La-Z-Boy Inc (LZB) 2008 Q3 法說會逐字稿

Greetings and welcome to the La-Z-Boy Incorporated third-quarter fiscal 2008 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 to you our host, Miss Kathy Liebmann, Director of Investor Relations and Corporate Communications for La-Z-Boy Incorporated. Thank you, Miss Liebmann. You may now begin.

Thank you, Jackie. Good morning everyone, and thank you for joining us on this morning's call to discuss our fiscal 2008 third quarter results. Present this morning 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 prepared remarks about the quarter and then Mike will speak about some of the more unusual items this quarter including the refinancing of the Company's debt. Following Kurt's concluding remarks, we will open the call to questions. As is our custom the time allotted for this call is one hour. In order to allow everyone an opportunity to ask questions, please limit your questions to two, and if you have follow-ups, you may reenter the queue. A telephone replay of the call will be available for one week beginning this afternoon.

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

Thank you, Kathy. Good morning, everyone. Thank you for listening in this morning. As Kathy mentioned, I will begin with an update on our performance for the quarter and then Mike will speak on several financial topics before I conclude with our prepared remarks and move to the question and answer period.

Our industry continues to face challenges across the board, from foreign competition on the manufacturing side to retail bankruptcies to a challenging sales environment for all players in the business. While we can not control the external macroeconomic environment and its consequential changes, challenges for our industry; we are determined to strengthen La-Z-Boy's positioning in the marketplace so that we emerge from this period as a stronger entity than ever before. We are focusing all of our time and attention on ensuring that La-Z-Boy remains a competitive force in the industry with leading manufacturing, distribution, and retailing capabilities. The unparalleled strength of our brand coupled with significant retail presence with the La-Z-Boy Furniture Galleries network of stores will carry us into the future where we will compete successfully in a vastly changed environment.

For the quarter, we reported sales of $373 million, down 7.8% from last year's comparable period with earnings per share of $0.18. In that number is a $0.02 loss from VIEs and $0.09 in income from the anti-dumping duties collected. While our upholstery and casegood businesses remain profitable even on lower volume, reversing the performance of our retail segment and turning it profitable remains the number one priority of our management team.

As I discussed last quarter, our team spent a significant amount of time and energy over the past several years working to rationalize our portfolio, transition our casegoods business, and deal with many other issues impacting our industry. With much of that now behind us, we are able to dedicate additional resources to improve the performance not only of our company-own retail operations, but the performance of our entire network of stores. For the quarter, sales in our upholstery segment was off 3.8% year-over-year and our operating margin was 6.9%. We are 80% the way through our cellular conversion project at our branded facilities and will complete it by the early summer with a full benefit of the cost savings expected in '09. In addition to reducing costs, the cellular process will increase our speed and quality, helping us to deliver on our brand promise to the consumer, which includes quick delivery of customer-ordered upholstery. Additionally, we are finding new and creative ways to merchandise our product by offering smart promotions to the consumer. As always, we continue to evaluate all aspects of our upholstery operations to ensure we operate as efficiently as possible.

Concurrent with the dynamic environment in which we are operating, we realigned our La-Z-Boy branded sales force during the quarter as part of a longer-term strategic initiative to give specific support to our various distribution channels. We consolidated our sales representatives into 46 territories across North America and changed their role from a traditional wholesale sales force to a more consultive field organization focused on retail performance. As a result, we decreased the number of sales reps by about 20% to approximately 100, which will decrease our related costs by about the same amount. It goes without saying that we appreciate the support and dedication of those sales professionals who are no longer with us, and we wish them all the best their future endeavors. Another set of initiatives under way is focused on improving our leverage of the Internet. First, we are increasing traffic to our web site through search engine optimization and paid search marketing. These actions combined with our new marketing campaign have increased unique visitors to our site over the last few months by more than 35%. Second, we are implementing tools that will encourage our customers online to provide us with their contact information, enabling us to regularly send them information on La-Z-Boy products, services, and sales via email. For example, during our recent Arm-Chair Quarterback National Sales Event, we had more than 60,000 customers register online during the two weeks of that promotion. The third piece is to ensure their experience -- that the experience we provide to our consumers on the Web meets their expectations; therefore, we are working on a strategy to leverage our site with online pricing and sales capabilities. With more and more consumers using the Internet to either look at furniture before purchase or to actually make a purchase, we are excited about the prospects of e-commerce and believe it will not only increase our visibility but make it easier for the consumer to do business with our company.

Now let me make some brief remarks on our casegoods operation. In the third quarter our sales were off 16.6% year-over-year and our operating margin was 4.2%, with casegoods products at higher price points than upholstery, this segment of the industry is facing greater challenges as the consumer postpones furniture purchases. We reduced our inventory during the quarter comparable to our sales decline, but in this environment, it is difficult to do so without price reductions. Importantly, even with our inventory reduction, we maintain the high level of service that our customer is accustomed to. At the same time, we continue to watch our cost structure and have indeed reduced the segment's headcount by approximately 20% year-over-year.

During the quarter, our petitioning companies, including American and Martinsville where we retain the rights to receive the anti-dumping distribution, collectively received $7.1 million net of legal expenses and distributions under the continued Dumping and Subsidiary Offset Act and certain settlement proceeds in connection with wood bedroom furniture imported from China. As of October 1, 2007, the government has secured approximately $180 million in estimated anti-dumping duties, but the final amount that will be distributed depends on the actual assessment rates supplied at the time of liquidation. In addition, approximately $40 million has been set aside pending a judicial process to determine whether companies which were not part of the original petitioning group are entitled to receive any monies. While it is impossible to know the outcome of the proceedings or the exact timing of future distributions, we look forward to a resolution with the monies released to the entitled parties. To the extent there are additional distributions, they are likely to be made in December of 2008, and in December in succeeding years. Depending on the outcome of the pending litigation and the claims submitted by qualifying producers, we believe that we can receive between 10% and 18% of the remaining monies that are to be distributed.

In our company-owned retail segment $8.5 million loss in 18% decrease in sales compared with last year's third quarter. During the quarter we opened our fourth and final distribution center in Chicago to support our company-owned store program. In mid-March, we will complete our IT consolidation, implementing it in the last market, Baltimore, Washington, and Tidewater. While we have taken out significant structural cost from our retail business, the benefit is not clearly evident because of the depressed sales volume coupled with the increase fixed cost of additional stores, specifically our higher occupancy costs.

I would like to take a moment to clarify the comparisons and timing issues between the same-store sales figures for our entire network of Furniture Galleries stores and performance of our company-own retail segment. As we noted in our press release, same-store network include includes company-owned and independent stores were down 6% for the 2007 fourth calendar quarter. That compares with the 18% decline delivered sales we experienced in the company owned retail segment for the November through January time frame; therefore, we are referencing different three-month periods with different measurements. Additionally we were operating our going-out-of-business sale in Pittsburgh during last year's third quarter. Approximately 6% of the 18% sales decline in this year's third quarter for our company-owned retail segment was related to the fact we are no longer operating in Pittsburgh. And the third factor that the sales and our overall network numbers include our Canadian Furniture Galleries whose performance continues to be stronger than their United States counterparts. And our company-owned segment, we are operating our stores in some of the markets that have been hardest hit by the housing downturn like South Florida, which represents more than 10% of our company-owned stores. We believe that strengthening our store system to achieve greater penetration in a market in which we operate is the right strategy. Having said that, in this environment, we are slowing down considerably on new store openings and doing what we can do to drive sales to our existing locations. At the same time, we are taking a step back with respect to the execution of our strategy and are analyzing every aspect of our company-owned retail segment to ensure that we improve its performance even during this difficult time frame.

I spoke last quarter about expanding our warehouse operations throughout North America to service our entire base of stores. Now that we have completed our own retail consolidation with 12 warehouses moving down to four, we are ready to roll out the service to our independent dealers over the next three to five years. This summer, we plan to consolidate four stores based in the central Pennsylvania market into our northeast distribution center, and when all is said and done, we expect to service all of our stores with ten to 20 strategically located warehouses throughout North America. These warehouses will replace some 85 to 100 individual warehouses currently used by our dealer base today. By providing back-end operational support, each dealer will be able to focus on sales and providing value-added services to the consumer. At the same time, it will reduce their costs and allow them to have a better in-stock position due to our new structure.

And with that, I will turn things over to Mike Riccio, our Chief Financial Officer. Mike?

Thank you, Kurt. Good morning, everyone.

I will take a few moments to review some of the financial highlights this quarter. First, as we previously reported, we entered into a new credit agreement, which we believe will give us greater flexibility to operate our business and to grow it profitably. Our new arrangement which has a fixed charge covenant if our availability goes below $30 million is an asset-based lending facility, secured against our inventory and trade receivables. As part of the refinancing, there was a make hold premium paid to our private placement noteholders and the Company will take a charge of $6 million in the fourth quarter.

Cash on our balance sheet at quarter end was $63 million, almost double that of the second quarter of fiscal 2008. That is a result of the $41.6 million that we generated in cash from operating activities during the quarter, which included the $7.1 million in proceeds from anti-dumping monies, and a more than $8.6 million reduction in our inventory from last quarter. Although we had no exposure to Wicks or Levitz, given the difficult retail environment, we incurred an increase in our bad debt expense of approximately $3.5 million as compared to the third quarter of last year due to some uncertainty with respect to our existing dealer base. We also sold investments and realized gains within the quarter that increased our investment income over the previous year's third quarter by $2.9 million. These gains related to investments the Company has in certain non-qualified defined benefit plans and are being used for tax purposes to offset a portion of the capital losses incurred by the sale of Clayton Marcus stock. These proceeds were reinvested.

Our SG&A expenses increased $3.5 million on a 7.8% decrease in sales. The increase in dollars relates to three significant areas--first, last year's third quarter had a $1.65 million reversal of our warranty reserve that was not duplicated this year, second; as I just mentioned, we recorded an additional $3.5 million in bad debt expense during the quarter, and third; we incurred an additional $6.6 million in advertising expense due to our new tier two advertising campaign; however, we do not anticipate our net advertising cost to be up significantly for the full year when you take into consideration the reimbursement from Furniture Gallery dealers which is reported in sales.

As you are aware, the Board made the decision at its meeting yesterday to decrease the Company's quarterly dividend to shareholders by two-thirds from $0.12 to $0.04 per share. The Board's decision reflects current industry conditions and its commitment to prudent cash management. In addition to paying down debt, the Board plans to reinvest the additional cash into the business as the Company continues to execute on various aspects of its strategic plan for profitable growth. In this environment, the Board will ease the redeployment of cash into the business to transform the Company and ultimately provide a better return to the shareholders.

Our effective tax rate for the quarter was 29.8% and was affected by some discreet items related to state tax issues. For modeling purposes, you should continue to use a range of 38% to 40% on continuing operations for the remainder of the fiscal year. Our CapEx for the year is expected to be in the range of $25 million to $27 million, about the same as our depreciation.

I thank you for the time this morning and I will now turn the call back over to Kurt.

As we continue into 2008, we are planning and managing for a difficult year for our industry. With that said, we are keeping our heads down and working to control all of that we can. We have important strategic initiatives being executed by talented people, and we are confident we will navigate our way through this period by capitalizing on our brand, growing our proprietary network of stores, running -- remaining a leading and efficient manufacturer, distributor and retailer, and managing this Company for profitable growth.

We are maintaining our guidance for the second half of fiscal 2008 and expect sales in this period to be down 4% to 8% and earnings per share to be in the range of $0.06 to $0.14. The second half 2008 range does not include restructuring charges, income from anti-dumping monies, interest expense for our make-hold payments on our private placement notes, or gains and losses on the sale of discontinued operations. These expected results compare with a $0.30 per-share from continuing operations in the second half of fiscal 2007, which included $0.11 per-share charge for restructuring, a $0.14 per-share gain on property and $0.04 per-share in income from anti-dumping monies.

We appreciate you being on the call today, and I will turn things over to Kathy to begin our question and answer period.

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

Thank you. (OPERATOR INSTRUCTIONS) One moment please while we poll for questions. Thank you, our first question comes from Bud Bugatch from Raymond James and Associates.

This is Chris Thornsberry, pinch-hitting for Bud today. A quick question on the guidance. If you excluded the anti-dumping stuff in this quarter you get about $0.08 to $0.09 and your guidance is unchanged at $0.06 to $0.14. That implies like a loss of $0.15 to a $0.05 gain in the quarter and sales have flattened pretty much down 8%. Is my thinking wrong for the fourth quarter?

If Chris, let me answer that question just to give some clarity because I knew this question would be asked. It is our perspective on this and how we view this. We have the $0.18 out there. $0.09 for anti-dumping and $0.04 for this capital gain.

Okay.

What--we are taking that out as well as far as looking at our earnings that we earn this quarter; Since that number really isn't part of operations and was more of a tax advantage strategy that we had. So that is one of the perspectives we have of why we are leaving the guidance where it is.

Okay. The sales, is our thinking okay there, looking at flat to down 8% for the fourth quarter?

That is our perspective, yes.

Okay. Does that imply some margin decline from third quarter to fourth quarter? And if so, what would be driving that?

Well, you know, you have to look at the entire range of the guidance, and we just didn't feel it would be prudent to update the guidance based on where we currently stand. We don't think margins are going to jump up in the fourth quarter from where they are at now, but we are not looking for a significant decline in margins over the next quarter. So -- but we do have some additional SG&A costs that are coming out because of our marketing campaign and those type of things, but we are not seeing a major degradation of our margin at this present time. And we it will just figure out how low volumes go to determine how well we can operate our plans.

Okay. My last question and I will yield to others. Could you kind of touch on what you have seen so far halfway through the calendar first quarter system-wide and retail. What trends have been. Have they accelerated, decelerated? Can you talk about that a little bit?

Chris, I think our comment on that would be we haven't seen a significant change either up or down. It is still a very tough environment out there. We have pockets of the country that are doing better than others. This downturn is unlike others in our view in that depending on the impact of the housing market to the specific trade area, it has a huge effect on sales. But it is still difficult sledding out there.

Internally are you looking for anymore bounce back from the stimulus packages or anything going on with the Fed lowering rates looking out maybe a year from now?

That is hard for us to calculate. I think that, you know, every time we get a little bit of good news like that, I hear this morning that gas prices might go up to $3.75 a gallon. So that is not something that we are hanging our hat on. I think more importantly for -- from our perspective, that the marketplace, the consumer has to see some sign that the bottom has been hit. They are starting to be some turnover of houses again. We start to get through this glut of unsold houses and get back the perspective of four to five months of houses on the market instead of 12 to 14. So it's -- there is a lot of factors at work here, and our crystal ball isn't any better than probably yours.

Okay. Thank you very much.

Thank you.

Thank you. Next question is coming from Matt McCall of BB&T Capital Markets.

Thanks, good morning, everybody.

Good morning, Matt.

Mike, let me just jump back to the initial question. So the baseline for -- or the number you were using for Q3 is essentially $0.05, so we can deduct that to get the range for Q4. Did I understand that correctly?

That is the math that appears to be the right way to go about it. You know, we are not trying to play games here, we are just trying to stay within the realm of what the rules are. But, yes, that would be the math of 18 minus 9 minus4.

Sure. Just making sure I am looking at that time the same way. And then when you initially included the second-half guidance were you including -- the modest benefit from tax rate and it sounds like -- the initial question I was going to ask that the other income benefit included but looks like you are stripping that out now.

Matt, it is our perspective. You know we can sit there and talk about all kinds of things. You know we have a cent here, a cent there and all the different expenses and pickups. The ones that I am bringing out to be prudent with what our guidance was were the two items.

Got you.

That's as far as I am willing to go with that.

I am just trying to gauge what may have changed versus your initial perspective. Even though the full-year guidance didn't change -- or the second-half guidance didn't change what could have actually changed in the industry. That is what I am getting at.

I understand.

The warehouse changes. I know a three-to-five-year horizon, but you talked a little bit, I think, about the benefits for your -- for your network of stores. What about the benefit for the Company? Obviously there is going to be some changes there. Can you talk about what the benefit would be there near term over the next five years?

Good question, Matt. I think there is a number of benefits involved for the whole system. It would -- it will lower our cost of doing business for the entire network of which we are a part of. It will allow us the opportunity to stay in stock and better flow goods from our facilities to our warehouses. And -- and it will also have a significant change on our accounts receivables with the dealers now not carrying nearly as much inventory but us carrying inventory and being responsible for the flow. And so I think you will see both a P&L improvement in certain areas, as well as a balance sheet change as we go through -- as we go through the process.

Okay. Okay. And then -- Mike, jumping back to your comment on the advertising expense, you said that it should not -- that the advertising expense or spending should not be up year-over-year. Explain why. But if we -- for the full year -- but if you just look at Q4, we had an anniversaried the initial increase in spending. So we should still see increases year-over-year at least in Q4. Is that correct?

Well, it's -- it's all component-driven there. The reimbursements that we get from our dealer shows up in sales, Matt. And the expenditures we have even on their part and ours as we are spending the money shows up in SG&A. So the net advertising cost for the whole year is not going to be up significantly, but the way the components are being shown, it may be a little higher within the component of SG&A for the fourth quarter still.

Got it. Okay. Then I am sorry -- I know I am over two questions, but you -- you referenced a lot about SG&A, a little higher than we expected but so was gross margin. And I guess if we look forward, anything that sequentially should change to -- to -- remind me of the seasonal impact of Q4 versus Q3 on the gross margin line. Just to -- should we see any -- any margin pressure there? Or are we going to remain in this high 28% range.

And I would answer that question in that typically our fourth quarter has been slightly above our third quarter. That was more typical when we were 100% a manufacturer or distributor as the businesses evolved and the retail seasonalities may be a little different than the wholesale, we are not -- we are not clear on exactly how that is going to change. I think the one difference on the gross margins on the wholesale side is the fact that in the third quarter, we have a few more days that the facilities are closed due to the holidays. And the fourth quarter, we run pretty much full out the entire quarter because there is not any holidays with the exception of the Easter holidays. So there may be some differential there, but it's -- it wouldn't be substantial, but that is that the only difference that would you see in a run rate.

And, Matt, just to clarify what Kurt said, for the most part, what we are talking about is this is now with the VIEs and the retail being -- and the third quarter being more seasonal for them and the further quarter being more seasonal for manufacturing. We are getting a little skewed on our margin in the third quarter because of historical levels because of the impact of the retail on our margins.

Okay. Okay. All right. Thank you all.

Thank you. Our next question is coming from John Baugh from Stifel Nicolaus and Company.

Good morning.

Good morning, John.

Three questions. Number one, you referenced doing some promotions or creative -- without giving away trade secrets, can you elaborate on what you are doing specifically and the impact of it?

John, I think we are just looking back and trying to be a little more creative. A lot of the tried and true promotions that have been run typically with our business aren't as effective as they used to be. One of the events was the Armchair-Quarterback-Sale, that we have done the two weeks leading up to the Super Bowl. While we always had a football or end-of-the-year sale, it wasn't as well coordinated. It wasn't as integrated. It wasn't as powerful as this last sale, also including the Internet component. So we are just trying to do things learning from other people what has worked and trying to make sure we are out there with compelling the offers to the customers. I don't really as you mentioned for competitive reasons want to go into a whole lot more detail, but we are continuing to challenge our marketing people to find new ways to reach the consumer.

Not asking to you predict what retail volumes are going to be this coming fiscal year, but if I were to give you a decline of 3% to 5%, excluding the impact of exiting Pittsburgh, I guess it was, what kind of annual pretax loss would you expect and I And I am trying to drive at -- are there -- are there incremental things that are going to drive the cost down, and what will the offset against further erosions in volume if my assumption is right and you are down a mid-digit kind of level.

You know you mentioned in the beginning you were going to ask three questions and you asked five right there in the one question. So I am -- I couldn't do justice to that question here in the time allotted. What I would tell you is that we have spent the last two and a half years doing a lot of heavy lifting on retail, moving a lot of stores, remodeling stores, opening stores, changing the distribution centers, installing IT, and all of that is imbedded in some of the inefficiencies and some of the losses that we've had going forward. I am particularly enthusiastic about next year and the fact that the whole focus is going to be on the four walls of the store and our execution with the consumer, and we are going to work very hard at training our people, at making sure customers are taking care of; of running the business tighter than we have been running because we have had all these other things happening. So there's certainly some inefficiencies and things we don't expect to repeat this year as far as all the infrastructure issues. And so we believe we have room to improve the financial performance of our retail division even without more sales.

Okay. And, Mike, can you provide more details on the credit line? How is the credit availability calculated? What is the interest rate? Just some more color on the whole debt structure now, and importantly, how you determine on inventories and receivables of what is available for the credit line.

Well -- that's a lot of answer there. We did file an 8K which included the entire debt document, the facility, that goes into -- it is 137 pages, so it is rather lengthy. But to give you a quick answer on it, we are at LIBOR plus 2% right now is our rate and prime. There is a prime factor of it that's prime, plus a quarter? Yes. And the -- the eligibility -- or availability is based on what they are defining as eligible accounts receivable and eligible inventory, and there are 20 different facets in that that make that up. To go into individual ones would be a little detailed, but it is laid out in the bank agreement that was filed with the SEC that is out there on our 8K. If you want to get more perspective on that.

Okay.

I am not trying to cut off your question, just that there is a lot more to it than just that. I won't go any further.

Thank you. Our next question is coming from Todd Schwartzman of Sidoti and Company.

Hi, good morning, guys.

Good morning, Todd.

A question about labor costs. What are you seeing with respect to -- to China labor-wise? And where do you see that going in fiscal '09.

Todd, I can't comment directly on labor specifically. You know, we're not -- we have partners over in China. We don't own anything specifically ourselves. But an overall comment is a combination of energy costs, less VAT rebates. More enforcement of overtime rates. There are four or five factors that are happening in China which is making their costs rise. So a combination of things. I am not -- I am not sure how much the component of labor is there. , but the cost of doing business in China is going up. Now I would counter that by saying while it is going up, it is going up from a very low base, but nevertheless, there is some pressure on China's cost structure at the present

With that said the effect on your total cost of goods on the casegoods side has been negligible?

It's been negligible to this point. I think there is some increases coming that we will have to deal with, and typically what we have seen in the wood business for us is -- you understand the cost pressures that are happening in other parts of the world when you start to get new goods and you get pricing on those compared to old goods, and you start to understand what dynamics are at work. So I would imagine a lot of the newer product coming out for all companies in our industry from Asia going forward, would be a little more expensive, but I don't -- I wouldn't call it material at this point.

Okay. Back in the U.S. where are those pockets of strength and also weakness regionally?

We have talked for some time that the -- for us, the greatest pocket of strength is really not the U.S. but it is Canada. We have about 10% of our stores in Canada. They are doing -- compared to the U.S. extremely well. On the flip side, the markets where the subprime problem were most devastating and what we have seen has been Florida, has been California, has been Las Vegas. Those are three big markets for us that -- that have had further weakening than the core of the country.

And as far as store openings and closures in Q4, where is the one brand new store, not a relocation, and which one is expected to be closed?

Well, in the fourth quarter, we will open two more stores in Chicago, on the west side. We will open a store in Richmond. And we will open -- and we will close one of the stores in Canada. One of the stores in Chicago is new. The other store is a replacement of a location we closed about four months ago in an adjacent market.

And if Canada is doing that well, why the one closure?

Well, the dealer that had the store decided to retire, and we couldn't find an owner.

Okay. That makes sense. And as far as the third quarter, where were the three openings and five closures?

Specifically in the third quarter, we opened a store -- a company-owned store in Bolingbrook, Illinois, and we relocated a company store in Chesapeake. Our independent dealers opened stores in Montreal, Brandon, Florida, Tukwila, Washington, and Warrenville Heights, Ohio. And then we had some very old stores close that were at the end of their leases and in most cases new stores have taken their places, but closed an old store in Charlotte, one in Crystal Lake which is the one I mentioned before we are moving to Algonquin in Illinois and a store in Nanuet, New York.

Great. Thanks a lot. Thank you.

(OPERATOR INSTRUCTIONS) Thank you. Our next question is coming from Laura Champine of Morgan Keegan & Company.

Good morning.

Good morning, Laura.

Kurt, I had a question on the dividend policy. If you hit the high end of your guidance range for this fiscal year, you will do what looks like $0.03 positive on an ongoing recurring operations basis. Why keep the dividend at $0.16? Why not eliminate it all together if you are not covering it at that level?

Laura, I am not sure we agree with your math, and we had a lot of extra items this year that we don't think will be reoccurring next year, but we certainly feel that the actions the Board took yesterday was appropriate. We believe at this point knowing what we know about the economy and our run rate of our business, that we'll be able to earn our dividend next year, and so we're not calibrating your math and believe that the two-thirds cut was the correct decision given the facts we have at this time.

Okay. If $0.03 is not the high end of the range for the year, maybe you can help me with my math and get me to where you think recurring ongoing operations will put you in terms of earnings for this year.

Well you are embedding the first half of the year where we had a lot of one-offs, a lot of closings, and had challenges on the -- on a number of different areas. If you look at the second half of the year where we are talking about a -- a $0.06 to $0.14 range and would you imply that going forward, there is plenty of coverage and that's not certainly not any kind of a guidance for next year, but we are -- we are looking at the run rate of the business today not what has -- or how it is transitioned throughout the entire year.

Okay. And secondly, your VIE stores are increasing a little bit, and it looks like on your P&L, you have about 31% of the total store base as of this quarter. Where do you think that is a year from now both from company-owned stores and VIEs. What percentage of the total store base do you think will be consolidated on your income statement?

Good question. We are not -- we don't have plans to open a lot of new company-owned stores next year. I think at the present time, we only have three or four in the markets we are already in, and a couple of those are probably relocations. So I don't see our total store count growing there. And our current VIEs for the most part have adequate number of stores in their markets. So I wouldn't anticipate at this point with what the Company owns today and our current four VIEs, I wouldn't anticipate our store count in that segment increasing significantly next year. If we -- if a few -- if our store count overall in the whole system goes down a little bit it certainly would be a higher percentage. I don't see a significant change in '09 through our mix of what the companies involved and compared to our independence.

Got it. Thank you.

Thank you.

Thank you. Our next question coming from Joe [Zupan] from Stone Tower.

Hi. I just want a little more detail on the sequential monthly trends. If you can kind of break that out by segment, because it seems like in the furniture issue we found a weakening of sales in January and February versus December. If you can just provide a little more clarity into how your business was affected.

Well, I think we answered that question question as far as we are comfortable in going. We don't report monthly sales and we are just into a new quarter and have given you our best thought on our sales for the balance of the year because of our third quarter mirrored our guidance of down sales 4 to 8 and we haven't changed that so you can see what we are thinking about for the fourth quarter. So I wouldn't want to give any more detail on that except to say every day is a challenge out there, and all of us are fighting for the consumer dollar. And we are -- don't see any meaningful changes either up or down at the present time. Okay.

And a little more detail on the bad debt expense line. Can you talk about customer concentration? Any other issues you are having, you are seeing with your customer base and smaller retailers operating in this difficult environment?

I would answer that from the perspective as we do not have a significant stake in any one customer that would be 89%, 10%, 12% of our business. Our customer base is pretty well spread out and we are not at risk with any one particular customer. At the same time, there is pressure in all parts of the business. You have seen recently -- although we did not have any exposure to it -- you have seen the problem with Wick's, with Levitz, with Domain and on the larger-sized retailers and always been -- certainly the pressure on the small family-owned companies that make up a lot of our distribution in rural America. So are just in close touch with our customers, trying to understand their concerns, trying to be prudent in our credit management. But you don't go through one of these without having some credit issues, and we are trying to be responsible in how we look at that.

Okay. And then within your retail group, is there a significant amount of EBITDA deterioration coming from a concentrated number of stores, or are you seeing deterioration across the board? Meaning -- I am just trying to figure out if a small group of your stores are very EBITDA negative while you -- you mentioned that stores in Canada were performing better. Can you provide any more clarity on that matter?

We have had the question before, and we have answer it in this manner. The -- we have two or three markets that are performing above the norm. And we have two markets in particular which we have identified that are causing us quite a bit of struggle right now. The one market we have been very public about has been South Florida, and the other market, due to lack of sufficient number of stores that is more significant than others, is the greater Boston market. Everybody else is at a comparable level, those two markets are much below that level.

Okay. And what percentage of your stores are in those two markets?

About 20%, 22%. Okay.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Thank you for being on our call today. If you have follow-up questions, I will be available for the remainder of the day. Have a good day, everyone.

Thank you for listening in.

Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.