La-Z-Boy Inc (LZB) 2013 Q2 法說會逐字稿

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

Thank you, Andrew. Good morning and thank you for joining us to discuss our fiscal 2013 second 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. And 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, and good morning everyone. Yesterday afternoon, we reported our second quarter results for fiscal 2013. Sales for the quarter increased 4.8%; same-store sales for the La-Z-Boy Furniture Galleries store network increased 13.3%; and we experienced a 16.1% delivered sales increased in our Company-owned retail segment which included new stores opened or acquired during the quarter. Without the new stores, the delivered comp for the Company-owned retail segment was a healthy 10.2%. Notably, our progress in retail operations continues to improve and we expect to achieve profitability in the second half of this fiscal year.

Additionally, demonstrating the faith our management team and Board of Directors have in our business model and positioning in the marketplace, we also announced yesterday that we reinstated our quarterly dividend. We are pleased with the results our business model and strategy are delivering. Four years ago, during the severe macro economic downturn, we made difficult but necessary decisions and reduced our cost structure significantly. This on the heels of completing the conversion of our La-Z-Boy branded facilities to the cellular production process and beginning the move of our cut-and-sew operations to Mexico.

With these strategic initiatives behind us and a successful brand advertising campaign underway, La-Z-Boy has been in a position to be more aggressive in strengthening our business in an environment that, today, is still somewhat challenging. Our same-store sales numbers demonstrate we are building market share and we will continue to leverage our lean operating structure while investing in our business to ensure we deliver return to our shareholders through profitable growth.

Of particular note, if you would look back to calendar year 2010, our 300-plus La-Z-Boy Furniture Galleries stores were doing about $850 million at retail on an annual basis. Assuming we continue with the same pace of volume that we have experienced over the past 18 to 24 months, those same stores should generate about $1 billion -- [$1.00005] billion at the retail level this calendar year, approximately $200 million more through the same number stores. This has been accomplished against a backdrop of a modest home furnishing retail market over the past two years, which adds to the significance of our progress.

Now let me spend a few minutes on each of our three operating segments. Sales for the upholstery segment increased 7.5% for the quarter and the operating margin for the period was 8.4% compared to 8.7% in last year's second quarter. This month we anniversaried two years of the Live Life Comfortably campaign featuring Brooke Shields. Since launching the advertising campaign, we have enjoyed double-digit same-store sales increases for the La-Z-Boy Furniture Galleries network and importantly, increased sales of our stationary line of furniture at a faster rate than sales for our core recliner and motion business.

Highlighting La-Z-Boy is a brand that offers a wide range of stylish upholstered furniture, rather than just solely recliners, is exactly what the campaign was meant to do and we intend to capture an even larger share of this stationary market going forward. At the same time, we are committed to continue to invest in the campaign as it is driving a more qualified consumer to our stores and that, combined with our Internet presence, is showcasing all we have to offer.

For the advertising year that began this September, we plan to be on the air for approximately 30 weeks, several weeks ahead of last year, and more than double where we were two years ago when we initiated the campaign. We believe that continuing to invest in the brand campaign will deliver ongoing volume growth and indeed, contributed to the 13.3% same-store sales increase for the period. In the second quarter alone, we were on the air for four additional weeks, and that increased our quarter-over-quarter advertising spend by $1.6 million, which impacted the conversion on the period sales increase. Importantly, for the year, we anticipate our total advertising spend as a percentage of sales to remain fairly consistent.

Investing in our business is paramount to driving sales growth of expanding our distribution and share of the upholstery market throughout North America is integral to our strategy. Both the Company and our La-Z-Boy Furniture Galleries dealer base believe that now is the time to open more stores. During the second quarter, throughout the network, three new stores were opened, two were remodeled and two were relocated. For fiscal 2013, in total, the network plans to open six new stores, relocate four, and remodel five, with the Company representing about 40% of those projects.

Now turning to casegoods. In the segment, sales for the quarter decreased 3.9% and the operating margin for the segment declined to 2.6%. As with the first quarter, occasional furniture sales outpaced the larger ticket dining room and bedroom groups as consumers remained reluctant to make the higher ticket purchases of full [Drew bedroom] groups. As we mentioned on last quarter's call, we believe this portion of the casegoods industry will continue to face challenges until housing starts to strengthen in a meaningful way.

Our Hudson, North Carolina facility began this quarter, producing several new American Drew bedroom groups, which is increasing our capacity utilization of the plant. We are in the process of converting this facility to a new production model that is similar to the cellular structure employed at our La-Z-Boy branded facilities. We believe this new method of production will allow us to be in a better position to service our customers while reducing cost and finished goods inventory.

Additionally during the quarter, we closed our lumber processing operation which lowered our cost structure and we will now source all wood parts. Importantly, we believe that maintaining domestic production, providing it operates profitably, will allow us to increase service to our customers by being able to more quickly deliver a customized product. We believe the changes we have made to our casegoods operations will save us approximately $1.5 million per year, providing our volume remains at today's levels.

Now I'll spend a few moments on our retail segment. For the quarter, we posted delivered sales increase of 16%. As referenced in my opening remarks, without new and acquired stores, our delivered increase was 10.2%. On October 1, we completed the acquisition of the southern Ohio market consisting of nine La-Z-Boy Furniture Galleries stores and an accompanying warehouse. The business has been a solid performer over the years, with revenues of about $30 million in calendar year 2011 and we expect it to continue to be accretive to our earnings as it was for the month of October. We paid about $16 million in cash for this operation.

We are pleased with the consistent performance of our retail segment. This quarter marked the 15th consecutive period of improvement and our loss of less than $600,000 is our best performance on our quest towards profitability. For the quarter, we experienced increases in the average ticket, units per ticket, and in-home design sales, all of which contributed to an increase in our gross margin. Additionally, we saw an increase in both floor and web traffic. We believe these metrics reflect and our brand advertising campaign is working. We are educating the consumer to understand that La-Z-Boy offers more than recliners and that you can furnish your entire room at La-Z-Boy with stylish upholstery and complementary accessories.

During the period, we continued to invest in our store system and opened two new stores. We remodeled one and relocated one at a cost of approximately $0.5 million. The two new stores are in the Pittsburgh, Pennsylvania market where we had been without distribution for several years. Because we have been advertising nationally for the last two years, there was an awareness of and appetite for La-Z-Boy, and we're very pleased with the pace of business experienced by those stores from day one. We will continue to look for opportunities to build out existing markets and enter [dark] markets like Pittsburgh where there is a need for multiple locations. As we've said in the past, we believe that branded distribution is a cornerstone of our strategy, particularly as the landscape continues to contract and change.

Furthermore, we believe North America has room for approximately 400 La-Z-Boy Furniture Galleries stores, so there is great opportunity for us to grow our own retail segment as well as the dealer side of the business. As we move forward, we believe the retail segment will be profitable so for the second half of fiscal 2013, barring any unforeseen changes in the pace of business. Our team is doing many of the right things. Improving the selling processes everyday to increase volume and gross margin, scouting new locations to increase distribution and grow, keeping a watchful eye on our cost structure. Now I'll turn things over to Mike to review our financials.

Thank you Kurt. As Kurt mentioned, for the fiscal 2013 second quarter, net sales increased 4.8% compared with last year's second quarter. Net income, attributable to La-Z-Boy Incorporated, was $6.6 million, or $0.12 per diluted share, after a $0.03 per share restructuring charge relating to a conversion of our casegoods plant to an import model for parts versus a manufactured parts model. This is compared with $7.9 million, or $0.15 per diluted share, in last year's second quarter. $0.03 per share restructuring charge reflected the write-down of certain fixed assets and inventories related to the closure of our lumber processing facility. As we mentioned earlier, we are now outsourcing all component wood parts that will then be assembled and finished at our Hudson, North Carolina facility.

We did generate $13 million in cash from operating activities during the quarter, and ended the period with $87 million in cash and equivalents after acquiring the southern Ohio business, and increasing our longer-term investments and restricted cash. Our restricted cash has been established to collateralize our letters of credit which further reduces our interest cost. At the end of the quarter, our total debt was $7.7 million and our debt-to-capitalization was 1.6%. As Kurt also noted, we declared a quarterly dividend to shareholders in the amount of $0.04 per share payable on December 20 to shareholders of record as of December 10, 2012.

During the quarter, we accrued $3 million more in incentive compensation cost versus last year's second quarter, relating to the continued improvement in sales and operating results for the full year period. Due to our improved performance the past couple of years, our year-over-year increase in compensation expense has been significant. But we expect the expense to have less of an impact in the second half of the fiscal year compared to our first half.

Also, we continued our journey to replace our legacy computer system with a JD Edwards E1 system. At this time, some of the expenditures are being capitalized. But as we complete the design phase of certain functions, we will expense more of the cost over the next two-year period. These two items, along with our continued investment in our marketing campaign, hampered our ability to convert at the levels we expected for this quarter. Capital expenditures for the first six months of fiscal 2013 were $11.6 million and are expected 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, the normal replacement of machinery, and costs relating to the land acquisition and development relating to our new world headquarters.

For the quarter, our effective tax rate was 36%. Going forward for modeling purposes for fiscal 2013, we still 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.

Thank you, Mike. We are pleased with the progress we have made over the last several years. The environment has been difficult, and ongoing macro economic challenges exist. But we have been executing on our strategic plan, controlling the controllables, and positioning ourselves to capitalize on an improving economy. Our brand advertising campaign is strong. We continue to introduce compelling product values with a focus on innovation. We have improved our retail performance and we are investing in our business.

In addition to opening stores and building out our vast network of branded distribution outlets, we are investing in many facets of our business including our marketing campaign and our infrastructure to ensure we achieve profitable growth and return value to all of our shareholders. We very much appreciate you being on the call today, and I'll turn things back over to Kathy.

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

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

Budd Bugatch of Raymond James.

Good morning, Kurt, Mike, and Kathy. This is actually Chad filling in for Budd.

Morning Chad.

Kurt, you talked in the release of the higher ad spend and the incentive comp increases impacting earnings and it sounds like the incentive comp increases will be of a lower magnitude over the next couple of quarters. Can you quantify maybe or give us a reasonable range of what to expect for the incentive comp year over year in the second half? And then maybe repeat what you said earlier about ad spend. Sounds like flattish year over year for the full year as a percentage of sales? So would I read that as not being as big of a year over year impact in the second half as well?

I will answer both the questions but I will start with the second one first. We're going to be spending more money on marketing. We have additional weeks of our print platform being run as we go forward, and obviously, the intent is to drive the additional sales. So if we continue to pace our business like it has been, while we'll be spending more money, we should get the return on sales. Now that is outside of whatever advertising we spend on the new market in Cincinnati and the new market in Pittsburgh.

We will be advertising with those stores, and spending more money but, again, we have the volume to back it up. So we will be spending more money. But we think the residual benefit for more sales, as a percentage of sales when the year is over, we don't expect our percent of sales for advertisement to be much different than the previous year. It could be up slightly but nothing significant.

As far as the incentive compensation is concerned, it has been a big number for the first half of the year. It's been around $6 million. And this all depends on continuing performance because these things have a continuing life on them. But we would think of what we know right now, that number should be somewhere around 50% or slightly more than 50% of the increase that we've had in the first half of the year.

Okay, that is helpful. Thank you. As I look through the segments, upholstery margins were lower year over year despite a pretty healthy sales increase. You did give us a lot of helpful detail in the Q filed last night but you had called out in there three factors that impacted the upholstery gross margin, I think, higher healthcare costs related to the ERP implementation and then some other manufacturing cost to improve customer service. Can you quantify or give us a little bit more color around those three items in particular? By my math, it had to be at least $2 million drag and then are those costs that will persist, moderate, how do we think about it going forward?

Very good question, Chad. I would say that those in the aggregate aren't anymore significant than the two that really had the biggest impact was the incentive comp is in the upholstery business. It is probably 50% of the $3 million for the year and the marketing, the $1.5 million that we spent up is in there. So those two things are singularly more than any of the three things that we highlighted in the outline. But they were -- they did cause some issues in the quarter but not as significant as the comp or the marketing.

Chad, just to clarify, that's what -- we're talking about for our conversion. We were just pointing out for our -- because obviously, most of these costs were in our SG&A but for the gross margin, those items affected our margin where these other ones are affecting our operating margin.

But our gross margin was still up for the quarter if you add back the restructuring, so it wasn't that significant.

Okay. And then on the delivered revenue, the 4.8% sales growth felt a little bit light given how strong the written business was last quarter. Was there any delivery or production issues or anything that impacted reported revenue? And I guess, if so, does that mean backlog improved sequentially or any thoughts there?

I want to put some of the context to that number. First of all, I think the thing that people have to understand is we have enjoyed a great run here for a couple of years with our double-digit same-store sales increases at the La-Z-Boy stores. But the La-Z-Boy store business is less than 50% of the entire upholstery segment's business. So I think some people are starting to equate the two that, that they should line up our delivered sales and upholstery with the growth of the stores.

And that is not -- what that tells you is that some of our other distribution, particularly the medium and smaller dealers, are not enjoying the same success. But we had a pretty good pace of business for the quarter. Our sales were up in upholstery, 7.5%. Casegoods business was down. And so I think that it's just reflective of the math of part of our distribution base being up and part of it being down, although we did have the best written comparisons in upholstery in the month of October which should flow over into our quarter here in the third quarter.

Okay, that makes sense. Last question for me and I will defer to others. You called out positive foot traffic in the release, which I think is a positive change versus the trend you have seen in recent quarters. Any color around that or is it -- to what do you attribute that improvement?

Well, it was positive and actually it was a little bit of a surprise to us on how positive it was. I'm not going to give a number but going from slightly down to flat, this was a pleasant surprise. But I also would say that being on TV another two weeks this quarter, the last quarter than the year before, I think, had a lot to do with it. And I think just the consistency of our message and the continued investment in expanding our TV campaign, I think the cumulative effect of that is starting to show up in our traffic counts.

Okay. Thanks Kurt, Mike, Kathy. Good luck to you on the rest of the year.

Thank you, Chad.

Thank you.

Thank you. Mr. Brad Thomas of KeyBanc.

Just to follow-up on some of the previous line of questionings. Again, great performance out of the Company-owned and partner stores. Kurt, could you just talk a little bit more about what the trends are that you are seeing in the other channels that you sell to? Has there been any slowdown? Are you picking up more market share from them from your Company-operated stores? If you just give us a better sense of what is happening in those other channels of distribution, that would be helpful.

Brad, I don't know that I want to go into a ton of detail there for competitive reasons, but I think the mid-sized to smaller dealers are having a little more difficulty and spending the money on marketing and being consistent with their advertising. And I just think that our stores are not just ours, but our whole network, are being a little more aggressive. They're in the higher population markets.

We do have our major customers that are also up so this is not -- you can't paint a brush as the same across all of our distribution types, but obviously, the La-Z-Boy stores are doing a little bit better right now. I don't believe it's taking share in similar markets. We don't have that many markets where there's cross competition that, that would be the case. It's just -- I just think being in the metropolitan areas where there is more buying power is benefiting the store program at this point.

Got you. That is helpful. And so as we think about the cadence of the total Company revenue, it does seem like sales were strong at the end of the quarter. The written business in the La-Z-Boy segment accelerated relative to last quarter. Is there a reason for optimism to think that perhaps the revenue growth should improve from the 5% level that we saw this quarter or how you are thinking about the top line outlook for the back half?

We are still one month into the new quarter, and it's an important quarter because of the holidays. And our crystal ball is not any better than anybody else's. The only comment I would make on that, Brad, is our pace of business through the month of November has remained consistent with previous trends. And so I think that bodes well for us but I don't want to make any comments beyond that.

Great. And then just lastly, Kurt, on the savings in the casegoods business, I know you indicated that it would be $1.5 million in annual savings. Is it reasonable to expect having the -- 50% of that rate coming in the back half of this year? Or is there anything that might change the timing or magnitude of how that might flow through?

Well, I think the safest thing to do is to look at next fiscal year and anticipate all that savings. I'm sure we will get some of it in this year but I don't think it will start in the third quarter [or falls out there]. There's things that have to get changed, there's parts that are coming in, there's selling off of some inventory and this and that, so I wouldn't make it all in the second half of this year, but it's certainly our expectations that in '14, the whole thing falls to converge down to the bottom line.

That's great. Thanks so much, Kurt, and best of luck to you all this holiday.

Thank you Brad.

Mr. John Baugh of Stifel Nicolaus.

I wonder if we could just start with the charge and where that falls out on the consolidated income statement, and then where, if it is captured on the segment?

So John, right now I would say majority of that charge is in the cost of goods sold. And we, as a practice, keep the restructuring out of the segments. It's down -- as you look at our segment disclosure in our 10-Q, you'll see a separate line item for restructuring that stays outside the segment cost.

Okay. And so when we're looking at that segment number, on corporate and other, does that have the higher bonus accrual in it or is that embedded in the segment numbers or both?

It is both. The portion of it that relates to the upholstery business would be in there, the portion of it, and all of our retail and then corporate would have their portion of it as well. So it is spread throughout the segments appropriately based on where the employees are employed or reported.

Okay. And then Kurt, maybe a comment on Bauhaus in England or your other upholstery business. Was the issue just that La-Z-Boy branded product going to independent distribution was lower or was there some drag from the non-branded as well?

No, there wasn't really a drag, John, but typically the -- particularly England there, their core customer has been the medium-sized and smaller dealers. So they don't have this volume [governor] like the branded group has or the La-Z-Boy stores right now. But no, neither one of our other upholstery companies were a drag on our growth this quarter. It is just as you get out and get the different mix of dealers, some are seemingly having more success than others.

So those would be up close to the 7.5% upholstery number as well, those two brands?

Yes, that would be accurate.

Okay. And then on inventory there was a meaningful increase. What do we attribute that to?

The acquisition of the Ohio market added some inventory to our finished goods, us getting in a better position to service over the holiday period. So we added some inventory and then we're just trying to keep our flow in the raw materials. The majority of our increase is in raw materials because of the order rate that we have talked about as well as our delivered sales being up. So we're just trying to be prudent not to run out of our most popular fabrics during this most holiday season while we're hoping for the increase in those sales. It was a planned increase, and some of it needed to be done in order to be servicing our customer better.

John, you won't see much change in that. In fact, you might see it go up just a little bit more. Because of Chinese New Year at the end of January where we had to bring in things in advance or we have some hiccups there. But I would think it would get down closer to last year's levels with the differential being the sales increase by year end. So it was, this was a plan. This was a -- we wanted to have enough fabric and leather to serve us on a more timely basis and we made the investment to do so.

Okay, great. And then just want to make sure I'm clear. This same-store written sales figure up 13.3% for the quarter, that is written, so it is not delivered; correct? And then I would assume that is part of this inventory build that you've got some level of increased backlog at least in the La-Z-Boy store network; correct?

Well, I mean, I don't want to make this any more complicated, but some of that written has been delivered because some of that written was written in August. So it is a quarter of written, and but over time, it isn't an exact flow-through, but over time, your written and deliver will average out to being the same as you catch up.

And the basic philosophy John, and because our dealer stock inventory as well as a Company-owned store, if a customer comes into the store and sees a product on the floor in the exact fabric and configuration she wants it, the odds are that the dealer has that backed up in their warehouse and can deliver that within a week. If it's a special order, by the time it gets to the customer, it could be six to eight weeks so we have a 60-day lag there on maybe a third of the business going through the stores that aren't sold from exactly off the floors. So you will always have that carryover quarter-to-quarter but it's fairly consistent.

Got it. On casegoods, if I understand correctly, so the charge is not in the segment numbers. So the 2.6%, I think, EBIT margin was the ongoing or operating number. That number bounces around a little bit. Obviously, the sales there continued to drip lower. Was there something with the plant? You mentioned you were making some more product and ramping? Did that have an impact there? Or I guess I'm wondering, can we bank on a 4% to 5% EBIT margin in that business going forward regardless of where sales are or is that sales-sensitive or process-sensitive or something else?

Well, there's a lot of questions in there. I think we are still comfortable with the mid-single digit range for casegoods on an annual basis. I think you have to accept that the casegoods industry, or the casegoods business in our industry is the most challenged. If you read all the numbers about growth and expectation, certainly bedding has been leading the industry for the last couple of years. Upholstery, in particular, motion upholstery is a high performer. But casegoods, especially the larger collections of bedroom and dining room, have been challenged, not just with the La-Z-Boy companies but most casegoods companies.

And so the move we made really to go to a parts production system should actually negate some of our dependency on running a rough mill and running the lumber area and things of that nature. So it should flex with volume and we should be able to deliver that profit. I am sure making the changes to shut down the wood room and do some of those things impacted our efficiencies for the quarter but they have historically performed in that range. We don't see anything that would cause us to believe at this point that it would be much different.

Okay, thanks and my last quick question. Any more details on the acquisition? You mentioned you paid $16 million, $30 million in revenue and it's accretive. Is there -- do you want to get any more refined than that? I have a suspicion you won't. But is there anything in terms of ongoing cost saves or sales synergies or something we should expect out of those nine stores? Thank you.

I think you will see as our results go on that this is a solid contributor. It would rate in the top tier of our market performers that we have running for the Company. We are extremely pleased to have bought a profitable retailer rather than having to take something and turn it around which has been our history. So there is more detail in the Q about the acquisition cost, and what we did under Note 2. But that's as far as we are going to go, John.

(Operator Instructions)

Mr. Todd Schwartzman of Sidoti & Company.

What was the impact of Sandy in the quarter? I haven't heard much discussed about that. Did it hurt you guys in any way?

Well, todd, that's a good question. First, I think we, like the rest of America, our hearts go out to the people that are affected. I know they've got a long way to come back and I'm impressed by the relief work that everybody is doing. So that is foremost on our mind. As a general statement, the Hurricane Sandy is not going to have a significant impact, it didn't have a significant impact on our operations this quarter.

We don't think it will going forward. We had about 40 of our stores closed for a couple of days. We had one store that didn't get back up for about a week but -- and we had a few dealer stores that we know had challenges. But it was isolated to that New Jersey/New York area, and we luckily were back in business quickly. So it has a significant impact on the people involved, but luckily it's not going to be that meaningful to us.

Were those couple of days, Kurt, weekdays?

They were.

Okay, and I guess I would have asked the question regardless but I think and particularly, in light of the fact that you saw an increase in store traffic, it's somewhat surprising to me since I think it's been -- correct me if I'm wrong, I think it's been a number of quarters now since you have seen growth there. And it's not just La-Z-Boy, it is industry-wide. So I'm just wondering to what you attribute the increase in traffic? Even if it was minimal, when in fact, you've have seen declines in recent quarters?

I don't know how to answer that question, Todd, any differently than we have. I -- we believe the consistency of our marketing, the additional weeks that we were on the air for the quarter, the aggressiveness of our message in the local markets at the retail area. We just believe that we are cutting through some of the clutter, and making a difference. But we were pleasantly surprised to see a pretty good uplift in traffic for the quarter.

Last question, Kurt. You sound somewhat sour or cautious maybe still regarding the macro environment. Can you speak to the fact that we were now, probably a couple of years in, at least, to a pretty strong recovery in the apartment rental market. And now we've got probably over a year since the recovery began in single-family construction so that should certainly [auger] well as we get into next fiscal year for La-Z-Boy. But what are you seeing that gives you a reason for pause? Is it your consumers' potential, consumers' ability to secure mortgage? Is it choppiness that perhaps others aren't seeing? What contributes to your outlook on the world at this point?

Well, I wouldn't say our outlook is sour. I just think there are probably two factors going on. I think, number one, the whole country doesn't know what the impact of the fiscal cliff and our debt and all that is going to do and the tax rates. And so, you see a lot of things going on in the month of December to try to guess that way. So I think that uncertainty doesn't help. We like where consumer confidence is going. We like those kind of numbers but I think there is that uncertainty over the economy. But I think our biggest reason for just being cautious is the housing market is still -- it is showing growth. It is showing big numbers, percentage growth, but historically, it is still extremely weak.

And while the number of unsold homes have come down and there's a lot of good trends, people are still having trouble getting mortgages. I would say, Todd, particularly in the casegoods business, they are very dependent on a lot of movement in house formations, new houses, the predominant time when people buy new bedroom and dining room furniture is when they move into a new residence or a new home. So we just want to make sure the pace of this housing is real, and we want to make sure that things are good, but no, we are not sour and obviously, we are having some success in this economy. But compared to the times in '05, '06, '07 of better growth and better GDP growth, that is not exactly where the economy is. So maybe we're just being cautiously optimistic. I would rather use that line than sour.

Matt McCall of BB&T Capital Markets.

Let's see. So a lot of talk about the SG&A and a lot of the commentary you have given is on a year over year basis but really, and where my model fell short or was too aggressive was on that SG&A line. So when I look at sales up 7% sequentially, SG&A was up 10% sequentially, can you talk about the sequential change in SG&A? I know you've addressed a lot of year over year but was there a big change in some of those items on a sequential basis?

Well, I think you've got the extra $1.5 million of marketing that we have called out, you got $0.5 million of new store and some remodels in there, and sequentially, the comp was the same. But for the quarter, I think the way to think about this is you've got, between the incentive comp, the marketing and the new stores, you've got $5 million worth of primarily SG&A running through the quarter.

And that's compared to the previous quarter?

That is compared to the previous quarter. Sequentially, the comp is the same but these other things are not, the marketing and the new stores are not.

Okay, Kurt, sorry if I missed that. On the corporate overhead, it's a tough number to model perfectly obviously, but if I look back historically, it looks like Q2 has been the peak for the year. Mike, is that the way to look at corporate overhead? Is this -- what did you do, what -- $8.9 million this quarter? Is that a good run rate going forward? How would you tell us to look at that in the back half?

I guess the way to answer that, we are not out -- the compensation costs that we have been talking about does have some impact on the corporate overhead. We are pretty consistent in our corporate overhead. The E1 project, some of that does go through corporate as well, and not the operating companies because of how we are building the system. But I don't know of anything that would make any other quarter that far out of whack with where we at other than the compensation.

So the compensation but you did say that was not going higher, that should be flattish? But you said on a year over year basis so is it the same thing sequentially?

Well, sequentially, we are probably running at the same rate. It's just that, sequentially, we had -- what we're saying that the comparison to last year won't be as significant.

Right, right. I was trying to compare that $8.9 million you just reported so it sounds like that might be a good number to use.

Sequentially, if that's what you are referring to, I don't know of anything that is out of whack from that to make sequentially that much different.

Got it, got it. And then the store growth plans that you -- I tried to compare what you said last quarter to what you're saying this quarter. Was there any change in the store growth plans? It seemed like there was a number like 19 for the year and now it seems like it's a little lower than that. Are there some delays or is it -- or am I misunderstanding what you're saying?

No, I think a couple things may have got pushed into the first quarter of next year. But we talked, Matt, about 15 projects including new stores, remodels, and relocations. That's a pretty good number. We've got another store to open before Christmas in Pittsburgh, our third store. And we're modeling our big store Paramus, which had to take a time-out because of Sandy for a few weeks to get back to remodeling. But we've got a number of things we're negotiating on and looking at and it's a top priority for us but we will give you some more color on our store growth for fiscal '14 when we get closer to the new year starting. But that 15 project number is probably the most accurate one to use at this time.

Okay, so just a timing thing, it sounds like. And then finally, on the retail margin, you called out gross margin improvement. You mentioned more in-home, more -- higher ticket, higher units per ticket. As you talk about the profitability expectations for next year, how much do those items come into play? I would call those maybe mixed or ASP benefits versus just growth in SG&A leverage? I'm assuming it's a combination of both but I guess this is the first time I've heard it called out in that specific way on the gross margin improvement side.

So we're just trying to give you some color into what is driving some things. I don't believe the rate of improvement that we've seen in our gross margins at retail are going to continue for the next couple of years. We've -- our team has done a very good job of getting, what we think, are very good gross margins in the retail business. We have taken them up probably 400 to 500 basis points from a couple of years ago. And I am not sure where we will be able to do that again but we are always pushing the envelope. How much more gross margin can we get before you affect volume? What else can you do for add-ons and options and every thing at the store level, but the majority of the push to profitability here at retail is going to have come from volume.

Okay, and I'm going to sneak one more in. You highlighted the targeted margin you're still -- you're sticking with the mid-single digits in casegoods. Can you review the out -- just your thinking on the margin potential for the other two businesses?

Well, that hasn't changed and I think, I know some of you are concerned about the conversions this quarter. I want to remind everybody that we have talked about our conversions on an annual basis and we have talked about our segment operating targets on an annual basis. And we have a much stronger second half of the year with more volume and much higher percentage of profit in the second half of the year. So we are still sticking to our high single, low double-digit operating margins in upholstery, the mid- single digits on casegoods, and for this year, getting our retail business to breakeven, that we will modify that target here as we move into next year. Where we expect the profitability to be but those have been our targets for the last 18 months.

We see no reason at this point that, on an annual basis, and on those conversions from quarter to quarter, we may not quite convert at mid-point of that depending on where we make investments. We think making investments for the long-term that will give us some benefit downstream. We're going to continue to do that. But eventually, they have -- those investments have to flow through to the bottom line and we believe they will. So I want you to keep this conversion and our operating targets looked at on an annual basis, not necessarily a quarterly basis.

Okay, Kurt. Just to clarify on the retail, you said breakeven for the full year. Is that getting to breakeven by the end of the fiscal year, or for the fiscal year, you'll be breakeven? Is that the target? Just want to make sure I understand.

At this point, we think there's, again this all depends on the pace of business and you are getting me close to making some guidance here. But we think the pace of business that, if we are profitable in the second half of the year, we haven't lost that much money in the first half. We think there is an outside chance that the segment could get close to profitable -- close to breakeven for the entire year.

Sean O'Malley of Wedge Capital Management.

Just a couple of questions. Can you give us any update on the timing or magnitude with respect to the corporate headquarters project?

Sure, I'd be glad to. So we are still working through some zoning and some due diligence with the various governmental bodies on some incentives that have been offered and trying to get that all tied up by the end of the year. We would say that our partners in this, the state of Michigan, the city of Monroe, the County, they have all been very supportive and very helpful and that everything is going as we all envisioned. So on a timing basis, hopefully that all gets wrapped up by the end of the year.

And we would commence with buying the land, and then breaking ground in the springtime, would be an ideal time frame for us. We don't have a final plan built, approved, signed off on. And we don't have all the incentives totally completed so I think it would be premature for us to talk about the net expense to the Company going forward. We will be glad to do that once we get all the details done. But the timing would be closing on the property early in '13, starting to build in the spring and it's probably a 2 to 2.5 year project to get completed.

Okay, and then with respect to the dividend, we think it's great that you are reinstating it here and I think it's a very good use of capital. But looking at the magnitude of it, at $0.04 a share, we're talking about $8 million a year or so right now. You have about $80 million in that cash on the balance sheet; operating cash, probably at $60 million to $80 million a year; capital needs, probably $40 million or less; it seems like you have a lot more room there in terms of returning capital to shareholders. Is there a reason for your caution or do you have some additional growth plans that would require additional uses of capital? What were the Board's and your thinking there?

Well, I think that we want to keep probably a little more cash on hand than maybe some of our shareholders would appreciate but we want to keep our financial flexibility. We do have some CapEx targets here for the next couple of years with a heavy emphasis on stores, with finishing up our ERP, with building the new headquarters. And we want to be in a position to start the dividend, hopefully continue to raise it as things continue to improve, if that's what ends up to be.

And you may accuse us of being a little conservative, but we want to get start -- before we suspended the dividend in '08, the Company had a history of paying a dividend for 122 consecutive quarters. And we hope the trend we're starting here, we will do that again. So we hear your question, but at this point, you might just call us a little conservative.

And we still expect to be mindful of dilution and looking at our stock buyback program as well to make sure that we are keeping that down as well.

Currently, there are no further questions.

Thank you, everybody. Have a great day and if you need to give me a call for follow-up, please do so. Good-bye.

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