La-Z-Boy Inc (LZB) 2016 Q3 法說會逐字稿

Greetings and welcome to the La-Z-Boy, Incorporated third-quarter FY16 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kathy Liebmann, Director of Investor Relations and Corporate Communications for La-Z-Boy.

Good morning and thank you for joining us to discuss our FY16 third-quarter 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. 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. Yesterday afternoon we reported our FY16 third-quarter results. It was a quarter marked by solid execution, and we are very pleased with our results.

We grew sales by 7.3%, operating income by 29%, earnings per share by 27%, and generated $48 million in cash from operating activities. Our consolidated operating margin reached 9.1%, the highest level in any quarter in more than 12 years with all three operating segments posting healthy margins. And, importantly, our Retail segment posted an 8% operating margin, a milestone for the Company in that business.

Over the years, we have consistently said that when we generate additional volume, we have the ability to enhance our profitability on each incremental sales dollar, and this quarter demonstrated just that. Our conversion target on an annual basis still remains in the 20% to 30% range.

I will turn now to briefly discuss our three operating segments. First, Upholstery. For the quarter, sales in the Upholstery segment increased 5.6% versus last year's third quarter, and we achieved a 10.9% operating margin, slightly off the 11% achieved in the comparable period of FY15.

Last year's quarter, however, included the benefit of a legal settlement which added 2 percentage points to the segment's margin. So we are particularly pleased that our Upholstery segment's performance this quarter was inherently better.

The ERP implementation at our plants is behind us, and we're gaining traction with our supply chain initiatives, which cut across two different disciplines. Procurement, where our global trading company in Hong Kong is managing sourcing, and our manufacturing, where we're working to continuously improve productivity and efficiencies.

With respect to sales, our brand platform marketing campaign continues to resonate well with consumers, as is our product offering, and we believe that with a vast line of on-trend and stylish stationary furniture, we are not only expanding our traditional base of consumers but are widening our demographic, which is one of the prime objectives of our advertising campaign. We had strong unit volume during the quarter while at the same time the power category continues to be a strong performer and contributed to the gross margin improvement for the period. And importantly, we are growing our business across a number of distribution channels.

While the La-Z-Boy Furniture Galleries network is vital to our future, there are other avenues through which to grow sales beyond the store system. In fact, we have some 2800 other distribution outlets where our upholstered products are sold, and we are having success in increasing our business with this base of customers and will continue to cultivate this channel.

I'd like to take moment to talk about England, our other upholstery company. England provides a superior level of service and delivery to all its retail customers, regardless of their size.

Its unique distribution model allows it to do business with top 100 retailers, along with over 1200 small independent store operations located throughout the US and Canada. Its consistent quality, coupled with quick and reliable delivery, that is customer orders delivered in 21 days or less with a 95% on-time performance rate, give this division a unique competitive advantage.

This advantage has resulted in strong growth and consistent financial performance. In short, England is a great performer for La-Z-Boy, Incorporated.

For the quarter, written same store sales for the La-Z-Boy Furniture Galleries system decreased 1.8% compared to last year's strong third-quarter performance of 6.5%. For the full calendar year of 2015, same store written sales increased 2.9% compared with calendar 2014. I'd like to make a couple of comments here.

First, we did in fact reach the $4 million objective for the average revenue per store in our 4-4-5 buildout strategy, more than 2.5 years ahead of our target, so we believe this bodes very well for the future performance as we continue to build out our store network. Second, over the last five years, we have increased the revenue per store across the network to $4 million from $2.8 million or 43%. So with our 4-4-5 store buildout strategy, the La-Z-Boy Furniture Galleries network is well on track to become a $1.6 billion enterprise throughout North America.

This brings me to an update of our 4-4-5 strategy. At the end of the third quarter, there were 331 La-Z-Boy Furniture Galleries stores across the network. While one objective of the 4-4-5 initiative is to increase the number of stores throughout the system to 400, another objective is to improve the quality of the network by upgrading old format stores to our new concept design through either remodels or relocations. Once we change out an old store, we do experience a lift in performance for that store.

As we near the end of FY16 across the network, we remain on track to execute approximately 30 store projects including new stores, relocation and remodels, yielding a 13 net new store figure. Over the next 12-month period, we plan to open more than 20 new stores with 8 in FY16 fourth quarter alone, so as you can see, our pipeline for store projects is very robust.

To put the stores system into perspective, at the end of calendar 2015, we had 80 stores in the new design concept format, 218 stores in the new generation format, and 33 old stores, down from 40 at the end of FY15. Collectively for calendar year 2015, the store system averaged $4 million in revenue as I mentioned a moment ago.

With respect to the performance for the three different channels or three different formats, in calendar 2015, our new concept design stores averaged $4.2 million, the new Gen stores averaged $4 million, and the old format stores averaged $3.2 million. As we grow the base of stores throughout the network and change out older stores into the new concept design, additional volume associated with these moves will flow through our upholstery facilities and enable us to better leverage the fixed cost structure of those plants and drive improved profitability.

Now let me spend a few minutes on Casegoods. During the quarter, we more than doubled our operating margin in the Casegoods business, reflecting our move to a pure import model. We accomplished this on a slight dollar decline in volume, which primarily related to higher percentage of sales of discounted products and collections in last year's third quarter, following the closure of our Kincaid manufacturing facility in Hudson, North Carolina as well as approximately $400,000 in hospitality sales, a business that we abandoned.

We are continuing to refresh our product lines at Kincaid and American Drew to reflect more lifestyle looks that are most appealing to today's consumer as their taste in homes become less formal. While the process to change out our product line has been lengthy, we are optimistic about the growth potential of the business and are confident we will deliver more consistent performance. Our occasional business at Hammary continues to track well, and we look forward to delivering in the fourth quarter new groups that were introduced and well received at the fall high point market.

Now moving on to Retail, we are encouraged with the performance of our Retail segment which turned in an 8% operating margin, the highest level we've achieved since we've been in the Retail business. Sales increased 22.7% to $110 million versus the prior year, and on the core 101 stores included in last year's comparable quarter, delivered sales for the segment increased 6.6% or $5.6 million. Additionally, the 10 stores acquired last quarter contributed $9.4 million in sales to the segment for the third quarter.

During the period, our team developed an excellent promotional plan that included the right cadence throughout the period. Again, the consumer is responding favorably to our product offering and brand platform. We did increase the segment's gross margin for the quarter with increased in-home design business, custom orders, and again a strong performance in the power category.

At the same time, the increased volume allowed us to leverage our fixed cost structure in the business, which consists primarily of occupancy and distribution-related cost. As we move forward, we plan to continue to invest in the Live Life Comfortably campaign as well as promotional marketing to support our retail stores and enhance our share of voice in selected markets.

As we have spoken about previously, one of the core strategies to grow the Company-owned business is to make strategic acquisitions of independent dealer stores in addition to opening new stores. The 10 stores acquired in the second quarter were integrated quickly and easily into our portfolio and were immediately accretive to the business. We would expect that to be the case with any future acquisitions.

As our Company-owned retail business grows, we will further benefit from the stacked margin associated with our integrated retail model where we enjoy earning an operating profit on both the wholesale and retail sides of the business. I will now turn the call over to Mike for his review of our financial performance.

Thank you, Kurt. Consolidated sales for FY16 third quarter were $384 million, up 7.3% compared with last year's third quarter of $358 million. For the quarter, consolidated operating income increased 29% to $35 million compared with $27 million in the FY15 third quarter with a consolidated operating margin increasing to 9.1% as Kurt noted earlier.

The Company reported net income from continuing operations attributable to La-Z-Boy, Inc. of $22 million or $0.43 per diluted share, compared with last year's third-quarter net income of $18 million or $0.34 per diluted share. Our consolidated gross margin improved 2.3 percentage points in the quarter compared with last year's comparable quarter, reflecting an increase in each of our three business segments.

Our Upholstery segment benefited from higher unit volume and favorable changes in product mix, as well as supply chain efficiencies. On a consolidated basis, favorable legal settlements in last year's third quarter provided the prior-year period with a 1.5 percentage point benefit.

Our Retail segment gross margin improved as a result of increased custom and in-home design orders, which generated a higher gross margin than sales of stock units. And the gross margin in our Casegoods segment improved due to the transition to an all import model. A little less than half of the 2.3 percentage point increase in gross margin for the quarter related to changes in the consolidated sales mix as our Retail segment has grown and it carries a higher gross margin than our wholesale businesses.

Selling, general and administrative expenses for the quarter as a percentage of sales increased 0.7 percentage points versus last year's comparable period. Advertising expense was 0.4 percentage points higher during the quarter as a result of increased investments in our marketing campaign and an increase in spending to enhance our share of voice in selected Company-owned retail markets.

Professional fees were 0.4 percentage points higher in this year's quarter versus the comparable period last year, primarily due to spending for our continued ERP implementation, our new e-commerce website, and other matters. Higher cost associated with our new world headquarters, primarily depreciation, was 0.2 percentage points higher during the third quarter versus the prior year period.

Incentive compensation costs were flat as a percentage of sales in the third quarter of FY16 versus the same period a year ago. As we noted in our Form 10-Q filing, we have two large drivers of incentive comp cost which in the current period mostly offset one another.

A portion of our incentive comp is tied to current-year financial performance, and those costs were higher than the prior year, due to the improvement in our consolidated financial performance against our incentive-based targets versus our performance last year against this target. This increase was offset, however, by lower costs for equity compensation due to the decline in our stock price during the third quarter of FY16 compared with an increase in our share price in last year's third quarter. Several of our share-based compensation awards are liability-based awards, and their cumulative expense to date is adjusted at the end of each quarter based on the share price on the last day of the reporting period.

As with my discussion of gross margin, changes in the consolidated sales mix had a 1.5 percentage point impact to SG&A expense as a percent of sales for the FY16 third quarter. With our Retail business continuing to grow, it carries a higher SG&A primarily due to occupancy cost than our wholesale operating segment.

Now let me turn to the balance sheet. For the quarter, we generated $48 million in cash from operating activities. During the quarter, we had capital expenditures of $5.9 million and expect CapEx for the full year to be in the $25 million to $30 million range.

We paid $5 million in dividends and spent $11 million to purchase 400,000 shares of stock, which leaves us 4.6 million shares available for purchase in our program. Moving forward, based on cash flows, stock market conditions, and other uses for cash including making investments in the business to drive growth, we will be opportunistic with respect to our share purchase program.

And lastly, our effective tax rate for continuing operations for the quarter was 36.2% compared with 34% for the third quarter of FY15. Our effective tax rate varies from the 35% statutory rate primarily due to state taxes, less the benefit of the US manufacturing deduction, and foreign earnings in jurisdictions with lower tax rates than the US. For the full year, 36% is a good range to use for modeling purposes.

Now before turning the call back to Kurt, I'd like to remind everyone that FY16 is a 53-week year with the extra week occurring in the fourth quarter. So for modeling purposes, in addition to including the extra week in this year's fourth quarter, you need to remember that for FY17, our year will only be the 52 weeks. Kurt?

Thank you, Mike. As we move forward, we are pleased with our positioning in the marketplace, particularly in this somewhat uncertain economic environment. We will continue to execute our four-pronged growth strategy including the 4-4-5 store buildout plan, acquiring independent La-Z-Boy Furniture Gallery dealers as we increase the size of our Company-owned Retail segment, increasing our business through other distribution channels and expanding our share of the stationary upholstery market.

Our operations are lean and efficient. Our distribution network is vast and varied, and our brand is strong. And as we increase sales throughout our enterprise, we should deliver increased earnings and long-term value to our shareholders. We do appreciate you being on our call this morning, and I will turn things back to Kathy to start the Q&A. Kathy.

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

Certainly.

(Operator Instructions)

Our first question today is coming from Brad Thomas from KeyBanc Capital Markets. Please proceed with your question.

Yes, thank you. Good morning, Kurt, Mike and Kathy and congratulations on a great quarter.

Good morning, Brad.

Wanted to first ask a question about some of your performance in distribution outside of the La-Z-Boy network, a lot of attention being paid to Wayfair in particular. Could you talk a little about some channels like a Wayfair, how they're performing and how you think that channel, e-commerce in particular, may grow as a distribution method for you in the years ahead.

Well, let me answer that question which is a good one, Brad, from a number of different points of view. I think one of the challenges people are having is people are equating our same-store sales percentages, 100% correlated to our wholesale business.

And one of the things that makes La-Z-Boy's distribution patterns unique is in addition to the stores, we have a wide range of other distribution throughout North America. In fact, the wholesale part of our retail business is only about 45% of our total wholesale business. And so there is not this one-to-one correlation which you could see this quarter with the growth of the Upholstery business that some of our other customers are performing quite well.

And as it relates to Wayfair, I'm sure they give out a lot of good information on what they're doing and how they're growing. We are a vendor of Wayfair and respect the way they have gone about their business model.

Certainly I believe the Internet is going to grow as their percentage of furniture purchases over time, but I'm not of the opinion at this point that it's going to replace brick and mortar stores. I think there's a place for both. I think they work in tandem.

And La-Z-Boy is trying to make sure that it stays receptive to what's going on out there and moves with the times.

Great. And if I could ask a bit more about the recent trends, your written orders have slowed. Could you just talk a little bit more about maybe what it is that you're seeing out there right now from the consumer, Kurt. And any color if you're willing to give it on how President's Day shaped up.

Well, I would say that the consumer is holding up better than the stock market right now, and we were very pleased that our same-store sales for calendar year 2015 were up nearly 3%. It was down slightly for the quarter, but that's not I don't think an indication of necessarily a future trend.

During the last 12 months we've had certain quarters up and certain quarters down. There are for obvious reasons some challenges in our business, particularly where it relates to oil in Texas and Western Canada, and there is a challenge for us in Canada with the exchange rate and the strong US dollar. But frankly, those are things we can't control, and we go on about our business, so I'm encouraged by that.

President's weekend was strong. We were affected, as was everybody else, a little bit with the weather, particularly in the Mid-Atlantic states. But it seems that we're affected by weather every President's weekend, so I haven't been able to see yet how it relates to the previous year, but the consumer is still being very resilient.

Probably a concern of ours is how long all the other negative stuff hangs over their head and will she become less positive and be a little more reluctant to shop. Right now, we're not seeing that indication.

Great. And from a housekeeping perspective, Mike, as we model the fourth quarter, how should we think about the earnings benefit that you might get from this extra week?

That's a good question, Brad. You have that extra week. Not everything is plus-plus, because we still have to pay people for the week and all that.

So we will get some more volume out of it, just depends on where the volume comes from and how it's processed through the plants. But I can't give you any better feel that we're going to have conversion of X percent on that one week more than we would have on any other week.

There obviously is some fixed cost that doesn't come in there, but I don't think it's that tremendous that you can add in an extra 20% conversion because it's an extra week. But it is just an extra week, and I think you just have to look at it in the totality of a 14-week quarter and what that does in sales.

Great. That's helpful, Mike. Thank you.

I will turn it over to somebody else. Thanks again and congrats again on the strong quarter here.

Thank you.

Thank you. Our next question today is coming from Budd Bugatch from Raymond James. Please proceed with your question.

Good morning, Kurt, Mike and Kathy, this is Bobby actually filling in for Budd. I appreciate you guys taking my questions and congrats on another very strong quarter.

Thank you.

I was hoping, Kurt, maybe you could give us an update on your thoughts around the motion category. That's been a nice strong shift in the product mix for a couple quarters now. How much more run room do you see in the consumer preference to shift towards motion?

Well, I don't know, Bobby, that it's a significant enough a shift to start predicting any kind of trend. I think La-Z-Boy's core reputation and what consumers know us for is motion, be it recliners, motion sofas, sectionals, and people are decorating their homes in more casual settings. People are decorating around televisions, and our furniture plays right into that.

But I don't believe there's a seismic shift of our mix between stationary and motion, and some quarters stationary does better, other quarters motion does better. I do think the one advantage that we're benefiting from is we have a wide range of power furniture on our motion furniture with great functionability, with great ease and the consumers seems to be reacting positive to that. I think that's a differentiation of product that we have that's probably the best in the marketplace.

That's helpful. I appreciate that.

Maybe a update on your -- inside your store plans, have you guys changed at all the target square footage that you're looking for on the new stores as you continue to build out the 4-4-5 plan? I know you guys were testing a smaller concept store in one of the Mid-Atlantic markets recently.

That's a good question, Bobby. To be clear, they're two totally different things. We believe the 13,000 to 15,000 square feet range of our new concept design format is ideal.

It's performing above $300 a foot. It's a comfortable shopping environment. It gets enough of our product in there to show the whole array.

Years ago, we went to larger stores, and, frankly, the last -- the additional 3,000 or 4,000 feet was not as productive. And we believe we can get the job done on a little bit smaller footprint. The urban concept store that we keep talking about, small store, is for targeted markets.

It's a test. We're trying to learn if there's a way that we can reach -- most of our stores are in suburbs, and we would not put a small store out in a suburban market. We would stay with a 15,000 [square foot].

So we're just trying to find additional avenues for growth, and we think the trend in America to move back to urban areas is obviously real. And we're trying to see if there's a way we can attract that customer.

Any take-aways on the first couple months of the urban concept?

It's still too new to really make any judgment. We're making some adjustments to the store. I don't think you can make any conclusion when you do things of this nature on just one store.

So we need to have half a dozen or so across other markets before we ever says this is really good or this is something we need to move in a different direction. And that day will come, but it's a while off.

Okay. Fair enough. I appreciate the color. Congrats again on the strong results and best of luck in the fourth quarter.

Thanks, Bobby.

Thank you. Our next question today is coming from Matt McCall from BB&T Capital Markets. Please proceed with your question.

Thank you. Good morning everybody.

Good morning, Matt.

So you brought up your supply chain efforts, and the two I wrote down were procurement and productivity. When you think about maybe quantifying the opportunity there, did you see some -- I think I got the second one right, productivity.

But did you see savings in the quarter, did you see benefit in the quarter? Have you talked about maybe some savings targets from that initiative?

We have not given any numbers on the savings. We're always trying to do things more efficient. We're always trying to find ways to cut out waste.

But obviously, Matt, raw materials, those things have been in our favor here the past six or nine months, not dramatically, but with what's happened around the world, the supply's a little bit less expensive. But it's also about our efficiencies, and it has to do with a whole host of things other than just commodities.

It's the E1 system helping us have more real-time and actionable information. It's you can see that we increased our inventory consciously prior to the holiday season, so we were in a better service position, had less out-of-stocks, shipped furniture faster. So it's a whole host of an integrated strategy to just operate at a very high, high level, and we're continuing up that ladder.

But no -- in the past you quantified some of the -- when you had an initiative, you're going to get X dollars of savings. This isn't one of those efforts where you can put some dollars on it outside of things like FX.

In the past when we did things, we gave you a big number on sell year. We gave you a big number on Mexico. There's no big numbers like that.

It's a lot of little things being done continuously and improving, but it's $400,000 here and $800,000 there. It pales by comparison when we said we're going to save $20 million on this project or something like that. It would be a lot -- there would be a lot of dialogue to get any significant number.

Okay. All right. That makes sense.

I guess this is similar. The four-pronged growth approach, you've quantified 4-4-5 in the past, and I think we've all tried to put our -- put the numbers together to get an opportunity or quantify the opportunity. When you think about the other three prongs, is there any way that we should look at that from a growth beyond the market perspective?

Well, that's a good question, Matt and certainly we want our ongoing organic growth. But we will be buying more La-Z-Boy licensed stores over time, but I can't tell you how many or when. That's up to some of our customers, when they decide if they want to retire or move on to do something else.

But we do have a pipeline of things we're working on, and some more will come. We certainly don't have the influence over our 2,800 other dealers that we do the La-Z-Boy furniture gallery system, but we have a vast sales force and sales management team that is working hard with all those customers to increase our importance and help our dealers sell through to the consumer. But that is a big piece of our business.

And the stationary business is a long-term growth opportunity for us, to make sure that people think of La-Z-Boy beyond just motion, and we think we can grow that category faster than the category grows organically. But we're not prepared to give any targets at this point.

Okay. Thanks for that. The last one I had, you reiterated your target margins. Wouldn't be a call without me asking about incrementals.

I won't ask about incrementals. You had some really good performance. Upholstery margins are -- Upholstery margins remain high.

Retail margin's good. Casegoods margin's good. Any thoughts on updated where those margins could go commentary?

I would have been disappointed if I didn't get this question from you, Matt.

I don't want you --

It's the first time we've hit some of these levels in certain segments, and one quarter is not going to change our mind to push them up. You have to remember, we're in a little bit of a seasonal business, so these kind of margins without the volume will be hard to maintain.

So in the first quarter of the year, we don't get nearly this volume, and so those margins on an annual basis won't quite be there. But if we showed you three or four quarters of these kinds of performances, we've historically then changed our margin expectations.

But the good thing about the quarter is there was no any one-time benefit or instance that caused us to have superior performance. I would tell you that our belief sitting here today is if we get comparable volume in a quarter or more, that these margins are repeatable, given everything else staying normal. The cost of raw materials, all this.

But this is -- we're now in a volume-sensitive business that if we're going to make more money, we have to have more growth. But if we have this kind of overall volume, we would be disappointed if we didn't have a comparable performance.

Okay. I do want to sneak one more in on the raw materials. Can you just talk about the benefit you referenced earlier, you've seen benefit the last six to nine months, what would be the expectation for I guess the quarter and as we look out into next fiscal year?

I think the commodities have been coming down for the past 18 months or so, and I don't have a crystal ball. But I'm not thinking we're going to get much more benefit going forward.

I'm not sure they're going to go up a whole lot, but I think the change that has happened in the last 1.5 to 2 years has probably reached a bottom plateau. And we wouldn't expect on a commodity price -- now, we're still doing other things about how we buy and how we source and all that to try to lower our cost, but the price of commodities I don't think is going to go down materially more the next 18 months.

Okay. All right. Thank you, Kurt.

Thank you, Matt.

Thank you.

(Operator Instructions)

Our next question today is coming from Kristine Koerber from Barrington Research Associates. Please proceed with your question.

Good morning. A few questions. First, can you just talk about the promotional environment and what you're seeing? Has it gotten any worse over the past quarter or so?

Well, Kristine, as I've said before, we are in a very promotional business, and depending on which customer segment you're going after and the type of store you have, it's a 365-day promotional business. But I don't see a huge change.

People are using discounts and financing and free TVs and all the normal things they've been doing, and I haven't seen any let-up on that, but I'm not sure there's much gas left in the tank for the industry to do much more. So it's a competitive industry, and people respond to sales and discounts, and that's prevalent throughout the industry and I don't see that changing.

Okay. And then as far as advertising, we saw an uptick in advertising spend in Q3. How should we think about advertising in Q4 and beyond? And any change to the current strategy?

So we've been trying to spend up in our advertising reach commensurate with how we're growing the business. Sometimes you have to spend the money in advance of getting the business, so you have to prime the pump.

And so our business, our spend on advertising next year could be up a little bit as a percentage of sales. And whether it's from the wholesale side with the brand or the retail side, there are some markets that we feel that we need a higher share of voice. And going forward we're going to be doing some testing and spend a little more money in that regard. But I don't think it's going to be material to our financial performance.

With regards to the those markets where you need to spend more to have more of a voice, why is that? Can you just --?

It all depends on who's your competitor in those markets, how many stores you have, what the cost of media is, and there's a whole litany of things we go through to decide. Suffice to say, there's some great local competitors in a number of the markets we're in, and we're a national competitor. And while we have greater share of voice nationally than most people, in some individual markets, we believe an additional investment in our marketing campaign will deliver some top-line growth.

Okay. That's helpful. And then just lastly, as you get through the remodels or relocations of those 33 old store models, what's next? As we think about the new generation stores, the 218 or so stores, will you need to go through and make any meaningful improvements or upgrades to those stores?

That's a great question, and our thinking about that has been that the new generation stores still are very inviting, very professional, present a great shopping experience to the customer. And as you can see from the results, they're still averaging $4 million a store. So it's not that they're in the kind of shape that the old, old stores are.

But with that said, stores age out. And one of the problems we have with the real old stores is that they look it and they feel it and they don't represent the brand promise. So our next phase after we get to the 400 part -- or 400 number of total stores, we would probably start looking at the oldest new-gen stores and the ones that are getting a little tired and need some freshening up and decide.

And encouragingly, we've had a number of our independent dealers already look at some of their new-gen stores and realize they're a little tired and the carpet's worn and the colors are a little dated, and they've already on their own, without any really encouragement from us, have gone ahead and started to remodel them too. So every eight to 10 years or so, the stores need a fresh look.

And so we're on a continuum here. The first one was a little more massive than in the future, but any store we have that we think is dated will get some attention going forward. And we will continue to encourage all of our dealers to continue to invest in making sure their showrooms are as up-to-date as possible.

That's helpful. Thank you very much.

Thank you, Kristine.

Thank you. Our next question today is coming from Dillard Watt from Stifel. Please proceed with your question.

Thank you. Good morning and congrats as well. Wanted to see if you could give a little more color on your retail performance beating your target in terms of timing to getting to $4 million.

Obviously I know there are lots of different buckets, whether it be store remodels, custom and in-home design, power, all those different things with mix. Is there anything else in there, what was different from what you experienced versus what you had planned on?

I'm not sure there was a -- I'm not sure there's been a big difference on what we were planning for. We have we think a very viable store model.

We have a number of great independent dealers who are fantastic retailers whose 100% focus every day is their stores. And it was just a matter of the way the Company got started in the retail business was really from a defensive mode, in taking over stores that were not being run very well and in poor location and just took time to get a fresh look on all of those and get them relocated.

So this was always our expectation. It probably just took a little longer than we thought. But it's a strong network, and we don't think we're done with the improvement that we can make.

So it's a combination of what you said, Dillard. Our overall marketing program, the way we handle the customer when she comes in, the comfortable feeling of our stores and the no-pressure sales philosophy that we have, the product that we offer.

I don't think there's any one thing you can call out. It's the aggregate collection of all the things that we do to make our stores work.

How much room do you think you have on custom and in-home design, and what have you been doing to drive some of that increase in business?

I think we have a lot of room, because truly the mass customization and the in-home design are two of the things that differentiate us from most of the other retailers. And it's increasingly going up as a percentage of sales, and it should because if we were just selling product without any added features or benefits or convenience for the customer, I think our business would look different.

So I think that will continue. As we get better at it, as we have more technology to help the customer understand how her room can be transformed, I think that will continue to occupy a much higher percentage of our sales going forward.

Great. And then lastly, on the acquired stores, are you, as you said, several years ago when you got into the business, you were acquiring underperforming stores.

Now you're probably I think acquiring stores that are more often than not outperforming your average. Is that still the case? And are you still able to grow sales and profits per store even once they're acquired?

Again, an excellent question, Dillard. Since we took over most of the markets that were struggling and not performing very well, the rest of our network today is very healthy.

So your conclusion that the stores we're looking at today performing as well as or better than our own network as a whole is correct, and most of those stores that we're acquiring, the dealers are coming to us and saying they're ready to retire. They don't have family in the business. And we do have some advantages to make them more profitable, just because we don't take out an owner salary and we don't have to have every store have their own accountant.

There are some scale, but we're buying very good businesses. We will improve on them, and unless it was a very unusual situation, which doesn't exist today, but the odds of us buying something again that's in very bad shape, not very high. We would opt probably just to shut down and start over because there has to be some inherent problems with their real estate or something that's causing the problem.

Great. Thank you very much.

Thank you.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Management for any further or closing comments.

Thank you everyone for participating on our call this morning. If you have follow-up questions, please reach out to me and I will make myself available. Have a great day.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.