La-Z-Boy Inc (LZB) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the La-Z-Boy fiscal 2012 fourth-quarter and year-end conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, the conference is being recorded. It is now my pleasure to introduce Ms. Kathy Liebmann, Director of Investor Relations of La-Z-Boy, Incorporated. Ms. Liebmann, you may begin.

Good morning, ladies and gentlemen. Thank you for joining us to discuss our fiscal 2012 fourth-quarter and year-end results. Present on the call are Kurt Darrow, La-Z-Boy's Chairman, 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 to Kurt for his concluding remarks. We will then open the call to questions. 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 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 Chairman, President and Chief Executive Officer.

Thank you, Kathy and good morning, everyone and thank you for joining us on our call this morning. Yesterday afternoon, we reported our fourth-quarter and full-year results for fiscal 2012. Before talking about the quarter specifically, I would like to take a moment to recap some of the highlights for the year.

First, our growth initiatives. On a comparable 52-week basis, we increased our sales about 6%. As you will recall, fiscal 2011 was a 53-week year. For the year, same-store written sales for the 312 La-Z-Boy Furniture Galleries stores increased 9.4%. We developed and introduced a new concept store and opened four stores in that format. In total, across the La-Z-Boy Furniture Gallery network, we added eight stores throughout the year and remodeled and relocated several others.

We continued to move our company-owned Retail segment towards profitability and improved our operating results by about 50%. We increased our marketshare, we maintained our focus on innovation and introduced compelling, stylish and on-trend products that were well-received by our customers and we announced a strategic agreement with Kuka Home, one of China's largest upholstery producers and retailers, to develop the La-Z-Boy brand in Mainland China.

On the operations side, our Mexico-based cut and sew facility is producing efficiently and we achieved our anticipated savings for the year. And with our lean journey permeating all facets of our operations and becoming a part of our corporate culture's DNA, our operations are running efficiently and continuing to reduce costs.

And finally, on the financial side, we posted a 92% increase in our operating income. We eliminated our final consolidated VIE. We generated strong cash flows and we strengthened our balance sheet by increasing our cash and paying off our revolving line of credit.

All in all, a good year. Clearly, the strategic initiatives and changes implemented throughout the past five plus years have gained traction and are increasingly evident in our results.

Moving forward with our brand strengthening, quest for operational excellence and vast network of proprietary distribution, we remain focused on three key objectives -- sales growth, making our Retail segment profitable, and positive conversion on that volume growth.

Now let me turn to a discussion of the fourth quarter. Our results for the period were impacted by a number of issues -- the 13 versus 14-week comparison, a change in our effective tax rate, and $4.2 million in additional incentive compensation, which included a $1.6 million bonus to those employees who do not participate in the Company's annual incentive program.

We also have a $2.6 million increase related to other incentive compensation, including both short-term and long-term stock compensation. As a reminder, last year's fourth quarter included a minimal level of compensation overall and this year, because our results improved significantly, we felt it important to reward each employee throughout the organization as our performance is a credit to every one of them.

Now on the wholesale side, sales for the Upholstery segment increased 0.8% or about 8.5% on a comparable 13-week period. Mike will discuss the 53-week comparable year and the 14-week comparable quarter in a few minutes and help clarify any confusion that may exist with respect to the additional week in fiscal 2011.

The operating margin for the period was 10.1% demonstrating the efficiency of our operating structure across all three of our upholstery companies. As I mentioned a moment ago, our Mexican-based cut and sew facility is fully up to speed and is delivering the cost savings we anticipated. Given the lean cost structure in place throughout our Upholstery operation, any uptake in volume would allow us to leverage our fixed costs and further improve our efficiencies. In other words, we anticipate converting well for earning a higher profit on increased volume.

On the sales side, we were pleased with the same-store sales performance for the La-Z-Boy Furniture Galleries network of stores. For the quarter, the increase was 10% and for the last 18 months, even comping at a high single-digit rate. In addition to marketshare studies on the industry, we believe this rate of increase is the single most important factor in demonstrating marketshare gains.

We attribute the gain to a number of factors, including the effectiveness of our brand platform, an innovative product offering, the perceived value for the consumer and the quality of our product. Additionally, we are utilizing improved merchandising strategies throughout our store network and amped up the style quotient of our product and effectively used Brooke Shields as a brand ambassador to appeal to a wide range of consumers where the message is La-Z-Boy has a broad selection of stylish and on-trend upholstered furniture that would fit into anyone's lifestyle. In fact, we announced in April that we extended our contract with Brooke for another two years and we look forward to building that momentum -- building the momentum the brand platform has achieved to date.

Our independent dealer base feels similarly and together with them, as we advertise cooperatively, we plan to increase the number of weeks on air beginning in September to 29. As a reminder, when we started the campaign 18 months ago, we were on the air for 12 weeks, which helps to put in perspective how successful both La-Z-Boy and our independent dealer base believe the campaign has been in terms of driving a more qualified consumer to the network of stores. As a percent of sales, our spend will remain fairly constant.

Our in-home design business continues to present a significant opportunity to drive volume throughout the Upholstery segment. On average, we increased the ticket threefold if a designer works with a consumer in their home. An additional opportunity and benefit is that the consumer is so pleased with her newly decorated room, complete with accessories, that she is often interested in having our designers work in other rooms in the home where we are able to leverage our complete product offerings and sell bedroom and dining room furniture from our Casegoods companies.

We remain excited about our new store format. Since we spoke to you last, the Company opened two additional stores, one in Chicago and the other in St. Louis, and between the Company and network of independent dealers, there are plans to open, relocate or remodel 10 to 15 additional stores with the Company representing about half of that number. As we have said in the past, we believe North America can support an additional 75 to 100 La-Z-Boy Furniture Galleries stores and that expansion will assist in rounding out the network to achieve its fullest potential.

Across the board, raw materials remain a headwind. We believe we will face similar cost increases of about $16 million through fiscal 2013 as we did in 2012. As a result, we announced a price increase of about 2% at the April Furniture Market to offset these costs and maintain our margin.

In our Casegoods segment, sales for the quarter declined 13.3% or about 6.6% on a comparable 13-week basis compared with last year's fourth quarter. In the absence of a more robust economy, the Casegoods business remains challenged due to the more expensive nature of full room groups. However, we remained profitable for the quarter and posted a 3.3% operating margin.

Our team continues to look to create innovative designs and ways to merchandise their products, open new accounts and gain floor space with existing accounts. Additionally, we are looking to improve the efficiency of our Hudson, North Carolina facility by putting more promotion through that plant, particularly as costs continue to escalate in Asia. At this past April Furniture Market, we introduced three new American Drew groups, which will be made in Hudson, North Carolina, which were all well-received and the production of those groups will begin in August.

Now let me turn to the Retail segment. For the quarter, delivered sales for the Retail segment were down 4.7%, but increased approximately 3% on a 13-week comparable basis. Importantly, the segment's operating performance continued to improve for the 13th consecutive quarter. The group posted an operating loss of $1.1 million versus $3 million in last year's comparable quarter. We are clearly on our way to making this business profitable. Our cost structure is lean and efficient and volume combined with margin expansion is driving the improvement in our performance. Our team is utilizing better selling strategies and is focused on providing the consumer with an excellent, pleasurable and professional shopping experience and for the quarter, both our close rate and average ticket increased.

Additionally, we improved the gross margin by 2.9 percentage points and this reflects the bettor mix if pricing in terms of promotionally priced and regular priced furniture. Striking that balance has been important in our ability to grow our margin.

As I mentioned earlier, we do have plans to open additional stores in the company-owned segment, including three stores in the Pittsburgh, Pennsylvania market where we haven't had a retail presence in the last several years. Our focus is to drive volume and one element of that strategy is to better penetrate existing markets to leverage our fixed cost structure and move into dark markets where opportunities to showcase our brand and develop our marketshare exists.

I will take this opportunity to remind everyone that our integrated retail strategy is focused on branded or proprietary distribution as we believe that is the best avenue to sell our furniture given the changing distribution landscape throughout North America. Additionally, we believe the consumer received a more professional and thorough experience when shopping in a branded outlet. And for sales that take place in our company-owned stores, we are earning a blended margin. That is a profit on the wholesale and retail side on the same transaction with the consumer.

I will now turn the call over to Mike to review our financials. Michael.

Thank you, Kurt. So to clarify our comments today, we are assuming that the extra week of sales for the prior year's fourth quarter and full year represents about a 7 percentage point and a 2 percentage point impact on average respectively when comparing to this year's sales figures.

For the fiscal 2012 fourth quarter, net sales increased about 4% compared with last year's fourth quarter on a 13-week to 13-week comparative. Net income attributable to La-Z-Boy, Incorporated was $20 million, or $0.37 per diluted share, of which $0.19 per share related to antidumping duties received from the CDSOA distribution. These results compare with a $10 million or $0.19 per diluted share, including a $0.05 impairment of long-lived assets primarily related to certain stores in the Company's Retail segment. The impairment also included a charge of $1.8 million related to the Company's California VIE, which was not included in the Company's per share amount due to the adjustment for non-controlling interest.

With respect to the antidumping duties, back in March, the Commerce Department distributed the monies that it had been holding back from the petitioning group of companies. Based on the rulings by the appellate and district courts, we do not believe it likely that we will have to return the money.

For the quarter, cash provided by operating activities was $27 million, including the $16 million in CDSOA distributions. And we ended the year with $152 million in cash while decreasing our total debt to under $10 million as we repaid the $20 million on our revolving line of credit.

Capital expenditures for the full fiscal year were about $16 million and are expected to be in the range of $25 million to $30 million for fiscal 2013, reflecting upgrades to our IT systems, including our ERP implementation, new stores and remodels of existing stores, investments in transportation equipment and the normal replacement of machinery.

For the full fiscal 2012 year, we purchased approximately 0.5 million shares of stock in the open market under our existing authorized share purchase program that has approximately 4.8 million shares remaining. The purchase of shares essentially offsets the shares issued this year through stock option exercises. Going forward, based on anticipated cash flows, we continue to be opportunistic in the marketplace with respect to share purchases and are mindful of offsetting dilution from share options.

Going forward for modeling purposes for fiscal 2013, we expect our effective tax rate to be in the range of 36% to 38%. Since our deferred tax assets still had a valuation reserve recorded in the prior year's fourth quarter, the tax rate for fiscal 2011 was affected by the impairment of fixed assets.

In analyzing our EPS for fiscal 2012, there were a lot of moving parts and we believe there will be less volatility in the EPS line for fiscal 2013 as we are no longer consolidating VIEs and therefore reversing out their results in the non-controlling interest line. We also do not have any significant issues with valuation reserves, which should result in a more normalized tax rate.

I will remind everyone, however, that what is left in the non-controlling interest line are our joint ventures and those operations have been profitable. So a portion of that income will be reversed out and the impact on the EPS line should be minor due to their size.

As Kurt mentioned when he opened the call, fiscal 2012 was a year to look at our operating income line, which increased 92% and this is to analyze the true performance of the Company for the year. As a note, the impairment charge in fiscal 2011 of $4.5 million contributed 29 percentage points of the improvement in operating income.

I will now turn the call back to Kurt for his concluding remarks.

Thank you, Mike. We talked a lot over the past year about driving growth. Accelerating our international expansion is one element of our growth strategy. We already have a significant presence in several markets around the world, including Australia, New Zealand, the United Kingdom, Korea and Thailand, among others. We are both interested in maximizing our presence in those core markets in which we already operate and where the La-Z-Boy brand has developed significant recognition, but also in the emerging and developing markets in the world where motion furniture is not as well known and where we have an opportunity to enter early in the market's evolution such as China.

This past March, we announced a strategic licensing agreement with Kuka Home, one of China's largest stationary upholstered producers and retailers to roll out the La-Z-Boy brand in stores across Mainland China. The partnership is focused on developing, manufacturing, distributing and retailing La-Z-Boy motion products and plans are underway to open several hundred La-Z-Boy stores throughout China, owned and run by Kuka over the next several years.

Joining forces with a capable and experienced local partner who understands and is able to navigate the local market has served us well in the past in other markets and we believe Kuka will prove to be a great partner for us. Going forward, we will commit more resources to our international strategy, allowing us to accelerate the development of other opportunities and to provide support to grow our existing businesses around the world.

Shifting gears for a moment in terms of uses for cash, our thinking has been consistent. First, we want to ensure that we have enough bandwidth to ensure liquidity in the event of an unexpected downturn in business. Following that, our first use of cash would be to invest in the business to drive growth as we believe that will ultimately provide the greatest return to our shareholders.

As Mike mentioned in his discussions of cash flow a few moments ago, our second priority would be stock purchases at a minimum to offset dilutions and our third priority would be dividends.

Overall, we are pleased with our performance for fiscal 2012. Our operating performance significantly improved. We generated strong cash flows and increased our sales. Importantly, La-Z-Boy is well-positioned to grow and to grow at a faster rate than the overall industry due to our brand strength, network of distribution and plans for new store growth. This combined with a solid operating platform will allow us to capitalize on any strengthening of the economy.

Our Company is celebrating its 85th anniversary this year and I am proud to say that the values instilled by our founders remain with us today and believe they would be proud of the responsiveness of our Company due to the rapidly changing industry. We ended fiscal 2012 with some momentum and are beginning the new year with expectations of continued progress. We want to thank all of you for being on our call today and I will turn things back to Kathy.

Thank you, Kurt. We will begin the question-and-answer period now. (technical difficulty) give you the instructions for getting into the queue to ask questions.

(Operator Instructions). Brad Thomas, KeyBanc Capital Markets.

Thanks. Good morning, Kurt, Mike and Kathy. I want to just ask first of all for a couple of points of clarification on the incentive comp. Understand that with the progress you are making in the business, you want to reward employees. Could you just give us a little bit of context in terms of comp over the last couple of years? And also is this something that, had you known what your results were going to be, that perhaps you would have accrued through the course of the year rather than having it all at once here in the fourth quarter? Just hoping to understand a little bit better the context of this.

Good morning, Brad. Fair question. If you go back a number of years, we did not have any incentive comp. We stopped making 401(k) contributions. We stopped making profit-sharing contributions. In the height of the financial crisis, our organization really hunkered down and gave back a lot of things to help us through the tough times. And we felt given the kind of year we were having, this was the start of a process to reward them back to a level that keeps us competitive with everybody else.

We, on the management incentive bonus, last year, we earned about 18% of our financial targets and this year, we will be slightly over 100%. And so that was accrued and looked at every quarter throughout the year and that did not make a big a difference one quarter to another. And you would assume on that annual incentive plan, if we achieve 100% of our targets next year, there wouldn't be a big differential in our comparatives year-over-year.

The two things that changed this year was our incentive stock compensation, as the Company continues to do better, the long-term plan of our three-year stock options, they are performance options, that continues to grow as you move forward. But the real big issue here was the $1.6 million that we decided in the fourth quarter to share with all of our employees on a payout that will convert next year over to a profit-sharing program and we just felt that, given what we accomplished this year and the effort everybody made and we thought it was the appropriate thing to do.

And so that will be -- some profit-sharing payment will be baked into our ongoing cost structure going forward. But it is the right thing to do for our people. They earned it. We appreciate what they did. And that hopefully explains the three components of our stock change -- of our compensation change -- excuse me.

Yes, that's helpful, Kurt. So to follow up on that, zooming out a little bit, as we look to the year ahead of us and we think about the flowthrough to the bottom line from an incremental dollar of sales, what should we be modeling for a contribution margin for this upcoming year? And then are there any specific quarters where that might be different from the annual expectation?

Well, Brad, I don't think we have really changed our position and there is ebbs and flows every quarter. It depends on which of the segments the volume comes through, but we are standing with our previously announced 20% to 30% incremental profit on the sales for next year and that is what we have charged our organization to accomplish.

Very helpful. Thanks, Kurt.

Thank you, Brad.

Budd Bugatch, Raymond James.

Good morning, Kurt. Good morning, Mike. Good morning, Kathy. Let me congratulate the organization for a good year. Kurt, I guess my first question has to do with trying to understand the difference between the company-owned retail sales performance in the fourth quarter and the comps or the written comps for the overall system. I think the system was up in written comps I think 10%. How did the Company compare here -- how did the Company stores compare to that?

Budd, we don't break out the differential, but I would tell you that, for the past 18 months, while it hasn't been similar every month, in the aggregate, the Company stores have performed at or slightly above what our independent dealers have performed. So there isn't a big differential between performance today as far as the percentage increase year-over-year.

What I am trying to get at is I think, in the last quarter, I think the comp for the system was up I think 9% as well and even comparably, the delivered sales for the company-owned retail was up about 4% as you adjusted for the extra week. Can you help us get through that disconnect or is there a disconnect there that we just don't anticipate?

I think, Budd, the disconnect is the increase came through all quarter in the fourth quarter, so there was an increase. Obviously February was the strongest month, but there was an increase in March and April as well that did not get delivered out in the quarter. And so our undelivered backlog in our retail business is considerably higher than it was a year ago.

Got you. Okay. And following up on Brad's question regarding incentive comp, just want to make sure I understand the $2.6 million were basically then an accounting charge for stock options that were granted in the quarter. Is that --?

No, the $2.6 million is the increase over last year. So that is the improved performance and that is the stock comp accruals that we are making for our longer-term plans that are out there.

So there is an LTIP that has that in there; is that what you are telling us?

Budd, this is the annual incentive plan that we are based on when Kurt was talking about we only paid out 18% to management overall in the last year and this year, it is over 100%. So it is our annual incentive. And actually, in our 10-Qs, we have been talking about that our SG&A expense has gone up because of annual incentive payments. The only reason we are specifically talking more about it this quarter is because of our decision in the fourth quarter to pay out the $1.6 million. It made the overall number a lot larger. So we have had increased comp all year this year over last year because we doubled our operating income over last year and we have hit our target. So the only difference this time is we are giving a specific number because it is so large when combining everything else.

Okay. On one of the uses of cash after you get to your -- and I believe your cash requirements -- your liquidity requirement, Kurt, is worth -- refresh me -- is $100 million. Is that [extra sleep] good number?

That's in the ballpark.

Okay. You bought I think 48,000 shares in the fourth quarter and I am just curious as to how you define opportunistic once you make that threshold.

Well, Budd, we are continuing to look at opportunities to invest in the business first. You will notice that Mike outlined our CapEx plans for next year, which are quite a bit higher than last year, but we believe there is justification for that. And we are also looking at other opportunities to accelerate the growth of the business, so that remains our first priority. If we can't find opportunities to deploy our capital wisely, certainly ways to give that back to shareholders through dividends or share repurchases would be considered, but we are sticking to our magnitude of priorities as we have outlined in the call.

Okay. And that did bring me to my last question, which was on the CapEx. Can you kind of outline what that CapEx -- how that -- was it $25 million will be spent this year -- will be allocated?

So Budd, our largest expense is going to -- we started on a journey of converting our legacy systems mainly in our branded business of La-Z-Boy to a J.D. Edwards E1 system and this year is a big year for us. We start to change some of the systems in our plants and go live. So we will spend a lot of money putting that E1 system in and go live this year. That is a large part of it.

We also have aging transportation equipment that we'll need to upgrade as we build that and get some more tractors and trailers. And then with our store growth, even if we do lease them, we still will put $400,000 to $600,000 into a store for putting some leasehold improvements in, putting signage, that type of thing. And then we have machine equipment that's in our manufacturing facilities, especially for upholstery, that have aged that we need to replace.

So those are the main things that we are doing and just a lot more of those. Some we have deferred trying to get the most out of our equipment and now that we have the cash, we need to get those updated.

So is there a bulge in fiscal '13 or does that get to a run rate that you're going to need to keep going forward?

I would say a bulge is probably not -- because we'll have other -- hopefully we will be adding more store as we go into '14 and on. But for the E1 cost and the transportation cost, I think that is more of a bulge on those things because we will not be spending that much money on the E1 system every year. This will just be a big year because we are starting to go into our plants and start getting a lot of updates throughout the plants.

I think, Budd, to answer your question in a different way, I think in some previous years, we have been a little light. This year, we may be slightly heavy. Probably the run rate the business needs is somewhere in between the two.

And just the size of the E1, (technical difficulty) transportation, commitment is how much?

I would say 30%, 40% of the cost of that. It is hard to say because it depends on how everything falls out during the quarter. I mean during the year, I'm sorry, because we will have certain things staged when we order them versus when they actually come in.

30% or 40% of the $25 million or 30% to 40% of the --?

Yes, of the $25 million to $30 million, yes.

Is for the E1 and the transportation. Thank you very much. Good luck on the upcoming year.

Thank you, Budd.

Todd Schwartzman, Sidoti & Company.

Hi, good morning, all. I wanted to just look at the gross margin a little bit, specifically for the full year. What is your outlook for poly and in fact all foam-related materials? And also what percent of cost of sales is represented by foam?

Well, Todd, we mentioned in the call that we are looking at raw materials in general going up $16 million to 17 million. Poly being the largest component of that -- of the increase and poly is a little bit more than 10% of our total raw material spend, so it is a significant --.

On the Upholstery side.

Yes, on the Upholstery side, it is a significant number and that is the one where we are seeing the most pressure today.

And on a total COGS basis, if you would, Kurt, what is the approximate (technical difficulty)?

Todd, we just are not giving out details of our cost of sales just yet as we've moved to this lean journey and going on the E1 system. So we are just not giving more details out on the portion of the cost of sales contributed to each one of our categories.

Okay, fair enough. But on the Upholstery side, it is a little more than 10% of total raw materials?

That is correct.

Okay, great. Yesterday, a competitor said it saw traffic moderate essentially since the early part of May I guess until today versus prior months, not a year ago I guess. Any thoughts on that? What are you seeing on that front in terms of traffic since the fiscal year began?

Well, Todd, we have had this phenomenon all year of frankly slightly down traffic, but fairly good results. So that did not change in the fourth quarter and that has not changed in the first two months of our new year. So our traffic remains slightly down, which we attribute part of that is the consumer doing more research on line before she shops and may not be shopping as many stores as she used to, but it doesn't seem to have negatively impacted our results at this point. And our momentum so far in the May/June period has been consistent with what we saw in the fourth quarter.

Just to be clear, I was interested more on a sequential basis versus the prior year period, so looking at May and June compared with January February, March, April.

Well, we always have a seasonal downturn in the summer months, but I am not going to make any comment about May and June, being more specific than that, but it is -- this is the ebb and flow of the furniture business. Seasonalitywise, the summer slows down and obviously we are seeing that, but, on a relative basis, we are performing consistently with how we finished last year.

Okay. How did Kurt -- you didn't really talk too much today, thus far at least, about product innovation. I am curious about the power recliner, the XR and the XR+. Can you give us an idea of either what the expectations are or based on what's shipped of late in terms of the number of recliner units that are now shipping with either the power recliner XR or XR plus and what the margin impact of those higher end models are?

Well, I don't have those specific numbers to give you, Todd, today and really the power XL is just getting shipped out to our dealers today, but we are very bullish on power. We saw percentagewise significant increases in power last year. We think it is going to continue to go forward. I think we talked on a previous call that, in Europe, the power category is 50%, 60%, sometimes 70% of their total business in the UK and other markets, so we are very bullish, Todd, and I don't want to give you a projection now of how much we -- it is a great thing. It is value-added. It is probably not that significant in increased margin, but it has increased dollars for our dealers and ourselves, so it changes the average sales significantly.

So we are bullish on power. We think we are in a unique position to be a dominant player in that area. You will walk into our stores and see power front and center. And so we think it has got a great growth trajectory for the next couple of years.

Okay. And on the retail front, with the return -- or planned return to the Pittsburgh area, I am wondering -- curious about what might have changed for the better since you exited that market. It is a combination of the Company and the market? Is it more La-Z-Boy or what is going on there?

Well, to clarify, Todd, the Company never had its own presence from owning the market in Pittsburgh. We had a dealer there for a long time. They became a VIE. We tried to keep that business going and we decided to shut it down because I think times were different, the way we ran the business was different. We had some locations that we weren't comfortable with and we made a change.

Then we took the line and sold it to a general dealer in Pittsburgh and we had some success, but unfortunately, in the 2008, 2009, I don't know, in my eyes, that dealer had financial problems and went out of business. So it bothers me greatly to have markets the size of Pittsburgh where you can't buy La-Z-Boy. So we analyzed our opportunities, we considered a couple of people that were interested as an independent dealer. We considered the dealers there, but we thought the best way for us to penetrate that and get our marketshare out of that was to do it ourselves through the company-owned stores. So we will be opening three stores over the next year in Pittsburgh. We think it is a good market. We think it is slightly underserved and we have expectations of doing quite well there.

And the estimated store opening dates?

I think we will have two of them open before the holidays and the third one will be sometime late spring, early summer of next year.

Great. Thanks much.

Thank you.

Matthew McCall, BB&T Capital Markets.

Thanks, good morning, everybody. So Kurt, you talked about traffic being down, but you've had good results. And I think in the past, you maybe provided a little color around what is going on with conversion and what is going on with the average ticket. I think you mentioned it's somewhere, but I don't (inaudible) hearing any numbers behind it. Can you add any color there?

I don't think so, Matt. I think, as I said, this is not new, this traffic, this traffic being down slightly has been a consistent theme, but we still had 18 months and close to double-digit sales increases. We do believe that the customer who is coming in, in a lot of cases, is a new customer that we are reaching through our brand platform and we think she has a better understanding of who we are and what we offer.

And our sales of stationary furniture, so sofas, occasional chairs, living room furniture, that is definitely outpacing the rate of growth that we have in our motion furniture business, but we have a much higher marketshare in motion furniture than we have in stationary and part of our strategy is to accelerate our growth of our stationary furniture and obviously that is primarily what we are advertising with our brand platform, so there is a direct correlation through that.

But yes, we mentioned the drivers in the press release and in the call that our average ticket and our close rate were up slightly for the quarter and our margin was that that made the difference in our results, but to quantify them to any great degree, we are not going to do that right now.

Okay. What about the demographic trends? Do you have any data that says your customers are changing, is it younger or maybe more affluent? Is it just the impact of the brand efforts just having -- or is causing a change to who is coming in the store?

I think it is still a little early to have any definitive opinions on that. We are going to do some other market research in the late summer, early fall on the change on that because we've really only been on the air here less than 18 months with Brooke and it isn't going to change overnight. We still skew a little bit older than we would like to long term and it is not that -- we don't have any issue with our customer base, but if we are going to expand our current base, we believe the base we want to expand with is a slightly younger customer than our current base.

Okay. So I think you mentioned an incremental margin target and Mike, this might be for you. Remind us of the cost savings that you recognized in Q4 of 2012? Specifically I am referencing I guess Mexico and versus Q4 '11 and is everything at this point recognized and now we're just going to see the benefits of leverage?

That is probably a pretty good statement there, Matt. We were saying that we would get about $2 million, $2.5 million a quarter from Mexico. That was about $10 million this year over 2011. We pretty much did that plus or minus a couple dollars every quarter. So that pretty much is now anniversaried against the 2011 year. So this year, most of ours will be on making sure that we efficiently are running our plants, that we are -- on our fixed costs and SG&A, especially in retail, that the volume will be effectively converted on that and any other cost savings that we have will either offset -- what we normally do in our labor increases and cost per benefit, that type of thing that we will have to overcome and our price increases that Kurt talked about would offset our raw material price increases.

But, Matt, your expectation is we probably won't call out Mexico like we have the last couple years. It is now at a maturity level. If we are able to increase our volume, which is our expectation, it will cover more of their fixed, but the dramatic savings that Mike talked about last year quarter-to-quarter, we are not going to see that -- we are not going to see that going forward. It will be the incremental piece that we get on a consistent basis.

Okay. And then following up on that, you mentioned the retail gross margin was up (technical difficulty). It sounded like it was mostly mix-related. Is there anything from a mix perspective less [fair] or is that also just a need for more volume now?

It is pretty much for volume. I mean the mix that is changing is our stores, both the Company and our dealers, are selling more rooms, they are selling more multiple pieces and that is part of our strategy to not be an item house, but to be a room house and so that is helping. But I don't -- in staying competitive and balancing our sales and volume needs versus our margin needs, I don't think we are going to experience the same kind of expansion in our gross margin in our retail business next year as we did this year. But it is still a very healthy gross margin at our retail business today.

Okay, thank you very much.

John Baugh, Stifel Nicolaus.

Good morning. Congratulations on nice share in a tough environment. A couple of things. I wanted to first follow up on Budd's questioning about the difficulty of getting to a 3% retail number when written orders in the prior quarter January as well as this quarter were both up close to 9%, 10%. Did you write a bunch of orders say early in the January quarter that resulted in a low backlog going into this quarter to ship and then the orders written here were skewed late in the quarter, so again you didn't ship much in this quarter or is there something else going on there?

Well, that would be part of it, John. I think if we look back over the various months, the last six months, our January written did not meet our expectations and then February and March and April have been very strong. So there is an ebb and a flow and we had a little bit of an issue earlier in the year about keeping up with demand because it changed around the holidays and we did have some fabric outages and some service issues. So that affected not only our own retail, but our other customers as well. So it is just a lag factor here that we will get caught up on and you can't write a 10% comp forever and deliver at 4%. We get that. But it will balance itself out as we go into next year.

Great, thank you. And then on Casegoods, Kurt, this has just been a steady decline for years, certainly another cyclical element here. I guess the question simply is can we still do with what I believe is largely a variable cost model still of 3%, 4%, 5% EBIT margin if sales go lower and lower and lower or do we need, because we do have some capacity still here, sales to stabilize and will this introduction that you are talking about shipping in August allow that to happen or are we looking in your mind at continuing declines in Casegood revenue going forward?

Well, to answer your last question first, John, we would not anticipate our Casegood business to continue to go lower and lower. We may have some Company-specific issues that we need to work to deal with, but I think the Casegood business in general is certainly in the industry not keeping up with upholstery and bedding. So we have got to look at the comparative subset that is out there.

We still have about 20% of our sales being made at our Hudson, North Carolina plant. We need more volume to go through that plant to have it be efficient and profitable. And so with a variable model on the 75% of our business, as sales would go down, we shouldn't have an issue with controlling that. But the pressure on the plant to produce enough volume to be productive is where our pressure point is right now and that is what we are working on and looking at some options and trying to see what we can do to get more volume through there. At this point, we have not changed our expectations that this business can produce an EBITDA of a mid-single digit.

So the decline that we saw of 3%-ish or whatever it was for the quarter was solely attributed to the lack of leverage on the US production?

Well, that and some of the volume. I mean not all of your costs flex when you go down. You have got your fixed cost. So the combination of lower sales and not covering your fixed are the same as you would with higher sales and the challenges we have at the plant were the two main drivers.

Got it. And then just quickly circling back on raw materials again, I know there is a lag impact of probably what goes through your P&L, but I am just curious, with oil having backed up fairly substantially here, what is embedded in your forecast because obviously a year is a long time and I appreciate that the raws going through the P&L maybe for this quarter and even next quarter are a byproduct of what has already happened, but do you anticipate further increases from here or some level of relief or just flat? I'm just kind of curious about the assumptions.

It is very much a moving target, John and the number we gave you, the $16 million, $17 million is what is embedded in our plan for the year and every month, we get some commodities with a little relief and then the next month, we get those that go up. And so right now, that is our best guess. That is what we put together with our plan. That is what we are seeing here in the first quarter, but it's volatile, it changes quickly and our real visibility into the second half of this year for raw materials is not that good to be candid. So we are going to stick with where we are at in our planning.

Great, thanks. Good luck.

At this time, I'll turn the floor back to management for closing comments.

Thank you, everyone, for being on the call today. If you have follow-up questions, you may give me a call. Have a great day.

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