La-Z-Boy Inc (LZB) 2009 Q1 法說會逐字稿

Greetings, ladies and gentlemen. Thank you for standing by. We apologize the start of our conference was delayed due to an unforeseen emergency at our location. Welcome to the La-Z-Boy Incorporated first-quarter fiscal 2009 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 and Corporate Communications for La-Z-Boy Incorporated. Thank you, Ms. Liebmann, you may begin.

Thank you, Rob. Good morning, everyone and thank you for joining us on this morning's call to discuss our fiscal 2009 first-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 with some prepared remarks and then Mike will speak about some of the financial highlights of the quarter. 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. 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 investor conference calls are one of La-Z-Boy's primary vehicles to provide guidance and to communicate with investors about the Company's current operations and future prospects. We will make forward-looking statements during this call, so I will repeat our usual Safe Harbor remark.

While these statements reflect the best judgments of management at the present time, they are subject to numerous future risks and uncertainties as detailed in our regular SEC filings and they may differ materially from actual results due to a wide range of factors. We undertake no obligation to update any forward-looking statements made during this call. And with that, let me turn over the call to Kurt Darrow, La-Z-Boy's President and Chief Executive Officer.

Thank you, Kathy and good morning, everyone. The challenges facing our industry persist. This is evident not only in our results, but in the results of all the companies operating in the home furnishings space. The difficulties are pervasive on both sides of the business, both manufacturing and retail.

On the wholesale side of the business, the distribution channels are changing with the credit worthiness of our traditional retail partners continuing to be a challenge demonstrated by the string of bankruptcies being announced throughout the industry.

On the retail side, the consumer is reluctant to make discretionary furniture purchases. Add to it increasing raw material and transportation costs and for our Company, a first quarter that includes July with a scheduled one-week vacation shutdown across all of our facilities.

With sales down 6.6% compared with last year's first quarter, we were able to improve the operating performance of the Company on the wholesale side, demonstrating we are making strides in strengthening our business model. We did make a slight improvement in our Retail business during the quarter and continue to strengthen our balance sheet. With those remarks serving as a brief backdrop, let me take you through a discussion of each of our operating segments.

On the wholesale side of our business, Upholstery sales declined 6.9% and case good sales fell 10.2%. In Upholstery, we improved our operating margin to 4.2% from 3.5% in last year's first quarter and we significantly improved our gross margin, primarily the result of the conversion to the cellular production process at our La-Z-Boy branded facilities, additional cost-cutting measures and improved merchandising.

We closed our Tremonton, Utah La-Z-Boy facility in June, one month ahead of schedule and transitioned its production to our remaining five La-Z-Boy facilities, improving their capacity utilization. We also transferred the majority of the cutting and sewing equipment from Tremonton to Mexico. Our new cut and sew facility in Mexico is under construction and on schedule to be completed in time to start operations in February.

This month, we will begin hiring and training people in a temporary facility in Mexico. As we stated when we made the announcement last quarter, we anticipate the combined savings of the Tremonton closure and the Mexico cut and sew operation to be in excess of $25 million, but we will not see the full impact of the cost savings until fiscal 2011.

We also made the decision during the quarter to liquidate our La-Z-Boy United Kingdom import and distribution business and took a related write-down for inventory and goodwill. As we previously reported, we sold the UK manufacturing facility in the fourth quarter of fiscal 2007 and booked a gain of $10 million. At that time, we transitioned the business to an import and distribution model. After a year of disappointing results, we made the decision to transfer the operation to an established manufacturer, importer and distributor in the UK who we believe is better suited to service our existing customers and grow our customer base with larger accounts.

For the second calendar quarter, same-store sales were down 1.9%, the lowest decline we have reported in more than a year. We are encouraged by this performance and although we are still reporting a negative number, we believe we are gaining share in a difficult marketplace, which is a credit to the hard work, commitment and dedication by our team of dealers.

We are almost a year into the "Comfort. It's what we." television marketing campaign launched last September and designed to drive awareness of the La-Z-Boy Furniture Gallery stores, positioning them as full solution resource to the consumer. This series of commercials is building momentum and we are pleased with the results of the campaign so far. In my mind, the best litmus test is that our Furniture Gallery dealers signed on for another year of pooled advertising dollars, indicating they too are seeing the success of this campaign.

Although our marketing expense for this year's first quarter was up $2 million over last year, it is paying dividends as evidenced by our same-store sales numbers. Over the course of the full year, however, our marketing spend will be the same as fiscal 2008, indicating the spend in the back half of this year will be lower compared with last year's second half.

We launched our e-commerce platform in June and are pleased with its progress to date. Our integrated system is working and we are learning many things which will allow us to continually improve the online experience for our consumers. Over the coming months, we will expand the range of available products, including tables, lamps and accessories. This initiative is representative of our continuing commitment to provide a seamless, multichannel shopping experience for the consumer. And over the next six months, we plan to completely redesign our website to make it even more user-friendly, informative and compelling with the goal of a relaunch in early 2009.

Our Casegoods segment continues to face more significant challenges in this environment, primarily due to the higher pricing associated with bedroom and dining room groups relative to upholstery pricing. Our team is working to expand into new distribution channels while ensuring this segment's cost structure is more closely aligned with a lower volume environment.

During the quarter, we reduced headcount and managed our inventories accordingly. We believe there are still levers to pull on the wholesale side of the business to drive out costs and garner greater efficiencies and we will work throughout the year to improve our operations further. Importantly, until the overall environment for home furnishings strengthens, with our expected single-digit sales decline, we believe we can improve our performance year-over-year.

In our Company-owned Retail segment, on a 6% decline in sales, our loss of $10 million was flat against that of last year's first quarter loss, primarily as a result of an improved gross margin during the period. In this year's first quarter, we were operating not only with a reduced overall cost structure, but have worked past the one-time expenses associated with the consolidations of our warehouses and IT systems.

Given the environment, we have slowed down our new store opening plans and are working to improve the performance of the existing store base. Although the operating landscape remains challenging, our senior management team is focused on driving the top line. We recognize that we need more than cost reductions alone to make our business profitable. We continue to work on training our sales personnel to ensure they increase their close ratios and their average ticket sale. Additionally, we are working to obtain more in-home design appointments where we consistently increase the average transaction per customer.

We are also continuing with the four test stores in the Chicago market. While it is still too early to measure their success and effectiveness, we are pleased with the positive results of several key selling metrics, including increased average ticket, margins, accessory sales, and in-home appointments. We will continue the test concept through the holiday season and make some judgment in terms of what to change heading into next year.

I have talked over the last couple of quarters about rolling out our warehouse system to our independent dealers as we believe a more robust distribution system will make our network as a whole more competitive. We now have a test dealer in our Northeast distribution center and expect to convert our other dealers to a system that would number 10 to 15 warehouses over the next three-year period. Once complete, the distribution network will also help to make a significant positive change to our accounts receivable.

Additionally, we will offer our IT retail management system to our independent dealers to begin the process of creating a common platform throughout our retail network. By providing these services to the dealer network, they will be able to focus on the front end of their business while we can help manage the backside.

And finally, as a result of greater operational efficiencies and improved merchandising, the performance of our VIEs, which represents 34 stores in four different markets, improved this quarter as they lost $0.01 per share versus a loss of $0.03 a year ago. I will now turn the call over to Mike Riccio, our Chief Financial Officer.

Thank you, Kurt. I will take a few moments to review some of the financial highlights for the quarter. We reported net sales of $322 million and a loss from continuing operations of $8.5 million or a loss of $0.17 per share. These results include a $0.09 per share restructuring charge, which relates primarily to the closure of our Tremonton, Utah upholstery facility and the La-Z-Boy UK operations. Our results also include a $0.03 per share intangible write-down related to the goodwill associated with the UK operation. The charge from the UK operations are a result of the changes Kurt referred to in his comments. Also, we were able to increase our gross margin during the quarter by 1.1 percentage points, even with our restructuring charges, which more than doubled quarter-over-quarter.

During the quarter, we reduced our inventories and receivables, but the cash generated was offset by a decline in our current liability. These changes are consistent with prior years and are a result of our summer seasonality. We also increased our provision for bad debts given the difficult credit environment we are facing. As you are aware, there has been a continuous stream of announced bankruptcies in our industry and we remain concerned about the credit landscape for both our general dealers and our Furniture Galleries.

We also sold properties during the quarter and recorded a gain of $2.1 million. Our tax rate on continuing operations for the quarter was 37%. It was impacted by the UK restructuring charges and the intangible write-off, as well as other discrete items. We expect our tax rate for the remainder of the year to be in the 38% to 39% range, excluding any additional discrete items.

Due to our expansion into Mexico and our IT-related upgrades, we believe that capital expenditures will be slightly higher than our depreciation and amortization in fiscal year 2009. Depreciation and amortization will be in the $24 million to $25 million range. I thank you for the time this morning and I will now turn back the call to Kurt.

Difficult macroeconomic conditions persist and we believe it will be some time before our industry recovers. However, with the changes we have made to our business model where we have been relentless in cost cutting and improving our efficiencies, we are confident the opportunity for growth and earnings will be readily more apparent when things improve.

We are managing our Company for cash generation and making decisions for the long term and will continue working to navigate our way through a difficult credit environment, depressed consumer spending and increasing raw materials. We are addressing each of these issues in a multitude of ways and are confident in our ability to emerge from this period as a leaner and stronger company, poised to grow marketshare through innovation, excellent customer service, lean manufacturing and structuring our Company to operate as an integrated retail. We thank you for being on our call today and I will turn things over to Kathy to begin the question-and-answer period. Kathy?

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

(Operator Instructions). Todd Schwartzman, Sidoti & Co.

Hi, good morning, folks. The magnitude of your cost-cutting efforts I think is becoming apparent. I wanted to just focus on the demand side and demand metrics for a minute. Can you talk, at least directionally, about store traffic and average ticket within the system during the quarter and especially if you track a closing ratio, what percentage of consumers entering the store actually buy something and how that ratio has been growing, shrinking or is it simply staying the same year-over-year?

Good morning, Todd. I will take a stab at a couple of those questions. Our store traffic is down. It is down consistent with our volume. Our team has done a reasonable job with adding on to the ticket. They have obviously more time to spend with customers and so they're working them harder. We are capturing names of people who have been in the stores who don't buy. We are doing everything we can to garner a greater share of wallet out of every customer that we interact with, but she is reluctant right now to make discretionary purchases and getting them to commit is harder.

I would say our close rates are down a little bit. Typically, the industry close rate is probably in the low 20s. That is a lot of times measured on a manual basis and have salespeople do the counting. In most of our stores, we have door counters and while there are some people that come in the door that aren't customers, it would indicate the closing rate is probably actually a little less than that.

One of the big drivers there is people do shop multiple stores before making a purchase. One of the things that we believe why the Internet is becoming more important, particularly in light of the fuel issues, is people are using the Internet for more information than they are going from store to store. So we believe you have to have an informative, engaging website for people to use that may cut down on their visits to other stores, but very few customers can buy on their first visit. And so I think that tends to add to the closing rate in the furniture industry compared to other retail businesses.

Thanks, Kurt. And my other question is what are you seeing with respect to foam prices?

Foam prices have gone up. They have gone up parallel with what has happened to oil prices because some of the ingredients in there are comparable, but poly and steel are the two raw material components that have had the biggest increases in our business in the last six months.

Thanks a lot.

Matt McCall, BB&T Capital markets.

Good morning. This is Sean Conner in for Matt McCall. I had a quick question -- I just wanted to make sure -- I didn't see any comment on the guidance that you offered at the end of Q4. And I know that you guys would address it if something had changed. Is it safe to assume that what you offered in Q4 is still on the table for the full year?

Our position there -- Sean, this is Mike. We went to annual guidance and we will update the guidance if it changes. Other than that, we just didn't think that putting it back in there or discussing it if it hasn't, in our mind, changed. So this is where we are going to leave it at, that we will give it annually and if something changes, we will reflect that in future filings to update the group.

Okay. And then secondly, you guys -- unless I missed it in your prepared remarks, I didn't hear anything any details on the change in the revenue recognition in upholstery. Can you quantify the benefit that that segment saw in this quarter and maybe an impact on a COGS line and maybe just some details on why the change was made?

I just want to correct one thing. It is not a change in revenue recognition. We had some contracts with some of our carriers that put into question whether transfer titled -- we transfer title at shipping point or destination. We got those contracts corrected so that there was no dispute and no question on that to be able to recognize the revenue upon shipping point. So our revenue recognition policy is unchanged; we just modified the contracts to support how we wanted to report the earnings. If you go back to our 10-K, we reported that there was about $11 million of sales that deferred in there. So that is somewhere in the neighborhood of what would have been impacted for this quarter.

And likewise on the -- I think it was $8 million on the COGS line?

Yes.

Okay. Thank you.

Budd Bugatch, Raymond James.

Good morning, Kurt. Good morning, Mike. Good morning, Kathy. Just talk a little bit about receivables, bad debts and the reserve. I don't think you disclosed the receivable reserve quarterly. You do it annually and the fourth quarter was like $18 million, up from $14 million the year before as we see it. What can you comment about bad debts and where does the reserve sit right now?

Budd, I think you are looking at the $18 million as the portion in current. We have some notes receivable in noncurrent, but in the cash flow, we reported that our bad debt provision went up $4 million during the quarter compared to $2 million last year. So if you take the numbers from the end of the year, which I believe were combined of somewhere around $20 million, then we are up to about $24 million.

I see. Okay. That hit the expense line in this quarter, right, Mike?

Yes, sir. So the issue, as we tried to explain in our comments in the queue, is Florida is probably the biggest driver right now for us because of some of the economic situations down there that just can't sustain some of our Furniture Gallery dealers. So we made some adjustments down there and made some adjustments to some of the stores. And therefore, we had to -- after we made that call, we had to make some adjustments to that provision. But overall, I mean Boscov's announced. We had some other people go out of business. It has been a tough environment for the retailers as well and we are just trying to be prudent on maintaining our reserve quarterly based on the current situation and make sure that we are being prudent as we expand our credit situation that we are taking appropriate provisions at the time we make the credit decisions.

Okay. And of that $4.2 million of provision, is that net -- so that is the net to the reserve in the quarter?

No, that would be the gross.

So is there any relief for the reserve?

We didn't -- there was no significant write-offs during the quarter if that is what you're asking.

Yes, that is -- just trying to make sure.

And I would also add, Budd, that we don't know -- nobody can predict this credit situation, but we would also believe that this would be the low point of a normal year for us with the seasonality in the summer and some of our customers needing some extra help to get back on their feet. So we are trying to do the appropriate thing.

Okay, because the net days outstanding actually went down year-over-year as I look at it on the -- at least on a calculated basis, but this helps that. The Boscov's number, that was about $1 million of AOU, is that in this number or is that something we've got to look forward to in the next quarter?

I think Boscov's, they reported in most those things that it is in the mid 700 range. But we have accounted for a large majority of the Boscov's impact. We will see how it pans out, but we should not have a significant change in that over the next quarters.

Okay. And likewise, I want to look at the inventories a little bit and kind of drill down there. The LIFO reserve didn't change in the quarter. You typically -- it looks like you don't change the LIFO reserve once or twice a year as you measure the index. And with inflation, do you think that is going to be an issue going up or is it the lower inventory levels allow you to keep the reserve where it is?

Two things there, Budd. One is LIFO is an annual calculation. In other words, we can have decrements in our inventory during the year because of the seasonality of our business being right now lowest that we are going to be. If we feel that the numbers will be -- if we will increase our inventory at the end of the year, then there won't be any issue there. There is inflation, but our FIFO inventories would go up, as well as our LIFO inventories would go down. There would be an offsetting -- if we had to write our inventories up because of inflation, then we would have to write them back down because of LIFO. There would be an offsetting side, so there shouldn't be a significant impact.

It depends on our quantities, where they are at the end of the year, and right now, we look at that every quarter to see that we don't have a significant change in levels, but we expect, at the end of the year when our business recovers like it normally does in the third and fourth quarter, that our inventories will have to come up with it.

And how much of the inventory reduction happens because of the closure of Tremonton?

Tremonton? Well, we move that around a lot. We don't think our production is going to change much, so our inventory will not substantially change because we closed a plant.

So is the reduction in inventory at retail? Where is the reduction happening? Or is it just the general level of business and maintaining inventories to match that?

Budd, I would say that our team has done an excellent job of flexing our inventories based on what has happened with demand and also doing it in a manner that hasn't disrupted service. But it is in finished goods, it is in work in process, it is in raw materials, it is across all business units and all categories and we have just been very diligent and very proactive in planning our business to be down slightly and flowing our inventories appropriately.

Okay. And it looks like, even though there are three more VIE stores this quarter versus last year, it looks like the sales per average VIE or per store actually went up. Are they being more productive per store or is it just something that is in the calculation that is not really accurate?

Well, there is a lot of things that go into that number because we have to eliminate what we sell to them and everything, so it could just be timing in some cases. But I mean they are holding their own, but I wouldn't say they are dramatically doing any better per store than they did last year in the first quarter.

But in combination of the VIEs, Budd, they don't have to drag of Florida and some of the other markets in the aggregate that have affected the total.

I got you. So when you look at that down 1.9% on a written basis on the sales, since you have got some Florida stores in that calculation, can you kind of give us, geographically, what is the high and the low of the comps?

Well, I would say our patterns have not changed. I would say that Canada is still our best market today and it is still tracking positive, probably in the mid single digits. So certainly Canada is a very strong performing network of stores for us today. And then on the flip side, the same four, five areas that we have talked about in the past -- California, Nevada, Arizona, Florida and Michigan for other reasons -- remain the real trouble spots for us.

Down double digit, Kurt?

In some cases, yes.

Okay. Lastly, when you look at the Retail operation in terms of what comps are needed, what comp level is necessary to get to either breakeven or to at least challenge breakeven?

Budd, we are looking at all avenues of that business. We are looking at obviously our marketing program for traffic. We are looking at the training programs for dealing with customers. We are looking at our margins. We are in the process of renegotiating some leases. We are analyzing our management team at all levels to be sure that we are considering exiting some underperforming stores. So there is all kinds of things we are doing there.

We are not anymore pleased with the performance than anyone else, but it is -- I think it is a combination of things. It is not just volume. It is not just costs. We are going to start bringing in the independent dealers to the warehouses, which will reduce the load that the Retail division is carrying on behalf of the entire network. So there is a number of numbers. As I think I said on a previous call, our store sales are down some 20%, 25% from their peak of 2.5, 3 years ago and that has put a tremendous drain on the performance.

Is the gross margin year-over-year of the retail stores about equivalent? Has there been a significant change in the maintained margin?

There was a significant change in the first quarter and there was a significant change from fourth quarter when we took some actions to get our inventories in line.

And so directionally, the first quarter versus the first quarter of last year is up?

Is up.

Up, and significantly and it is up significantly versus the fourth quarter when you took some inventory?

That's correct.

Thank you very much.

John Baugh, Stifel Nicolaus.

Good morning. Just quickly on the Retail comp number of 1.9%, was there a divergence between the corporate end and the independent of any significance? And then, that's an awfully good number, and I was curious, did you run any kind of promotion or financing, merchandising promotion? And then on the improved gross margin in Retail, was that really a byproduct of what you did a year ago in terms of liquidating "bad inventory" or is there something you are doing with merchandise mix or otherwise that is really helping that gross margin?

John, I will start with the first part of your questions. I want to make sure everybody is clear on the timing of the statistics we are giving. We are giving written sales of April, May and June, down 1.9% for the entire network. We are giving delivered sales for our fiscal first quarter of May, June and July down 6% in the Company-owned stores. So it is two different measurements at two different timeframes.

With that being said, there wasn't a dramatic difference between the Company's written business and the independents' written business in the quarter. If we thought we had a magic formula, we could do this all the time, we would. We were very successful in our Memorial Day sales strategy. We heavied up our national TV buy. We were not on TV at all a year ago because we did not start the campaign until September of '07, so we believe that made a significant difference. We are anticipating a similar strategy for Labor Day, but that was the big driver of the quarter in terms of the written sales.

And any feel or commentary on July? The reports I get are that July was pretty weak, not that June was terrific, but any color there?

Well, the summer is obviously a challenge. It is book-ended by two strong holidays and our look at it is if we don't do very well in those couple of holidays, it is hard to bring the summer up to a level that is acceptable.

I would say that the gross margin improvement is just better marketing, better pricing strategies on store. It is not that we are anniversarying a really poor first quarter a year ago, but we have been very diligent about the way we go to market and the expectations we have on our selling margins. And so I think it is just a natural improvement that we are getting.

Our team has been challenged with getting the warehouses resituated, putting in a whole new IT system, having a common IT system is helping us to watch our margins and watch our pricing exceptions. So I think we are just managing the day-to-day transactions better than we were a year ago.

And Kurt, really quickly, on the upholstery margin front, you had improvement there and we have seen significant inflationary pressures. Is it fair to say that you have taken some pricing I am sure, but that there is a squeeze still between raw materials and pricing, but you are more than offsetting it with the cellular improvements or is that wrong?

Well, our intent has been to make improvements to our business to pay for things outside of raw materials. In other words, if we are going to have wage increases, healthcare increases and all, we have got to find the efficiencies within our own business to help justify that. But when the raw materials come at us like they have the last six months, I don't believe there is any money in the industry that can absorb those or who can get efficiencies as fast as they are getting raw material increases. So yes, we have taken pricing to try to keep us even with the ramp up in the raw materials.

Thank you.

(Operator Instructions). Laura Champine, Morgan Keegan.

Good morning. My question is on the Retail segment. Given the continued losses there, is there the potential that you would exit the retail business at least as an owner of stores and if so, what are the timelines for that and what kind of bogeys are you looking at as far as measuring returns you can get on your investments in retail?

Laura, I don't believe that we would consider exiting the retail business. We believe the network of La-Z-Boy stores, both what we own and our network, is a strategic advantage to us. But if you look at the retail landscape today and see what is going on with the various retailers going out of business and bankrupt, we believe it is very important to have your own distribution channel.

It seems as though the survivors in this business are those who are charting their own course. The places to sell our product is dwindling, so having a retail presence is paramount I think for our brand and our Company long term. That is not to say that we couldn't exit certain markets that we are in. That is not to say we wouldn't exit certain stores, but to totally abandon our Retail program, which is the cornerstone of our strategy, I think would not be something that we would consider at this time.

Can you comment on the profitability in the independent dealer base and on the potential of needing to perhaps take over some of those stores that aren't performing as well?

Well that is -- the profitability of our independent dealers varies by dealer. We have some that are, even today, in today's conditions, still very profitable. We have had dealers that have been with us for 20, 25 years who are very solvent and are very committed to moving forward with the business.

I think if you recall our comments a couple of years ago, when we decided to enter the retail business and when we ended up with that in the VIEs, we effectively addressed the majority of our troubled retailers at that time. The remaining base of our dealers was fairly profitable. That certainly has changed with the economy, but we are watching all of our individual customers that own the stores.

We have about 100 independent dealers that own the other 270 stores. We are in close contact with them. But it wouldn't surprise us -- as we have said in our release, it wouldn't surprise us that we may close 9, 12, 15 stores this year. There are certain of our independents who are going to retire. There are certain of them who don't have the wherewithal to get through this. It is a very difficult marketplace out there, not only for our La-Z-Boy store owners, but for a number of our independents as well and it is something we are watching very closely.

Got it. Thank you.

There are no further questions at this time. I would like to turn the floor back over to Kathy Liebmann for closing comments.

Thank you, everybody. If you have follow-up questions, give me a call later this afternoon. I will be available. Have a good day.

Thank you.

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