the furniture space, retail conditions remain extremely challenging. Indeed it has been difficult to achieve top line traction, undoubtedly the result of higher gasoline prices, a slowing housing market, concerns about interest rates and inconsistent consumer confidence levels all of which is making the competition for discretionary dollars allocated to furniture more difficult than ever before.

While there are many external factors in this environment that we cannot control, we remain focused on controlling what we can -- our costs, our inventory and receivables, our balance sheet and, importantly, our focus on strategically positioning La-Z-Boy for the future within the rapidly changing marketplace.

For the quarter our sales were down 9.4% to $407 million and we earned $0.16 per share from continuing operations compared with a $0.24 per share loss from continuing operations in last year's fourth quarter. Last year this $0.24 loss included a $0.44 charge for the write-down of intangibles related to our Bauhaus division. For the full year sales decreased 4.6% to $1.62 billion and we earned $0.38 per share from continuing operations versus an $0.11 per share loss for continuing operations last year.

Let me be sure that everyone understands the various items included in both the quarter and the year. For the quarter our results included a restructuring charge of $0.08 related to the previously announced closure and consolidation of facilities as well as reduction in corporate headcount. We also sold several properties for a gain of $0.14 per share. For the year our earnings per share figure of $0.38 included a $0.17 per-share gain on the sale of properties, $0.04 in income from the anti-dumping duties collected, a restructuring charge of $0.13 per share and a non-cash stock option expense of $0.03 per share.

Importantly, even on down volume for the full year, we maintained our wholesale upholstery margin and increased our wholesale case goods margins reflecting all we have accomplished in managing the cost of each business. Importantly, we are extending those same disciplines and principles across our retail operation. And while we posted a loss in this segment we are taking aggressive actions to improve the results of our retail business as fiscal 2008 progresses. Let me take you through each segment in a little more detail.

First, upholstery. For the quarter we posted a 6% operating margin on an 11% drop in sales. While this performance is below our target margin range of 8 to 10% it does reflect our focus on cost containment, lean manufacturing and global sourcing. For the full year our upholstery segment sales were down 5.7% but we maintained an operating margin of 6.6% which was consistent with the previous year.

We continue to focus on rightsizing our manufacturing operations to ensure they are in tune with the current business environment and in March we announced a restructuring plan that included the closure of two of our facilities -- first, our La-Z-Boy branded Lincolnton, North Carolina facility and Bauhaus' Iuka, Mississippi facility. Additionally, we consolidated operations at our Taylorsville, North Carolina upholstery facility and eliminated corporate positions throughout the organization. And as part of our strategy to realign our portfolio of companies to focus on growing the core La-Z-Boy brand we finalized the sale of Sam Moore to Hooker furniture.

The conversion of our La-Z-Boy facilities to cellular production process is on track with two of our plants now fully converted. The remaining facilities are in various stages of conversion and we are scheduled to complete the full conversion project by the end of this fiscal year. Cellular production will not only reduce our cost by an estimated $25 million to $30 million annually, but will increase the quality of production and speed of delivery to the consumer. We believe that is a competitive advantage as some 40% of the La-Z-Boy Furniture Galleries' business is comprised of custom orders.

I would also like to spend a moment talking about observations made during my recent trip to Asia as the manufacturers there are dealing with their own set of economic and political issues. In China both the country's currency and energy prices are up and their labor costs are increasing as the government enforces overtime pay practices. Additionally, we've reduced VAT rebates and other costs increasing they are facing increased margin pressures.

We continue to believe that given China's current situation our strategy of importing component parts, including cut-and-sewn kits to assemble here, is the right on. We are taking advantage of the cost savings offered by those parts and are combining that with our ability to deliver custom furniture quickly to the consumer by manufacturing the product domestically.

Last quarter I talked about the findings of our La-Z-Boy brand consumer research survey and mentioned that as a result of the survey and findings we had undertaken an advertising agency review. Since we last spoke we announced the appointment of our new agency, Santa Monica based RPA. An excellent firm, it has been Honda USA's agency for over 30 years and they also work with Acura, SoyJoy and MGM. We are in the midst of working with them to finalize our new national TV ad campaign which will launch this fall.

I also discussed on our call last quarter the results of the survey told us the La-Z-Boy brand has universal recognition and near universal favorability. Additionally, the research confirmed that we define the category for recliners and that consumers place a high-value on comfort, quality and durability with La-Z-Boy enjoying a commanding lead for those attributes over other brands. It also told us that customization and professional services are important to our targeted customer and a competitive advantage for us. I won't reveal the focus of the new campaign on this call, but we are very excited about its potential to drive traffic into our stores and to differentiate us from other furniture retailers.

Now let's turn to case goods. For both the fourth quarter and full year sales were off double digits, although we improved our operating margin for both periods versus the comparable periods last year. For the fourth quarter we posted an operating margin of 8% versus 5.6% in last year's fourth quarter and for the full year we turned in an operating margin of 7.7% compared with 5.9% in fiscal '06.

We are pleased with our ability to operate at these levels given the significant volume decline and it demonstrates the success of our transition to primarily an import model as well as our more efficient domestic operations. However, our primary challenge is to drive the top line and we will seek to do so through increased distribution and new product introductions.

Given our improved operating margin performance over the past two quarters we are raising our target margin range for this segment going forward. Our new target is to achieve an operating margin between 6 and 8% for fiscal 2008 compared with our previous target of 4 to 6%. As part of the restructuring announced in March we closed our rough mill lumber operation in North Wilkesboro, North Carolina and consolidated it into our Hudson, North Carolina facility. And as part of the portfolio evaluation, last quarter we committed to a plan to sell Pennsylvania House and Clayton Marcus.

Now let's move to a discussion of our company-owned retail segment. Although we posted a significant loss for both the quarter and the year we are confident that pursuing a strategy of increasing our proprietary distribution is the channel that will offer our company the best opportunity for future growth particularly as the retail landscape changes. The loss for both the quarter and the year was primarily due to soft retail conditions and the high cost structure we inherited when we took over the various markets these past two years. Additionally, Southeast Florida, acquired a year ago, has been particularly challenging with a very soft housing market.

We continue to make changes to our operating structure to eliminate duplicate costs throughout the company-owned markets and are on track to complete both our warehouse and IT system consolidations by fiscal year end. We expect to realize savings of $8 million to $10 million annually as a result of consolidating these functions. We also exited the Pittsburgh market this quarter and that, combined with having various inventory clearance sales behind us, will help us increase our gross margins going forward.

As we continue to build out our store system and convert stores to the New Generation format we will expect top line improvement in fiscal 2008. At the same time we will increase our share of voice in each market and improve our cost structure as we spread our fixed cost over more volume. That said, however, without an increase in same-store volume it will be a challenge to see all the results of our cost savings initiatives fall to the bottom line.

We made a lot of progress repositioning our company-owned stores during fiscal '07. We opened 16 new stores including the six we acquired in the Florida market, relocated and converted 10 stores into the New Generation format and closed nine. At year-end our company-owned store count stood at 70 with 47 of those, or 67%, in the new format. Last year at this time only 28 or 44% were in the new format. By year end fiscal '08 we plan to have approximately 55 of our 75 stores in the New Generation format representing about 75% of our total company-owned stores.

We are confident that long-term we will not only turn our retail segment around and make it profitable, but that it will provide a solid platform for substantial growth and will differentiate us from our competitors. I would now like to turn over the call to Mike Riccio, our Chief Financial Officer, to take you through the numbers in greater detail. Michael?

Thank you, Kurt. Good morning everyone and thank you for participating on today's call. I would now like to review our numbers from both the quarter and year to ensure everyone's understanding of what's in and what's out. As a reminder, we reclassified Sam Moore, Pennsylvania House and Clayton Marcus as discontinued operations last quarter and their results of operations are no longer shown in our results from continuing operations for any of the periods presented.

At the end of April we sold Sam Moore for $9.9 million which was comprised of $9.5 million in cash and about a $400,000 receivable. And as Kurt will mention in his concluding comments, we are still actively discussing our options with regard to Clayton Marcus and Pennsylvania House.

Although Kurt broke down the onetime items for both the quarter and the year earlier, let me further clarify the various components. We have restructuring costs totaling $11 million relating to the closure of several manufacturing facilities, the consolidation of retail warehouses and the closure of our retail stores including the Pittsburgh, Pennsylvania and Rochester, New York markets as well as others that were underperforming.

We also sold in number of properties for an aggregate of $47 million in cash and received an additional $3.4 million in anti dumping duties related to bedroom furniture imported from China. Additionally, our results from operations including a loss of $0.11 per share from our VIEs compared with a loss of $0.09 per share in the previous year.

Our effective tax rate for continuing operations for the year was 33.8%. But for modeling purposes you should use a range of 38 to 40% for fiscal 2008. Our CapEx for 2007 was $25.8 million and we expect capital expenditures for fiscal 2008 to be in the range of $23 million to $26 million, about the same as depreciation.

With respect to our balance sheet, over the course of the year we reduced our debt by $35 million and we generated more than $120 million from operating activities and the sale of assets and discontinued operations. We also did a solid job in managing both our inventories and receivables relative to the declining sales environment and will remain focused on that going forward. You will also note that the current portion of our long-term debt increased by approximately $35 million reflecting a private placement note that comes due next April.

We did not purchase any shares during the quarter, but did repurchase 540,000 shares earlier in the year and we still have authorization to purchase 5.4 million additional shares. The Company will continue to use a blend of strategy of debt paydown and share repurchases and we will manage that process on a quarter-by-quarter basis depending on the overall sales environment as well as general conditions in the stock market. Kurt?

Before I move to my concluding remarks I'd like to take a few moments and talk about some executive appointments that were made during the quarter. First, we named Peg Mueller to the position of Vice President and Corporate Controller. Peg has been with La-Z-Boy for 14 years and positions of increasing responsibility in the corporate accounting area.

Second, we appointed Roger Miller as Vice President and General Manager of our international operations. Prior to joining La-Z-Boy Roger worked with a number of companies expanding their global presence.

And third, Doug Collier rejoined the Company from Select Comfort and has been appointed Vice President and Chief Marketing Officer, which comes at a fitting time in the Company's history as we are about to launch many new marketing initiatives this year.

In summary, we believe we are aggressively managing our business during this difficult time in our industry. In terms of our five strategic initiatives, in retail we continued to execute against our strategy of building out markets and streamlining our cost. However, given the weak top line it has been a challenge to see the results of our efforts fall to the bottom line.

With respect to our portfolio evaluation -- as we mentioned earlier, we completed the sale of Sam Moore, are in active discussions with potential buyers for Clayton Marcus and Pennsylvania House so that we will be able to bring more focus to the La-Z-Boy brand and its growth potential.

Third, we continue to make progress in converting our facilities to the cellular production methods and today we are 50% through that process. At the same time we have improved our production cycle times to ensure quicker delivery to the consumer with customization offerings that differentiate us from our competitors. And finally, we continue to strengthen our management team with bright, energetic and talented individuals.

Now let's turn to our guidance. I'm sure by now you have all seen our press release announcing we are moving to yearly sales and earnings guidance, a trend among other public companies. And with the uncertainty in our business today we think it's prudent to take a longer-term view of what we expect our results to be. We will make as many qualitative statements as we can about the state of our business so that you can draw the best conclusions possible to model our business throughout the quarters. And of course, should circumstances warrant, we will update our guidance throughout the year.

Given the difficult retail environment for home furnishings and indications that challenging conditions will persist, we are forecasting sales for fiscal '08 to be down 5 to 10% compared with the $1.6 billion in fiscal '07 and earnings per share to be in the range of $0.45 to $0.60. Our guidance relates to earnings per share from continuing operations and does not include the effects of any restructuring or monies received from anti dumping duties or gains or losses from the sale of discontinued operations or facilities.

We will remind you again that our first quarter is typically our softest quarter of the year due to the nature of seasonality in the furniture business. Thanks again for being on our call today and I will turn things back to Kathy to begin our question-and-answer period.

Thank you, Kurt. Diego, please review the instructions for getting into the queue to ask questions.

(OPERATOR INSTRUCTIONS). Sean Connor, BB&T Capital Markets.

Good morning. Matt's actually traveling so you can deal with me this morning. I was hoping to maybe -- if you'd help me understand the top line a little bit. It looks like the weakness is actually going to accelerate versus the year we just finished. Is that a trend that you're expecting to be consistent throughout the year? Do you think you might improve on the back half or how do you expect that to shake out?

Good question. Given the environment we're in today and the seasonality of the furniture business, the summer months have been extremely difficult and challenging. Certainly there's some optimism that the year as it unfolds may be getting better, but we don't see anything on the horizon right now that would indicate that things are going to substantially change with the economy, with the business. We believe to plan on an uptick that may not materialize would not the prudent thing to do, so we are giving the guidance that we think is prudent at this time and anybody's guess is probably as good as ours about what may unfold over the next nine months, but right now this is how we're seeing things.

Sure. My guess is that relates to margins. The last couple quarters your plan seems to be working. You've got -- the margins seem to be improving pretty good despite the top line declines. How much more margin are you expecting strictly from I guess operation efficiencies before you're going to actually need to see some sort of leverage, some volume leverage to drive it further? (multiple speakers) gross margin?

I would answer that question in two parts. There are a number of levers that can be activated on the wholesale side given wherever your volume ends up relative to efficiencies and capacity utilization and things of that nature. So our wholesale businesses aren't as high a fixed cost business as the retail, so we believe we can manage to our margins pretty much regardless of volume. That's a broad statement, but that's a generalization of what we see on the wholesale side, but the opposite is true on the retail side. It's got a higher fixed component, there's only so much downsizing you can do, and our retail item our business is much more dependent on volume for any kind of margin improvement than our wholesale side.

Okay. And then on the SG&A line, is that going to continue to be in that 25% range that you expect or will that continue to maybe grow a little bit higher than that as more and more stores are added?

One of the things that you have to take into account when you look at our financials is as the retail business becomes a higher percentage of the total business our SG&A cost will continue to creep up because it has a different SG&A model and gross margin model than the wholesale business. So you should see a corresponding lift in both the gross margins and the SG&A as retail becomes a higher part of our business. We are doing everything we can on the wholesale side to keep our SG&A levels at or below our previous run rates.

Additionally, Sean, just remember -- that's where those gains on sales of that property are as well. Unfortunately we won't have those gains every year, that will be in this year's SG&A.

Is there a time frame to when you expect that the retail will start to turn profitable or breakeven? I mean I know that's more of a longer-term outlook I guess.

Our expectations are for us to complete the consolidation and the rationalization of our acquiring all these markets and get positioned to where we're running them like a 75 store chain. The assistance from the economy and having a little more top line or even getting back to same-store sales that are not negative would be a shot in the arm.

Okay, great. I'll let somebody else hop on. Thank you.

John Baugh, Stifel Nicolaus.

A couple things. One, working capital in '08, the forecast, assuming that revenues are down 5 to 10% can we assume a source of cash from working capital? And if so, how do I model that?

John, obviously that will be one of our major focuses over the next year as to as we start sourcing more from overseas we'll have to start focusing more on that flow and making sure that we restrict that flow as we see volume going down to keep our inventories in line. Receivables will be -- it's a tough question to answer because it depends on where the volume went into presiding at. But we will be managing that pretty significantly and we do hope to get a cash flow from working -- from operating activities over the next two quarters as our sales volume ratchets down that would keep our inventories and receivables in check with that.

And again, I know you're making a forecast on volume, but you've made a forecast on volume, it's down 5 to 10%. So you would expect, if that's a right forecast, for inventory as well as receivables to be a source of cash for '08?

I do expect that. The only caveat I have is as we get more and more into imports for our component parts and for cut-and-sewn kits as we've done, there are fluctuations that ebb and flow and the timing of issues of when they get on the water, it's just a different model that we're still predicting. It could just be a timing difference of when things hit the water from overseas that changes that prediction at the end of the quarter.

Okay. And then, Kurt, maybe address -- you didn't buy any stock back in, you bought a little bit I guess previously, you've got some planned divestitures on the table. What's the likelihood we see some level of stock buyback in fiscal '08?

John, I think the answer to that question depends a lot on business conditions, having the cash available to do all the things we want to do in the business to make the improvements that are necessary to balance our debt versus the stock repurchase. We are planning and setting ourselves up for a challenging back half of '07 and we need to see some evidence that there's going to be a pick up here before we would be inclined to be aggressive in any kind of a stock repurchase.

Okay. And then, getting back to this SG&A number, could you tell us where you're running, excluding charges, on a wholesale business today with SG&A as a percentage of revenue? And with planned divestitures and I guess trying to streamline this more into a La-Z-Boy wholesale model going forward where you'd target SG&A? Basically, are there opportunities to reduce overhead on the wholesale side of the business materially once all these divestitures are complete?

Was that one question or four, John? We believe we're providing a lot of information to our investors. We try to be as transparent as possible, but to get into our segment gross margin or SG&A targets; I don't know that that is someplace we want to go. Certainly there's always judgments made on what you can do with SG&A. In our position, particularly with a brand like La-Z-Boy, one of a larger components of our SG&A is marketing and advertising and we think this would be the inappropriate time to pull back on that.

In fact, as part of our plan we intend to increase that this year because while you're managing your cost and trying to right size your capacity with your volume you still have to keep an eye on the future and you still have to have some top line emphasis going forward. So we're going to be spending on the brand -- it won't be the majority of our marketing initiatives for the year, but as far as the specifics and any further than that I don't think we want to explore that at this time, John.

Well, if you don't want to explore it numerically, philosophically or just sort of is there opportunity to downsize the organization overhead in light of the fact you're going to be a smaller business going forward? I don't argue with spending marketing dollars on La-Z-Boy, but you're going to be a smaller business with fewer brands. And I don't know all your cost structures, whether there are separate accounting departments or sales staff or the High Point expenses, all these things. Is there opportunity there?

To answer that question, there is opportunity, there's always -- we're evaluating things consistently. As we talked about in our comments, as part of our restructuring in March we did a headcount reduction at the corporate level and combined some things and we're continuing to look at all facets of our business relative to the volume levels that we're operating now and we've got some other plans and are going to continue to execute against them.

But I think the difficult thing for all of us in this business right now is is this the new run rate, how long will this last? If you cut back too severe and things turn around you're not in position to service. If you don't cut back fast enough it affects your ability to deliver on your earnings. So it's a balancing act that we watch very tightly and we're trying to react given the best set of information we have.

And lastly, quickly, on that retail $8 million quarterly EBIT loss, is there any benefit yet from consolidation efforts and therefore the lack of sales and the tough environment is even worse? Or have we just not yet seen any of the benefit that it will accrue going forward?

I would answer that question two ways. One, the degradation on our same-store sales is greater than we anticipated, so that minimizes some of the cost savings falling to the bottom line. Number two, we really only consolidated one of our four major DCs with both the system conversion and the warehouse conversion so there's much more savings to come as the year unfolds.

Thank you.

Budd Bugatch, Raymond James.

Let me kind of first explore one of the things I think John was trying to get at. And I know you don't like giving up segment granularity, but the retail gross margin I believe had been impacted -- company-owned retail gross margin had been impacted by inventory quality of the acquired companies and the requirement to discount and take markdowns to clear goods. I can't quite get into the inventory numbers because I don't think the prior year has been restated for the divestitures, but where are you on -- can you give us directionally where you were on retail gross margin -- company-owned retail gross margin in the quarter either sequentially from the prior quarter or year-over-year?

That's a much more clever way to ask the question, Budd, but we probably still aren't going to answer it to your satisfaction. We said six months ago that we had the opportunity to, once we exited a couple markets, once we finished our store closing sales, once we cleared out all the various inventories that we acquired that we had the opportunity to increase our gross margins by 3 to 4% in our retail business and for the latter part of the fourth quarter, if you took Pittsburgh out, we were running at that rate and would anticipate running at that higher rate for '08.

Okay, that is helpful. In the New Generation format of the Company owned retail, I think you give us the number of stores versus last year, but the New Generation format is what, about 3,000 sq. ft. per store higher than the old format? Can you give us a square footage breakdown for New Gen versus Old Gen?

Yes, on average, Budd, our prior store footprint was about 13.5 on average and the new footprint is about 15.5 on average, only about 2,000 ft. But we have ranges of stores as small as 10,500 ft. and as large as 20,000 ft. So we have them -- depending on the community and the real estate situation -- different. But the average is 15,500 ft. today for our systems square footage.

What I would encourage is maybe giving us the square footage metrics of company-owned, New Gen versus Old Gen. And then I'm going to ask you a productivity question that I don't know that I know the answer to which is the sales per square foot of the New Gen versus the Old Gen today and even with the down comps and I would tell you I know now down 9% is not comfortable for anybody, but it seems to me to be better than some of the public entities that I've seen reporting to.

If you would go back, Budd, probably 18 months ago when the pace at retail a little better and we had some history for a couple years of opening a lot of New Gen stores and repositioning them to better locations, we were getting somewhere between 20 to 25% sales lift on the New Generation format as compared to the old. Now in our belief that is a combination of a more updated store, a better shopping experience in addition to a better location. So it was a combination of all three of those factors that led to the uptick.

The remodels, if they were in the same location, did not quite track at that 25%, but they were up 10 to 15% even if you remodeled an old location. The challenge now is that we have moved into, both ourselves and our independent dealers, into the better stores with the higher occupancy and with the decline same-store comp of 10% for the math standpoint. That is putting additional pressure because that extra sales has dissipated with the comparisons.

But you can see sequentially how they're performing at least versus each other versus New Gen versus Old Gen. Does that differential still hold for a store that's been remodeled in location maybe 10 to 15 and for a store that's been relocated to a better site 25?

I would say on a general basis, Budd, that would be okay. But I would tell you and the rest of the listeners that what -- we're seeing big differentials in our various markets, both company-owned stores and with our independent dealers. And those markets that had a huge run up in housing the last few years -- like Florida, like the Bay Area in California and a number of other places -- we're seeing more dramatic drops in their same-store sales than we are in other places that did not have as dramatic a run up in housing.

So we've got customers and we've got some of our own stores that are running even or maybe just down a point or two and we've got other customers in some of our own stores that are running 15 to 20% down and the average comes out as we reported, but there's not a consistent story that you can look at market by market. So it makes those types of comparisons a little more difficult to generalize.

Okay. A couple more questions if I could. The $25 million to $30 million savings from cellular, how much of that might be baked into this year's guidance. Is there any of that baked in?

Certainly there is a portion baked in. We don't achieve a lot of the savings until the plant is 100% converted because you're running two different production cycles. You've got extra people involved to supply those different lines. And so given the fact that our largest facilities won't be converted until late in the year 100%, a lot of that savings will not be realized. But there is certainly some of that baked into it.

And the other question that these savings that we originally calculated on this process started with our original volume projections of a year ago. And as those continued to ratchet down your proportionate savings, because you're doing less volume, comes down a little bit too. But certainly that is part of why we believe we can have increased earnings on declining sales is a part of the efficiencies that we're gaining through that process.

So let me be clear. The two plants that have already been converted, that represents what percentage of residential -- La-Z-Boy residential production?

Probably, Budd, less than 15%.

Okay, so --.

We started this process with our smaller facilities to work out some of the kinks and get them done first and use them as a laboratory. So getting those finished is important and we're seeing the results we anticipated. But we have, of our six La-Z-Boy facilities left, we have some that are 250,000 to 300,000 feet and we have some that are over 1 million feet and we've completed the conversion on the two smallest plants.

So just grant me just a silly imputation. If I take that 15 to 20% against the $25 million to $30 million would that -- and just assuming that volume comes in, that volume diminution is not huge. That wouldn't be a stupid way to look at that in terms of improvement?

No, I think that would be accurate.

Okay. I was disappointed with the upholstery margins in the quarter. I was pleased with the case good margins and two questions they are. The upholstery business, was there anything going on specifically that affected contribution margin more differently in this quarter that might go away in the out quarters?

To answer that question -- I'll try to answer that question from this perspective. We anticipated a little better volume in the fourth quarter than we achieved, so we operated at a little less capacity utilization and probably had a few more people at the time than necessary. One of the things that you will see as part of the restructuring that we announced in March is one of our facilities in the branded business is closing this quarter and that production is being moved to the other facility. So that would certainly give us a lift for the balance of the year, won't help us much in the first quarter, but it's part of what we've done to try to increase our capacity utilization in a declining sales volume.

Okay. And two more questions -- one, case goods. You have now for the last three quarters either been at the top end of your new guidance or above it on the restated basis for the last three quarters. Should we think about a reduction in margin, is that what you're telling us by that 6 to 8% new target?

I think our bias there, Budd, is the fact that we still have a couple of domestic facilities. And depending on how business transfers the rest of the year and what we're able to do with the top line, our ability for the most part to improve or maintain the margin levels that we're at hinges a lot on us being able to operate those facilities at the level we did in the fourth quarter. If we had to ratchet back even further than the challenge on maintaining our margins or increasing our margins would be challenging and that's why we gave the guidance that we did.

So that's Chilhowie and Hudson, both of those are the two plants?

No, that's North Wilkesboro and Hudson. We have a plant in North Wilkesboro that makes youth furniture and we have a plant in Hudson that makes solid bedroom furniture for Kincaid.

And they are operating at once what cap utilization?

It's lower than we would like. From a capacity standpoint the plants are much bigger than we're utilizing today, but our staff is not. So we're operating them in the -- our capacity utilization for the entire company is in the mid 80s and that's the run rate we're at here in the first quarter and it's always a little bit lower in the first quarter, but -- and we then improve it as the year goes on. But there's a minimum staff that you have to whether you're making X amount of production or Y amount of production and we need a little more volume going through those plants to make the kind of return that we want.

Okay. And my last question -- or one last comment is that, Mike, I don't think the inventories are restated on the '06 balance sheet for the discontinued ops, is that correct?

That is correct. We're not permitted to restate the balance sheet, only the P&L. That's why the cash flow, you'll see the true inventory decline. But we do in our 10-K have a footnote that describes the inventory receivables for the discontinued ops that are there. But AOM and Sam Moore were in last year's balance sheet and they're not in this year's at all.

Yes, I understand that. I'm looking at basically about a $40 million drop in inventory and I was trying to -- I can't quite get the 10-K to print out in a way that doesn't come all over the place because of formatting. What's the inventory of the (inaudible)?

The free cash flow inventory was $4.5 million for the year.

Thank you very much. I'm not as clever as John, believe me. And he'll tell you the same thing.

Okay, we'll take note of that.

Danna Getske, Morgan Keegan.

Good morning. This is Laura Champine; I was able to get on the call. I understand you're not giving quarterly guidance anymore, but is it reasonable? I think the consensus is for earnings growth despite the weak sales climate. Is that something that you think you can achieve in the July quarter even though it's the seasonally weakest quarter of the year?

Obviously, Laura, we believe we can improve our earnings even on down volume because of all the initiatives we're undertaken. But I think in keeping with our new policy on annual guidance it would be wrong for us to comment specifically on the first quarter other than statements we have made that the first quarter has typically been less than 20% of our sales volume and even less than that of our earnings for a full year. It's the quarter where we take vacation shut down in our facilities and you can't draw the run rate comparisons on our business based on the first quarter only. And the environment out there for the summer has been extremely challenging, but for us to give anymore color on the first quarter we think would be inappropriate.

So you'd rather not say whether you're running ahead of breakeven so far in the July quarter or is that something we should just take as a given?

We're not going to comment on our position for the first quarter.

Okay. Just so I can get more clarity on the fourth quarter, it looks like there are some gains in the SG&A line, can you talk about what the gains on divestitures are in the SG&A line and what their tax impact was?

What we put into our comments as well as in the 10-K, they're mainly for some idle facilities that we had, not for divestitures of companies. Because the divestitures of the companies show up in the discontinued operations line. But we did sell some significant assets during the quarter and they had some -- that's why I gave you for modeling purposes, you need to look at 38 to 40% for our tax rate going forward because we did have some different taxing rates on some of those sales that did impact our overall rate along with a bunch of other things that happened.

So the total gains in the SG&A line in the fourth quarter, is that something that you disclosed? Or I can see in the K that for the full year it's -- is it $14.1 million in the SG&A expense?

Yes, and I think we gave for the quarter -- it was around $0.11 for the quarter. I have to look that up -- for the quarter it was $0.14 and for the year it was $0.17.

So I can just subtract whatever you put on the other line netting out your restructuring charges in getting to that number? Okay, great.

It's not in restructuring though, it's in SG&A.

Got it, thank you.

Todd Schwartzman, Sidoti & Co.

Good morning. I wanted to ask about the new TV ad campaign. How much incremental ad spending will the new campaign represent?

Todd, I'm not sure that, again, for competitive reasons we want to reveal that. When we -- we launched the program and we're taking a different approach with our proprietary dealers as partners on this we'll reveal a little bit more. I wouldn't say that it was material at this point; it's really a little bit of a change of focus and it's really a more concentrated effort on some of the core strengths of the La-Z-Boy brand and it's much heavier in the television arena than we've been in a number of years and we're pulling back from some of the print arena that we've been involved with. So it's a shifting and more targeted focus of our dollars as opposed to a huge increase in spend on our behalf.

Okay. Regarding the timing of finding a buyer for the discontinued ops, could you tell us, are there any accounting ramifications of not finding a buyer within a specified time period and, if so, what those might be?

There are more business reasons. The more it sits out there looking at discontinued operations there becomes business opportunities that we'll have to address. But we'll have to address them as the year goes on. We can't leave them in discontinued ops for years, but we believe we have some direction that we're going in over the next quarter or so that we'll hopefully be able to resolve that and make some announcements. But right now we're not too concerned that there would be any accounting issues relating to our discontinued ops.

Okay. And other than Florida, are there any other pockets of geographical retail strength or weakness that we should know about?

Todd, in terms of the company-owned markets or in terms of the general business overall?

Either/or.

In terms of general business overall, I mentioned the Bay Area, I mentioned Las Vegas, Florida, those types of market where they had the best run-up in housing over the years and now that that has stopped it is more difficult in those markets. By the same token, on the positive side we are seeing a nice trendline and actually a lift out in Western Canada -- Vancouver, Calgary, Edmonton, the Western Canada economy where the oil situation is very strong and today that's probably the area of the country where we're seeing our best performance.

What percent of sales are Canadian?

Our Canadian business is appropriate to where the population is from Canada to the U.S., it's 8 to 10% of our sales but growing. And our network of stores in Canada is a significant part of our business in that country.

All right. And finally, I didn't catch your full response, Kurt. Did you quantify your timetable for breakeven at retail?

We did not and the challenge with that, Todd, is to have some more clarity on what our same-store pace is going to be. It will be difficult even with a margin improvement, the consolidation cost savings, everything we will do and we will get that all done this fiscal year, we didn't bake into our original calculations a double-digit same-store sales decrease. And if that persists for an extended period of time our target of when this -- we can get to a breakeven level will be pushed out.

Great, thanks a lot.

William [Mansfield], Millennium.

I was going to ask you guys a little bit more on the retail side, but my first question on the retail was going to be if you compare your -- how you view retail today versus how you viewed it say on the last conference call, I was going to ask you is it better, worse or the same? But I'm kind of anticipating you're going to say it's a little worse because the same-store sales have come in a little worse. Is that fair?

I think that's fair, William. I think the one thing that we're not clear on at this point is this just a summer lull, is this an experience that we always go through in the middle of the year from a standpoint, will it rebound in the fall? Or is this the new run rate of what the industry is going to be for a while given the slowdown in housing and all the other things we mentioned? So we're trying to get some feeling for that so we can make the other business decisions we have to make to align the Company appropriately.

Okay. And my last question on the retail or my last question overall -- is your retail network -- I'm assuming you believe it's outperforming furniture retail nationwide and that's because in addition to sort of this overriding weakness for the whole industry there's the sort of trend of I'm assuming the smaller retailers who aren't affiliated with brands like yourself or aren't backed by pretty healthy financial parents are getting squeezed a lot here.

We would think that's probably a correct assumption and bias. I think the problem is -- with the change is what's happened in our industry. There's not that many public statements on pure furniture retailers. And even the larger retailers like Target and others have talked about the challenges of their home business, their home related business. Certainly a lot of the small dealers, you don't get the exact numbers from them. We see a little bit of what's going on from our sales to them. We see a little bit of what's going on from our credit relationship with them.

But furniture today is sold in so many different channels and so many different outlets, to make the statement that we're fairing better than everybody else right now, we would be a little reluctant to be that bold. We're working hard at making our stores different than other people, working on our staffs, increasing the number of services like our in-home business to help the customer with their decorating needs. But suffice to say it's a difficult environment out there and we're doing all we can to keep whatever sales we have coming in the door at the present time.

Thanks very much for the answers.

Thank you.

Joseph [Lind], [BDJ] Capital.

Thanks for taking my call. Do you anticipate consolidating any more independently owned stores?

The question about that would probably most relate to the situation we are presently seeing with our VIEs. We have four VIEs that we are working with. We believe those businesses are being run by professional managers. There's some upside to them in the markets they're in and the ability for them to work their way out of those situations is a primary concern and interest to us.

From an overall standpoint, we have stated repeatedly that our interest from a company standpoint in ownership of stores is targeted today in the top 25 markets. We are not interested in, as a company, being involved in markets that have one or two stores. We think our system is still strong enough than an individual entrepreneur can afford to make a nice return on doing that.

Our efforts would be in the markets where there's opportunity for eight, 10 or 12 stores. And if something like that came to fruition we'd have to look at it, but at the present time we don't see anything on the horizon that would say that that's in the immediate wheelhouse of what we see going forward.

And on your income statement, what actually is the intersegment sales for '07? I know it's consolidated with the VIEs.

We don't really disclose the clarity of all those numbers individually.

Okay. Are the intersegment sales -- do they have the same margins as other sales?

Yes, we sell to our stores and to the other parties within our network at the same margins that we would do anyone else in our retail store network.

And how do the sales to the retail store network compare to sales to other dealers?

We've consistently said that about 50% of the branded business of the La-Z-Boy brand business is done through the La-Z-Boy store network. And about 20% of the retail sales of the La-Z-Boy store network is run by the Company.

I saw that in the K. I'm sorry, I meant the margins versus -- the proprietary stores versus the dealers.

Again, for competitive reasons that isn't anything that we want to divulge.

Okay. So one last question, if the independently owned stores are typically in smaller markets, how do you think their profitability is doing versus what you're reporting in your retail group?

Let me clarify. I was talking about company-owned interest in smaller markets. We still have a number of very long-term, very capable customers in some of the big markets. We only own eight of the top 25 markets, the other 17 are owned by individuals who some have as many as 14 stores and they've been partners with us for a long time. So I don't want there to be any confusion that all of our independent Furniture Gallery owners are in small, small markets. There's a number of them that have the larger markets as well.

And I think it's an individual case-by-case situation depending on how long they've been in business, what their occupancy structure is, what their competitive situation is, what their share of voice is in the various markets. So to make a blanket statement about one segment of our business being different than the other in terms of large stores or large market stores and small market stores, we don't see a -- it's more geographically driven and historically driven than it is big versus small.

Okay, thanks.

(OPERATOR INSTRUCTIONS). There are no questions at this time. I will turn the conference back over to management to conclude.

Thank you very much everybody. And if you have follow-up questions I'll be around for the remainder of the day to take your calls.

Thank you.

Thank you. This concludes today's conference. Thank you all for your participation. All parties may disconnect now.