La-Z-Boy Inc (LZB) 2008 Q1 法說會逐字稿

Greetings and welcome to the La-Z-Boy Inc. first-quarter 2008 conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the presentation. (OPERATOR INSTRUCTIONS). It is now my pleasure to introduce your host, Kathy Liebmann, Director of Investor Relations and Corporate Communications. Thank you, Ms. Liebmann, you may begin.

Thank you, Ryan. Good morning, everyone, and thank you for joining us on this morning's call to discuss our fiscal 2008 first-quarter results. Present on the call 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 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.

In order to allow everyone an opportunity to ask questions, please limit your questions to two, and if you have follow-ups, you may re-enter the queue. 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 results for the fiscal 2008 first quarter. As Kathy mentioned, I will begin with an overview of our quarter and an update on our current business conditions, then Mike will take you through the numbers in more detail before I conclude with our prepared remarks and move into the question and answer period.

The retail environment for home furnishings remains challenging and this quarter, historically our weakest due to seasonality factors, was no exception. With a $50 million decrease in sales to $344 million, we lost $0.17 per share, which included a $0.04 restructuring charge. Although we continue to pare back costs and rationalize operations, the significant reduction in volume this quarter impacted our ability to absorb the fixed costs associated with our business. And, as we mentioned in our press release, with our quarter ending in July, our results not only reflect the industry's seasonality factors, but also reflect the scheduled vacation shutdown at all of our manufacturing facilities.

Clearly, we are not satisfied with the quarter's results. We have a lot of people working diligently on both our strategy and its execution, and this quarter was a disappointment. Our performance was not what we expect of ourselves, nor was it was our shareholders expect of us and we need to improve on our ability to deliver on results and return value.

Before moving into a review of our segments, I would also note that I'm guardedly encouraged as we move into the stronger fall selling season. It appears that today's written orders are more reflective of real demand as most retailers have worked through their excess inventory problems. And importantly, I would note that we do not believe our results are indicative of the Company's run rate for the full year.

In the meantime, we continued to execute against our plan in each of our segments to ensure La-Z-Boy is strategically positioned for the future. And with a strong balance sheet intact, we undoubtedly have the ability to weather this storm and emerge from it a stronger Company with a solid brand and a platform for growth in what is becoming a very different operating environment.

Now let's move to a brief discussion of each segment, first upholstery. For the quarter, our operating margin was 3.5% on an almost 14% drop in volume. As I mentioned earlier, with the magnitude of the decline in sales, the absorption of our fixed cost was less than optimal. In addition to the vacation shutdown of our operations, we also closed four facilities during the period and shifted the production from each to other plants. While closing the facilities was strategically the correct decision, training and ramp-up costs involved when production lines are shifted cause short-term inefficiencies. In this case, those inefficiencies put further pressure on our results.

That said, today these moves and associated transition costs are behind us and with our capacity rationalized, we're heading into the fall in a much stronger position from a cost perspective.

Also during the quarter, we continue to make progress in converting our La-Z-Boy manufacturing facilities to the cellular production process, and today more than 50% of our upholstery product is coming from cells. Once we complete this project at the end of our fiscal year in April of '08, we will remove significant cost from the operations side of the business. That, combined with our plant rationalization efforts over the last few years will ensure that we remain a competitive manufacturer with a unique ability to quickly deliver furniture to our consumer.

I talked quite a bit over the past year about the importance of our proprietary distribution for our Company. Indeed, we are confident it is the best channel to differentiate us in the marketplace. At the same time, it gives the consumer an excellent brand experience when shopping in our stores. As part of our strategy to strengthen the performance of our proprietary distribution network, we are just a few weeks away from launching our new marketing campaign, and as I mentioned on our last call, its hallmarks will be very different from our advertising in the past. Most importantly, we are confident that over time, it will drive additional traffic into our stores and help us increase our revenue per store.

Now a few remarks on our casegood operation. In the first quarter, our sales were off 12.2% year-over-year and our operating margin decreased only slightly to 4.9% from 5.3%, reflecting the transition of our business to one with primarily a variable cost structure. In general, our two domestic facilities have improved their efficiencies, although they were also impacted this quarter by the scheduled vacation shutdown in July in addition to some extra down days taken to control finished goods inventory. Going forward, our team is focused on driving the top line through channel expansion, new product introductions at competitive price points and increased levels of service to our customers.

As we announced in February, as part of our portfolio evaluation, we made the decision to sell three companies -- Sam Moore, Pennsylvania House and Clayton Marcus. We sold Sam Moore in the fourth quarter of fiscal '07 and anticipate we will make announcements on both Pennsylvania House and Clayton Marcus in the very near future. The most important takeaway from the sale of these businesses is that it will allow the senior management team of this Company to focus on growing our core business, the La-Z-Boy brand, what has historically been the growth engine of our Company.

Now let's turn to retail. In our company-owned retail segment, our sales were down 13.4% and we posted a $10 million loss this quarter. We are continuing to execute against our strategy to reduce our cost structure while increasing our penetration in the markets in which we operate. We are moving stores to better locations while converting old format stores into the new generation format, but these moves come with increased costs. Between this quarter and the same quarter last year, we closed 14 underperforming stores and opened 17 in the new generation format, of which three were remodels. Those were opened in prime real estate locations, carrying much higher occupancy cost and with the retail environment as difficult as it is right now, the absorptions of these costs is a challenge, given our reduced volume levels.

We have also seen large disparities in performance between markets across the country. Those markets which had the biggest run-up in housing over the last few years -- California, Florida and Las Vegas, for example -- are now going through significant downturns and furniture sales across the industry as a whole have been impacted as a result. For our own company-owned segment, we have been particularly hard hit in the Florida and Washington D.C. markets which represent almost one-third of our stores.

We will continue to pare back our costs in this segment with our consolidation efforts while opening new stores to increase our market penetration. However, turning this segment profitable is predicated on volumes picking up on a same-store basis. We continue to believe that proprietary distribution is the channel that will best differentiate our Company in the mind of the consumer and over the longer term are confident that the La-Z-Boy Furniture Gallery system as a whole will provide us a strong foundation for the future.

In our first quarter, we opened one new company-owned store and closed two. Of the 69 company-owned stores, 48, or about 70%, are in the new format, versus 31, or only 45%, at this time last year. For the remainder of the year, we expect to add eight New Generation stores, including four new stores, as well as four relocations or remodels.

With that, I will now turn the call over to Mike Riccio, our Chief Financial Officer, to take you through the numbers in much greater detail.

Thank you, Kurt, good morning everyone. I will take a few minutes to bring you through some of the numbers as Kurt had mentioned. As a reminder, two quarters ago, we did reclassify Sam Moore, Pennsylvania House and Clayton Marcus as discontinued operations and their results of operations are no longer included in results from continuing operations. However, the balance sheet from the prior year's first quarter has not been reclassified to reflect this change.

For the quarter, we posted a $0.17 loss of the continuing operations compared with $0.02 income in last year's first quarter. This year's loss did include a $0.04 charge for restructuring which was primarily related to the finalization of closing down the Lincolnton, North Carolina facility. We also had some restructuring charges associated with closing down a number of the underperforming stores.

Additionally, as we noted in our footnote disclosure, our results from operations include a $0.03 loss from our VIEs compared with a $0.02 loss from last year's first quarter. As you would expect, our VIEs were also impacted by the sluggish retail environment.

In terms of cash, working capital changes reduced cash flow from operating activities in the quarter more than they have historically, and this was principally due to the significant decline in our revenues. We did not repurchase any shares during the quarter and we do have authorized to purchase 5.4 million additional shares. The Company will continue to evaluate the uses of cash on a quarterly basis, and as we have stated in the past, will consider share repurchases depending on the overall sales environment, our cash position, as well as overall stock market conditions.

Our effective tax rate for the quarter was 37%, and for modeling purposes you should continue to use the range of 38 to 40% for the remainder of the fiscal year. Our CapEx for the year is expected to be in the range of 25 to $29 million, about the same as depreciation. This CapEx range does include a $5.2 million acquisition of a retail store that we subsequently sold and leased back.

I will now turn the call back over to Kurt.

In summary, the environment for the furniture industry as a whole has been difficult due to a number factors, including inconsistent (technical difficulty) consumer confidence levels and the troubled housing market. For the quarter, our results reflect the seasonality of our business, the significant drop in volume and the vacation shutdown at our facilities, coupled with various inefficiencies as we shifted production lines from the plants we closed. As I said earlier, we do not believe the first quarter to be indicative of our results for the year and are on target with our ongoing plans to reduce our cost structure and improve the performance of our company-owned retail segment.

Going forward, we're very excited about the new marketing campaign and our renewed focus on growing the La-Z-Boy branded business.

In terms of our guidance, as we announced last quarter, we are forecasting sales for fiscal '08 to be down 5 to 10% compared with the $1.6 billion in fiscal '07 and our earnings per share to be in the range of $0.45 to $0.60. Our guidance relates to the earnings per share from continuing operations does not include the effects of any restructuring or monies received from antidumping duties.

We want to thank you for being our call today, and I will turn things over to Kathy who will begin our question and answer period.

Thank you, Kurt. We will begin the question and answer period now. Ryan, please review the instructions for getting into the queue to ask questions.

(OPERATOR INSTRUCTIONS). Laura Champine, Morgan-Keegan.

I noted that you didn't change guidance for the full year, but for the first quarter, the actual results missed the consensus pretty soundly. So I'm just wondering if the first quarter were results were in line with management expectations and we were just a little out of the range, or if you're actually -- if I actually need to be more aggressive in the back half of the year?

Laura, I think I would respond to that question in the following manner. First, our results for the first quarter were not quite at our expectations. While we did not expect great things in the first quarter, we came in below where we should have been and where we had in our plan. With that said, we have -- as we indicated in my comments in the press release -- we have seen an improving order trend as the summer has played out compared to what we saw late spring and early summer. And the comments I made relative to inventory, if you would deduce from our press release that the La-Z-Boy Stores' volume for the quarter was only down 7% and the upholstery volume was down 12 to 13%, there is a delta there that on an ongoing basis won't remain in that kind of a proximity. So, I think our dealers, our proprietary dealers, along with a number of other dealers, had to adjust their inventories and their business models based on the declining sales. We think we have gone through the majority of that. And what we are seeing now in our incoming orders probably more accurately reflects real demand out there, rather than adjustments between wholesale and retail inventories.

Okay. So the quarter was not as strong as you expected, and yet you're maintaining guidance for the full-year because you see trends improving a bit?

That is correct.

And I'm also trying to put, and as my second question, the retail group's decline of 13% in perspective, I know that the store count that you've got on your income statement hasn't changed much year-over-year, but since many more of those stores are in the New Generation format, my guess is that your square footage was actually much higher in this quarter than it was in the year-ago period. Can you give me a sense of what the year-over-year change in square footage was, or if we could just cut to the chase and talk about sales per square foot on a year-over-year basis?

Just to get you calibrated [of] our store count, while we have the same effective store count, we have exited both the Rochester and Pittsburgh markets that we were in a year ago at this time, and we entered into the Florida market. So while we have the exact numbers -- same number of stores, the location of those are a little different. Those newer stores and the stores in Florida obviously are -- the occupancy costs are more expensive than the ones we have vacated. And while we are making the progress on both our consolidation efforts and our cost reduction, the increased occupancy is what our real challenge is now on the volumes. We don't give out our sales per square foot on our individual stores, but obviously when volume is down 13%, that is reflective in what they are doing at the individual store level.

So the square foot -- I understand the shift of markets into markets which are deteriorating faster, but is there a square footage change you could give us year-over-year?

It's not significant, Laura. I'm not sure if I have the number handy, but the same number of the stores and the stores that we closed are not appreciably smaller than the ones [that] were open. So it's not that we're carrying 10 or 15% more square footage, it's the performance in the footage we had on a constant basis.

David Cohen, Midwood Capital.

Question for you. On the comparison of $0.45 to $0.60 versus last year's $0.38, is it -- am I not correct in saying -- the $0.45 to $0.60 is a very clean number, no restructuring charges, no gains and losses on discontinued ops, whereas in the $0.38, there is some of that. I'm netting out to about $0.08 from that. So really, your EPS change has to go from $0.30 -- has to go up either 50 or 100% this year, and you're starting in kind of a hole after this first quarter. Is that the right -- am I making a more apples-to-apples comparison in sort of saying $0.30 as the base line for last year?

I will answer the first part of your question and have Mike answer the second part. Our guidance on the $0.45 to $0.60 is, as you called, it a clean number. There s no restructuring charge in that number. There is no antidumping, there's no gains of sales of properties or businesses. It's an earnings number from continuing operations.

I don't have the annual report sitting in front of me right now, but I believe that we had $0.14 of gains from the sales of properties in last year. What we're mainly taking out is the nonoperational part of the equation, being restructuring and discontinued operations. We're just trying to give some clarification on that. We're not trying to take out every nonoperating cost that hit last year, because then we start getting into a game of what's relevant and what's not. So we're trying to stick out those things like restructuring that's a line item on our annual report, and that's what we're trying to clarify on that. And going forward, we're just trying to clarify what the $0.45 to $0.60 will include so you can make your own judgments based on what we're clarifying in our current projections.

To be honest here, your answer is confusing, because the $0.45 to $0.60 is clean, so I would think that the best way to look at it is versus the cleanest number from last year. So I'm struggling to understand how, with the shortfall in the first quarter, of revenue declining for the rest of the year or for the full-year of 5 to 10%, so that impacts some of your planned cost savings I think is what you said on the last call. How do you get such a big profit improvement for the balance of the year? That is what I'm really struggling with.

If you look at last year, our $0.38 last year was from continuing operations, which had approximately $11 million of restructuring in it and $3.4 million of income from the antidumping.

But it also had significant gains on property sales, $0.17 a share.

I understand, but if I have property sales this year, they're in the ordinary course of business, I'm not trying to say that I'm taking those out of the equation. I don't know if I will have property sales this year, but that was not -- if it's a restructuring charge or a restructuring reimbursement from selling property that we've previously written down, we're taking that out. But if I sell another piece of property, that is part of operations.

So $0.45 to $0.60 may include gains on sales of property?

That's correct.

Okay.

It may. So we're only taking out the restructuring and the antidumping money, because that's more nonoperational type line items that you can pull off the financial statements themselves.

Budd Bugatch, Raymond James & Associates.

A couple of questions. Let me go here first. Can you quantify for us the impact of the down time in the upholstery segment? You're 250 basis points down year-over-year. I think what you're hearing from most of us is skepticism that you can get to the guidance given the first quarter performance. So maybe if we know what some of the inefficiencies were, the quantitative impact of that, that will help. How should we think about that?

There's a number of factors that we have looked at, Budd. The inefficiencies were significant this quarter as we've moved product around and changed the production of various lines into other plants. The savings on the four closures of the facilities that are no longer operating, assuming the volume that we were running at last year, the savings are around $8 million on a run base going forward.

Is that for the final three quarters, or is that an annual number?

That's an annual number, Budd.

2 million a quarter?

Yes.

You did not have any of that in the first quarter?

Well, the plants -- no. The plants shut down at various times, but the inefficiencies of shifting all of the other product lines and the hiring of people, the training costs and everything, outweighed any of the savings that we have, and most of them weren't closed until July. So we did not have any of that. I think the other thing that we look out, when we look out for the year and the reason we're a little bit more confident perhaps than the rest of the audience is the back half of last year was not very robust and we don't see us declining another 10% in this year from what we did last year as we look out over the comps as we go through the year. And so we are making our best guesstimate. Obviously with what is going on in the marketplace today, nobody knows what the next six months is going to do as far as the housing issue, the housing market, the changes to the dynamics in our business. But what we are seeing with our order trends, what we're seeing with the inventory reductions, what we're seeing at the pace of retail, we think there's reasons to be more optimistic than what our first-quarter would indicate the run rate.

But Kurt, you've given us now what you think the savings are for closing those four facilities in upholstery in the first quarter. So we now know that maybe for the rest of the year, we're going to get a $6 million improvement. What were the inefficiencies of the first quarter that may be absent now going forward in upholstery? Can you quantify that for us?

I could, Budd. It's in the couple of million dollar range, but again, how much of it was unabsorbed fixed cost, how much of it was much lower volumes, how much of it was the vacation shutdown, how much of it was transfer of product. A lot of those things are intertwined, and there's -- to break it down precisely, that it was 100% this or 100% that, I don't know that we want to get into that level of granularity. (MULTIPLE SPEAKERS)

Just take one number. I don't need that whole level of granularity. I just need something to help us model going forward to get to a margin that is sensible and realistic. It's obvious that all of us, and you have gone to annual guidance, and I understand all of that. But if your first quarter came in significantly below what we were looking for and what you were looking for, more importantly, and I suspect you did not budget for a loss in the first quarter, although I have not heard you say that, then the other three quarters have got to show significant improvement and we would like to find a way to get there.

Well Budd, last year on an ongoing basis, we made $0.02 in the first quarter and our EPS showed $0.04, but $0.02 of that was the sale of one of the businesses, so we made $0.02. On a $50 million decrease in business, we did not intend to increase our earnings on that kind of a sales decline. We did not project that kind of sales decline, but we did not project any improvement over our first quarter performance of a year ago in our annual planning.

So you -- and I don't think we knew that, or maybe I didn't get it, knew that you were planning then essentially for a flat $0.02 -- essentially around a $0.02 quarter, because that would have happened -- I don't know what your volume plan was for the first quarter. But that would have been I guess where that would have worked out. So I'm still trying to get to an idea of what that -- those inefficiencies were in upholstery that allow us to get better margins. Should I take $2 million, another $2 million per quarter in the second, third and fourth quarter and add that as a reduction of expenses, or is that unreasonable, or is that just -- what?

I think again, Budd, we have gone to annual guidance. We don't want to get into talking about what happened one quarter and what we're going to do the next quarter and things of that nature. I think the bigger assumption is, going forward, where does our volume end up, and does volume go from being mid-double digits to mid-single digits down as we run out through the year? And on that additional piece of volume, can we convert at the rates that we have accustomed to convert, and therefore, that will be accretive to our earnings? But the detail of everything that has to happen to get from where we're at to where we're going, we start down that path, I'm not sure we're going to either make any more comfortable or make any more confused.

I will take it your way, then. If you can give us a contribution kind of number on additional upholstery revenues now that you have reduced it by four plants, we will take it that way too, Kurt. We will take it any which way we can get some sort of hook to model the numbers.

We did tell you that on the facilities that have been closed, if we maintain the volume we were running a last year, that's a $6 million gain for the balance of the year, and there was probably 2 to $3 million of inefficiencies in the first quarter that should go away.

So -- then I take it then, what I can do is that that 8 to $9 million of additional and divide it by similar volumes of last year and get kind of a contribution run rate or an improvement run rate -- is that correct?

You can, but that all assumes that our volume improves.

No, it assumes your volume improves -- just volume goes flat with last year's second, third, and fourth quarter volumes, lumped up as into one number. I'm just trying to get to a contribution margin rate that we can get to. I will cede the floor because I have more questions, but I will cede the floor. That's what we're trying to do. We're trying to find a way to get some confidence and comfort that the back half of the year, that the other three quarters in total, understanding not quarter by quarter, get to the number that you can get to that $0.45 to $0.60.

I would just end this part of the discussion, Budd. It's not just the contribution margin on wholesale either. It assumes some improvement in our retail business and a degradation of the losses that we've been experiencing in retail as we continue to take more cost out, and as our volume comparisons to year-over-year improves.

Now that you've opened that one up, that was where I was going to go.

Why don't you let somebody else on to ask a question.

I will come back.

[Ryan Redmond], Smith Barney.

Are you in danger of defaulting on your bank covenants?

We have included in our 10-Q that we are currently in compliance with our covenants. What we're trying to disclose there is that if we have deterioration in the future periods beyond what we currently consider to be our forecast, we could have a potential issue with dipping below that. We have plenty of liquidity right now in what we are -- with our open credit lines. We have good dialogue with our banks. I don't anticipate having any future problems as such getting liquidity, but we had to disclose out there that there is a potential if our earnings do deteriorate below our expectations, that there could be a problem. But we don't have any borrowings right now off that revolving line, just to make that clear as well.

Okay. Also, my second question, I would like to know -- how much does the Company plane cost on an annual basis?

That's not a number that we're going to divulge.

Carney Hawks, Brigade Capital.

Just a follow-up with some of the other questions people have thrown out. The EPS guidance you gave, is there any benefit that you're going to have this year from changes in interest, taxes or depreciation that makes it easier for you to get to that number, or is that all just driven by an improvement at the end of the year, you anticipate from the year in operating income?

In my comments, I pretty much gave some tax rates that you can model after. As far as the interest rates and other items, there's not much change that I can give you on that. We are pretty much right now flat on our debt. Our debt is, in our footnote disclosure at the end of the year that shows what our rates are, they are pretty well fixed. We don't have any floating rate, so I don't anticipate any significant change on those as well.

So to get to the EPS then, you will have improved operating income by the end of the year, based on your current estimate?

That's correct.

And I guess second question, you talk in the release that you are starting to see improved demand, it seems like, I guess some of the channels have cleared out. Is that on a sequential basis or a year-on-year basis? Are things better right now than they were a year ago, or just compared to June and May?

I think the phrase of the day that a lot of people have used in this business is things are just less bad. They are not -- we're not seeing them, and it has not been a long trend line, but we're not seeing them ahead of last year but we're seeing them a lot closer to last year's run rate. Still down, but certainly not down as much as we experienced from the April through July period.

Okay, but the improvement you're going to see that's going to drive that EBITDA higher year-on-year then, it's fair to assume, is you're going to see -- if your estimates that you're throwing out prove to be correct, you will see -- the improvement will get better and better sequentially, meaning it's mostly back-end loaded?

That's correct.

Matt McCall, BB&T Capital Markets.

Kurt, I'm a bit -- let me ask this way. You say the trends you're seeing at retail, you're obviously talking about some improving trends. Given what has gone on in the market for the last couple of weeks, are these updated numbers, so -- or are we talking about up-to-date in August, things continued to look better? And would that indicate that the inventory issues seem to be the bigger issue, rather than housing?

I think it's a twofold question, Matt. I think the inventory things are definitely better and we have some real data on the inventory levels, particularly at our proprietary dealers. But the actual activity at retail in our stores the last six weeks has been improved over the rate it has prior to that. But it could fall off the next two weeks, just like it was before. We're not making a judgment on what the next 1.5 months would be. What we are reporting is the last four to six weeks have been significantly better than what we saw prior to that as we went through the early parts of the summer. We are not -- we are encouraged by that, but we're not yet ready to call it a trend or not calling it a something that's sustainable. But nevertheless, we are encouraged that there is some evidence that things are different for us, and there's a combination. There is the part of dealing with the consumer in our retail stores that we have tracked, and there's also the part of our incoming orders from our wholesale customers, and both of those indices are improving, again, the last six weeks over the run rate of what we have seen over the last three months.

Okay. So it's not -- I've been trying to keep in mind seasonality here, so it's more of a sequential improvement from what you saw in previous periods, but year-over-year, are you saying improvements? I'm trying to get an idea of what the seasonality was like or what the trends were like last year this time. Was spring an easier comp or a tougher comp than summer? Do the trends get any easier? I don't think we have that level of granularity that you provided.

Just as a top line for our business last year, and last year in the first quarter, we had -- we still had a little bit of a heavy backlog left over from the foam shortage in the fall of '06, and there were some other issues. But in last year's business as you look at us, the first half of our year, our volume was flat to '06. In the second half of our year, our volume was down about 10% compared to '06. So when you look at -- we talk about our performance relative to our own measurements, that is the comps we're going up against.

Okay. And then let me jump back to the expected margin improvement. Mike, just to make sure I understand, the range of EPS, I think someone just asked about the change on interest, taxes, depreciation. I heard the answer there. But what about the benefit from the sale of property? What level are you including in that guidance range?

I'm not giving that kind of detail out. We don't get into that kind of granularity in our numbers to give to everyone. All I'm trying to explain is that's included in our normal operations. Do I know of any large number? I cannot speak to anything in detail because we don't get into that kind of granularity.

Right, but when you give the guidance -- maybe of an order of magnitude, how much of the margin improvement that you expect this year is going to come from -- I don't know assume much is going to come from better volume because you're talking about down year-over-year. So maybe compare the cost savings initiatives to the elimination of the shutdowns, and I think you said the cost savings will give you about $6 million for the rest of the year, Kurt, assuming flat volume, now. I guess that is an assumption we have to make. And then, the elimination in shutdown or the inefficiencies in Q1, which were about $2 million. But where did the -- order of magnitude, is sale of property somewhere between those two?

You've got remember, you guys are focused on wholesale here. We have retail that we are consolidating our distribution centers, we're pulling cost out, we're improving our margins there. We're trying to get it from all of our sectors. I don't know exactly what the hang up is on sales of properties. I know we had some anomalies last year, but in our normal course of business, we don't usually make money off of property. So I guess I will leave you, it's just that I don't have a significant amount of income going into our numbers that would reflect nonoperating asset sales.

Okay, that's fair. Let me ask you this. I think last quarter, you provided a little bit more detail into the margin goals for -- or, in the past, you've provided a little bit more detail into the margin goals for each one of the segments. Can you update us on those goals?

Well Matt, those goals have not changed appreciably once we can get back to a more -- evenly run rate as far as volume. Obviously for us to say that we think the year is going to be down in the range of 5 to 10%, we were down more than that in the first quarter. We expect improving trends the balance of the year. But the question that we have to ask ourselves all of the time is -- at what level is the market demand going to be, and at what -- how do we right-size our operations to do that? We have continued to take out costs, we've continued to close plants. We don't think the market is going to stay suppressed forever. But your guess is as good as mine when we see any kind of a turn or any kind of improvement. The downside as we see it is, if you adjust your capacity and your cost of people and processes and all, and if you go too far on that and then you do have any kind of pickup, you're unable to take care of your customer and you're unable to service.

So every quarter, we're making a judgment on what we think the demand levels, the capacity utilization and what we can do to take more cost out of the business. So in addition to just the comparisons first quarter to second quarter that we were having the discussion with Budd about, we have a number of other initiatives to reduce cost, to change headcounts, to do a lot of things that were embedded in our original plan that gave us the guidance we released when we talked to you at the last [quarter]. So there's a lot of things going on. There's a number of different avenues that we're pursuing for things and it's all a judgment on what's going to happen. Really to us, it's much more of a top line issue for us than it is what we're doing with our costs.

Budd Bugatch, Raymond James.

Good morning again. Let me try to go -- I do want go to retail, and I do realize that's a very important segment. You did mention in your comments I think that you took additional markdowns on some excess and obsolete inventory, or at least excess inventory. Can you quantify that at all, Kurt? What was the impact on the retail margin? Because that's a pretty significant drop.

Budd, I'm not sure. I will answer your question, but I'm not sure we made any comments about excess inventory and drops in margin or things of that nature.

What you did say was, you did say you were right-sizing the inventory in the retail business, both your dealers and your company-owned stores (MULTIPLE SPEAKERS) volume, and that would assume that you're bringing inventories down, and one of the ways you do that is to mark it down.

No. Actually, what everybody has done for the last four weeks is not just ordered, or actually the last four months. We have not seen huge markdowns. We always have a balance of deciding how much to discount, how much to run the plants, how much to put into finished goods. So there is a balancing act going on. But actually, we're seeing improvements quarter-over-quarter in our retail gross margins and we're not out of the ordinary course of business with our discounting, obsolete inventory, anything of that nature. It's just a matter of, as business has ratcheted down over the first six months, a lot of our dealers started out the first if the year with a lot more inventory and they just worked down that inventory in a very sensible and a very logical and a very measured basis.

My presumption is about half the business at retail is custom order, and half of it is stock. Is that still a reasonable balance?

Not in total. It is not quite that high in any of our business. It's probably closer to 60/40 in our proprietary business, but it's not that I with our general dealers.

60/40 custom, 60/40 --.

40 custom, 60 stock.

60 stock?

60 stock. 40 custom -- but that's only on the proprietary store network, not our total dealer network.

And total dealer network would be closer to 50/50, then?

No, no, the other way.

Oh, okay, 70 stock, 30 custom. Okay.

Or maybe even higher. And it depends on the business each of our various dealers are running. Some of them are -- pride themselves on being in stock, having limited selection and service, and others are more of a design business and do everything special order. So we have a broad range of customers that handle stock and special order differently.

Well it's heartening to hear to say that retail gross margins have started to improve because that tells us that -- and if they have ordered less on the factory side, that ultimately, as you mentioned earlier, that has to ultimately come back into balance, which means that the plants will run more full. Is that a fair way to look at that?

Absolutely. The other thing that we're doing in our own Company retail side is we continue to consolidate our warehouses. And as you do that, you will take out inventory, and we have one more warehouse to consolidate before Christmas, and that is in the Chicago market where we will be consolidating Kansas City, St. Louis and Chicago into one. And I would suspect by the time that's done, the inventory that we have in three warehouses won't be the same that we have when we get the one up and running.

The other comment you did make I think in the press release was that higher -- and you have a higher cost of occupancy in the Company-owned retail because of the change of venue from Pittsburgh and Rochester to Miami and some of those movements of stores. Can you at least quantify for us either on a cost per square foot, some basis, what was the delta here in the additional occupancy that we need to put into our thinking about the retail marginability?

In our 10-Q, we've out in there that it's about $1 million a quarter.

Of additional occupancy?

Yes.

Thank you. I know the Q came out either very late last night or this morning. (MULTIPLE SPEAKERS) haven't been able to focus on it.

Yes, it came out late last night, which means it was available this morning first thing.

Alright, that's very helpful. Thank you, Kurt. Sorry to be so hard on you on the call, but I'm trying to make sure that I understand, at least from my perspective, how to get to the numbers that you feel comfortable putting out in public.

Yes, sir, we understand what your role is.

Stanley Elliott, Stifel Nicolaus.

I'm filling in for John, who's traveling today. Had a quick question for you all about the losses on the VIEs. Do you have any thoughts on those going forward? Are these retailers looking to buy, or are they going to continue to struggle?

Good question. If you go back to when the VIE issue surfaced, it was about the same time that the Company went into the retail business on its own. We made the determination then that we had four VIEs that we thought were being managed very well, had capable management in those retail operations. We're managing them in accordance to the way we would run the business and our beliefs. And at the time, we felt that they were in a position to be close to breakeven or slightly positive, given a little more time to work on things. Unfortunately, since then, obviously, the external environment has continued to go downward and they're not at the levels they expect or we expected. But we don't -- we still have a lot of confidence in those four operations and we think they're on the border line of marginally loss, marginally profitable, and we're going to continue to work with them to get their business models fixed to be profitable.

Okay, perfect. And in the release on the casegoods section, talked about expanding channels of distribution. Is that more of just the stores that are going to be open this coming year, or --?

No, that is not. Other than a couple of test stores and other than occasional product, like tables and curios and things like that, we do not sell bedroom and dining room in the La-Z-Boy Stores. The La-Z-Boy Stores are primarily an upholstery store, concentrating on the living room and family room. But not all of our casegood companies are selling all of the customers they should. Not all of our casegood companies have reached out beyond the traditional furniture dealer and looked at alternate distribution and there is opportunities for us to garner new customers with our casegoods business that we're not selling today, and that is what they are focused on.

Seeing as there are no further questions in the queue, I would like to turn the call back to management for any concluding remarks.

Thank you for participating on our call this morning. I will be available later today if any of you have follow-up questions. Have a good day.

Thank you.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.