La-Z-Boy Inc (LZB) 2014 Q4 法說會逐字稿

Good morning, Ladies and Gentlemen. Welcome to the La-Z-Boy fiscal year 2014 fourth quarter and full year conference call.

(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, and thank you for joining us to discuss our fiscal 2014 fourth quarter and year-end results. With us this morning 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 judgments of Management at the present time, they are subject to numerous future risks and uncertainties as detailed in our regular SEC filings, and they may differ materially from actual results due to a wide range of factors. We undertake no obligation to update any forward-looking statements made during this call.

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

Good morning, everyone, and thanks for joining us today on our call. Yesterday afternoon, we reported our fourth quarter and full year results for fiscal 2014. It was a solid year for La-Z-Boy, Incorporated during which we achieved a number of accomplishments.

With respect to our overall results, we grew sales by $83 million or 6.6% to $1.36 billion, increased operating income by $22 million or 32% to $89 million almost doubling it from two years ago, and generated $91 million in cash from operations and strengthened our balance sheet ending the year with more than $200 million in cash, cash equivalents, investments, and restricted cash.

On the wholesale upholstery side we experienced an increase in same-store sales for the year of about 6% following a double digit increase in 2013. We set the stage for one of the largest growth initiatives in the Company's history with our 4-4-5 store build out strategy.

We launched Urban Attitudes, the most important furniture collection we have introduced to the market in 10 years. The upholstery group posted a 10.7% operating margin in the segment an improvement of 140 basis points from the prior year. We also extended our contract with Brooke Shields through November of 2016.

In our retail segment, we posted four quarters of profitability with a 3.7% operating margin for the year, solidifying our position in the industry as a successful integrated retailer. And, finally, we increased our Company owned store count to more than 100.

We also increased our quarterly dividend by 50% and returned $43 million to shareholders through dividend payments and share repurchases, and we broke ground on our new world headquarters project which is on time and on budget. Importantly, as we review the year, against a back drop of modest growth throughout the furniture industry and housing sector, we continue to grow our business profitably, achieving our fourth year in a row of increased sales with five consecutive years of solid operating profits.

Our pathway to the future is filled with opportunity, and we are invigorated by the growth potential we are creating and realizing. Our manufacturing and retail platforms are solid and improving. Our positioning within the industry is unparalleled, our marketing and merchandising programs are resonating with consumers, and we have the financial strength and flexibility to invest in our business to fuel ongoing growth and profitability.

As far as the fourth quarter is concerned, we grew consolidated sales and earnings but believe our results were impacted by weather issues as well as various costs most of which were incurred to grow the business. I will take a few minutes to discuss each of our three segments in more detail.

First, wholesale upholstery. For the quarter sales increased 2.3%. We posted a 10.9% operating margin while increasing the gross margin demonstrating the efficiencies with which we are running our manufacturing facilities. As mentioned a moment ago we believe our performance for this segment was hampered by weather issues beginning in the third quarter and extending into the fourth quarter particularly in February when same-store sales for the La-Z-Boy Furniture Gallery system were down almost 5%.

Also impacting our Quarterly Results for this segment were increased advertising expenses and costs associated with the opening of our regional distribution center in Columbus, Ohio. These costs were partially offset by a reduction in compensation costs, and Mike will speak more about that in a few minutes.

Although same-store sales for the La-Z-Boy furniture gallery network were down slightly for the quarter, they follow 13 quarters of same-store sales increases. While it's too early to determine if the weakness experienced during the quarter is purely the result of weather or if it is of a broader nature, we continue to operate our business with a philosophy and strategy designed to drive growth and profitability.

We are investing in our brand platform to generate further interest in La-Z-Boy and educate consumers about our broad line of stylish stationary furniture in addition to our core recliner and motion offerings. And we remain focused on innovative design, are introducing new product and are actively working on our store projects as we execute our 4-4-5 strategy.

For those of you who may be new to our story, 4-4-5 is our strategic initiative to grow our store base throughout North America with the objective of having 400 stores averaging $4 million per store in revenue, and, given recent results, we believe it could be more than $4 million per store over the five year period. Fiscal 2015 marks the second year of this initiative.

During fiscal 2014 throughout the network, 10 new stores were opened, 6 were remodeled, 2 stores were relocated, and 8 were closed. We ended the year with 315 La-Z-Boy furniture gallery stores in North America. Importantly, with much time spent getting processes under way to identify locations, enter new leases and secure permits, we paved the way for 30 to 35 store projects whether they be new stores, remodeled or relocations scheduled for completion in fiscal year 2015.

In addition to growing our store system to 400 Furniture Gallery locations, a key near term objective is to replace old format stores with those in the new concept design. We are actively working to change out approximately 50 old stores in the system which are under performing and do not properly represent our brand promise to the customer.

Indeed it is a high priority to transition these stores, and both the Company and our independent dealers are actively working to close and move stores to new locations and reopen them in the new format. Our plan is for all of these stores to be addressed within a three year period.

At the end of fiscal 2014, there were 31 new concept design stores, with 30 to 35 projects slated for fiscal 2015, we estimate we will add approximately 15 net new stores and more than double the number of stores in the new format by the end of the year as we continue to build momentum with our 4-4-5 store growth strategy. Although the costs associated with opening stores will impact short-term results, we continue to believe that investing in our branded distribution platform offers the best opportunity for long term growth. As we have noted in the past, once we reached the 400 store pinnacle, the Company will likely own approximately 40% of the La-Z-Boy Furniture Gallery system, and the system as a whole will be about 25% larger with a potential sales increase of approximately 40% to 50%, as we will not only increase the size of the network but will also improve the quality of the store footprint by changing out the old stores as we discussed a moment ago.

In addition to moving into new markets we will add stores in those markets we currently own while considering acquisitions of markets depending on their size and geographical location from retiring dealers. An example of a dark market which we will enter this fiscal year is Minneapolis/St. Paul with plans under way to open three stores.

As highlighted in my opening remarks, we extended our contract with Brooke Shields through November of 2016. She has been a great brand ambassador, and we believe she is bringing a new and different consumer to our stores and to the other La-Z-Boy dealers. This Spring we produced and began airing new commercials featuring Brooke to support the Urban Attitudes launch as the collection began making its way to retail floors during that time.

While our advertising costs were up during the quarter versus last year, we believe investment in the brand platform has played a critical role in our ability to capture market share and will continue to be important as we expand our footprint across North America. As we have discussed in the past, we are mindful of keeping our advertising costs fairly consistent as a percentage of sales each year.

And one last note on the segment before moving to case goods. We closed on the sale of Bauhaus during the quarter. While Bauhaus is a fine company we did not believe it was a long term strategic fit from a size perspective with respect to its revenues or earnings and believe our resources will be better utilized driving growth in the business through our integrated retail strategy. We wish the Bauhaus team all the best going forward.

Now let me turn to our Case Goods segment. Sales in our case goods segment decreased 5% from last year's fourth quarter, and our operating margin was about flat at 5.1%. During the period we announced plans to restructure the business which included Marketing Lea Industries for sale, and as a result our reported results reflect the treatment of Lea as a discontinued operation.

Our restructuring plan includes discontinuing production at our Hudson, North Carolina manufacturing facility, making us a 100% importer of wood furniture, exiting the hospitality business, marketing our youth furniture business Lea for sale as we mentioned a moment ago, and consolidating and transitioning our warehouse and repair functions. While we have made many changes to our case goods manufacturing model over the years to be more competitive, in the final analysis we determined we cannot generate enough domestic volume to support the size facility we operate in North Carolina.

Today the Hudson facility represents about 12% of our case goods volume. With strong manufacturing partners and a Global Supply Chain team on the ground in Asia managing quality and logistics, we expect to seamlessly transition the remaining product offerings being made in our Hudson facility to our suppliers overseas. We expect to cease production in Hudson during the second quarter of fiscal 2015.

With respect to Lea as with Bauhaus, it is not a strategic fit from a size perspective in terms of its revenue or earnings, and we believe our efforts will be enhanced by focusing our resources on the core case good product lines which include bedroom, dining room, and occasional pieces positioned in the mid to upper mid price points of the market. To try to give you all some perspective, the three business units we have or are exiting, Bauhaus, Lea, and hospitality, represented approximately $60 million in sales over the last year and generated negative returns.

I would like to emphasize that our case goods business remains an integral component of our total offering to the consumer. In addition to the many independent dealers carrying our various case good brands, our wood business is vital to the merchandising of the La-Z-Boy furniture gallery stores and is becoming increasingly important as we gain momentum with our in home design program where we are expanding services to include bedroom and dining room sales.

During the quarter occasional furniture continued to exhibit the most strength. At the same time we believe that the changes we are making to the segment including the product refresh at Kincaid and American Drew, where we are introduce more transitional collections, will position the segment for performance improvement.

Finally let me turn my discussions to our retail segment. Delivered sales in our retail segment increased 7% to $79 million compared with last year's fourth quarter; however on the core base of 91 stores included in last year's fourth quarter, sales for this segment increased 1%. The operating profit for this segment was $2.9 million compared with an operating profit of $4 million in last year's fourth quarter.

Our retail business is continuing to make progress. For the year we more than doubled our operating income; however, for the quarter with a majority of the stores that we own located in the Northeast and Midwest, our results were hampered by the weather. The segment's performance was also impacted by costs associated with the acquired stores as well as expenses related to increased advertising and building maintenance including snow removal.

In terms of retail metrics for the quarter on slightly lower traffic and average ticket our conversion was positive, and we increased the gross margin in this segment as a result of improved merchandising and a higher priced product mix. Moving forward we believe our integrated retail model is the right platform to drive growth and profitability for our Company, and we believe we will strengthen our performance in the segment as we increase the size of the Company owned retail segment and continue to benefit from the blended wholesale/retail margin opportunities.

And now I'll turn the call over to Mike to go through our financial report.

Thank you, Kurt. Consolidated sales for the fiscal 2014 fourth quarter were $353 million up 2.1% compared with last year's fourth quarter of $346 million. Both periods reflect the reclassification of Lea and Bauhaus to Discontinued Operations. For the quarter consolidated operating income was $23 million compared with $27 million in the fiscal 2013 fourth quarter.

The Company reported net income from continuing operations attributable to La-Z-Boy Incorporated of $14.6 million or $0.27 per diluted share, including a $0.06 per share restructuring charge. This compares with last year's fourth quarter results of $18.9 million or $0.34 per diluted share which included a $0.03 benefit due mainly to foreign and state taxes and a $0.01 per share after-tax gain related to the sale of investments.

As noted in our Press Release adjusted income from continuing operations attributable to La-Z-Boy Incorporated per share was $0.33 in this year's fourth quarter versus $0.30 in last year's fourth quarter. Also for the quarter our operating margin was 6.4% versus 7.8% in last year's fourth quarter. The decrease in the operating margin is almost all attributable to the $5 million restructuring charge we recorded during the period.

For the full year, our consolidated operating margin increased 1.3 percentage points to 6.6% from 5.3% in fiscal 2013. For the year the restructuring charge related mainly to fixed asset and inventory write downs associated with the restructuring of our case goods business. This compares with a restructuring charge of $2.6 million in fiscal 2013 that mainly related to fixed asset and inventory write downs associated with the closure of the lumber processing operations in our case goods segment.

Now let me talk about SG&A. SG&A expenses increased in absolute dollars in fiscal 2014 compared with fiscal 2013 and increased as a percent of sales by 0.2 percentage points in fiscal 2014. Advertising costs were 0.2 percentage points higher this year than in fiscal 2013 due primarily to increased spending related to our Live Life Comfortably Marketing campaign.

Incentive compensation costs were 2 percentage points higher in fiscal 2014 as well. The increase in incentive compensation and advertising were somewhat offset by a reduction in our provision for doubtful accounts as our dealer based financial condition continues to improve.

Turning to the balance sheet. During the quarter we generated $28 million in cash from operating activities and ended the year with $150 million in cash and cash equivalents, $45 million in investments to enhance returns on our cash, and $13 million in restricted cash. We used cash during the quarter to pay our $0.06 per share dividend, and we also purchased approximately 450,000 shares of stock in the open market under our existing authorized share repurchase program and have 2.8 million shares remaining in the program. We plan to continue to be opportunistic in the market with respect to buyback activity.

Capital Expenditures for the quarter were $10.7 million and were $33.7 million for the year. We expect CapEx for fiscal 2015 to be in the range of $60 million to $70 million reflecting costs associated with our new world headquarters which will be approximately $40 million of the total as well as new stores, transportation and equipment, and routine maintenance. As we are in the implementation phase of our ERP system at this time costs associated with it are being expensed rather than capitalized.

As a result of our increased global demand for leather, polyurethane and plywood, we expect raw material costs to rise in 2015 and to be approximately $9 million to $12 million more than in fiscal [2015]. To offset the expected increase, we put through a price increase at the April market, mostly on leather product that went into effect on May 1, 2014. Due to the timing of orders we will realize the full impact of the price increase in the second quarter.

And lastly, our effective tax rate for continuing operations was 34.3% for the year compared with 33.3% in fiscal 2013. Our effective tax rate varies from the 35% US federal statutory rate primarily due to state income taxes and the US manufacturing deduction.

Our rate for the year was impacted by certain discrete adjustments including a tax benefit of $1.2 million for the release of valuation allowances relating to certain US state deferred tax assets. Absent discrete adjustments the effective tax rate for continuing operations in fiscal year 2014 would have been 36.1%.

As a quick reminder to everyone, our fiscal first quarter is typically the weakest in terms of sales and earnings due to a general slowdown in the industry related to the summer months. As a result of softer demand in the quarter, we shut down our manufacturing facilities for one week in July for vacation and maintenance, with lower volume during the period in addition to one week without production and shipments, we historically have converted at a lower rate for the quarter.

Our conversion objectives on true incremental volume is still in the 20% to 30% range for the year, and we will experience variances from quarter to quarter. We define incremental volume as generating more sales with the assets we currently have deployed, in other words for retail, same-store sale increases.

And now I'll turn the call back to Kurt for his concluding remarks.

Thank you, Mike. We have much to look forward to with La-Z-Boy Incorporated. We have positioned our Company for ongoing profitable growth and will execute against our plan to achieve it by leveraging and maximizing the strong foundation we have built across our business.

While there is uncertainty with respect to the economy particularly housing, our strength traverses the key pillars for success in our industry, a leading flagship brand, a strong network of branded distribution outlets, an excellent product line up, a commitment to innovation and operational excellence, and an integrated retail structure that provides value to the consumer while generating returns for our shareholders. Our goal is to innovate, grow, and succeed in order to provide opportunities for all stakeholders, and we believe we are well on our way.

We thank you again for listening to our call this morning and I will turn the program 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.

Thank you.

(Operator Instructions)

Out first question comes from the line of Brad Thomas with KeyBanc Capital Markets.

Thanks, good morning, Kurt, Mike and Kathy.

Good morning, Brad.

Wanted to first ask just about your expectations here on the cadence of business, it's clear that you all were affected by weather. You obviously called out the data point from February. We know you have stores that over-indexed in the Midwest and the Northeast. Kurt, could you give us a little bit more color just on what you've seen in more recent months and what you've seen from a geographic standpoint?

So I think you can tell from our release, Brad, that if February was down 5% and the quarter was close to flat that we saw a reversal of those negative trends. And on average over the last 90 days, our business is up in same-store sales in the low single digits, so there is an improvement going on. And geographically, the only comment I would make is certainly the warmer weather climates didn't have the down trend that we experienced in the snowbelt, and the snowbelt results were obviously a lot worse than the 5%, but the mix of having a North America platform kind of averaged that out.

Okay and then just to follow-up on that. If we think about the nature of the furniture purchase, it's probably not as long cycle as some purchases are, but it can still take multiple visits to the store. Do you feel like there's still a hangover that's happening because of the weather earlier this year and that could trickle into this first quarter before we maybe see a return to the trends that you've been seeing earlier?

Brad, that's a different way to use the word pent-up demand, and I've struggled with how to define that for the last 10 years, so I don't know. I think there's a little more strength in the market today than there was three or four months ago, and whether that was all weather related I can't comment. But we are glad, and I'm sure the rest of you are that we're not going to talk about bad weather here for the next four or five months.

I look forward to that. Just one last one here on the store projects for this year. I think you mentioned 30 to 35 of them. It sounds like it's not finalized exactly what those projects will be, but what do you think that the net growth of stores looks like for this year?

So I made a reference to that in my comment. We believe at this point, Brad, and the only thing that's really not final is a couple of stores that the timing of getting them open in the fourth quarter, but that 30 to 35 number is very valid. And I think you'll see a range from 14 to 16 to 17 net new stores in the system this year.

Great, thanks so much and good luck.

Thank you.

Our next question comes from the line of Budd Bugatch of Raymond James.

Good morning, Kurt, Mike, Kathy. Thank you for taking my questions. Kurt, you said for the last 90 days that same-store sales looked like they were in the low single digits. That includes what, May and half of June I would guess?

No --

Would you care to parse any of that? Say again?

March, April, May, Budd, the 90 days -- the 90 days after the February number that we gave that was down 5%, is turned around the other way.

And any difference in May versus the last 60 days of the quarter?

I'm not going to comment on that since May is in our next quarterly results, and I think we gave you the color that we're going to provide on that topic.

Okay and I think the 10-K says that traffic for the year was flat with the change in pretty much in average ticket, and did I hear you say in your scripted remarks that traffic for the fourth quarter was positive?

No, the traffic for the fourth quarter was down as well, and it's a trend that we're monitoring, although we believe that people are doing more research online and narrowing their choices and perhaps not shopping as much. So and they aren't big declines but they are not growing and so our teams are working real hard on conversion and making sure they take care of the clients that come in to the best of their ability. And that was our conversion was positive for the quarter, but we did have slightly less traffic.

Okay, because traffic is I think that will be an important indicator. We pretty much aren't we in a state where we should be anniversarying some of that change in behavior where people research more online. That's been going on now for a couple of years, so I would hope to see traffic start to turn positive.

So would we.

I got you. Okay, price increases effective May 1, care to give us an overall number, and is it pretty much just upholstery and retail? How does that factor?

Yes, the price increases were introduced at the April market. They go in effect in May. It's primarily on leather, Budd. The availability and the cost of hides around the world has increased substantially, and so we had to make an adjustment, but it's all in the upholstery area, and a large portion of that is in the leather categories.

Okay and I've seen those cost increases so, Mike, I think all that $12 million to $15 million of increased cost is -- did the price increases for the fiscal year pretty much cover that or is there a little bit of a margin opportunity in those price increases to cover some uncertainty?

No, Mike's comment was we think raw materials will go up between $9 million and $12 million this year, and we always attempt to take enough increase to not just cover the cost but to cover our margin as well.

Okay. And finally for me, you talked about one dark market being opened up which is Minneapolis. How many more dark markets over the next couple years, and what might they be that you might attempt? Are there a number of them?

So, I would tell you, Budd, excuse me for interrupting. I would tell you that I think in terms of major markets that are -- that can take four or five, six stores, we are coming probably to an end on that. Two years ago, we entered Pittsburgh with three stores. Last year Southeast Michigan with four, and our intent is to have four in Minneapolis.

And thankfully a lot of our independent dealers in the fourth quarter and in the first quarter of fiscal year 2015 we're opening stores in places like Corpus Christi, Bakersfield, Naples, one store operations that our independent dealers are doing, but markets that are truly dark, we're not -- we don't have a lot of that opportunity.

The opportunity for us is in the larger markets where we're not fully stored out, Miami, Boston, New York, Southern California, those are where multiple stores are still needed to penetrate. They are underserved as opposed to our Markets in Chicago, Washington, Baltimore.

Those markets are fully stored out in terms of the number of stores. We may have to move some of the stores as the market conditions change, but in terms of covering the market, those markets are in good shape and we have three or four that need additional coverage.

Any thought as to when you might get those underserved markets fully stored? Is there a time frame?

No, that's all part of 4-4-5, and one of the reasons some of these markets are under-stored is they have the most expensive real estate in the country, and we're just being very prudent about not getting ourselves upside down with the sales we can generate in relationship to the occupancy cost, so we're scrubbing the markets really hard.

Thank you very much. Good luck on the beginning of the year.

Thank you, Budd.

Our next question comes from the line of Todd Schwartzman of Sidoti & Company.

Hi, good morning, everybody.

Good morning.

Wanted to just kind of reconcile the reported sales, the continuing ops sales with my model. I had looked for $367 million so it's about a $14 million difference between the as reported number and continuing ops basis, but I did not exclude Lea. Can you give us a sense of what the contribution in top line for the quarter as well as for the full year from Lea was and also what Bauhaus' contribution was?

So last quarter, we kind of talked through some of the -- when we reported that for the first nine months, Bauhaus' sales were $27 million, and if you divide that by three we kind of talked about that Bauhaus contributed about $9 million a quarter last year.

In our Note 4 we do give the sales for both Lea and Bauhaus for the year that were reclassified to discontinued operations. So if you look at the two together for last year and again remember Bauhaus is only in our numbers to the end of February which is a five week month, so they didn't have March and April in the number we're disclosing.

But if you look at the last two years prior to that, they averaged about $37 million a year in the two -- so an annualized basis $37 million would be the number to use. But we had $51 million of sales between those two. If you just divide that -- you can't divide it by four because you don't have the full amount of Bauhaus, but if you just look at Lea it's about $4 million or $5 million a quarter, and Bauhaus being $9 million, it's about a $13 million to $14 million a quarter number that isn't going to be in the next couple quarters as we anniversary the reclassification of those discontinued operations.

Okay, thanks, Mike that's helpful. Regarding the Urban Attitudes, can you give us a timeline maybe how far along you are with the rollout, what ultimately will be the total number of SKUs maybe talk about price points how they differ from the existing collections?

Well, let me take those questions in reverse. As far as the SKUs are concerned, it's a collection of seven or eight upholstery groups with occasional chairs and accessories and tables all correlated, so it's a fairly large collection for us, but price point wise, it is right in line with what we're -- where we sell today. It's in the $799 to $1199 price points on average.

The uniqueness of it is its styling, is its scale, is its shape and this growing trend of more apartment dwellers, more condo dwellers, people moving to smaller spaces. The industry did a pretty good job, and we were right there with them making large furniture and at times furniture that in older homes couldn't even get through the doors.

So it's more about scale and look and appearance than it is any kind of a dramatic departure from our core customer or our core price points. And it's still a little bit too early, we just started running the commercials in May. It's still getting out to all of the retail floors, so later this year, we will give you some more detailed statistics on what percentage of our upholstery business it is representing, how fast it's growing, but I think right now to do that would be premature.

Got it, and on the Minnesota market, just to remind us, when were you last in the Twin Cities area?

We've never had, either an independent or ourselves, we've never had freestanding La-Z-Boy stores in that market. We've had another retail partner who has done a great job for us in the market, but there's -- they don't represent the entire product line, and we think there's room for both. So this will be a new venture and the first time that the La-Z-Boy Furniture Gallery program has had a presence in the Twin Cities.

So in that interim, in terms of the industry dynamics, the local market considerations, how has the competitive landscape maybe changed for the better in your estimation where you want to ramp up to perhaps three? I thought I heard you say initially three stores, Kurt, and then four as the ultimate goal in that market?

Well, we have -- we identified four areas to start, and we only have committed leases on three of the four. We haven't found the right real estate in the fourth market in Minneapolis that we want, and that may not -- we may not stop at four, but like our entry into Southeast Michigan, we wanted to get four the bases covered, see how well they do, track the zip codes and where the customers are coming from and see if we have some gaps that we could add either a fifth or a sixth store in either one of those markets, but we needed to get a core of four to be able to effectively afford to advertise and cover the geographic area.

And on those underserved areas that you called out, Miami, Boston, New York, Southern Cal, can you give us a sense maybe a total of those four or by market what kind of incremental store count we might look for over the next few years?

Well, this is ever changing and fluid, because as we look for new stores, we've got leases in old stores and old markets coming up, but of part of the 70 stores that we have to get open to go from 315 to 400, I'm sure we're going to have to get at least 20 stores out of those four markets to reach that goal, so -- and Southern California is more developed than the other three but there's still some opportunity and New York is the least developed of the three. So we've got lots of opportunity.

Great, that's helpful. On the CapEx guidance the $60 million to $70 million, is a little bit more than what I was looking for, although you mentioned that includes about $40 million for the headquarters. Doesn't sound as though there's really any change with respect to the headquarters component. Can you talk about how maybe if at all your expectations for spending have changed since last quarter?

Our expectations of spend has not changed at all. We've stated what we thought the headquarters would cost. We're staying within budget and on time. We may have thought that we would have spent a little more money in fiscal 2014 on the headquarters, and we didn't so it's transferred into 2015, but a $20 million to $30 million CapEx for our continuing business is not out of the norm of what we have been doing the last few years. The headquarters is a one-time unusual situation, so we've got our normal CapEx budget that has been pretty consistent and then the $40 million for the headquarters.

And Todd our depreciation and amortization has been averaging $24 million to $25 million a year so we've been staying at about replacing that every year.

Terrific. Thank you guys.

Thank you, Todd.

(Operator Instructions)

The next question is from the line of Matt McCall of BB&T Capital Markets.

Thank you. Good morning, everybody.

Good morning, Matt.

Kurt, help me. You said it's too early to determine if it was only weather that was impacting your business, yet the cold weather areas seemed to do better than the warm weather areas, and you've seemed to see a bounce back in activity post the cold weather. So what's giving you that hesitation, and why are you not willing to say that we think it was weather related?

Well, I'm not sure that we're communicating correctly. We said that the cold weather climates in the beginning of our fourth quarter in February, their sales were off a lot more than just the 5% that the system reported, so the cold weather climates were hit very hard in January and February with weather. The fact that we have a North America system brought up the average to the negative 5% in February, but since that time we�ve said that sales have been positive and have been trending in the right direction.

Okay, maybe I wrote it down, it's too early to determine if it's only weather.

Well, I make no -- every time there's a blurb on the market about housing and everything it seems that the furniture people go into shock for a minute and then things go on. So there's -- I'm not predicting what's going to happen the balance of the year, but we believe that if we don't have another weather issue that we'll get back to some normalcy of business.

So I think maybe it was an earlier question about your traffic trends, and you've given some commentary around ticket and conversion, do you see similar trends with say traffic around the weather impacted parts of the country where -- and have you seen any improvement in that metric since weather got better?

Well, the traffic, if you look at it over a year's time, it would average out, and certain of our markets are having increased traffic. Certain of our markets are not, but overall for the system, and I think not just the stores that the Company owns but for our independent dealers as well, traffic has been modestly down this year, over a 12 or 14 month period and over all of North America.

Okay, so last quarter you mentioned the term supply chain opportunities, and I know you talked about a new regional DC, and you talked about ERP. I didn't hear you mention that phrase supply chain opportunities this quarter. Any reason it didn't get mentioned, and can you kind of give us more detail about what it is you're referencing there with supply chain opportunities specifically?

So Matt, I would tell you that we've made a lot of changes and did a lot of work on a number of areas of our business. We changed the way we manufacture from individual incentive to team incentive. We went to cellular manufacturing, we put in the regional distribution centers, we changed the way we were running our stores, we changed a lot of things with our brand platform.

The last piece of our business that hasn't had quite the same scrutiny is our supply chain, so and we -- historically when we had a number of companies, we were operating supply chain in the individual companies. Over the last year or so, we have transitioned to be operating our supply chain efforts from a Corporation standpoint collectively buying, collectively selecting our vendors and all. So we just think by giving it a little more importance and attention, doing it on a corporate basis instead of an individual basis, being -- hiring some new talent that's had experience in these areas, we think there's opportunity.

It's too early for me to give you any kind of an insight into the numbers and all, but we do think there's opportunities for efficiencies, savings, and really better cooperation with our supply chain partners. And the things that we've learned in the last five years on lean manufacturing and lean practices, we think we can provide some help to some of our suppliers about how they're servicing us and other things, and we think collectively there's more money to get out of the system.

You spoke about some of those things in the past tense, in the past year you've done some of these things. Are some of those benefits being recognized now, or are they still all to come?

I would say my reference of the past is that we've taken this time to get organized. We've taken this time to hire the team, to get the strategy, to communicate to our suppliers, and we haven't had any real significant numbers on that yet, or we would have reported on them. But we anticipate that could be coming downstream.

Okay, and that will lead nicely into my final question. So Mike talked about the 20% to 30% bogey for incremental margin. You talked about some things that will likely be a drag on that. I wrote down increased store project, ERP expenses you're going to I guess continue and then sounded like maybe some near term price cost mismatch.

So can we -- are you going to arrive at that or attain that target or reach that target with the benefits of this supply chain improvement offsetting some of these near term pressures? Is that why we can still be confident in that kind of incremental margin target range?

Well, I think that there's always puts and takes in a year in something like this. We're still comfortable with the 20% to 30% conversion on incremental volume, and I think one of the challenges we're having with the outside world is you're taking our whole volume and whatever it is, and then you're putting the 20% to 30% on that and saying that's what your contribution should be.

And with our -- all of the new stores we're going to open and all of the stores we've acquired that's truly non-incremental, because we've got all of the costs associated with it. And to give you some example and as it starts to impact us because the Company is going to be opening more stores, there's probably over a 90 day period from when we start hiring people until we get the stores open and running. Every time we open a store there's probably a $0.25 million drag on the new store process.

Now it's a one-time issue, and we think again investing in stores that can do $4 million -- that's a small price to pay, but we're going to have some of that. And we'll try to let you know the magnitude of that as the year rolls on but no, there's other things that we're working on and always decisions on where to invest, where to spend your money, things of that nature.

And we have a whole other dealer base out there that's beyond just the stores and all that we're expecting some solid growth from. So no, we aren't backing off our 20% to 30% provided it's only applied to the incremental volume on an annual basis, so we'll -- certain quarters we may do better, certain quarters we may do worse and I think you need to judge us when the year�s over whether we delivered on that promise or not.

Okay, so the way to look at it is take that $0.25 million, if I wrote that down right, $0.25 million, multiply it by the stores that you're going to introduce in that -- new stores you're going to introduce or open in that quarter, and that will be basically the only adjustment. The other things should kind of offset themselves, and you should be within that range?

Well, it's not exactly that simple, because if we open a store at the end of the quarter, we still have some more expenses that go on and it's a rolling -- and if we open them at the beginning of the quarter we had some -- because we start, we hire people 60 days before the stores open. We have those expenses, you've got pre-opening costs. You've got all your marketing to get the store open before you make the first sale.

So it's just there, I want you to be aware of it, but if anything we're saying is going to cause us to have a huge earnings miss or anything of that nature but when you're investing in growth you've got some short-term things to overcome.

Okay, perfect. Thank you, Kurt.

Thank you, Matt.

There are no additional questions at this time. I'll turn the floor to Mr. Darrow for additional closing comments.

Hello, everyone. Thank you very much for participating on our call this morning. If you have follow-up questions, please give me a call. Thank you and have a great day.

This concludes today's teleconference. You may now disconnect your lines at this time, and we thank you for your participation.