La-Z-Boy Inc (LZB) 2015 Q4 法說會逐字稿

Greetings and welcome to the La-Z-Boy Incorporated FY15 forth-quarter and year-end results conference call.

(Operator Instructions)

As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kathy Liebmann, Director of Investor Relations and Corporate Communications. Thank you. You may begin.

Thank you, Jessica. Good morning and thank you for joining us to discuss our FY15 fourth-quarter and year-end 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. Slides will accompany this presentation and are available for viewing through our Webcast link. 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. As Kathy mentioned a few slides will accompany our remarks this morning if you would like to follow along.

Yesterday afternoon, we reported our FY15 full-year and fourth-quarter results. All-in all it was a good year, marked with steady progress as we continue to transform our Company through the execution of key strategic growth initiatives.

For the year, sales increased 5% with increases in all three business segments. Operating income grew 15.5% and we generated $87 million in cash from operating activities. We also returned $66.4 million in value to shareholders through increased dividend and share purchases, an increase of 56% over last year. And we finished the year with a strong balance sheet which will continue to provide us with the necessary financial flexibility to invest in our business, to drive long-term profitable growth, while continuing to return value to our shareholders. Throughout the year, we made excellent progress with our 4-4-5 store buildout strategy, successfully implemented our new ERP system in four of our five domestic La-Z-Boy branded facilities, and strengthened our case goods segment through a major restructuring with a move to a pure import model the key component.

Before I discuss the particulars for the fourth quarter, I would like to take a moment to provide some perspective on the progress La-Z-Boy Incorporated has made over the five-year period following the economic downturn in the fall of 2008 into 2009. Since FY10, we have increased sales by 29%, increased our operating income by 168%, increased income from continuing operations by 134%, and increased our earnings per share by 121%. We have also returned $129 million in value to shareholders in the form of dividends and share repurchases, and have generated $357 million in cash from operating activities. And, finally, during this period of time our share price has increased 86%.

Fueling this performance has been an ongoing focus on building our branded distribution channel, principally through our 4-4-5 store growth strategy introduced two years ago, a compelling marketing campaign that is resonating with consumers, an emphasis on providing consumers with a great shopping experience at the La-Z-Boy Furniture Gallery stores, and applying lean operating principles to every facet of the organization.

At the same time, with a strong culture of innovation embedded within the roots of our Company, our merchandise offering is as good as it's ever been, with our improved power product and sleek Urban Attitudes collection driving top-line growth. Indeed, La-Z-Boy looks very different today than it did five years ago with our product, our retail stores, and our marketing more in sync than ever. We believe this perspective is important as it demonstrates the strategic moves and investments we are making in the Company are delivering results and providing a solid platform for profitable growth and future market share gains.

Now let me take a few moments to review the three operating segments for the quarter. First, upholstery. For the quarter, sales in the upholstery segment increased almost 7% to $305 million versus last year's fourth quarter. And we achieved an 11.6% operating margin, an increase from 10.9% in the comparable quarter last year. We achieved this strong performance despite the additional expenses associated with our ERP implementation at our plants as we were able to benefit from volume leverage as well as supply chain efficiencies.

We have been on a five-year journey working on the design and implementation of a new ERP system throughout the Company. As I mentioned a moment ago, during FY15 we implemented the ERP system in four of our La-Z-Boy branded facilities with the implementation at our fifth and largest facility, our Dayton, Tennessee plant, going live just last week. I'm pleased to report that it was successful and that today all the La-Z-Boy branded facilities are operating on one integrated system.

With respect to our supply chain initiatives, given the size and scope of the total La-Z-Boy enterprise, we see opportunity to drive operational efficiencies throughout our supply chain and have established a supply chain operational excellence initiative to optimize all facets of sourcing and global logistics. We are consolidating our supply chain efforts so they are managed on a corporate-wide basis rather than by our individual operating companies. And in April we established a global trading company based in Hong Kong to leverage our ability to efficiently procure materials, innovate with new products, source strategically, and capitalize on our global transportation network.

As we work with multiple suppliers in Asia, our sourcing program for finished goods, components and raw materials is quite extensive. And we believe that having dedicated on the ground resources will enable us to improve quality and delivery times by reducing costs for the organization. While we are already benefiting from this initiative, it is a multi-year project and we expect to further optimize our supply chain as we move forward

On the merchandising side, we are enjoying success with our enhanced power product and Urban Attitudes collection. At the April High Point Market we expanded the collection and it is being well received by consumers and performing very well at retail.

With consumer preferences for researching and purchasing furniture continuing to change, we are responding to those dynamics through evolving marketing and technology programs, enhancements to the ways in which the consumers are able to connect with us and the various services we offer. Our objective is to make the consumer experience as robust as possible and to make her shopping process inspiring and easy, no matter where that process occurs, either online or off line.

Our Live Life Comfortably campaign featuring Brooke Shields continues to progress. We plan to air two commercials late this summer, ahead of the busier fall selling season. The commercials have a new and different creative twist and we believe they will build on the momentum the campaign has already established, and will continue to widen the perception of La-Z- Boy and expand our consumer demographics. Additionally, late this summer we plan to launch new desktop, mobile and eCommerce platform for the La-Z-Boy branded business. Our goal is to create a compelling digital consumer experience that will make it easier to be inspired and informed and to shop for products and connect with our stores digitally.

Finally, we continue to make steady progress with our 4-4-5 buildout strategy. During FY15, across the La-Z-Boy Furniture Galleries network, meaning activity by both the Company and our independent dealers, 30 projects were completed, consisting of 15 new stores, 11 remodels, 4 relocations, and 5 closures, bringing the total store count to 325.

In addition to opening new stores we are actively changing out old format stores to elevate the performance of the entire network. All new stores opened in the future will be in the new concept design format which is performing at a higher level than our other format stores.

To review the numbers we gave out last quarter, in calendar year 2014, the new concept design store averaged $4.2 million in revenue, the new generation stores averaged $4 million in revenue, and the old format stores averaged $3.2 million. During FY15, we improved the quality of the store footprint by about doubling the number of new concept design stores, ending the year with 61. We expect to have close to 100 of the new format stores by the end of FY16 and are planning for 35 to 40 projects throughout the year, which will include 17 net new stores. When 4-4-5 is complete we anticipate having 200 stores in the new concept design and 200 in the new generation format.

So, as you will note, we are making important and strategic investments in the business to strengthen our operating platform as well as to drive growth, with the ERP system stores, new products, our marketing campaign and digital platforms. While these investments impacted our performances this past year, they are necessary and will benefit the Company for the long term. In just a few minutes Mike will provide more detail on what these investments will look like in 2016.

Written same-store sales for the La-Z-Boy furniture Gallery network -- for the first five months of calendar 2015, for the January through May period, were up 4.6%. As we mentioned on our last call, written activity in January was strong, with it somewhat choppy during the fourth quarter. In May we experienced a nice pick up in business including a solid Memorial Day weekend.

Now let me turn our attention to case goods. Sales for FY15 fourth quarter were $25.9 million, down 5% from last year's fourth quarter. During the year our case goods segment underwent a major restructuring which included seasoned production at our Hudson, North Carolina manufacturing facility and moving to a pure import model, while consolidating offices and show rooms and exiting the youth and hospitality business. For the year, we nearly doubled our operating income versus FY14.

As we noted in the 10-K, for the year we experienced lower sales of hospitality product through the product line being eliminated when we ceased domestic production. A large part of this quarter's sales decline related to exiting the hospitality business whose sales were included in last year's fourth quarter volume.

Over the past 18 months we've been working to refresh our case goods product lines to reflect the more transitional styling consumers are favoring today as homes become less formal. We are gaining traction with our new collections. And with the case goods business remaining strategic to the La-Z-Boy furniture gallery stores, and particularly our in-home design program, we believe the combination of the many moves we have made has stabilized the business and positioned it for long-term performance improvement.

Now moving on to retail, delivered sales in the retail segment increased 10% to $86.7 million in the fourth quarter compared to last year's comparable period. On the core base of 95 stores included in last year's period, delivered sales for this segment decreased 1.6%. The retail segment posted an operating margin of 3.8% compared to 3.6% last year. In terms of metrics on lower traffic during the quarter, the Company-owned stores experienced increases in ticket count, units per ticket, and conversion.

As part of our 4-4-5 strategy we expect the Company ownership of the total store base to increase from today's level of approximately one-third to somewhere north of 40%. We will accomplish this through new locations, primarily in existing markets where we need to increase the number of stores, and through strategic acquisitions of our independent dealer stores. Early in the fourth quarter we acquired 4 stores in Southern California, bringing our total store count in that market to 19.

Our integrated retail strategy is a key component to driving margin expansion for the Company, with sales through the Company-owned stores delivering a blended or stacked margin as we earn a profit on both the wholesale and the retail sales. During FY15, the Company opened 8 new La-Z-Boy stores bringing our Company-owned count to 110. For FY18, we are planning to open 7 new stores in addition to some remodel activity.

I will now turn over the call to Mike to review our financial performance.

Thank you, Kurt. Consolidated sales for the FY15 fourth quarter were $375 million, up 6.2% compared with last year's fourth quarter of $353 million. As a reminder the operating results of Baja and Lee Industries are reported as discontinued operations.

For the quarter, consolidated operating income increased 31% to $29.6 million compared with $22.5 million in the FY14 fourth quarter, with the consolidated operating margin increasing to 7.9% from 6.4%. The Company reported net income from continuing operations attributable to La-Z-Boy Incorporated of $19.8 million or $0.38 per diluted share, which included a $0.01 per share restructuring charge and a $0.01 in anti-dumping income related to the Company's case goods segment. This compares with last year's fourth-quarter net income of $14.6 million or $0.27 per diluted share, which included a $0.06 per share restructuring charge related to the case goods segment.

As noted in our press release, adjusted income from continuing operations attributable to La-Z-Boy Incorporated per share was $0.38 in the fourth quarter of FY15 versus $0.33 in the fourth quarter of FY14. For the year, our consolidated operating margin was 7.2% versus 6.6% in FY14.

Our consolidated gross margin improved 1.2 percentage points in FY15 as a result of increased volume and selling prices, a higher weighting of the retail segment, and improved performance from our case goods business due to the restructuring Kurt referenced earlier, and a reduction to the LIFO reserves related to that segment. These factors were partially offset by raw material cost increases and disruptions experienced in our upholstery segment from the ERP implementation.

I'd like to emphasize in my comment about the higher weighting of our retail business as this is important for modeling purposes. As you are aware, the retail business carries a higher gross margin than our manufacturing business. In general, furniture retailers have gross margins in the low 50% range versus wholesale businesses which typically carry gross margins in the high 20% range. As our retail business becomes a bigger part of our overall business, theoretically our consolidated gross margin will increase.

This brings me to my next point about SG&A. Part of the increase in consolidated SG&A expense as a percent of sales for FY15 was the result of our Company-owned retail business growing. Let me give you some color on this, as well.

Typically, retail furniture businesses carry an SG&A expense as a percent of sales in the mid to high 40% range, while wholesale businesses carry an expense in the high teens. So here, too, as our retail business continues to grow, and we have made it clear that we plan to increase our Company-owned store count, our consolidated SG&A as a percent of sales will increase.

For the full FY15 year, selling, general and administrative expenses as a percent of sales increased by 0.6 percentage points compared with FY14. This was due to the growth of our retail segment which has a higher level of SG&A expense as a percent of sales than our wholesale segments, as just discussed.

Additionally, SG&A expense increased due to investment spending for technology, reflecting the new ERP and the replacement of our website and eCommerce platform. Together this spending resulted in a 0.3 percentage point increase for the year. We also experienced a 0.3 percentage point increase for distribution costs primarily related to expansion of our regional distribution centers network.

Partially offsetting the increases associated with the ERP, the replacement of our website, the higher retail mix, and new stores were lower incentive compensation costs of 0.5 percentage points for the full FY15 year. The decrease in compensation was driven by stronger prior-year results against the incentive-based targets compared to this year's performance.

Before turning to the balance sheet, I'd like to go through a few items that are important for understanding FY16. First, raw material economics. We do not see meaningful increases over FY15.

Second, the technology spend for ERP and eCommerce as well as other technology platforms. Here, too, we do not see a meaningful change over FY15, although we will still have expenditures. With regard to the ERP, we just finished implementation at our Dayton, Tennessee plant, which is our largest plant, producing some 40% of the La-Z-Boy-branded product and has multiple shifts.

We will work on the front end of the business for the remainder of the fiscal year, specifically the sales order management component, and we will touch on the customer service module. And with respect to the replacement of the eCommerce and web platforms, we are planning for an August launch so there will be some pressure in the first quarter. In total, however, for the year, the spend for technology should be fairly consistent with this year's spend.

Third, the new store drag. This relates to costs associated with the 90-day period around the new store opening and includes labor, pre-opening rent, advertising, and technology. With roughly the same number of new stores planned in the Company-owned retail segment for FY16 as in FY15, year over year the spend will be similar.

Fourth, CapEx. Capital expenditures for the FY15 fourth quarter were $13.8 million. For the full year, CapEx was $70.3 million with $44.6 million relating to our new world headquarters. With that project behind us, as well as a majority of the ERP project that can be capitalized, we expect CapEx for FY16 to be in the range of $30 million to $35 million for regular maintenance, transportation and equipment, continued investments in technology and for new stores.

Fifth, depreciation. We expect our depreciation will increase around $5 million or about $1.25 million per quarter as we begin to depreciate the new headquarters and the new technology cost. And, finally, the difference that I alluded to earlier with respect to SG&A and gross margin as they relate to our retail business. Again, as a reminder the retail business carries a higher gross margin and SG&A as a percent of sales, so as our retail business becomes a bigger component of our overall business, those line items will increase, which may offset some of the other efficiencies gained with higher volume.

Turning to the balance sheet, during the quarter we generated $32 million in cash from operating activities, and for the year, as Kurt said, we generated $87 million. We ended FY15 with $98.3 million in cash and cash equivalents, $45.5 million in investments to enhance returns on our cash, and $10 million in restricted cash.

For the full FY15 year, we spent $52 million to purchase 2.1 million shares including 600,000 shares in the fourth quarter. This leaves 5.7 million shares of the program for purchase. And based on cash flows, other capital needs to invest in the business to drive growth and the stock price, we plan to continue to be opportunistic in the market with respect to buyback activity.

Lastly our effective tax rate for continuing operations for FY15 was 35% compared with 34.3% for the FY14. Our effective tax rate for the full 2015 fiscal year was impacted by a tax benefit for the release of valuation allowances related to certain US and state deferred tax assets. Absent discrete adjustments, the effective tax rate for continuing operations in FY15 would have been 35.4%.

Before I turn the call back to Kurt, I'd like to remind you of two things. First, as our fiscal year ends the last Saturday of April, FY16 will be a 53-week year, with the extra week occurring in the fourth quarter.

And, second, our first quarter is typically the weakest in terms of sales and earnings due to a general slowdown throughout the furniture industry related to the summer period. As a result of this, we close down our manufacturing facilities for one week in July for vacation and maintenance. With lower volume during this period, in addition to the one week without production and shipments, we historically convert at a lower rate during the first quarter.

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

Thank you, Mike. Before we close, I'm happy to report we have moved into our new world headquarters and the atmosphere in the office is energetic and very positive. We are invigorated by working in a more collaborative and creative environment that we believe will drive innovation, productivity, enhance teamwork, and the ability to attract and retain talent to the organization.

The investment in the building is behind us. The building is completely debt free. And offsetting a portion of the costs will be benefits received from local and state governments for the next nine years.

Moving forward we believe our future is bright with many opportunities to grow our business. While we have a clear pathway to execute our 4-4-5 strategy, we are also hard at work setting the stage for the next wave of growth with a number of initiatives in the pipeline being studied and evaluated. At the same time, our team is working to further expand our product line which will allow us to continue to increase our market share.

Our brand remains the most recognized in the industry and our distribution network is vast. As we grow our business, we will be able to leverage the efficiencies of our operating platform while driving increased profitability through our integrated retail model. We will continue to make strategic investments in the Company to drive profitable long term growth and enhance shareholder return.

I thank you for being on the call this morning and hope you found the new format with the slides helpful. I'll now return the call to Kathy for the Q&A.

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

(Operator Instructions)

Our first question is coming from the line of Brad Thomas with KeyBanc Capital Markets.

Hi, guys. This is actually Jason sitting in for Brad this morning. My first question is on some of your real estate. You've made a lot of good progress on your 4-4-5. I know you've talked about you've got some of the low-hanging fruit behind you and there's a couple more difficult markets that you're going to look to enter. I was wondering about your FY16. Are there anymore of those lower-hanging fruit markets or are you going to have to make a push into some of the New York, Boston type markets?

Good question, Jason. We really don't have many vacant markets that the Company is looking at right now. We are building two more stores this year and we want a third store to go with our first one in Edina in Minneapolis. That's a greenfield buildout.

But after that it's the markets where we are already in, it's markets that we need additional stores. We'll be putting between ourselves and our dealers two to three more stores in New Jersey and other places. The greenfield markets are, for the Company, diminished quite a bit. There are some smaller markets that our independent dealers are pursuing, so there will be some new communities experiencing a presence of our stores, but the majority is in the much larger markets with deeper penetration.

Okay. And then, whenever you look at, you mentioned strategically acquiring dealers, do you have a sense of what that pipeline looks at? And is it you proactively going to a dealer and saying -- you have three chains, they're not really performing well, why don't you sell those to me -- or is it more a guy who's looking to retire may just want to cash out of his investment, how those deals arise?

We have had a store program for nearly 30-plus years and we've had great support over that time from our independent dealers. It wasn't really until about 10 years ago that the Company got involved in owning stores.

For the most part, I would say, Jason, that it's dealers talking with us about their exit strategy, about retiring, about not having a succession plan, about their kids not that interested in the building. So, most of these have been very amicable, very business-like and very smooth. Just the nature of our business, of somebody that's done this for 30 years trying to plan their retirement, becomes a natural process.

Okay. And then this one is more for Mike. There seems to be, whenever you transition into a headquarters, you have a period of some duplicative costs. You have moving expenses, utilities in both places. Was there any impact on fourth quarter from that? And what are you really looking for in the first half of the year in terms of drag from the headquarters move?

There was a little bit of that disruption in the fourth quarter because we moved in March. We pointed out some of that disruption but it wasn't significant for us to call out a percentage. We will have duplicate costs in the summer, as we will run. But we've tried to reduce that impact as much as possible.

But the new building will cost more than the other building to run. We don't have enough experience to how much the air conditioning is going to cost in the summer versus the other building. I don't think it will be measurable that I'll be pointing out that we lost X percent of our earnings because of the new building, other than the depreciation I've already referred to in my comments.

Okay. And then last, is there any puts or takes that you'd call out within any of the segments that we should be looking at when we model out FY16?

I would just make a couple of comments. One is I think the overriding number that you should be cautious of is, we talked a little bit about the softness of the retail business during the quarter. But the pace of the overall business for the first five months of the year, same-store sales-wise, is 4.6%. That's a pretty solid performance.

The other thing, we've got one more quarter of the case goods business anniversarying the hospitality sales, and a lot of that was in the first quarter, so there will be a little bit of a comparison to that. I think there was some $2 million, $2.5 million in the first quarter last year in the case goods business in hospitality that's not there this year. But it should not have an effect on the business for the year, just the first quarter.

All right, I appreciate it. Good luck next year.

Thank you. Our next question is coming from the line of Budd Bugatch with Raymond James.

Good morning Kurt, Mike, Kathy. Hope everybody is well. On case goods, Kurt, you just made that comment about the $2.5 million. So, for the year, should we think case goods will actually have positive revenues comparison?

That is our plan today. We believe there's an ability to overcome the hospitality volume that we're replacing. As we go through our product refresh, the new groups are selling a lot better. In fact, a couple of them were a little short of inventory right now and catching up. So, yes, it would be our intention to not have a down year in case goods.

Okay, thank you. And on the written sales for retail, I'm a little bit confused, so make sure I understand it. 4.5% for the first five months of this year for the first quarter, but the fourth quarter was just like a 1%, is that right?

That's right, Budd. And the reason we're giving that number is we had very strong written business in both January and May, and choppy business in the fourth quarter. I don't want to use excuses. It's hard to remember the fourth quarter because that was February and March. And we experienced some of the same challenges, not using this as an excuse, but we experienced weather issues, we experienced the port strikes, we had some of the other issues. But I think the better number is the pace of business in the entire network, and the pace of business over a five-month period, has averaged out at 4.6%.

Okay. So, for the year, we would expect that mid single-digit increase is a good way to look at for the year?

I can't predict the rest of the year. Our same-store sales increase last year for the whole network was right around 3%. We would hope to do a little better than that but I'm not really going to give you a number. I can't see into the back half of the year in any confidence to give you a number but obviously we think we can still continue to grow the base store business.

Okay. Let me take this tack. Mike, you had gone over and given us some of the mix comparison as the Company's characteristics change for gross margin and SG&A. Are there any other changes this year? If we were going to just project out, should we project out something different to get those two numbers other than the mix change? Or what other factors, because you said raw materials are relatively benign. I take it that means there's not much in the way of pricing? How do we think about the SG&A overall and the gross margin or cost of goods sold overall?

In my comments, I tried to list as many things as we thought were prevalent to give, Budd, and obviously I emphasized a little bit more on the gross margin and SG&A because of the weighting of the retail. I'm just trying to make sure people understand we may get some efficiencies in our SG&A based on our volume at retail, but then as a consolidated number it does offset some of that. But I don't have any other color I can give you that we're aware of right now that's going to impact other than the things that I outlined in my prepared comments.

Kurt, let me just take some other tack now. You have a very strong balance sheet, as you said, nearly $100 million of unrestricted cash and almost no debt. Last year you returned a whole bunch of cash to shareholders, dividends. What's the dividend policy thought process now? How should we project out of that if we want to do a couple years forward, because it looks like cash is going to grow on the balance sheet, you don't have the claims of the new headquarters anymore, and it looks like you've got depreciation, not terribly, but fairly in close with CapEx?

Budd, I would go back a little bit and say one of the things that we were a little cautious a couple of years ago with cash is because we knew we had all these investments we were making in technology and in stores and in the new headquarters. And with that behind us we have a little more flexibility on what we want to do.

But our priorities on our cash have not changed. It's investing in the business, it's share buyback, and it's dividend. To tell you the weighting of those, I can't comment because things could change. We're going to continue to try to increase our number of stores both through greenfield projects that we do and through buyback of our dealer organizations.

We are watching that and trying to balance all three of those. But obviously we've worked hard to get our balance sheet in this position and should we not have investments we can make in the business, you would see fairly strong returns of cash to the shareholders like you did last year. But we're also looking to invest cash in the business long term to try to enhance our returns and grow our business.

So, do I take it, in the order I think you gave it, you had share repurchase above dividend. That's a more pressing higher priority?

No, I would not -- I would reverse. The order of magnitude is investing in the business is first and always first. And then how we return the cash to shareholders depends on a lot of factors and the share price and the market and things of that nature. They're not hugely disproportionately weighted.

Okay. And as the Board discusses dividend policy, is there a payout ratio that you target? Is there a yield that you target? What's the thought on the Board that you could share with us in the public domain?

Most of the things we talk about in the Board I can't share in the public domain. But we have our targets and we talked about the dividend appropriately. We reintroduced it three years ago and have increased it each of the last two years.

I think that's a signal that we're sensitive to what our shareholders are looking for and need. But I don't want to make a blanket statement and commit to any kind of ratio because we want to remain flexible.

Lastly, Mike, for you, just tax rate for modeling purposes of 35.5% rate. Is that a good rate or what would you think is the right rate?

That would be a good rate, Budd. 35% to 36% is where we've been targeting. It just really depends on what our overall taxable income ends up being, what some of these deductions get to be. But that's a good range.

Budd, I'm not sure that's a good rate but that is our rate.

I'd rather it be 25% but I just can't seem to get it there.

I hear you. Thank you very much.

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

Thanks, good morning, everybody. Just to clarify, first, on the raw material side, you said there's going to be no change. Making sure I understand what you're saying there. You had some pressure, if I remember, in 2015. Are you going to get relief in 2016 as that pressure goes away, as we see some deflationary benefits, or is it we're going to see another year of mid teens type pressure?

Our comment on that, Matt, is we don't see much change in our raw material pricing in aggregate for the year. Some things are going down, some things are going up. Last year we did have raw material price pressures and we took some price increases to cover that. This year, as we look out sitting here today, we don't see much of that on the horizon and we haven't done anything pricing-wise to mitigate that.

Okay, thank you. You talked about -- I'm talking about same-store sales here -- the quarter being up slightly the year, year-to-date being 4.6%, and May is better. When you look at the good months -- and you broke out the different drivers, traffic, ticket, units per ticket, conversion -- is there anything that changed during those months at all that drove traffic that much better, or was it the ticket was conversion, or was it more of those items like weather and ports and some of the --?

Matt, I would say that there's three components to this and I really can't tell you because, frankly, we're not 100% clear, but there's three factors. Number one, the same-store sales number is the entire network, not just our stores. We know a little bit about some things we've changed within our stores on some incentive compensation issues, on some management changes, et cetera. But I don't know intimately what our independent dealers did to drive their same-store sales through that five-month period, so I can't comment on that.

And the other factor here is the consumer. The consumer at times seems to retreat temporarily and then come back. And I think, from everything we've seen in the market, that the industry had a good Memorial Day weekend, which was not like the last couple of years. And I'm not positive it's anything the industry did but I think the consumer was out more and all of us benefited from that.

I can't point to one or two things that has really made the difference. And we're as equally puzzled by the change month to month from being very positive to tepidly weak one month to the next, with us not changing anything. That's a lot of conversation without a whole lot of detail because I think that's the environment we're in.

But I guess the point there is your results are consistent with what you're seeing in the broader industry?

Our own stores are paralleling the results of our independent dealers. So, that's an ebb and flow. And when the Company stores have a flat same-store sales month it's not like our independents are up 10% or anything like that. There is a pattern to that all over North America. And then remembering that we do at least 50% of our business with the non-store customers, the pattern I just outlined seems to be consistent with their experience in business, as well.

Okay. And then you mentioned the supply chain operational excellence initiative. Any more color you can add there near term, long term what you expect to accomplish from a savings perspective?

We're just in the beginning phases. We have had a couple of people that have been working here at the Michigan office moving to Hong Kong and establishing our trading company. To date we have been basically doing quality and logistics in our group in Asia. And it's going to become a little more aggressive with procurement and direct sourcing and some other things that we won't see a lot of benefit of that for another 12 to 18 months.

As we look at things organizationally to do it more corporately, and as retail plays a larger and larger percentage of our growth in our business going forward, the global sourcing entity is a natural out growth of that.

Okay. More to come, okay. And then maybe, Mike, you gave a nice list of some puts and takes for 2016 over 2015. As we think about that in terms of your stated conversion targets, can you maybe consolidate all those items? Is the bottom line, other than the SG&A or gross margin shift -- and I get that -- but is the bottom line that we'll see some continued pressure on your targeted conversion in 2016?

We still believe on the incremental basis from what we're adding on if we do same-store sales increases, that type of thing, we'll convert at our stated amount. Now that we're finished with Dayton, our largest plant, we went live a week and a half ago and everything is showing that it's going very well. Still disruptive but based on having this being our largest plant with two shifts and all of the different facets of this building, it's gone really well.

I don't have anything that I can add to that to make the conversion any different. We are still working through can we give you all some better information on what an overall conversion would be without incremental. There's just so many moving parts with our technology changes, with the building, with the plant going live. So, we just need to see some consistency to give you better information on that so we can take out the incremental part.

Okay, got it. Thank you, guys.

Our next question is coming from the line of Kristine Koerber with Barrington Research Associates.

Good morning. First, let me just follow-up on CapEx. The $30 million to $35 million, is that something we should use? Is that ongoing? Is that something we should use beyond FY16?

I think the depreciation, amortization of getting around $30 million, maybe it's a little under that, but I think $30 million is a good number to use going forward for right now. We found that the one thing that we cannot go back on is making sure that we're updating our technology. It's changing so dramatically every year. So, we'll have a cadence of spending that money every year. Maybe not any more than what we're spending but we'll have some cadence for spending that.

And with our plants, we have dedicated resources ensuring that our plants stay modern. We'll continue to do that, as well. So, I think the $30 million number going forward is a good barometer to start with.

Okay. And then another question on the technology. After the sales order management software, and then you have the customer service module you talked about, what's next besides regular updates? Are there any other major investments that will be needed over the next couple of years?

It's hard for us to answer that question, Kristine, because we don't know what's coming next from the technology companies. But I know whatever we're doing today in technology, five years from now it won't be obsolete but it won't be best practices at the time.

So, our view is we're trying to, as we look at our future investment in spending, is to protect that bucket of technology investment for knowing that something else is going to come downstream that helps us in the retail stores, helps our people on the front lines, some other things. We can't tell you specifically what that would be but odds are technology spending is going to be continuing at a high level for most all companies.

Okay. And then as we look at advertising, what is the advertising budget projected to be this year over last year? And as we think about the television campaign, how are you measuring ROI? How do you know that a campaign's working and that it's driving traffic into the stores, into the brand?

Both those are very good questions and I'll answer the second part first. Since we launched the Live Life Comfortably campaign, and it's certainly not the only factor, but our average store is doing over $1 million more than it did four years ago. So, the marketing effort has had to have some impact on that.

I think our salespeople are more knowledgeable. I think our product is more fashionable and competitive. But the only thing that we do consistently over the whole network of 325 stores is the marketing because it's all done with the same creative and the same message. And over that period of time we've had traffic so I think that it's a clear indicator that our marketing campaign has been effective.

And to answer the first part of the question, we have, for the last few years, been spending around 4% of our sales in advertising. And that's all kinds. That's not just the Live Life Comfortably campaign. And we increase it every year as our sales go up. So, we put more dollars to it but we haven't materially changed the percentage. We were spending 4% when we were doing $1.2 billion and we're spending 4% when we're doing $1.5 billion. And the dollars are important but as a percentage of sales there hasn't been much movement.

Okay. And then, Mike, you'd mentioned expect to see some pressure in Q1 from the website launch. How much pressure? What should we expect as we model out Q1?

Like I said, we spent the money last year more evenly, and we're just talking about that since the web launch is going in August most of the money will be spent in the first quarter. It will probably be, I wouldn't say it's going to be more than $3 million but it will be a couple million dollars in the first quarter on that spend for the technology.

And I think we had to be sure, because some of these things in a normal quarter we probably wouldn't even call out. But historically the first quarter we do $50 million, $60 million less than we do in the fourth quarter and so any expenditure is amplified because of the lower volume. But on a year basis, it's not going to have that large of an impact.

That is the main purpose why I put that in my comments is the first quarter does have the pressure on it because of the low volume.

Okay, great. And then, just lastly, can we just get an update on Urban Attitudes? I know it's doing quite well for you guys. What are you thinking about the collection longer term? And I'm assuming we'll continue to see expended SKU assortment.

I think that's safe to assume, although we may not put it all under the Urban Attitudes moniker. What it has shown us is that we have a customer that's looking for that type of product, and a customer that we're trying to attract more of to our stores, which is a little younger, a little more fashion forward. I think we were underserving that customer prior to Urban Attitudes.

It's still pushing almost one-third of our upholstery business. And it also, I think, reflects what's happening with urban living and people downsizing and living more in apartments and condos. Just the smaller scale of furniture is something that everybody is attacking and we're glad we got out ahead of it.

Okay, great. Thank you.

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

Hi, Kurt, Kathy, Mike. In discussing the Q4 comps written and delivered, and in fact the January to May entire first five months of the year, you talked about a number of factors but one thing I don't think I heard mentioned was the promotional landscape. Can you talk about any changes you may have seen from month to month within that five-month period?

Todd, we don't really see that much of a change. The furniture business, the furniture industry is very promotional and everybody is trying new things, ways to attract a customer. But nothing that we can point out significantly different.

This is an unusual period of time when we have certain months that are high single digits and certain months that are flat, and they're back to back and we see no discernible change in what's going on in the external environment. So, we're scratching our heads a little bit to figure out both why it was so good and why it was flat come the next month. But nothing that we can point to yet.

I can't recall off-hand what the weather was like in January 2014, but if weather was a factor was it better in January? Is that what helped that month as Memorial Day essentially stronger year over year helped that particular month?

I'm not going to use the weather as an excuse or anything. We had bad weather in 2013, too -- 2014 and 2015. I just said that was part of the factors but I can't say that was the only reason or the biggest reason. I would say that January is one of the largest sales volume months we have because of the post-holiday sales, clearance sales.

Sometimes the percentage increase on a month is not as meaningful because the month itself, like the month of April is not nearly as strong as the month of January. And then the peculiar thing that doesn't happen all the time in May was that there were five Saturdays and five Sundays in the month, so there was a full complement of five weekends, which is a retailer's dream. We probably benefited from that a little bit. But there's no discernible difference in any of those things that you asked.

So, if we were just to parse the Memorial Day and isolate the Memorial Day weekend, you saw some, it sounds like, good growth year over year. Can you quantify the demand pick up in terms of traffic, ticket, any weight at all?

The reason we gave you the five-month number of 4.6%, I think that takes out all of the noise and gives you a more steady run rate than one weekend was good, one week was bad. In two weeks we have another inflection point with the 4th of July weekend. We'll see how that turns out.

We like to look at it over a longer-term basis and not focus solely on one month. So I think for your planning purposes and thinking about what's the real pace of our business, that 4.6% number is the best one you can use.

Got it. Okay, thanks. I wanted to just ask on the case goods, Kurt, you'd made a statement that you're gaining traction with some of the new collections. Just curious about what you were referring to, whether it's new customers or maybe just better placement with existing ones.

My comment there, Todd, was that 18 months, two years ago we said that, in general, our case goods assortment was skewed too far on the traditional side and we had to get more transitional and more up-to-date looks. So, we've changed out a lot of the product and we're more balanced today with less formal, because the American people aren't building as many formal dining rooms and formal bedrooms, and they're more casual, and our furniture didn't quite reflect that.

And we're starting to see the benefits of that. In fact, we've had a couple of groups, particularly at Kincaid, that sold so well we temporarily ran out of stock, and we'll be caught up in the next 60 days. But, yes, it's just a product that's more on trend as it's resonating. As we have that better product, our ability to sell more through existing customers and pick up new customers is going to increase.

Excellent. Thanks a lot.

Thank you. It appears there are no further questions at this time. I would like to turn the floor back over to Management for additional or concluding comments.

Thank you, everyone, for joining us on this morning's call. If you have any follow-up questions please give me a call. I'll make myself available for you. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.