La-Z-Boy Inc (LZB) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the La-Z-Boy fiscal 2011 second 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 your host, Ms. Kathy Liebmann, Director of Investor Relations of La-Z-Boy Incorporated. Ms. Liebmann, you may now begin.

Thank you, Jackie. Good morning, everyone, and thank you for joining us to discuss our fiscal 2011 second quarter results. Present this morning 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 today's call and then Mike will speak about the financials before turning the call back for 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 remarks. 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. Kurt?

Thank you, Kathy. Good morning, everyone, and happy Thanksgiving. Yesterday afternoon we reported our second quarter results for fiscal 2011. Our results were reported later than scheduled as a result of an accounting issue related to our VIEs. While the issues did not impact our fiscal 2011 second quarter earnings-per-share figure, we took extra time to close the books to ensure that prior periods were properly revised, even though there was no material impact to each individual period.

Sales were down 2.6% for the quarter reflecting the challenging macroeconomic environment. Specifically, the ongoing weakness in the housing market, coupled with consumer confidence remaining at low levels. These factors hinder the consumers desire to make discretionary big ticket purchases. On a per-share basis, we earned $0.07 for the second quarter versus $0.11 in last year's second quarter. Our earnings were negatively impacted by lower overall sales, a decrease in the average selling price and higher raw material costs.

Against that backdrop, we are addressing head-on the issues within our control, and in doing so, we are investing in our future. Over the past few years we have lowered our cost structure considerably across all three business segments, and the changes we have made have been demonstrable in our results, even in low-volume environment. Today our focus is on driving sales and positioning the Company for volume growth and market share gains when the consumer returns to the marketplace. We are investing in our most important asset, our brand platform, and we are investing in research, technology and customer care. In short, we are proactively using the current period to make these investments and are confident they will strengthen our organization to fuel future growth and profitability.

First let me talk about our investment in our brand platform. Last month, at the Furniture Market in High Point, we announced that Brooke Shields will be featured in a comprehensive new brand platform and advertising campaign, which will be concentrated on convincing female consumers that La-Z-Boy comfort fits their lifestyles and that we have a wide range and selection of great looking and high quality furniture beyond our well-known recliner. The campaign debuted last week across North America on national cable television, on local network and local cable TV and in print magazines and will be prominently featured on our website. The combined spend over the next 12-month period, split between our sales and our dealer organization, will be approximately $20 million. We believe Brooke, a well-known actress and style icon, will be a credible and inspiring brand ambassador, and her message will resonate with our target audience. The investment in our partnership with Brooke and the associated creative development demonstrates our commitment to investing in the future with the objective of increasing traffic, driving sales growth, and increasing our market share.

We are also investing in research. Over the past six months we have been working with the Boston Consulting Group to identify ways to strengthen various parts of our business, from customer care to procurement to a specific emphasis on driving sales and making our retail operations profitable. Although a significant undertaking, our history with BCG has been fruitful and we believe our recent work with them will yield demonstrable results paying dividends for us in the future.

On the IT front, we are investing in systems that support operations to improve efficiencies and standardization across the wholesale organization. At the same time, we continue to upgrade our retail management system, to vertically integrate retail outlets and distribution centers with the wholesale side of the business. These systems upgrades will allow us for greater visibility across our enterprise, from supply chain, to manufacturing, to each retail market.

And finally, we have established a new Comfort Care Organization and are introducing a strategy that will better encompass the relationships of both consumers and dealers, which will enable us to elevate our level of customer service while remaining attentive to our customer's overall post-sales experience. Our goal is to enhance every touch point with customers, as well as making it easier for them to interact and communicate with us to resolve any issues they experience. A cornerstone of this initiative is to move our customer call centers, which today are based regionally, into a new customer care support center, which will be located at our corporate headquarters in Michigan. As I mentioned earlier, we believe now is the time to make investments in these initiatives. Although in this environment, it is unclear when the consumer will return to the marketplace, these moves will ensure that we are properly positioned to capitalize on the inevitable uptick in business for the industry.

Now let me turn to a brief discussion of our three business segments. First, Upholstery. For the quarter, Upholstery sales were off 3.4% compared with last year's second quarter, reflecting lower volume overall and a change in our product mix due to sales being comprised of a higher percentage of the front end of our line. In this economic environment, this is not surprising. When the consumer opts to spend money on furniture, she's being more selective and is more interested in the starting price points of our various product lines.

Our operating margin for the segment was 7.6% compared with 10.9% last year. The margin was impacted primarily by an increase in raw material costs, which we have discussed on our last two conference calls. While still a factor, we believe that it will be less of a factor as the year progresses, and Mike will speak more about this in just a few minutes. The margin was also impacted by overall lower volume, a lower average selling price and costs associated with the various investments we are making in our future.

I would like to take a moment and talk about our Mexican operations. As we said in our press release, the Mexico cut-and-sew facility is not yet delivering all of the cost savings projected. While it is taking longer than anticipated, we will indeed realize the full benefit of the estimated $15 million in savings. The plan is making steady progress in improving its performance month by month. We will garner savings this year, but the majority of the benefit is expected to be realized in fiscal 2012.

The difference between our cut-and-sew program in Mexico and our cut-and-sew program in China is that the kits coming from China are for our high-running SKUs. The sewers are making the same kit over and over, which limits the learning curve. In Mexico, most kits are for custom orders, which means the team has to learn approximately 400 frame styles and more than 1000 different cover combinations between fabric and leather. The learning curve for this, as you would imagine, is steeper. As an example, it is very possible that one of our Mexican workers may not see the same frame style or fabric in a two-week period. Again, we are making steady progress and are achieving the output necessary, albeit with more people, to supply our US facilities and we will see the efficiencies ramp up as the year progresses.

Now let me spend a few minutes on our Casegoods segment. Sales were up 5.9% year-over-year to $39.5 million, and the segments operating margin was 3.5% compared with a negative 0.5% in last year's second quarter. The progress we have made in the segment reflects the combination of improvements in our sales and our operating structure. On the sales side we have experienced an increase in our dealer base in addition to increasing our square footage with existing customers. On the operating side, we are enjoying the efficiencies garnered from our warehouse, plant and business unit consolidation last year. Going forward we will continue to identify additional opportunities to increase efficiencies and, importantly, our team is working to drive sales through product innovation, customer service, and marketing.

In our Retail segment, sales increased 3.2% to $39.2 million from last year's second quarter, and importantly our Retail Group continues to make progress reducing its quarterly loss. On the sales side of the equation, our conversion rate was better this quarter as we increased our close ratio on lower traffic. At the same time, our average ticket decreased, reflecting what I alluded to earlier, consumers are purchasing more of the starting line-up of our product offering.

Over the past two years we've had an ongoing process of making adjustments to our operating structure, in term of the selling process, expense controls, and marketing efficiencies, but are still challenged by our lease-expense-to-sales ratio in the lower volume environment. As you know, the Company's stores are based in very good retail markets, but expensive markets from a real estate perspective, and most of our stores were opened during the real estate boom. With 20% to 30% of our leases coming up for renewal in the next three years, our team is working diligently to renegotiate them to more favorable rates. Most importantly, we continue to work to drive traffic to the store system and our new marketing campaign will undoubtedly help that metric. Now let me turn over the call to Mike to make a few comments about our financials

Thank you, Kurt. For the fiscal 2011 second quarter, net sales were $293 million, down 2.6% compared with the prior year's second quarter. As Kurt mentioned earlier, our net income attributed to La-Z-Boy Incorporated was $3.9 million, or $0.07 per share, compared with $6 million, or $0.11 per share in the fiscal 2010 second quarter, which did include a $0.01 restructuring charge primarily related to the consolidation of the Company's Casegoods facilities and previously-announced store closures within the Company's Retail segment.

With respect to our results, you should note that our second quarter and six-month sales and operating profit, net of eliminations, were impacted by the deconsolidation of our Toronto VIE at the end of fiscal 2010. In fiscal 2010, the Toronto VIE sales for the second quarter were $4.6 million and its operating income was $400,000. For the six-month period, sales attributable to this VIE were $8.3 million and its operating income was $1.3 million. Our results for this year's second quarter and six-month periods do not incorporate the results from this VIE. On a consolidated basis, more than half of the change in sales this quarter is a result of the deconsolidation of the VIE.

Now just a couple of comments relating to our VIE accounting and deficiency in internal controls over financial reporting. As noted in the press release, management discovered errors in some of the accounts related to one of our VIEs, and concluded that it did not maintain effective controls related to the accounting for the Company's consolidated VIEs. Although we had controls in place to consolidate the VIE, they were not at the same level of precision as the more rigorous controls used to consolidate the La-Z-Boy Incorporated Companies and their wholly-owned subsidiaries for a timely detection of any possible misstatements of the consolidated financial statements. There was no impact to the Company's net income attributable to La-Z-Boy Incorporated on a per-share basis for the periods presented in our press release related to these revisions. We will revise all prior-period account balances as reported when we complete our filings in the future. We have concluded that this controlled efficiency constitutes a material weakness. We have already taken steps to remediate this deficiency and believe that this material weakness will be remediated by the end of fiscal 2011. We anticipate filing our Form 10-Q later tonight, which will include more details relating to this matter.

As Kurt mentioned earlier, with respect to raw material costs, quarter-over-quarter there was a large differential in what we paid for raw materials this year versus the second quarter last year. However, raw material prices are moderating somewhat and because there was a progressive increase in raw material pricing over the course of fiscal 2010, we expect smaller quarter-over-quarter changes in raw material pricing during the back-half of fiscal 2011. Assuming raw material pricings remain at current levels, we would anticipate paying $16 million to $18 million more this year versus last year. For the first six months of fiscal 2011, we experienced an $11 million increase in raw materials versus last year, which would leave a $5 million to $7 million differential for the back six months of the year. In terms of our Mexico cut-and-sew operation, we anticipate to realize approximately 25% to 30% of the anticipated cost savings in the back-half of fiscal 2011, with the majority in fiscal 2012, as Kurt said.

Due to our level of pre-tax income and routine discrete items, our effective tax rate for the quarter was 30.3%. compared to 39.6% for the second quarter of fiscal 2010. Until such time as our deferred tax valuations are reversed, our tax rate will be impacted by the level of pre-tax income and changes in timing differences. At current levels of income, we believe that our ongoing effective tax rate for the remainder of the year will be about 40%.

Now let me shift to the balance sheet. As we have discussed in the past, our objective is to ensure we have the greatest amount of financial flexibility during this challenging macroeconomic time. While we don't anticipate there being a double dip, we want to ensure that we have a strong cash position in the event of another downturn. At the end of the second quarter, we had $84 million of cash on the balance sheet and $97 million of availability under our revolving line of credit. This compares to $108 million in cash and $91 million of availability on our revolving line of credit at the end of fiscal 2010. Our debt stands at $46 million, leaving us with a net cash position of $38 million. Capital expenditures for the quarter were $2.6 million and were $5.0 million for the first six months of fiscal 2011. For the full year we expect our capital expenditures to be in the range of $12 million to $14 million. I will now turn the call back over to Kurt for some closing remarks.

Thank you, Mike. As I said at the outset of the call, we are addressing the various issues we believe are necessary for the future. Making investments in the future is of paramount importance in the right strategy to fuel profitable growth and market share gains. Everything we are doing is designed to ensure that we are quick out of the gate to capitalize on an uptick in furniture sales. In the meantime, we will continue to do all we can to drive volume, but believe until the housing market and consumer confidence strengthen, it will remain a challenging environment.

The solid cost structure we have established is delivering profits, even in this environment, and we believe our cost structure should improve compared to the first half of the year. Our Mexican facility is becoming more efficient, other cost reduction programs throughout the Company will bear fruit and there will be a smaller delta with respect to quarter-over-quarter changes in raw material pricing, providing raw material prices remain at today's levels. Our brand remains the strongest in the industry, we have a vast network of branded distribution and a solid balance sheet from which to build our business and position ourselves for the future. We appreciate your interest in La-Z-Boy and being on our call today, and I will turn things over to Kathy.

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 is coming from Budd Bugatch of Raymond James Financial.

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

Morning, Bud.

I guess my first area of question goes to demand, because I think that's the single biggest issue that is challenging right now. Would you talk a little bit about how demand proceeded over the quarter, what you may be seeing now? And I do have a few more questions on that.

Budd, I would answer that, probably from this standpoint, the first six months -- five-and-a-half, six months of the calendar year were pretty solid, and we thought set up for some continued improvement as we went through 2010. But in the summer things slowed down considerably, and it remained a very tough environment all the way through October. So there wasn't a significant difference in August, September and October as far as demand was concerned. It was choppy and inconsistent for all three months.

We have seen a particularly more intense slowdown in Canada than we had experienced before. Canada had been our shining star a year ago and they have slowed down a little bit. In addition, our business on the West Coast, and particularly in California, has been extremely challenging, and those two areas of North America are showing the biggest detriment to the previous year.

The current trends, I will have a better answer for you after this weekend, because without a solid Thanksgiving period it can make or break your month. But we just don't see anything on the horizon. There have been some theories about the elections and some other things changing, demand, but there's still so much uncertainty out there that we are just cautious right now about what things hold, and as we go into 2011 right now, there's a lot of things that have to come together for there to be significantly more demand from the consumer.

Okay, and I think in your release information you talked about a negative same-store sales performance of negative 7.1% for the system-wide stores. Did you parse it -- if you did, I missed it, between Company-owned stores and dealer-owned stores?

No, you didn't miss it, Budd. We report our delivered sales for our own retail network and the written sales for the whole system at each quarter, but we don't delineate between the two at this point.

Could you give us some flavor of are the dealer-owned stores performing better than the Company-owned stores, or is there a significant difference between the two?

I wouldn't say there's a significant difference. There's pockets, and the fact that the Company doesn't have any owned stores on the West Coast probably is a factor right now. But there's months when the Company stores perform better than the network and vice versa. I wouldn't say there's a definite pattern at this point yet.

Just turning to cost of goods, I know there's a difference in a moderating effect of raw materials going for the balance of this year, which is obviously good news. The Mexican progression, while it is notable and significant, at least has been somewhat disappointing in terms of speed. And I think you had to probably increase some of the costs at your domestic factories in the interim to handle the shortfall. Can you comment on that, and maybe what impact that may have had in the quarter?

Well, I think you articulated it pretty well, Budd. We had a fairly aggressive plan, and thought we would be further along with our efficiencies. So what really has taken place is we have a few more people working in Mexico at this point to make the output that we need to run our US facilities, and we have a small group of workers, less than 200, still in the States, cutting some fabric and leather to make up for part of the shortfall that we were not able to accomplish down in Mexico. We would see that migrating out here over the next 90 days and we have seen all through the quarter our efficiencies getting better in Mexico. But the ramp-up time, the training curve, a little bit of turnover issues, we just haven't been able to achieve the production-per-man-hour-worked that we anticipated. But we believe we can get there, it is just going to take us a little more time and a little more effort.

Okay. A couple of more questions, if I could. You reported last year $300.7 million in volume, and this year $293 million, and Mike, did I hear you correctly when you said half of that difference is attributable to the deconsolidation of the Canadian VIE?

That's correct.

Okay, and you had a 236-basis-point difference in gross margin year-over-year -- or gross margin percentages, percentage of sales. Can you perhaps walk us through? I know raw materials is a piece of that, are there other pieces that can tell us about how that detriment walked through from--?

Budd, I would add a couple of things, one for the six months, primarily all of the sales differential is because of the deconsolidation of the VIE in Toronto for the entire year. The margin differential for the quarter was pretty much around our VIEs, our lower average selling price and our lower margins on our starting products compared to our more expensive products, and then some of the expenses that we had on some of the investments we are making for the future. Those are the three big components.

And in that order, Kurt, in order of magnitude? Or is there a--

Yes, probably so. The last of -- the raw materials was obviously the biggest, the other two were probably equal, but we don't have any real detail on it. But much smaller than the raw material piece.

We will have some more detail in the 10-Q when we file tonight, but we're -- there's not much difference of what we have been talking about over the past couple of quarters regarding our lower margins on the starting selling point and then the raw material costs.

And so when you look at the contribution margin, excluding certain items, where do you get these days?

Well, we have been talking about the lower volume also, so it just really depends on where our volume ends up in some cases of how much contribution margin we are going to get, Budd. So that's probably the biggest focus. As we've talked about that the raw material costs will wane a little bit quarter-over-quarter in the third and fourth quarters, so it is really going to depend on how well we do on conversion, if we get volume pick-ups or not.

I think most of us take raw materials, those changes out of the calculation of contribution margin and trying to get some normalized rate. That's what I was trying to get to.

I understand, but we are just not prepared to give out a forecasted gross margin at this point.

I got you. Okay, last question you talked about getting the past financials restated with the filings. Does that mean filing one-by-one and quarter-by-quarter? Or will you have it all done in the filing of the Q tonight?

We will have the --- for the annual amounts of what the effect is on the net income, we are still working through our disclose -- it just takes a little bit longer to get the Q done than the press release because of all of the disclosure requirements. So we will have some of that detailed in the Q, and then when we file our future statements, especially our annual report, we will have more file changes on that. But we are still working through that right now, Budd.

Thank you very much. Good luck for the balance of this calendar and fiscal year.

Thank you, Budd.

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

Thank you, good morning, everybody.

Morning, Matt.

Let's see, a couple of little ones first. Did you say what the cost inflation was and what -- Mike, you referenced for -- I think you referenced, it was consistent with thinking or the trends, did you talk about the inflation was in Q2? I know you said it was going to be a little bit less in the second half.

We said that it was $11 million in the first half of the year.

$11 million? Okay, perfect. Sorry, missed that. And then you -- Kurt, you talked about the $20 million in spending associated with the brand building efforts, what was the comparable number, and you said that was for you and your dealers, what is the way to look at it from your income statement perspective? What's the number that hit or will hit this year, and then how does that compare to last year?

So the $20 million number, Matt, is what we think will be spent on the campaign with Brooke specifically, that is not our total advertising spend, that is not the dealers total advertising spend, because part of our spend for the campaign on Brooke Shields is to educate people about the, the style and breadth of line that La-Z-Boy has. So we will still be running promotional and activational commercials as well, and we didn't include that in the number.

I wouldn't say that either -- unless it gets a lot of traction early on, then we would spend relative to sales increases, but I wouldn't expect the annual spend on our marketing costs to be up significantly. It could be up a little more next quarter as we launch this and get things kicked off and pay for some of the development costs, but on an annual basis, we are not anticipating increasing our marketing costs significantly. We are just shifting a lot of things we were doing before into the Brooke Shields campaign.

Got it. Okay. Then you broke out two other areas of spending research, you talked about the -- the consultants and then your IT systems upgrades, can you give us an idea of the magnitude of the spending there? And I am trying to get an idea of what the hit was, maybe Q2 what the trend will be like for the rest of the year, and then how that compares to a year ago?

Well, specifically for the first six months of this year when we were engaged with BCG -- I am not going to give you a specific number on it, but it was a few million dollars, and a lot of the IT stuff is capitalized.

Okay.

So it is not a huge expense item. There are some, but most of it is long-term investment in the systems and we will capitalize those and spread them out over the years.

Got it. Okay, thank you. And then one thing we haven't talked about is you talked about consumer confidence and the weakness there and then housing, what can you tell us about consumer credit trends and what you are hearing from your retailers? And assuming it's still tough, could that be having any impact on the ASP and the pressure there?

Well, I think generally industry-wide, I think the comments you made that it has some pressure and some issues on velocity of sales is probably accurate. In our particular case though, Matt, given that we appeal to a little bit different customer, we haven't seen, as the year has rolled on, we haven't seen much difference in our credit approvals and we have a high credit approval. We have an 88% -- 85%, 86% approval rating through our partnership with GE, and our finance business through a third party is in the range of 25% of our business. So it has been steady and we don't see a big differential in that over the last 12 months.

Okay. So the 85% to 86% is pretty consistent with where it has always been?

Well, historically, when we had the crunch in October of 2008, it dropped precipitously for 60 days or so because everything tightened up temporarily, but it is back to normal levels and has been at normal levels for most of 2010.

Okay. And then finally, on Mexico, I think you said 25% to 30% of the savings is expected in the second half. So it sounds like with the inefficiencies, you are not seeing anything yet. Did you talk about the pressure that you actually saw in the quarter and how, I guess the way I'm looking at it is, you saw pressure in the quarter, you've seen pressure in the first half, and that could flip to benefit in the back-half? Am I double counting there when I talk about eliminating the pressure and going into a net benefit?

I am not exactly sure how you are counting it, but I know our -- the amount of kits we will be making in Mexico in the second half of the year will be significantly higher than the first half. I know our costs will be substantially lower, but to give you a bogie on what that would be, it is pretty much what Mike outlined. So we didn't get a lot of benefit from Mexico in the first half and we anticipate getting the number that we said. Right now it would be great if the savings from Mexico and our other cost reduction programs would outstrip the rate of material increases, but that's yet to be determined because the prices could change and we may not get all the cost savings, but certainly one of our goals is to have more cost savings in the second half of the year than our inflation costs go up in materials.

Okay. Perfect. Thank you all.

Okay.

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

Good morning, guys.

Morning, Todd.

Good morning.

What was the magnitude of the delta in ASPs during the quarter, just curious?

I think it was in the range, Todd, of probably 2% to 3%. It's been trending that way, so it depends on how far back you want to go, but compared to a quarter ago, that's probably the range. And the -- I don't know that it is as big an impact on the sales piece as it is the margin and the gross margin dollars you make on a $300 item compared to a $500 are substantially different. So that's where it has the biggest impact to our financials.

Got it. With respect to the quarter-over-quarter moderation in raw material inflation, I think, if I recall, you made a fairly similar comment in terms of your expectation last quarter. Was there any surprise in the second quarter year-over-year increase, or was it about what you expected?

It has been about what we expected. The other noise out there right now -- and we don't have a lot of hard data and knowledge about this yet because it is in the very early stages, but one of the things that is not projected in the numbers that Mike talked about is there's a lot going on around the world about commodity costs as it relates to yarns and fiber, and with the costs of cotton skyrocketing, people are switching from cotton-based products to polyester to other things, and there's a lot of upheaval right now in that arena. So, if there's a significant change in fabric costs or something of that nature, again we are not sure it will be there or won't be there but there's a lot of conversations going on right now with some of our key suppliers. If that was to happen that is not in the range of the data we gave you so far.

Okay. And can you maybe get us up to speed, up to date Kurt, on the supply chain, particularly in the Casegoods side in stock position, where you are now, how that has progressed for the last three, four months?

We've continued to make improvements, Todd. Our -- we have four different brands within our Casegoods Group, and three of them were in fairly good shape six or nine months ago with the supply and availability. Our occasional furniture line, Hammary had some challenges. We have not been in a very good stock position through the summer, but they're in a much better position now, and I would say as we head into this key season for us, we are in as good a shape stock-wise as we have been for the year.

And that's shown in our inventory increase in the quarter, by getting a better position, we have a little bit more finished goods inventory related to our Casegoods Group.

Got you. I realize that visibility is not great right now. Demand is -- pick-up is anyone's guess to the timing. However, cash flow is still relatively good. Earnings hopefully improve from here, but when do you start to think about share buybacks, and more to the point, what would you need to see in place before buying back meaningful amounts of stock?

I think our answer to that, we've been fairly consistent, Todd, I think we would have to see an environment out there where we think that there can be some sustained growth, and because to have any meaningful increase in earnings going forward here, there's got to be some growth happening in the marketplace. And we are running the business carefully, cautiously, we can make money in this environment, at this level, because of the work we have done to our cost structure. But to really start earning the kind of money to be able to make some other investments to do a number of different things going forward, we would like to see an environment where we thought, for the next three or four quarters, we were pretty confident we would have some growth, and more earnings and more cash would fall to the bottom line so that we were in a position to do something differently. And right now, candidly, we don't see that.

We hear a lot of talk about things perhaps that are going to be done to help in that regard, but the rest of the economy could start doing better than the furniture business, and as long as the housing and lending and consumer confidence is where it is at the furniture business is going to struggle to have a lot of upside opportunity in the short term.

And on the Retail operation, do you have any stated goal, timing of break-even?

Well, we keep making progress. We -- the team has done a great job the last couple of years, every quarter we are shaving $800,000 to $1 million off the losses. We would think that could continue. It is a combination for us, Todd, of more volume and less lease expense. So we are out in the market right now, and as we mentioned in our press release, we have -- or my comments, we have 20% to 30% of our leases that are coming up for renewal in the next few years. We are out -- on the ones where we want to stay longer, we are out negotiating an extension, but an extension with a much different rate than we are paying today.

So we need a combination of both. We need a combination of volume coupled with a reduction in our occupancy costs to make that segment profitable. And I can't predict at this point when that crossover will come. But that's certainly the targets that we are working off of.

Okay, very good, thank you very much.

Thank you, Todd.

Thanks.

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

Thank you. Good morning. I wanted to focus on the upholstery segment and the volume for the last quarter was $225 million, and the EBIT margin was 7.6%. And, just looking, taking a stab, it looks to me like the volumes per quarter in the second half might be fairly similar to the just-reported quarter. And you have gone through the raw material issue, which you then commented you would hope that Mexico may offset that. Let's just assume that it doesn't--?

John, just for clarification, it was Mexico and other cost reductions that--.

Correct, correct. But using a $6 million, I think it was, raw material increase and then assuming Mexico only saves $4 million, I get a 45-basis-point hit to EBIT margins, if you don't get those other cost saves, that leaves us a little room, I guess, for raw materials to go up, what have you. So the question really is, there were several other items that dragged on that EBIT margin of 7.6%. I guess -- I don't know where the consultants come in, maybe that's below the line on corporate. But lower volume, you touched on, lower APU and some "investments" in the future, and it looks to me, obviously, on a year-over-year basis, volumes will be lower, but again, I am comparing -- in the third quarter I am comparing your second half volumes per quarter to the second quarter, and they look, based on revised estimates, like to be fairly similar.

So the question is, really how much lower EBIT margins -- or how they will look in the second half vis-a-vis that 7.6% you just reported in light of lower APU? I assume they're going to go up from that level, I just don't know whether we'll be approaching the 11% levels in the second half last year would be well short of that.

Well, let me try to start from your assumptions. The moderation of the raw material costs, the savings that we could get from Mexico and other reductions, there would not be the consultant costs, which we mentioned was a few million dollars, in the second half of the year that there was the first. So those things all line up to be positive one half over the other half. I mentioned we may front-load the launch of our new marketing campaign as we head through the second half of the year. And I wouldn't anticipate the same degree of drop in our average selling price that we saw in the second quarter compared to a year ago.

So I think you have outlined the elements there, how that translates to what our margin would be, John, depending -- it all would depend then on the volume. But given what we are telling you and the delta coming down on the exact same volume in the second quarter, if we did it the next two quarters, our margins shouldn't slip, it should be a little bit better.

Okay. And then, when you talk about orders, and I will focus on total written, not the comp, I think it was 8.7% negative, obviously you sell other things through your stores than just upholstery. But the majority of it -- the vast majority is upholstery, I assume, and I am just curious as I think about segment revenues and deliveries with those written numbers being down so much, whether we should be assuming upholstery revenue segment year-over-year will be down, similar levels, high-single-digits down in the third quarter year-over-year?

Well, you've got to be careful of drawing a one-to-one correlation there, John. You would notice that we were down same-store sales 7%, but our upholstery revenue was only down 2.5% for the quarter, and a lot of that was the VIE. We've got to remember in our upholstery segment we have two other upholstery businesses that don't sell to the La-Z-Boy stores. And the La-Z-Boy stores represent about 53% to 55% of the La-Z-Boy branded business at wholesale. So the -- we have another batch of business from all of our independent and major regional chains that may or may not be as reflective as the numbers reported for the stores.

So there's not -- you can't just assume that whatever the stores report that that is a direct correlation to what our wholesale business would be. Now obviously if they have a few quarter of down sales consistently, for the Upholstery Group to have an uptick would be a challenge, but there are two other independent companies, Bauhaus in England and then there's all of our other distribution in the marketplace that play into the upholstery wholesale numbers.

And, John, just to clarify so we don't get confused, our VIEs are not in our Upholstery Group, Kurt was talking about our consolidated numbers. So I just didn't want people to start thinking that we had combined them in there.

Okay. And then, Kurt, where are you with -- my recollection was that certain SG&A costs in fiscal 2011 were going to go up versus fiscal 2010 because you were going to revert to giving some contribution to 401(k) or what have you that you had terminated. Is that all still going through or have you changed any thinking on overheads given sales weakening?

When we had the financial meltdown in 2008, we froze a lot of things. We froze salaries, we froze 401(k) contribution, et cetera. When we started calendar year 2010, those things -- some of those things were turned back on, not to the same level that we did in prior years, but our people went a number of years without increases, we did a great job in turning the Company around and then they deserve some recognition. So those two things are ongoing. I think the biggest change that is in the offing is due to the results we had last year, we paid incentive bonuses to the senior team, and without some improved performance during the second half of the year, there would be a difference in what we do year-over-year in that regard. But, no, we are not at a point where we are thinking about going back and freezing a lot of things right now.

Okay. So, I'm sorry, the incentive bonuses for senior management in second half fiscal 2011 could be down from the second half of fiscal--?

No, the incentive compensation on an annual basis year-over-year could be different this year depending on our performance in the second half of the year.

Okay. So there might be some lowering there, but it would be offset by some of the increases you gave employees earlier in the year? Would that be fair?

Potentially.

Okay. Let's see. Oh, and then last thing was, if we are now looking at revenues year-over-year being flat or down, Mike, would that imply working capital might be a source or, with inventory out-of-stock positions being bad, you've increased inventory so that you may not get a source of cash? Just help me with that item. Thank you.

Well, if you look at historically, based on the way our sales volume and our business is cyclical, we are usually building in the fall and then we usually, going into the summer, are reducing our working capital based on our summer volume versus our fall volume. So forgetting about the -- what we do selling-wise or anything, just our normal trend is to increase working capital going -- at the start of out fiscal year, the first six months and then over the third and fourth quarter, start reducing that working capital back down again as we go into the summer.

So for the annual, for the whole year, in terms of working capital, if that's the case that sales have obviously weakened and we are going into a working cap source in the second half seasonally, should we expect for the year working capital to be a source or neutral?

Well, all things being the same, if our business stays about where it is, we shouldn't have any significant changes in working capital year-over-year. Because our business model is such now that we can -- unless something changes in the supply chain, we feel like we have to build things ahead of time or whatever, that's always a consideration, but normally, unless the business picks up -- the only difference will be somewhat, John, that is hard to explain is our 14-week fourth quarter, we will have some impact on working capital because of the fact that we are -- this is that one in six years we have this 53-week year that somewhat skews what our requirements are in the fourth quarter. So there will be some impact on that.

And is that 53rd week a vacation week, shut down week or is that a normal week?

Well, it is just when you have a 5-4-4 year, every six years, you end up having to add an extra week to get the calendar to work right.

No, I understand that. I was just--?

No, it's not a -- we will shift that week and work that week, it is the last week in April. There's no shut downs or that type of thing scheduled for that period of time.

So everything being equal, we'll get a 6% to 7% boost year-over-year quarterly just from the extra week in revenue?

That would be the indication based on if you look at a normal week per year, 6%.

Right.

For quarter, yes, not for the year.

That's what he said.

Correct, for the quarter, Q4.

Yes.

Thank you. Appreciate it.

Thank you, John.

Thank you. (Operator Instructions) Our next question is coming from Barry Vogel of Barry Vogel and Associates.

Ladies and gentlemen, hi.

Hi, Barry.

Mike, I want to beat the dead horse of the Mexican savings one more time so I understand it. Originally, a year-and-a-half ago, you were talking about $20 million in savings if you were successful in doing what you are trying to do in Mexico.

That's based on the volumes we had a couple of years ago, that's correct.

Okay. And, obviously, this does not come about for whatever -- we know the reasons why. And in looking at fiscal 2011, the first question I have, and one of the prior questioners sort of intimated that you didn't have any savings in the first half of fiscal 2011, and you implied on a base of $15 million in savings now as opposed to $20 million in savings that you had announced earlier, that would imply about a $4 million savings if you didn't have any savings in the first half in the second half. My first question is, is that accurate as far as fiscal 2011?

Base on -- yes, and the $15 million is what our volume-adjusted savings would be based on where we are at now, and the 25% to 30% of the $15 million is what we are referring to, that's correct.

So that would be about $4 million and with most of it being in the second half of the year?

Yes.

Okay, and if that's the case, and based on what your volume is now, that would leave, on that $15 million base, $11 million of potential savings for fiscal 2012.

That is correct.

Now, if volume improves from where it is now, do you go back to that ultimate $20 million in savings that you announced a couple of years ago?

We would, Barry, but from the time that we announced the project to now, our volume is down some 20% to 25%, and that's how you go from the $20 million to $15 million. And, obviously, the if the business goes back up to the level that it was before and we get a 20% increase, the savings that we would get on those kits being made in Mexico as opposed to the US would still -- it would still be realized.

Okay. Thanks for the clarification.

You're welcome.

Thank you. There are no further questions at this time. (Operator Instructions). Thank you. There are no further questions. I'd like to hand the floor back over to management for any closing comments.

Thank you everybody for joining our call this morning. If you have follow-up questions, please give me a call and have a happy Thanksgiving. Bye-bye.

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