La-Z-Boy Inc (LZB) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the La-Z-Boy fiscal 2013 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 Incorporated. Ms. Liebmann, you may now begin.

Thank you, Rob. Good morning, everyone, and thank you for joining us to discuss our fiscal 2013 first-quarter results.

With us today 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.

With that let me turn over the call to Kurt Darrow, La-Z-Boy's Chairman, President, and Chief Executive Officer. Kurt?

Thank you, Kathy. Good morning, everyone, and thanks for joining us this morning on our call.

Yesterday afternoon we reported our first-quarter results for fiscal 2013. We posted a 7.6% consolidated sales increase for the quarter, a 9.2% same-store written sales comp for the La-Z-Boy Furniture Gallery store system, and a delivered sales comp of 17% in our own company-owned retail segment. We also continue to improve the performance of our retail operation, narrowing its loss for the 14th consecutive quarter.

And, in addition to increasing sales in all three business segments during the quarter, we more than doubled our operating income, reflecting our ability to leverage our lean cost structure. We are pleased with our results, particularly given the seasonality that impacts the industry during the summer months. And as we noted in June, when we reported strong written orders for the fourth quarter the pace of delivered sales in our Upholstery and Retail segments accelerated during the first quarter as the strong written orders from the past several months flowed through to our delivered sales this period.

As we move into the fall, we believe we are well positioned to capitalize on what is typically a stronger selling season. Our marketing initiative is driving more qualified consumers to our stores and dealers, our operating structure is lean, and we are in good service position with respect to fabric and leather inventory.

Importantly, we are using our financial stability and resources to invest in the business at all levels, including our increased marketing spend, our infrastructure, inventory levels, new stores, as well as remodeling stores to continue to drive growth while keeping a keen focus on retail profitability and conversion on our additional volume.

Let me take a few moments to discuss our three operating segments. Sales for Upholstery segment increased 9.5% for the quarter and the operating margin for the period was 6.5% compared with 5.1% in last year's first quarter.

Our brand platform marketing initiative featuring Brooke Shields continues to gain traction and we believe it is driving a well-qualified consumer to our stores and our dealers, one who has become more knowledgeable about the breadth of our offering. We have seen the success of the marketing initiative with stationary furniture growing at a faster rate than our traditional motion business and consumers stepping up to buy more full room groups rather than one piece at a time. Our advertising year technically begins in September and we have already kicked it off with one of four new commercials featuring Brooke with another one about to begin airing just ahead of Labor Day.

We also produced several new print ads and our digital content for the Web. As we reported last quarter, our plan is to be on the air for about 30 weeks during this coming year, which is more than double what we were when we initiated the campaign less than two years ago. The fact that La-Z-Boy and our dealer base are committing additional resources to the campaign speaks volumes for our collective belief in its success. Although we are increasing our advertising spend with the additional airtime, as a percentage of sales on an annual basis it should remain fairly consistent.

We are also pleased with our Internet traffic with unique visitors to our website up 20% during the quarter. And that is just to our core site. Our mobile site is also seeing very high traffic.

In terms of e-commerce, over the past 18 months we have seen solid year-over-year increases in online sales, although it is still a small piece of the business as most consumers want to touch and feel furniture before they purchase it. But the fact that they are going to our website -- and importantly we have noticed a fairly high correlation between our weekly web traffic and our retail sales, which indicates that a significant percentage of our customers are visiting our site and doing research and selection on the web before visiting a store.

Finally, the pace of same-store sales for the La-Z-Boy Furniture Gallery network remained strong at 9.2%, which bodes well going forward. This quarter marked more than a year-and-a-half of high single-digit same-store sales increases and, as we said last quarter, we believe this is the single most important metric supporting our belief that we are gaining market share.

On the operating side, our facilities are lean and efficient and we increased our operating margin during the period on the increased volume. Moving in the remainder of the year we believe we will realize even greater efficiencies through our manufacturing facilities compared to the first quarter when our plants were closed for one week of vacation and scheduled maintenance.

As I mentioned earlier, we are keen to invest in opening new stores to drive growth throughout the Company and, with the performance of our marketing initiative and solid same-store sales comparison, our dealer base is also interested in adding additional stores. During the first quarter two stores were opened within the La-Z-Boy Furniture Gallery network, another one was relocated, and one was remodeled. Two stores were also closed during this period.

For the second quarter of the plan is to open three new stores, relocate two, and remodel two. For all of fiscal 2013 there are plans to open six new stores, relocate four, and remodel nine. The Company (technical difficulty) will represent approximately 40% of all of these projects.

Opening stores to obtain better penetration throughout North America is integral to our growth strategy. With underserved markets as well as several dark markets, there is significant opportunity for us to build on our store system and increase our distribution while growing market share within our Upholstery business.

In our Casegoods segment sales for the quarter increased 1.4% and the operating margin for this segment improved to 3.7% from 1.6% in last year's first quarter. During the quarter we experienced better sales performance with our occasional furniture as consumers across the board continue to show reluctance with respect to making higher ticket casegood purchases, such as full bedroom and dining room groups. History tells us that new homes tend to drive the purchase of those room groups and until housing starts to strengthen in a meaningful manner we believe this portion of the casegoods industry will continue to face challenges.

During the period we continued to work on the cost side of the business. That combined with better merchandising and more effective promotions enabled us to deliver a better performance for the segment. At the same time our team is working to broaden the price points of new furniture introductions, particularly at Kincaid and American Drew to enable us to appeal to a wider consumer base and enable us to gain space on dealers' floors.

Additionally, as we mentioned last quarter, we introduced several new American Drew bedroom groups at the April furniture market which were well received. Production of those groups will begin this month in our Hudson, North Carolina, facility, which will provide for higher capacity utilization and should increase operating efficiencies at the plant.

Now let's turn to the Retail segment. For the quarter delivered sales for the retail segment increased 17% compared with the first quarter of last year. In addition to our ongoing order rate, the increase was partially the result of fourth-quarter written orders for the company-owned stores moving through to the first quarter. During the period we continued to increase the average ticket, which lead to higher margins, and we increased our close ratio, both of which drove our results this quarter.

As I mentioned earlier we continued to improve our performance in the segment and are steadily moving (technical difficulty) towards profitability. Assuming sales comps continue at a steady pace, we believe we will see profitability in the latter half of this fiscal year. The caveat to that would be as volume declined or performance was temporarily offset by significant new store start-up costs.

As I mentioned earlier, we are opening stores in the company-owned retail segment including three new stores in the Pittsburgh, Pennsylvania, market. During the first quarter we opened one new store and for the full year we will open four. At the same time, we are also refreshing approximately 20 existing stores with paint, carpeting, new fixtures, and accessories to give them a more current up-to-date look and feel that is more in keeping with the new concept design.

We believe now is the time to invest in our company-owned store network as opportunities arise that are in line with our cost formula. In addition to driving volume with new stores, opening stores better penetrate markets where we already have a fixed cost structure will also improve our performance in this segment.

Last week we announced that we intend to acquire nine La-Z-Boy Furniture Gallery stores and a distribution center in southern Ohio. The stores are in Cincinnati, Columbus, Dayton, and a combined annual revenue in calendar 2011 of approximately $30 million. We are purchasing them from two retiring dealers, Elliott Hilsinger and Walt McBeath, who agreed that selling the stores to us would be in the best interest of their employees by providing for the greatest stability and continuity of the business.

I would like to take a moment to thank Elliott and Walt, who since 1975, when they opened their first store, have built a vibrant business throughout southern Ohio. They have been excellent to work with over a more than [45] year period and we appreciate their commitment and dedication to the La-Z-Boy Furniture Gallery store system and to our company. We wish them all of the best in their retirements and, again, we thank them.

The nine stores and distribution center will become part of our Retail segment, bringing our company-owned store count to 94. We are paying approximately $18 million in cash for the operation, which has been a solid and consistent performer, and we expect it to be accretive to our earnings. The transaction is expected to close in October.

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

Thank you, Kurt. As Kurt mentioned, for the fiscal 2013 first quarter net sales increased 7.6% compared with last year's first quarter. Net income attributable to La-Z-Boy Incorporated was $4.4 million, or $0.08 per diluted share, versus $45.5 million, or $0.85 per diluted share, of which $43.4 million, or $0.81 per share, was attributable to reducing our valuation reserves against our deferred taxes.

For the quarter, cash used for operating activities was $15 million which is typical for our first quarter. We also transferred $15 million into longer-term investments and restricted cash accounts during the period to increase our return on investments and reduce costs on our letters of credit. As a result, we ended the period with $113 million in cash and equivalents and decreased our total debt to $7.8 million.

Our inventory increased during the quarter, primarily as a result of our planned increase of fabric and leather levels to improve our in-stock position as we move into the traditionally stronger fall selling season. Liabilities decreased during the period, mainly due to our physical 2012 annual bonus payout and the seasonality associated with the summer period.

Receivables also decreased compared with the fiscal 2012 year-end due to one less week of shipments resulting from the one-week shutdown of our plants.

During the quarter we purchased 300,000 shares of stock in the open market under our existing authorized share purchase program that now has approximately 4.5 million shares remaining. The purchase of shares essentially offset the shares issued during the period through stock option exercises. Going forward, based on anticipated cash flows, we will continue to be opportunistic in the marketplace with respect to share purchases and are mindful of offsetting dilution from share options.

Capital expenditures for the first quarter of fiscal 2013 were $5 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 remodeling of existing stores, the normal replacement of machinery, and costs relating to the land acquisition for our new world headquarters.

During the quarter we accrued $3 million more in incentive compensation costs relating to the profit sharing and stock compensation plans versus last year's first quarter. The increase relates to the three-year performance-based share plans, our new profit sharing plan, and stock option costs reflecting our improving performance and awards granted. If our performance trend continues, we would expect the quarter-over-quarter comparisons to be higher in the second and third quarters and as we reached the fourth quarter more in line with last year's accrual.

For the quarter our effective tax rate was 37% and last year's first quarter the tax rate was greatly impacted by the release of a portion of valuation allowances relating to the US federal and state deferred tax assets. Going forward for modeling purposes for fiscal 2013, we expect our effective tax rate to be in the range of 36% to 38%.

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

Before moving on to closing remarks, I want to take a moment to comment briefly on the announcement we made last week regarding the options we are exploring to build a new world headquarters here in Monroe, Michigan.

This year we are celebrating our 85th anniversary as a company and we have spent the last 85 years at our current location. While it has grown over that period and served us well, it is time for us to build a new corporate campus to house our some 500 corporate employees. We are excited about moving into a location that is in concert with our evolving image as a truly global organization and where we can host customers, partners, and suppliers from around the world.

Continued upon approval of state and local incentives, at this point in time we are focused on a land purchase agreement with the sisters of the Monroe-based Immaculate Heart of Mary Order, and the proposed concept would involve the acquisition and development of a significant tract of land currently on their Monroe campus. Importantly, we as a company are committed to developing a LEED-certified building, utilizing recognized sustainable building practices, and revenue from this agreement would enable the Order to continue the development of their campus as a learning lab for sustainable living as well as to sustain the mission and assist with the congregation's retirement needs.

Because the project would be a large undertaking for us, it will only be feasible here in Michigan with financial support and assistance from the state and local community. As things evolve, we will update you on our progress, but suffice it to say, we are excited about this new undertaking.

As we move into the fall, which is typically a stronger selling season for furniture, we remain cautiously optimistic. We firmly believe we are well positioned to continue to build our market share given the strength of our brand, the success of our advertising campaign, our vast network of La-Z-Boy branded distribution outlets, and plans for store growth. Furthermore, we believe we are poised to capitalize on an improving economy, particularly as housing and consumer confidence strengthens. Importantly, we are in a position to strategically invest in our business and we remain committed to doing so with our investments in new stores, infrastructure, and marketing spend to ensure we position ourselves for growth and differentiate ourselves from the industry landscape.

We want to thank all of you for being on our call this morning and I will turn things back to Kathy.

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

(Operator Instructions) Brad Thomas, KeyBanc Capital Markets.

Thanks. Good morning and congratulations on a great quarter here. Wanted to just follow up on the performance in the Casegoods segment. I think this is the first quarter in over a year that there has been growth in that segment. Obviously we would all love than to continue.

What do you think has caused the turnaround here and how sustainable do think it is, Kurt?

Well, that is a good question, Brad. As I mentioned in my comments, in our business this quarter, and it has been improving the last couple, we put more emphasis on occasional furniture and tables and things of that nature that are more item specific, because the industry and our own Casegoods group is struggling with the large bedroom and dining room offerings. The mood still isn't to make large purchases of those products and they are very influenced by new housing starts which, obviously, aren't going on.

So a little more emphasis on occasional furniture has helped us. That is not to say that we are not selling bedroom and dining room, but we are certainly not selling at a pace we would if there was more robust housing.

So when you drill and look at units versus the ticket is there anything going on there that is helping to stabilize the business?

No, actually we are probably selling more units because of the cost of occasional furniture at lower dollars. So our unit count is up significantly, but it is not -- our average selling price is probably down.

Got you. Just, secondly, on SG&A. Mike, I think you said in the quarter the consensus comp was up $3 million year over year and if you continue to have good results in the second quarter and third quarter it would be up again. Should we expect a similar magnitude of an increase in 2Q and 3Q, or what are the drivers that we should look for in terms of how we model that?

I think what I am just trying -- progressively it will probably get more in line as the year goes on, but there will be -- and, again, as long as sales continue to be driven the way they are and we are able to do the things we want to do that is what I am referring to. Of course, the second quarter will be an interesting quarter with all the other things going on in the world. But it will progressively get more in line with the prior year, so I guess you just kind of have to model [decreasing] differential as the year goes on.

So to be clear it should be less than the $3 million, unless you all have a phenomenal quarter?

Yes, that depends on performance, Brad, but, yes, if we stay at a pace we have been on the first quarter should be the biggest differential year over year as we see it today. But, again, that is a moving target every quarter based on our performance.

And in some cases our stock price. So it is a lot of moving parts so we are trying to give the best information we have at the time as we move forward.

Got you. Congratulations, again, and best of luck.

Budd Bugatch, Raymond James.

Good morning, Kurt, Mike, Kathy. This is actually Chad filling in for Budd. Let me add my congratulations as well on another solid quarter.

Quick question I guess, with regard to the Ohio stores can you help maybe quantify for us the level of profitability of those stores? Kurt, you talked about getting to profitability in Retail in the latter half of this year. Once you have those stores in the fold what kind of quarterly revenue run rate do you have to hit to get to breakeven?

Let me tackle the first part of your question first. The performance of these stores would place them in the higher tier of our performing retail stores today. We have always talked about our Baltimore-Washington market being our best market in terms of operating leverage and this southern Ohio market would be at that level.

And so I haven't really done the math. I believe that we always talked about a volume level in our current 85 stores somewhere above $60 million, $62 million given the 85 stores. Now we keep opening new stores and spending some money so that level is going to go up, but we were modeling and planning for the core 85 stores to become profitable without the southern Ohio acquisition in the second half of the year.

Everything goes like we expect for the southern Ohio that just gives us a little more impetus to have a little higher profitability here as the rest of the year and next year rolls out. Again, for us, because of our high occupancy cost on the core stores, it is all about volume and as long as we can continue at this pace we should be able to get there. That is probably the wild card.

Okay. I know raw material costs were a drag in the quarter. Mike, can you quantify for us in terms of dollars what that was? And are you still thinking that $16 million or so is the right number for the full year in terms of being headwinds?

We haven't really gone into quantifying quarters. We have just given the annual amounts. We are kind of in a quandary right now where things aren't really coming down all that much, so we are trying to refigure that as we look at the second quarter, look at our contracts. We will probably be giving more of a flavor of that going forward, but I don't think we have done enough insight into what is going to happen in this quarter to know if it is going to continue to go up or it is going to subside and plateau out.

So we are still working through that, but we don't do as many long-term contracts so we don't have as much visibility in all of our supplies. The economy has just kind of decided what it wants to do on its own going forward, so we are just trying to get as much visibility as we can.

The quarter was impacted the rest of the year. We still believe that $16 million to $18 million is the number that is out there. We are just not so sure whether we will get some relief from that in the near future.

Okay. Similar to what we have heard from you in recent quarters, you talked about ticket and conversion as [comp] drivers and I know traffic has typically been a bit negative. Was that the case again this quarter and has there been any significant change in terms of the cadence of traffic from what you have been able to tell?

No, there really hasn't, Chad. Our traffic was essentially flat and that is why I talked a little bit about our web traffic and the interest. I just think there is underway a fundamental change in the way people shop, particularly for big-ticket furniture. Using the Internet to get more research to narrow down your choices; I just don't believe people are physically shopping as many stores as they did 10 years ago.

We like this correlation of watching our web traffic and our same-store sales. We will see if that continues here and continue to report on that. But we are just being more productive with the traffic we are getting and I think that is a testament to our sales teams. I think the customer who is coming into La-Z-Boy stores today is more knowledgeable [of] the product and services we offer and that helps our close rate. We are watching that but the traffic still is relatively flat.

Okay. Thanks for taking my question, guys. Good luck to you on the rest of the year.

Todd Schwartzman, Sidoti & Co.

Good morning, everyone. Did you quantify the expected accretion of the Ohio stores?

We have not.

Would you like to take a stab at that?

We would not.

Suffice to say, this is a good business. We are pleased to be in a position to purchase a profitable retail business. A lot of our work to date is taking over unprofitable ones and turning them around.

This is not a turnaround strategy. We have a gentleman who's going to run the business for us that has been running it for the two owners for the last few years, so we expect an easy transition. But this is a very solid business that we are pleased to have as part of our portfolio.

So these stores, just to reiterate, these are at or near the top of the heap along with Baltimore and DC, is that correct?

Their earnings, their operating income on their sales would be in the top tier, along with all the stores we have in our portfolio.

Would you care to round out the top five, Kurt, just to give a sense of geographical strength?

No, it is not really geographical strength. It is the condition the businesses were in when we bought them and our ability to get stores relocated and the markets done. All my comments the last five minutes have been about within our own 94-store now network; it is not about the whole 312 stores. But within our own network these will be a solid contributor to our Retail division.

Understood. Can you maybe you say a little bit about the effect of pricing in 1Q -- ASPs, promos, and maybe talk about the extent to which traffic and close ratio improved in July over June?

Well, we give you our statistics on our Retail business for the quarter. I don't want to get into month to month and go into that kind of a detail.

But we took a price increase in the spring; it is starting to flow through. But we have also, as Mike indicated earlier, with our $16 million to $18 million anticipation of raw materials, we have got about 20% of that in the first quarter. We are seeing some fluctuations with pricing right now on raw materials, but nothing to the extent that we would change our mind on our expectation.

So that seems to have flown through and it hasn't caused a hiccup in volume, so we are hoping that if raw materials will moderate here going forward we will be able to go through a year here without having to take major price increases like we have had the last couple of years.

So poly pricing, for example, is within a reasonable -- the fluctuation area is within a reasonable band at this point.

Yes, both poly and steel are within a reasonable -- yes, poly and steel. The one that is jumping a lot and hard to get contracts on is plywood.

The leather, our cover costs are fluctuating as well. We have talked more about the steel, the poly, and the plywood but the cover fluctuates pretty significantly at times too, especially leather.

Speaking of covers, Mike, any update on the Mexican moderation?

Todd, I will handle that. We gave you for three years quarterly updates on how Mexico was progressing. It is at a mature state now. It is part of our six operations within our branded business, so we don't report out on our individual plants in the branded business.

So unless there would be a major change or some kind of hiccup, you won't hear us reporting out specifically on Mexico, because we think it is the ramping up and the huge savings that we had year over year. Now it is going to be -- as we drive volume we should convert better, we should be able to cover our fixed overheads. But there is nothing significant to report on that and we have decided we are just going to talk about the business in total instead of singling out Mexico.

Okay. Finally, how should we think about -- for the balance of the year, how should we think about the incremental manufacturing efficiencies that you are expecting?

We are still on the -- there is all kinds of oddities that will happen there and we have talked about the compensation, but we still expect to, on the incremental dollars, to convert at the 20% to 30% realm. We have talked a little bit about the fact that we open more stores up and we spent a lot more time refreshing stores and building for our future. We may have some offsets to that incremental volume, but it is still our call that 20% to 30% is incremental operating margin that we will receive on incremental dollars that we sell.

Okay, that is all I have. Thank you.

(Operator Instructions) Matt McCall, BB&T Capital Markets.

Thank you. Good morning, everybody. So I am actually going to follow up on that last question. Mike, you said 20% to 30% the target. Just understanding some of the puts and takes I think, Kurt, you said that ad spending is going to remain flat as a percent of sales. I'm not sure if that has been a leverageable item in the past. Mike, you just mentioned incentive comp.

The other thing I wrote down was the improved utilization in Hudson and then I'm still not sure how to look at price costs. It sounds like cost is okay; I didn't understand the price element of that. Are you at parity there? Are you going to get some net benefit, net pain?

So if you net all those out were you saying net of all those we are at 20% to 30%, or we start at 20% to 30% and then we have to adjust for all those?

Let me take a stab at that, Matt. First of all, some of these investments we are making, the marketing spend and the store, we are expecting to do more volume. We wouldn't be making the investment. If we don't do more volume, our conversion will go down slightly. There will be no more sales; our conversion would go down. So we are taking the position that these investments are going to generate more sales that can help our conversion.

On the pricing issue, we mentioned that we took price to counteract the raw materials and we took enough price to not only cover the raw costs but also to cover our margin. So we expect our pricing and our raw material build to be neutral.

And so I guess the last wild card is the compensation, which has been higher than normal based on improved performance. And that may have some effect, so let's say on an average we would like to be in that range, in the higher end of the 20% to 30%. It might put us down a couple of points depending on how we are doing things.

But we haven't seen enough evidence yet to say that if the pace of business continues like it has been the last few quarters we are still believing that we can convert at these levels.

Okay. And this might be repeating myself a little bit, but the corporate overhead number. As I look back the last four years Q1 to Q2 it has gone up anywhere from 15% to 70%. Just trying to understand what the seasonal impact is on that item that you break out. Can you tell us how to look at that as we lookout into Q2 and what would make it go higher?

In this quarter as if you -- we just put our Q out last night. If you look in there, we had $1 million reserve reversal that we talked about last year in our last year Q, and that affected corporate and other, relating to an environmental reserve on an acquired company that we were able to get out of that obligation.

So that was last year. Then this year we have the additional comp that went into corporate and other that made it a little more skewed on the year-over-year adjustment. So going forward we don't have any of those other one-offs in the prior year of any significance and we will just have the compensation going forward that will be reflective.

And we think that we will be on a steady cadence after that is what our current anticipation is. I don't know of anything that is significant that I can give you that would make a difference there at the present time.

Okay. So just look at that incentive comp on a year-over-year basis and look at the cadence of last year as a guide?

That is the best information I can give you right now, yes.

Okay, that is fine. Then, Kurt, I have asked this before but can you talk -- I think there was a question about traffic and ticket conversion. What about mix and then what about demographics?

What have you been able to learn, if anything, from who is coming in the door or who is buying and then what they are buying? Any deltas in the growth rates of some of your products? I think you mentioned Casegoods, but I am more talking about on the Upholstery side.

Good question, Matt. I mentioned in my call that we, because -- if you look at the marketing we are doing with the brand platform and the things that Brooke is talking about, we are trying to change people's perception of La-Z-Boy. That we have more than recliners, that we have style, that we can do a full room. And we have been on a constant (technical difficulty) you are not seeing Brooke talk about the La-Z-Boy recliner and pushing that because people recognize this.

What is nice to see is the result of the continuum of our marketing is that we are seeing much faster growth rate, higher growth rate in sofas, occasional chairs, the non-reclining products than we are the reclining products. Both are growing, but our pace of growth in the living room business, if you will, the stationary business is accelerating at a pace higher, which correlates to all the things we are talking about with our marketing.

Okay. And then just anything on the demographics that you have been able to learn?

Well, I think it is still a little early and we have got some research we are going to do this fall. The La-Z-Boy customer typically tended to trend to be slightly older and slightly higher income. We are trying to see if we can attract a little bit younger customer without hurting the core customer when he have had, but we haven't done the quantitative research on that for me to really make any statements.

Okay. Thank you, Kurt. I more, let me sneak it in, that some competitors obviously having issues out there. Is the opportunity -- is there an opportunity related to that? And if there is, I'm assuming there is, but if there is, is it tied more to the potential for new floors for La-Z-Boy or is it basically the existing floors will benefit from vacated share, if you will?

That is the quandary question that has been debated a lot in our industry. It doesn't always seem that when a dealer goes out of business in a certain community that all that business transfers to somebody else, that doesn't seem to happen that way. Or all the people that went bankrupt over the last decade that business would all fall in the laps of everybody else.

You get less people promoting furniture and give them less choices furniture doesn't remain as top of mind on people and they spend their money elsewhere. So it is not an end sum game of how that business translates.

I do think we have benefited some from some of our competitors having challenges in having more floor space on our existing dealers. We have a very strong dealer base. We are very committed to the distribution we have and having an environment where they can grow and make money.

We are not out there pursuing a number of brand-new accounts because most of them would have a conflict with our existing dealers. As long as our existing dealers are growing and promoting the line and doing the things we think, we are going to give them the opportunity to capitalize on any change in the marketplace.

Okay. Thank you, Kurt.

Matt, I just wanted to add one overlying comment. When we talk about our conversion, we are talking about an annual conversion. Our problem is -- not problem, but our issue is any quarter over any other quarter there is some fluctuations in how we spend marketing one quarter versus another based on when the holidays fall. There is maybe some compensation one quarter over another because of the way we recruited last year.

So I just wanted to make sure you understand that our conversion rate we think over the full year will be there. There may be some instances within a quarter over another quarter that things may get a little pared based on the way things were last year and the way we are trying to set up our marketing and those types of things as well as the other comps. Just kind of laying that out there.

Okay. Thank you, Mike.

John Baugh, Stifel Nicolaus.

Good morning and congrats on the strong revenue numbers here. I wanted to jump into the Retail segment. If I look at the last couple of quarters prior to this one, I think your volumes in retail were $58 million and $56 million and the EBIT loss was fairly lower. Is there some timing here? Is it store opening expenses? Is there something that explains the increase in EBITDA drag in that segment?

Good question, John. It is primarily store cost in terms of new stores. We recognized all the costs early before you get any volume.

We opened a store in St. Louis this quarter and we had some costs -- we opened already a store this month, in August, in Pittsburgh and some of those costs we incurred during the quarter.

We are remodeling some stores. We are doing this refresh program in about 20 stores over the course of the year. So, yes, there is a little more cost of making an investment in our stores that don't have quite the (inaudible).

Now later in the year we should get the improved sales. You should see that flip over here as we get some stores up and we stop having those initial costs and we start benefiting from the volume. But in this quarter the biggest differential on the comparison was new store start-ups.

So if we were to somehow be able to look at the operation without remodeling new store expenses, etc., there wouldn't have been a change in the contribution margin, if you will, or the profit?

That is correct.

Okay. And then I thought I heard an $18 million number thrown around in discussing the purchase of the nine stores. Can you clarify that number?

We are buying the enterprise, including their inventory, their customer deposits, all that. We are buying the enterprise in southern Ohio for $18 million and we reported on that in our Q.

Okay. So it will be an $18 million cash outlay and there won't be an earnout; that will be it?

That will be it.

Okay. Then, Kurt, if you could just comment on the -- largely we have got a variable expense model in Casegoods, but you have referenced this remaining plant and increased production. Is that something we should get excited about in terms of leveraging EBIT margin from here? Because that is the loan fixed cost piece, and if you get more production through there that could really enhance margin.

I would say, John, that we are making these moves. We are trying to put some more product in there. There is an appetite with some customers and some consumers about the made in America story. It does differentiate us. We can do more finishes and some other things.

But the plant has had a tremendous drop in volume over the last five years and we have to get it back up to a level that is acceptable. This is one move in that direction. If the product sells and it meets our volume expectations, it would be a good thing. If it doesn't -- so we have got a year or two here to make up our minds about what the model should be.

I like the fact that we have some flexibility with having a domestic facility, but we won't continue to operate the facility at a loss forever and we are trying to see where that breakpoint is.

Kurt, is the production that you are talking about with these Drew bedroom suites, is that basically samples or have you got samples placed and are you starting to get orders?

No, no. We introduced this in April and we have got solid orders and we have got great placements. This is just starting to get them out on the floor. So we don't have any sell-through yet, but these will all be on the floor in September and October in anticipation of selling through the holiday season.

Thank you. Good luck.

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

Thank you, everybody, for participating on our call this morning. Should you have follow-up questions, I will be available, give me a call. And have a great day. Thank you.

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