La-Z-Boy Inc (LZB) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the La-Z-Boy fiscal 2010 first quarter conference call. At this time 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 Ms. Kathy Liebmann, Director of Investor Relations of La-Z-Boy Inc. Ms. Liebmann, you may now begin. .

Thank you, Jackie. Good morning and thank you for joining us to discuss our fiscal 2010 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 begin this morning's call and then Mike will speak about the financials before turning the call back to Kurt for his concluding remarks. We will then open the call to questions.

As is our custom, the time allotted for this call is one hour. 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 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. Yesterday afternoon we reported our first quarter results. Without question, the furniture industry continues to go through a challenging period and La-Z-Boy is not immune to the difficulties that exist throughout our sector. However, our performance for the past two quarters demonstrates the depth and breadth of work we have done to strengthen our business model and insure that we can run our business profitability even in a low volume environment. For the first quarter, which is historically our lowest demand period due to seasonality issues, we posted net income attributable to La-Z-Boy Incorporated of $2 million or $0.04 per share on a sales decline of 18.3%. This compares with a loss in last year's first quarter of $8.5 million or $0.17 per share.

While the low volume environment persists, our positive results for the quarter are reflective of the following. First, over the past few years we have made many strategic decisions which are enabling us to be more competitive with a leaner operating platform. This includes plant rationalizations, continued cost reductions, the conversion to cellular production, warehouse consolidations, the Mexico cut and sew facility, and other projects, including our commitment to marketing even in difficult times. We also made structural changes to our business by divesting smaller companies and focusing on the La-Z-Boy brand, as well as our other larger entities. Today we are refocused on the core growth in earnings engine of our Company, the La-Z-Boy brand. Second, we took aggressive and decisive actions last fall when the crisis in the financial and credit markets brought consumer spending for furniture to a halt. We made many difficult decisions which eliminated costs across our entire Company.

We reduced our work force significantly, curtailed spending, closed stores and facilities, and curtailed many employee benefit programs. We moved quickly to remove $60 million in annual structural costs from the business to insure our costs are in alignment with today's volume. Third, we are committed to marketing the La-Z-Boy brand in both good and bad times. And that strategy has allowed us to build our powerful brand over 80 years. During this period many in our industry scaled back on their marketing efforts, but we remain resolute in our commitment and protected our media spend. This gave us an opportunity to increase our overall share of voice in the marketplace and ultimately increase our market share, as evidenced by our same-store sales numbers. Fourth, in this environment we believe our brand strength is more important than ever.

As history tells us that in difficult times people trust brands and come back to them when there is perceived value and quality. That is certainly true of the La-Z-Boy brand. We are also benefiting from being primarily an upholstery Company operating in the mid tier of the market. We believe that is the sweet spot in today's environment as higher end consumers appear to be trading down somewhat and the lower end consumer is more challenged during this time. Historically upholstered products in general are more affordable than higher end case goods and tend to be more resilient during difficult times, with the consumer more apt to spend money for a sofa or chair, while putting off larger purchases of complete bedroom and dining room sets. And finally, we have established an excellent management team over the past few years, people who are talented, committed, innovative, and experienced.

Our management team did a great job to remove a myriad of costs last fall and it should be noted that our employees made many sacrifices since that time to insure our Company would prevail. Before I go into discussion of our segments, I will take a moment to make a brief comment on our balance sheet. As most of you know our Company has always had a conservative stance with respect to the balance sheet and today that philosophy continues. Mike will speak to the numbers specifically, but I will note that we remain focused on debt reduction and liquidity improvement, particularly in this environment. Now let's turn to our results for our wholesale operating segments. First upholstery. For the quarter our operating margin increased to 8.3% from 4.2% in last year's first quarter, while sales in the segment declined 17% or $40 million. We are becoming a lean and efficient organization, as evidence by the almost doubling of our operating margin.

In addition to our plant rationalization efforts, which brought down capacity to be in alignment with current volumes, it is in large part attributable to the cellular production at our La-Z-Boy branded facilities. Cellular has allowed us to gain efficiencies through the significant reduction of indirect labor and the process itself has afforded us the ability to vastly improve our productivity per employee and has contributed to our success over the last two quarters. Looking ahead, we will garner greater efficiencies throughout the La-Z-Boy branded business when our Mexican cut and sew operation is fully transitioned. The move to Mexico has gone smoothly and seamlessly and today we have over 600 employees working in the facility, which is making cut and sew kits for our custom order business.

With custom orders a significant part of our business and, importantly, a strategic -- a strategic position in the market for us, the proximity of Mexico allows us to deliver on our brand promise to the consumer, custom furniture delivered to their home in 30 days or less. As I have said in the past we are not yet deriving the cost savings from Mexico, as we continue to run dual cut and sew operations in Mexico and in our domestic plants. This will insure there is no service interruptions while the Mexico facility ramps up its staffing and training. We expect to be fully transitioned to Mexico by next summer with some cost savings coming through in early calendar 2010. The full benefit of Mexico, which is expected to be $20 million on an annual basis, will flow through in fiscal 2011. On the case goods side of the business, although sales declined 25%, we essentially broke even on an operating basis.

As I stated at the outset of this call, the challenges in the furniture industry from a volume perspective are exasperated in the higher end case goods business. Given the significant volume reduction this quarter, our team did a good job of running the business as efficiently as possible. Our operating margin was impacted this quarter by continued discounting to reduce the inventory of discontinued collections. To give you some perspective, we reduced our case good inventory by approximately 8% during the period, with a composition of that inventory mainly finished goods. During the quarter, we ceased production in our North Wilksboro, North Carolina facility and moved it to our Hudson, North Carolina facility, which has improved the capacity utilization. Next spring we will vacate a leased warehouse in Statesville and move that operation to the Company-owned North Wilksboro facility.

The combination of these moves will save the Company between $5 million and $6 million annually based on our current run rates. Now I will spend a few moments talking about our retail operation. For the third consecutive quarter we significantly reduced our retail losses on much lower volume levels. This quarter our volume declined 15.2%, yet we decreased our losses by $4.3 million. Our new management team has instituted a number of changes across the operation, from the four wall structure to the way in which we approach the consumer. Additionally, during these difficult times, as we have cut costs across the business, leaving no stone unturned we have been more effective with our media spin for the La-Z-Boy brand, while many competitors were pulling back. By doing so it gave us an opportunity in this environment to increase our overall exposure and drive traffic into the stores.

We have also placed an emphasis on the improvement and effectiveness of our sales team and are increasing our close ratio along our average ticket. Our in home design program, which is a tremendous growth vehicle for us, has also gained traction and typically yields a much higher transaction than one where designed services are not utilized. All of these changes have helped us improve our gross margins on a sequential basis. We believe we can make further improvements in this segment's performance, but we will need an increase in volume before the segment can become profitable, as our fixed cost structure is high, primarily due to expensive occupancy costs in the markets in which the Company-owned retail segment operates. Finally I want to take a brief moment to remind everyone that we continue to believe integrated retailing is a winning strategy for us as branded distribution will play an important roll in the growth of our Company.

As the distribution landscape contracts, the stores afford us the ability to obtain the necessary penetration in each market. When we analyze our business we look at the blended wholesale retail margins as well as cash flow models and anticipate being cash neutral on the integrated retail model with an increase of volume of 10% to 15%. I am going to turn the call over to Mike now to discuss our financials for the quarter.

Thank you, Kurt. I will spend a couple of moments to give you clarity on a few financial items for the quarter, including the FAS 160 accounting change, our tax rate, and our balance sheet. First, the new accounting standard, FAS 160, which was implemented this quarter. It changes how we account for noncontrolling interest like our Thailand and Asia interests, as well as our VIEs. Previously, income from noncontrolling interest, which we refer to as minority interest in the past, was reported as a reduction to operating income. With FAS 160, income attributable to noncontrolling interest is now a separate line item on the P&L. Importantly in the past any losses incurred by VIEs in excess of their equity were absorbed by the Company. Under the new accounting method these losses are included in net income attributable to noncontrolling interest and, as a result, are excluded from that income attributable to the Company.

Prior year reclassifications were made to be consistent with this year's presentation, although, as the accounting standard requires, net income attributable to La-Z-Boy Incorporated was not restated to exclude the VIE losses. Second, our 16.7% effective tax rate for the quarter resulted primarily from an increase in estimated federal income tax benefits of approximately $0.9 million associated with the completion of our fiscal 2009 federal income tax return. Our effective tax rate was impacted by the relatively low level of free tax income reported for the quarter ended July 25, 2009 and the valuation allowance on our deferred tax assets. Without the benefit of the increase in our federal tax refund, this quarter our effective tax rate would have been in the mid 40% range. With the completion of our 2009 federal tax return and carryback of our losses, we have utilized a significant portion of our federal NOLs.

We continue to be focused on liquidity, so during the quarter we generated $13.8 million in cash from operating activities, we reduced debt by $11.7 million bringing our net debt position to $10.8 million. We have $38.3 million of cash and increased availability on our revolving line of credit to $70.5 million. As we have discussed in past calls, our excess availability fluctuates based on our outstanding borrowings, eligible receivables and inventory among other factors, such as outstanding letters of credit. In this environment, our objective is to continue to evaluate the appropriate level of our debt and increase our cash position to afford us the greatest level of financial flexibility in running our Company. As we mentioned earlier, our case goods segment reduced its inventory by 8% during the current quarter, but the Company's overall inventory increased during the last three months by about $2 million.

The increase was mainly due to raw materials, specifically cover, relating to the ramp up of our production of our Mexico facility, as well as anticipated seasonal increases in business for the fall compared to the summer months. We remain vigilant in maintaining our inventory at appropriate levels based on our seasonal adjustments. Our capital expenditures for fiscal 2010 will be in the range of $12 million to $14 million, primarily related to the maintenance of our facilities, transportation equipment, IT upgrades, and our cut and sew center in Mexico. We estimate that depreciation and amortization will remain in the $23 million to $25 million range. I will now turn the call back to Kurt for some closing remarks.

Thank you, Mike. The environment for furniture and its discretionary nature remains challenging. Although our sales decline this quarter was lower than in the previous two quarters, we believe it is too early to predict a recovery in the sector. I will note, however, that we believe our industry has worked through most of the inventory overhang, both on the wholesale and retail side of the business and that today as product is sold at retail a manufacturing order needs to be placed. As I have previously stated, we right sized our operation last fall to insure profitability at this rate of volume. For modeling purposes, given the magnitude of the changes we have made to our business, both structural and otherwise, and given the last two quarters of profitability, we believe it is prudent to analyze our Company going forward using our current cost structure.

The platform we have established for our enterprise has made us much more efficient and should volume increase we believe the incremental piece would operate at a higher level of profitability, although it is too early to quantify that level. If for some reason volumes were to deteriorate from where we are today, we will again react quickly and make the necessary adjustments to the business to reflect the real order flow. Additionally, in the next fiscal year we will realize the benefit of our Mexican cut and sew operation in addition to the savings we will achieve from the consolidation in our case goods business. While we look forward to deriving the benefits of these actions, we continue on our lean journey, with our team identifying various projects from which to garner additional cost savings, which will help to offset normal increases in operational costs due to inflation and other factors. Concurrent with our focus on costs, the mantra throughout our organization is to find way to drive sales.

This takes many forms, from innovation and R&D, to marketing and advertising, to the experience the consumer has in the store and at every touch point, to our ability to deliver custom order furniture in 30 days or less. We believe the consumer will come back to the marketplace and are confident the infrastructure we have established will enable us to capitalize on that return. Additionally, as the distribution landscape contracts with so many smaller furniture stores closing, we believe there is great potential for the La-Z-Boy Furniture Gallery store system, as well as our other branded outlets, to gain market share. We are committed to leveraging the power of the La-Z-Boy brand, making it more relevant and insuring that we maintain its leadership position in the marketplace. In addition to being proud of the work our team has done, I also cannot say enough about the support and strength of our dealer base.

With an 80 year history our Company is privileged to work with a great network of customers throughout North America. Their commitment to La-Z-Boy is second to none and gives us a distinct competitive advantage. In closing, we all look forward to a positive, to a more positive operating environment, one in which the strength of our business model and balance sheet will carry us well into the future. As the consumer comes back to the marketplace, we believe it should be financially rewarding for both our Company and our shareholders. We appreciate your being on our call today and for your interest in our Company. I will now turn the call back over to Kathy to begin the 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.

(Operator Instructions) Our first question is coming from Budd Bugatch of Raymond James.

Good morning, Kurt. Good morning Mike. Good morning, Kathy.

Hello, Budd.

Good morning.

A couple of questions. In the upholstery segment, congratulations on the, on the performance. In the upholstery segment did raw materials play a piece of the improvement year-over-year or quarter-over-quarter? And how will that factor going forward?

Budd, I think there's three factors in the gross margin improvement, the raw material to price ratio, the lack of restructuring this year compared to last year, and the efficiencies of our cellular production. All three of those pieces played a role and we are not going to quantify them anymore than we have in our filings, but it played a significant role.

And --and how persistent are the raw materials at price, will that persist all of this fiscal year or when does that kind of run off?

Well, that's a -- that's a very good question. Hopefully if demand picks up throughout a lot of sectors, including housing and all, I would think lumber and some other things might tend to go back up, but it is anybody's guess if that's going to happen. The last couple years raw materials have been pretty volatile and have gone up quickly and back down quickly. So it is something that I --our bias probably is it is not going to stay at this level for the next year and a half, two years, but that is -- that's just speculation at this point.

Well the segment operating income margin at 8.3%, do you think that the -- the first quarter is historically the weakest quarter of the year, if I remember right. And will the margins in the -- do you suspect the -- do you believe the margins for upholstery in the next three quarters will be higher than the 8.3%? I guess that's the operable question.

I would answer that question, Budd with this. If we -- historically we would do more volume in the succeeding quarters, primarily even with the -- in the first quarter we are shut down one week. So -- so, yes, I believe if we can do more volume we can see improvement to our margins in the future in the upholstery segment.

And you do shut down a week too in third quarter, right?

Yes, we do at Christmas time.

Yes, okay.

But if there is sufficient demand we can figure out a way to work.

Got you. In case goods, how much of the case goods now and in the future will be sourced versus produced domestically. You are going to have one case goods factory left. Is that right?

We have one factory left in Hudson and it is making bedroom furniture or -- it is making bedroom furniture for Kincaid, American Drew and some and where that is going to settle in, Budd, I would say 75% to 80% will be imported and 20% to 25% will be produced domestically.

Okay. And can you quantify at all for us to how much -- how much the discounting impacted the quarter. What was the amount of foregone gross profit on the discounted sales and is that finished?

I won't probably give you exactly what you want, but it was substantially less than last quarter and it will be substantially less next quarter, as we are pretty much worked our way through that.

How much was it last quarter?

A lot more. (laughter)

You are learning the game, Kurt. You might just as well. Okay. A couple of other questions. Can you give us kind of a feel for what the breakeven level is at retail in terms of volume? Or do you think you have gotten the cost down to.

Well, we have quantified our -- our cash neutral position on the integrated model being the 10% to 15% better than we are doing today. On a standalone model, you are probably looking double that, somewhere in the 20%, 25% range of increased volume over our current plan or current run rate in order to -- in order to become profitable, which wouldn't even be back to the high water mark the stores performed at a few years ago.

I got you. And for Mike, I have got some just -- I am confused. Well, I live confused, but between FAS 160 and the tax rate, what is the -- what is an appropriate book tax rate for us to model going forward?

Well, I tried to give you a little bit of insight on that by telling you we had the one discrete item during the quarter of additional refunds and if you add that back it would be in the mid-40s. So, based on where we stand now and what our -- because our valuation allowances are not -- are 100% pretty much of our deferred tax assets, depending on how things come off the timing differences, Budd, it just gets a little complicated, but right now the best I can give you insight on that is the mid-40s.

And how does that work if you have got -- if the valuation allowance is -- has taken all of the deferred tax asset, how are you in a book tax position.

Well, essentially what will happen is I've got some add backs to my book income that will make my taxable income higher than my book income.

And that has to get booked in the financial books as opposed to just on the tax books .

Right, because you take the tax rate from your tax return, apply it to your book income. Now the issue is obviously, as I stated, we used the majority of our NOLs, or at least our federal NOLs and carried it back to a couple years to get our refund that we are anticipating getting later on this year. So we don't have a significant number of NOLs to carryforward.

And the evaluation allowance, when will that come back on the books then if you are in a -- if you are in a profit position doesn't that start to come back on.

There's all kinds of -- but the -- you have got to get out of a cumulative loss position over the last three years is what the rule of thumb is.

Okay. And on 160, how is that going to look going forward? Are we going -- is the VIE operating results not going to then -- then not going to be above the line, it is only going to be below the line and is that a tax affected number.

It is -- it's in operating income and then it comes back out on that line tax affected.

Okay. And you're not -- you are not going to separate that out for us to know.

We separated the VIEs out in the footnote in the 10K -- Q, sorry.

Okay.

And I don't have it off the top of my head, but I think we about broke even this year on VIEs and we lost about $1 million last year in the first quarter.

Okay. I looked at the Q, I don't remember seeing that. But I will go back -- .

It's like footnote 15 or 10 -- we're trying to find that real quick.

I will go get it. That's fine.

But it's -- it is one of the footnote disclosures in the back like 13?. So footnote 13.

Okay.

That's about -- I -- going forward, our hope is that this will have a minimal impact on us, but it had in the previous years had a significant impact from the VIEs we were losing money. We had to absorb them.

Got you. Thank you very much. Congratulations again.

Thank you, Budd.

Thanks, Budd.

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

Good morning. Can you hear me.

Yes, we can hear you.

Morning. Let's see, first, Kurt, you talked about the average ticket and I know you mentioned it in the release as well. Did you quantify what the improvement was on average ticket?

We -- Matt, we did not quantify it and it is -- but it is improving. It is -- the more in home design business we are able to do, which has a substantial higher ticket as a percentage of our business, the more of that we can do every quarter will influence that percentage. Also selling multiple pieces, finishing off the room when people come in to buy sofas. And just a better effort at the point of contact with the consumer and a lot more focus by our field team with our sales people in maximizing the share of wallet out of each customer, all of those things are starting to take effect. But I -- but we are not going to quantify where we were and what is going on because just one of those other competitive things we don't want to reveal.

Sure. That's fine. What about the -- the -- is this the first such increase that you have seen on a quarterly basis, in a while. Not the first ever, but the first ina while.

It fluctuates depending on our promotional activities for the quarter, depending on the emphasis on whether it's -- whether it's on leather, where it is on chairs, our marketing emphasis can skew that a little bit. So it is something we watch all the time, but we mentioned it because it was more than a normal improvement this quarter.

So I don't want to beat it to death, but I an just going to make sure I understand it. How many designer -- are you fully staffed with designers in all of the locations now and -- or do you have more to go where you could potentially see some incremental increase from this?

No, we have design capability in 90% to 95% of our stores. There is a couple of small stores that don't lend themselves to that, but we have that capable and a combination of how good we become at offering that service and the consumers appetite to accept it will determine the success of that going forward.

Okay. And these are all tied to this next question. You said that you have ways to, maybe this wasn't the exact quote, to further improve the performance at retail, but you need to see some volume to get -- to get profitable. What -- what can you tell us about those other ways that you can improve the performance of the retail segment, what more things can you do?

Well, the majority of the improvement we have seen in the last three quarters has been on the cost side and there is -- there is not huge, there's some other minor things, there's not the huge improvement we can make on the cost side going forward, but there's always things with your margin, there's always things with your close rate, there's always things with your volume that you -- you work on and challenge the team every month on and that is where the focus has shifted from getting the business structurally sound to now operating at an efficient level.

Okay. So it is just continuing what you are doing, there is not some -- would you consider it low hanging fruit or something that you are having to fight harder for these savings now?

Hopefully by now we have got all of the low hanging fruit and I don't see a holy grail out there. It is just executing everyday better than we ever have.

Okay. And then you talked a lot about -- I think Budd asked about the discounting and quantifying it and I know you probably won't quantify this, but you have talked about the duplicate costs that you've had in -- in Mexico with the cut and sew. Are those costs pretty much, the duplicate costs pretty much stagnant even though you are scaling down here, moving up there. I guess you are having the same number of employees and I assume you still have the same factory,so are we still seeing the same duplicate costs quarter-over -- quarter-over-quarter?

You can think it in that way, Matt, it doesn't always happen one for one at a time. We have been very reluctant to overly -- to be overly agressive on -- on disrupting our service and so we are probably carrying some of the -- our domestic cut and sew capabilities longer than you would say you need to, but we just -- we don't want there to be any hiccups. And so it is not a one to one relationship, but obviously as we get more people trained in Mexico, that that corresponding headcount declines in the domestic operations.

So when you talk about getting savings in the first half of calendar 2010, that is -- that is when you will -- that is the initial savings will be elimination of the duplicate costs for --

Most of it.

Okay. Okay. And then I note that you have been clear about that target of $20 million in stating that that is on -- in the past you have said it is on current volume levels. Volume levels have ticked a little lower, I just want to make sure I understand, is that -- were you assuming normal seasonality and maybe that's the way it is playing out and that is why you can still talk about $20 million or are there incremental savings that you are going to be able to generate on this lower top-line level?

I would answer that, Matt, with a couple of observations. One, when we gave you the $20 million number originally, that was at the volume at the time. It would be in our planning that by 2011, at some point in time, volume starts to trend back to that level. So we haven't calculated over a two or three year period continuing to run at this -- at this run rate that we ran in the first quarter. I would also say that one of other judgments we have is -- is we do still do a significant part of our cover business, our fabric and leather, in Asia, with good partners there. There's a -- there is a volume level and a sophistication level of certain patterns and fabrics that we may choose to do here in Mexico as opposed to Asia, just depending on how our business flows, how efficient we get. So, there's a -- there's a give and take process here in where we source which particular part of our business. Okay.

Okay.

You have got to remember most of our commercial goods, most of our high volume SKUs are being done in Asia and Mexico's intent was to do mostly or primarily our custom order business. There's been a cadre of styles that falls in between there. They're not pure custom, but they're not at the volume level of our best sellers. So where do you do the cut and sew work for that piece of business, we have not determined that.

Got it. Okay and then one more and I will hop off. The -- the cost savings you talked about -- we talked about Mexico, we talked about the case goods consolidation, you also mentioned some curtailed spending, some benefits that were curtailed, can you talk about any cost savings that may return should -- should things stabilize and improve? Thank you.

Well, the -- the first two that come to mind is what would -- what would happen to raw materials over a 12 or 18 month period, that's anybody's guess and I made some comments on that earlier. The other issue is at an appropriate time, when we have more clarity to the choppy environment, there are a number of employee programs that we curtailed and suspended that we would consider reinstating. And that is on our agenda, that's on our horizon, but we are not going to make any quick judgments on that, have to get further downstream here, but that is another cost that needs to be added back to our operations for us to have a competitive pay program for our -- for our employees.

Okay. Thank you, Kurt.

Welcome.

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

Good morning, Kurt, Mike, Kathy, good job.

Thank you, John, good morning.

I guess maybe coming at the same question but a little bit differently. You have thrown out three numbers as it relates to savings, at least I heard one of them being the $60 million annual cost reductions, the $5 million to $6 million that I guess is pending through the case goods and then the $20 million. How do we-- I am not going to plug in, what is that, $85 million into my retax earnings next year and I am sure you don't want me to. But I guess the question simply is how do we -- how much of the $60 million is in the numbers we are looking at either on the latest quarter or trailing six months or 12 months. Obviously the $5 million to $6 million is pending and then we have talked a little all ready about the $20 million, but are we getting some offset from Mexico yet with the added cost as do running dual operations or we got a full $20 million to start flowing, again assuming the volumes are back at that level at one or two quarters out, anymore color there? Thank you.

Well, let's start back in November when we made a number of changes and we gave the $60 million number, that number consisted of a number of facility closings and at the time over 800 people leaving the organization, a lot of other curtailed spending, cut back of programs. And that -- that has only been now a -- we -- we announced it, you don't get all the savings the day you announce it. It trickled out there in the third quarter. We started to see some benefit in the fourth and now in the first. But that piece was structural and we are -- we are -- the primary reason we have been able to post a profit the last two quarters and that should flow through the next two quarters and we would start anniversarying that next year in the fourth quarter the full benefit of that. The -- the piece on -- on Mexico, the best direction we can give you is we think it will be more positive to us in calendar year 2010, in probably our fourth quarter we will start seeing some increased benefit and then the majority of that benefit.

So if we get some of it in the fourth quarter we may only get, and I am not quantifying this, we are just trying to give you the math, we may only get $17 million or $16 million of it in full 2011. We can't get $5 million in the fourth quarter and then another $20 million in 2011. So, it is going to be -- it will -- it is going to be happening going through there. And then the whole other -- and the $6 million is pretty -- pretty much a standalone process through the greater efficiencies at our Hudson facility, one less facility, greater capacity utilization and going from a fairly expensive distribution center to one where we own. So that pretty much is a standalone piece in the case goods business.

But we will get some of that this year as we made the transition

We will get some of that. But it is -- and, John, all those things then determine the volume. And we always try to clarify when we make these decisions based on our current volumes. If volumes get higher there's some costs to add to service of that volume and the volume gets lower than the number -- the savings on a per unit basis aren't quite as great because we are not running the same number of units through our facilities. But --but I think your other issue is not putting the $85 million into your model is other things go up, then there's other costs and there's other things that will change in the business. But our attempt was to get our cost structures in line to where we thought our volume was going and still be profitable. And our team accomplished that.

(inaudible - technical difficulty) up in the numbers. So the $60 million you might look at the trailing 12 month of revenues through November of '08 or something to quote old cost structure. And you have attached that $60 million and it is probably fully implemented, what, for the quarter we are in now.

That would be a good assumption.

Okay. You'd mentioned, I think, on the last call about the retail cash flow drain of about $8 million annually at the, quote unquote, current volume levels. And then you mentioned a bunch of different numbers today about P&L breakeven. Is that -- is that still a good number to think about in terms of volumes here? Integrated will -- be a negative cash flow of $5 million to $10 million for retail.

Let back up here. We talked last quarter about our integrated model and not the cash flows on retail as a standalone, but our integrated cash drain on the business between the two given current run rates and current profitability of the wholesale business and losses of the retail business to be a cash burn in the $10 million range, just using that. Budd asked the question about the volume to get the retail business to be profitable standalone and that volume number is much higher than the 10% or 15% increase we have to have to be cash neutral. There is probably a doubling of that or a 20%, 25% level that it takes for retail to be profitable, on a standalone business.

Yes. I guess what I am wondering is your -- your revenues in retail were certainly better than I thought they would be. Does that cause you to think about that $10 million cash flow integrated number being less or is that still a good number to think about?

Well, again, where we are at with our retail business is all dependent on volume and if -- and if we continue to make improvements and one day our industry starts talking about same-store sales increases, that number will come down quickly. But -- but right now, we are using the numbers that we have in our plan and haven't really made any adjustments to that based on our first quarter.

Okay. And then lastly, on the case goods side, you've gone to largely a variable cost model. So excluding the -- the plant consolidation expenses and all that, are you -- and you discontinued some lines -- are you going to be able to be a -- a profitable EBIT Company on case goods even if volumes just continue to drop from here? You will be down to one plant, so I assume -- I guess, basically, if we were to -- able to look at the [core] you just reported and exclude the discounts you took and exclude what I assume is some fixed cost overhead drag on the production part of your business, are you profitability in the stuff you are sourcing.

That's a correct assumption. If you were to back out the excessive discounting and some of the overhang of the start up costs of new product lines at the Hudson facility, our case good group as a total would have been profitable. But I would caution that with the case goods business is the most difficult space to be in right now in the furniture business and it is very competitive and everybody is faced with the same challenges that the consumer has pulled back more than any other category. And so the competitive nature of what is happening in that category is also going to have an effect on our ability to improve our earnings performance in that segment. But obviously, our planning is no different in the case goods segment than it was in upholstery. What do we have to do to be profitable at the assumed level of volume, which was assumed to be down quite a bit.

Okay. And my last question was just on the same-store sales number. I wanted to make sure that we were -- in the past I think you talk about calendar quarters, I think this refers to a July quarter, is that correct and then -- and it is Company owned and independent and it is -- it is written business, is that correct?

You have done your homework, John. I will repeat, our same-store sales numbers that we report in our press release, because we are reporting one week later than previous years, we now have the current quarter's numbers. So it is the May, June, July period. It is the entire system, all 300 plus stores, and it is written business.

And when you look at that year-over-year by month, was there any material trend. Was July better or less worse year-over-year than May.

Our -- our business got sequentially better as we went through the quarter.

Right. Thanks for answering my questions, Kurt.

Okay. And, John, just to clarify one thing, just to make sure we are clear on the $60 million, it does -- it is not all structural changes that we did. Some of it was the suspension or curtailment of these benefit plans that Kurt spoke to earlier.

Sure, which some of that might come back if -- .

Right.

Exactly. Understood. Thank you.

Yep.

Thank you. Our next question is coming from Barry Vogel of Barry Vogel and Associates.

Good morning, ladies and gentlemen.

Good morning, Barry.

A couple of questions for Mike first. What -- do you have a debt reduction goal for fiscal 2010.

What we are -- the way I can answer that for you, Barry, is we are just being prudent on how we utilize our cash flow and we will determine the right balance between debt reduction, if it is available. Some of our debt is fixed at a certain level. Our IRBs we -- and our -- we have a -- some dealing with interest rate swap and then based on that we will -- we will deal with the rest with cash and determine how -- what our levels need to be.

Well, if -- notwithstanding what you just said, what would -- what would you be allowed to reduce in terms of the debt level if you had the cash generation or the desire to do that, because you have $38 million of cash on your balance sheet, so obviously you can reduce debt further. So what can you reduce debt at.

Okay. If you look at our annual report and it breaks out our debt levels, there's not much more that we can reduce debt without asking for early retirement of our debt, which we don't -- don't intend to do. But IRBs are $15 million, $20 million now or something. We had some come due and we have a certain portion of our revolver that is tied into an interest rate swap. So, what we are probably within a couple million dollars of that number as it is.

So you probably were hardly going to reduce debt this year?

That's a prob -- well, we have already reduced it this quarter, but of the 50 -- of $50 million that we have left in debt, there's probably, I don't know, I will just take a guess at $5 million, $10 million at the most I can reduce.

Okay. And as far as that tax refund you mentioned, what is going to be the amount of the tax refund in fiscal 2010?

I think I've have noted in there it should be about $14 million all -- with all in, with all our different -- .

You will get $14 million in cash, but from tax refunds this year, which you haven't received yet.

That's correct.

Okay. Now, as far as inventory, the fact that you had to -- you raised your inventory to a couple of million dollars, does that imply that you are not going to have inventory reductions this year from the end of last fiscal year.

Well, I think the answer to that, Barry, would be it would depend on business. Our business, frankly, was slightly better than we had anticipated and we had to make sure we have inventory to service. And historically, I am not saying it is going to happen this year, but historically between now and Christmas is better than between April and July. So you have to -- and you have to anticipate in front of that and you have to buy fabric and some other raw materials out ten to 12 weeks. And so you have to make some judgments on -- on where you think the business is going.

All right. So basically what -- the bottom-line is you are probably not going to reduce inventory in terms of a probability in fiscal 2010 versus your inventory level at the end of fiscal '09.

You are not going to see huge decreases in our inventory unless you see huge decreases in our volume.

Well, probably based on what you are doing your volume is going to go up. So don't be so pessimistic.

(laughter)

Now I have a question for you, Kurt, about this color on this Mexican thing and the cellular thing. So I just want to try to pin point it. The fact that you were doing these duplicate lines and you had the start up of the Mexican cut and sew operation in fiscal '09, tell me if I am wrong, that it affected you negatively in terms of P&L in fiscal '09.

That's correct.

Can you give us some idea of how it affected you negatively in fiscal '09.

We -- we won't -- we won't be revealing that.

You won't?

No.

Why?

This is a -- it is a moving target. And I would tell you one thing now, I'd have to correct it before and just let me try to explain again, that -- that in our original strategy, when we started in to cut and sew, we sent our high volume styles and fabrics to Asia and our partners over there only had to learn a half a dozen styles and they had big runs and they can get up and be efficient pretty quickly. We are challenging our Mexico team to learn all 400 styles and to be flexible on how to cut and sew those and to be nimble, depending on how volume comes and goes on certain styles. And that is not an easy process with a brand new work force and so we are backstopping that with people in the US until we are positive it can handle it. So there are gains happening at certain times and then we step back a little bit and so it is just too fluid for us to give you any exact numbers on that process.

All right, having said that, again once you put a number out with analysts they just dwell on it and that $20 million number, you can see you keep on getting asked about how that going to play out. But is it fair to assume that in fiscal 2010 that there will be positive effect on -- for Mexico for the full fiscal 2010 and to get to that $20 million you mentioned $16 million in conversation with one of your questioners for fiscal 2011 as far as savings, and I know that has nothing to do with volume, I don't think, if volume was neutral. So is it fair to assume without putting you to the wall here, that you might have a positive $4 million effect for Mexican cut and sew in 2010 and the remaining $16 million in fiscal 2011, just to get to that $20 million figure.

I would answer it this way, Barry, whatever benefit we get in the fourth quarter you need to deduct from the fiscal '11 savings, it can't be duplicated. So whatever that number -- but I want to be sure everybody on the call is clear. I don't know whether that's $4 million or $8 million or $1 million or $10 million in the fourth quarter. I was giving an example of what you had to carryover. So, there's no number out there for us of what that is going to mean to us.

Okay. And as far as the cellular, you mentioned that that was one of the primary drivers for improved gross margins. Can you give us some idea now that the cellular is basically in effect, how much savings approximately in fiscal 2010. And you have an idea now. Remember, you are in the slow quarter of the year. Things are going to get better in terms of volume. You get more volume, you get better cellular savings. Can you give us some color on what fiscal 2010 savings from cellular will be in fiscal 2010.

Well, I think the greatest indicator of what that is providing us is to look at the difference on the lower volume and our operating margin. It is significant and -- and the largest component of our improvement of gross margin is cellular, but we are not going to quantify that to any greater degree. Our -- our position was we gave some targets of what we were -- were going to save with the cellular process when we started this three, three and a half years ago. We have continued to get better at it. Our -- our productivity per employee, our quality, our speed have all improved as a result of it, but to give you how much better it is going to be compared to last year, compared to the following year, we are not -- we are not going to get into that.

But what -- what we did say, Barry, in our comments is that you can look at our current cost structure and what we have done and go forward with that because there's -- we had the reduction of work force last year. We had the restructuring last year. We have a lot of things that happened. So to sit there and say at what period are we saving that money off of it, it would be more productive for you to take our current cost structure and try and go forward with it.

Okay. Now, Kurt, as far as retail is concerned, do you think you are going to continue to consolidate your Company-owned stores or you can just stick with them?

I'm not sure I understand the question, Barry.

Well, you might be -- you have a certain amount of Company-owned stores, some of them you expanded under duress, but you needed more -- more base sales in an area. You have been talking about that for the last few years. Are there any retail stores that are -- you might want to close to -- to improve profit to the retail segment?

My answer to that would be that we are -- we are not contemplating vacating any markets that we are in. Obviously, we have leases coming up in the next couple of years on stores that may or may not be the correct location and there may be some stores, isolated stores that close. But, no, we're -- we have invested heavily into these stores. They are our mainstay of our volume in the markets we are in and it is our intention to make this work and to continue to improve its performance.

Okay. And I have one more question for Mike. I know you have some dealer loans on your balance sheet and I believe they are in other long-term assets. Could you give us at the end of July what those loans are in terms of dollars.

Barry, we don't separate out our individual assets and everything within our balance sheet. We have -- we have --we continue to monitor those and put appropriate reserves against them as we -- as we deem necessary, but I am not going to dissect the individual parts of my balance sheet at the present time.

If they go sour -- if some of these deals [won't] go sour because someone -- these guys go bankrupt, are you going to tell us that in your filings.

Well, you will see that in my cash flow as I boost or not boost my bad debt reserve.

All right. So what happened to bad debt reserves in the last quarter.

We booked a little over $2 million, which was about $1.5 million or $1.8 million less than last year at this time.

You guys are doing a great job, don't be so pessimistic be optimistic. Thank you very much.

Thank you, Barry.

Thanks.

Thank you. Our next question is coming from David Cohen of Midwood Capital.

Hi. I know if you guys have effectively touched on this in some other answers, but was wondering if you could speak to the very impressive sequential decline in your SG&A and how much of that is sort of seasonal factors or whether or not that $77 million is sort of the base if you keep volume constant.

Well, what we are trying to get our SG&A to be as variable as possible, so as our volume comes down it will come down as well. Some of it is due to structural changes that we made last fall in late November eliminating some positions as well and eliminating some of our benefit or suspending some of our benefit programs. But I would assume that as our volume comes up the variable portion of that will still go up with it. This won't be a run rate at this rate no matter what the volume is. So the volume goes up 10% and I would suspect the SG&A would go up correlation to that.

Well -- I mean -- but the variability was dramatic. So if you look sequentially it was like a $22 million sales decline, but a $10 million SG&A decline. So conversely, if sales went up $20 million, would you get a $10 million bump in SG&A?

No, but we have done a lot to take the cost out of our SG&A. A couple of million of it was just bad debt to loan, as we show in our cash flow, we didn't have as many this quarter. And we -- our commissions and our warranty and our advertising all pretty much go down with sales volume. But it is not going to bounce back at the same level because we are not going to put all the costs back in.

Okay. One additional question. I noticed, this is going back, I don't know if it affected this quarter but let me know if it did. There's some disclosure in the 10-K about reduction of LIFO reserve, reducing cost of goods sold, is that something that occurs on a quarterly basis or is this some sort of annual calculation you threw up there.

LIFO is more of an annual calculation, it is based on your end of the year volume. There are some things in -- but that is mainly end of the year calculation based on volume levels.

So last year's really would just affect -- just have effected the fourth quarter.

That's correct.

Okay, thanks a lot.

Okay.

(Operator Instructions). Our next question is a follow-up from Budd Bugatch of Raymond James.

Yes, I just had a couple of quick -- quick follow-ups. Did you calculate -- did you quantify the benefit that might come -- benefit cost of 401K match, et cetera, that might come back on the P&L and maybe hazard a guess as to when you think the board would or the management team would start to bring those back on?

Budd, I -- again, we are not trying to be evasive, but it is, as I said earlier, it is too early -- all I can say is it is too early to do that now. We want to be -- we want more clarity to the retail environment. We want more time to be adequately comfortable with the -- what's going on. The last thing in the world we want to do is to reinstitute some of these programs and have to suspend them again six months later. So that -- we have got some internal targets that we have talked about. Perhaps everything won't be turned on at the some level it was before we had to suspend it. But at the time that we start making those decisions, we would certainly let the investment community know of their impact and what they mean to us going forward.

But how would you -- what's the key operable metric then to say, is it revenues, is it earnings?

Well, it will be a combination of revenues, earnings, cash position, all those things rolled into one and how sustainable is the position going forward.

And what was the savings in taking those out, Kurt, have you given that.

That was part of that $60 million number.

Well, I understood that, I just didn't know what part.

I didn't know either.

You probably have a better idea than we do. All right, thanks.

And the other thing, Budd, you have to -- what -- and frankly I couldn't give you the exact number, I know what it was when we took it out, but now we have a lot less people. So reinstating it isn't at the same price it is that we took it out. So I just -- I just keep you grounded on that.

How much per person then?

Good try.

Okay. Thank you.

Thank you.

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

Thank you, everyone, for being on the call today. I will be available this afternoon if you have any follow-up questions. Have a good day.

Thanks.

Thank you. This concludes today's teleconference. You may now disconnect your lines and thank you for your participation.