La-Z-Boy Inc (LZB) 2016 Q4 法說會逐字稿

Greetings and welcome to the La-Z-Boy Incorporated FY16 fourth-quarter and full-year results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Kathy Liebmann, Director, IR and Corporate Communications. Thank you, Ms. Liebmann, you may begin.

Thank you, Michelle. Good morning and thank you for joining us to discuss our FY16 fourth-quarter and full-year 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 website 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 excellent results for FY16 and the fourth quarter. We continue to make strong progress in the execution of our strategic growth initiatives while improving the efficiencies of our operations and this translated into the fifth consecutive year of sales and operating income increases. We are also delivering on our corporate vision, to enrich people's lives by turning houses into homes; by providing great product, services, comfort, and quality with the ability to satisfy both our shareholders and customers simultaneously, giving us tremendous satisfaction.

Before reviewing the quarter, I would like to run through the highlights of the full FY16 year. As a note, FY16 included 53 weeks with the additional week having an approximate 2 percentage point impact. For those of you new to our story our fiscal year ends on the last Saturday of April, and every five or six years due to the way the calendar works, we have an extra week in our fiscal year.

For FY16, our sales increased 7%. We've improved efficiencies. Our operating margin reached 8% for the year, the highest in 13 years. And diluted earnings per share increased 21.1% to $1.55, despite the impact of the previously announced $0.07 per share charge related to a pending legal matter. This charge impacted our consolidated operating margin by 0.4 percentage points.

Over the past five years our EPS has increased 278%. In addition to operating cash flow exceeding $100 million this year, our balance sheet remains very strong with $112 million of cash on hand, access to additional lines of credit and virtually no debt, giving us the financial flexibility to execute our growth initiatives, reinvest in the business, and move into the future with a solid foundation.

As referenced a moment ago, throughout the year we delivered strong execution against our four strategic growth initiatives. Just half-way through our 4-4-5 store build-out plan, we achieved the second 4 in the 4-4-5 moniker: $4 million in sales as an average per store.

Second, we are working to expand the distribution of all of our Company's product lines, La-Z-Boy, England, Kincaid, American Drew, and Hammary, as we have some $700 million in sales through distribution outlets beyond the La-Z-Boy store network as well as our increasing global presence where we see great opportunity.

Third, we continue to increase our retail scale by opening and owning a larger percentage of the La-Z-Boy Furniture Gallery network. And fourth, we are leveraging the powerhouse La-Z-Boy brand beyond the iconic recliner as we expand our market share in the stationary category of the upholstered furniture market.

Now, let me take a few minutes to review the three operating segments for the FY16 fourth quarter. And as a reminder, the extra week in FY16 which occurred in the fourth quarter improved our quarterly sales by approximately 8 percentage points.

For the quarter, sales in the upholstery segment increased 9.7% to $335 million versus last year's fourth quarter. For the period, the upholstery margin achieved an 11.8% operating margin, an increase from 11.6% in the comparable quarter last year.

We achieved this strong operating margin performance despite the $5.5 million accrual for a pending legal matter associated with a lawsuit over a contract dispute which had a 1.6% drag on the operating margin for the segment. However, even with this charge, we outperformed the prior-year quarter, a result of increased volume and our ability to leverage the fixed cost structure of our manufacturing facilities, as well as supply chain savings which include procurement and plan efficiencies.

Our supply chain operational excellence initiative, or SCO as we call it, is delivering results. Overall, our in-stock position for manufacturing supplies, raw materials, and finished goods has improved substantially, allowing us to improve our delivery speed to customers. And as part of our SCO process, our global trading Company established late in FY15 in Hong Kong with a mandate to streamline overseas sourcings of finished goods, component parts and raw materials, is also providing tremendous value.

And finally, our plants are improving their efficiencies, driven partly by the ERP system implementation which was completed in all of our residential plans early in FY16. Since that time, we've been realizing the benefits of a truly integrated system in terms of better information flow and data visibility, which in turn allows us to improve our service to our customers. We are working on a sales order management component of this system and plan for that implementation throughout FY17.

On the merchandising side, we are enjoying success with our broad power product range which continues to increase in popularity. At the April High Point Market, we introduced an articulating head rest on a number of our motion styles to provide proper head support when in the reclined position.

Within our stationary line we are expanding our selection and offering multiple style choices to keep up with today's trend, while most importantly providing consumers with the legendary comfort that is the hallmark of our brand. Our Urban Attitudes collection, targeted for smaller spaces, remains a key collection and we continue to introduce new styles within that assortment.

We were very excited to introduce this past April, an exciting new fabric program called I-Clean from Culp which uses innovative technology to surround each fabric fiber to repel spills. We are offering approximately 65 fabrics in the line which will be available on most La-Z-Boy styles. It was extremely well received by our dealer base and believe the line has great potential with consumers.

Meeting the consumer where she wants to be met is of paramount importance. In addition to our advertising platform playing a key role on television and in print media, it also permeates our desktop and mobile websites and all of our social media platforms, enabling us to canvas the marketplace with targeted messages. Most importantly, we are available to the consumer through whichever outlet they prefer.

During FY16, we launched a totally new desktop, mobile and e-commerce site technology platform. In developing a more dynamic and intuitive digital experience within the new La-Z-Boy.com, we can more powerfully connect with our customers, helping them bring to life their vision of living life comfortably. We believe we have created a digital experience that will evolve the brand to new levels and our team continues to fine tune the site to provide the best user experience for the consumer.

As part of the new website launch, we updated our e-commerce site to insure we are providing a best-in-class digital experience, making it easier for customers to be inspired and informed about our products and to shop in the manner that best suits their needs. Traffic to our site continues to increase and there is much anecdotal evidence that consumers are spending a lot of time researching frames and fabric selections before they visit either a La-Z-Boy Furniture Gallery store, or one of our other distribution outlets.

While we continue to believe that most consumers will prefer to make their purchase in a store, we are committed to offering them a variety of means to browse, collect information and shop so we can indeed meet them where they find it most convenient. Throughout this process, we have also been implementing a marketing cloud, a technology platform that consolidates data and enables us to personalize digital content so we can maximize our investment by ensuring our communications are timely, relevant and compelling.

With respect to our 4-4-5 store build-out strategy, we are making steady progress expanding the La-Z-Boy Furniture Gallery store network. And as mentioned early, we are pleased to have already achieved the $4 million in average revenue per store. This was an exciting milestone and gives us great confidence in what we are doing with the La-Z-Boy brand with respect to the stores, the network build-out strategy, merchandising, and our product offering.

Our 4-4-5 goal is to create a $1.6 billion retail business through the La-Z-Boy Furniture Gallery network and with the progress to date, we are well on our way to achieving that objective. And if we do not hit the 400-store number by the end of the five-year period due to some real estate obstacles, we still believe that the revenue performance of the stores will deliver the same economic value, $1.6 billion at retail.

For FY16 throughout the network, 28 projects were executed, including 16 new stores and 12 remodels, bringing the store count to 338 with 89 in the new design concept format. As we talked about in the past, a key part of 4-4-5 is changing out old format stores into the new concept design, as those stores are performing at a higher revenue level than our other formats.

Looking ahead to FY17, we have approximately 25 to 30 projects scheduled to be completed and expect to end the year with approximately 120 stores in the new concept design format and 350 stores in total. And when 4-4-5 is complete, our expectation is to have about half the stores in the new concept design and the other half in the new generation format.

Written same-store sales for the La-Z-Boy Furniture Gallery network for the FY16 fourth quarter increased 2.2%. As a note, same-store written sales are reported on a comparable basis, meaning the extra week in the quarter did not apply to the written same-store sales increase.

Now let's turn to case goods. Sales for the FY16 fourth quarter were $26.3 million, an increase of $1.6 million from last year's fourth quarter. The operating margin for this segment increased 6.2% versus 4% in the comparable period last year. Our operating margin performance demonstrates the peer import model is working well and as a result, we believe we will see more consistent performance in this business moving forward.

Our team is working to drive sales and has been refreshing our product lines to reflect more up-to-date lifestyle looks that are more appealing to today's consumer, as their taste in homes become less formal. As a result, at the High Point Market in April, American Drew introduced a great new collection called AD Modern which was met with a lot of excitement throughout our dealer base. We expect it to hit retail floors in September and believe it has great potential. While the process to revamp the operations and product lines of our case good companies has been lengthy, we are optimistic about the potential for this business.

Now moving on to retail. We are extraordinarily pleased with the way our retail business has grown over the past few years and particularly with its performance improvement. For FY16, the retail segment was about a quarter of our overall business, hitting a milestone with sales exceeding $400 million, and we expect further growth. I will speak more about that in a moment. Additionally, we more than doubled our operating profit versus FY15.

For the fourth quarter, delivered sales in our retail segment increased 26% to $109.2 million. On the core base of stores included in last year's quarter, sales increased 13%. The operating margin for the segment was 5.8%, up 2 percentage points over last year's comparable quarter, demonstrating the efficiencies with which we are running the business and our ability to leverage the segment's fixed cost structure with improved volume.

Sales through our Company-owned La-Z-Boy Furniture Gallery stores provide us with the greatest level of profitability due to our integrated retail model where we benefit from the combined margin, earning a profit on the wholesale and retail side. Additionally, as the retail business becomes a larger portion of our overall business, we will benefit from its increased size due to the higher gross margin it carries compared to our other businesses.

As part of our 4-4-5 progress, we are opening new stores and are also acquiring stores from independent dealers. During FY16, we acquired 11 La-Z-Boy Furniture Gallery stores, 2 in Wisconsin, 2 in the Carolinas, 6 in Ohio, and 1 in Fort Collins, Colorado. As we begin FY17, we acquired a store in Reno, Nevada. As a note, the Fort Collins and Reno stores are two of the highest performing stores in the system and the highest volume individual stores we have acquired to date. We have done well in integrating all 12 of these stores into our portfolio and they have been accretive to the business from the start.

I would like to take a moment to thank Jason Johnston, the owner of the Fort Collins store and Don and Becky Gruner, the owners of the Reno store. As part of the La-Z-Boy family for many years, they were very committed to our brand and its evolution over time. They built great businesses and we wish them all the best in their retirements.

During FY16 the Company opened five new La-Z-Boy Furniture Gallery stores bringing our Company-owned store count to 124, including the 11 stores acquired. For FY17, we are planning to open six new stores in addition to the remodel activity and believe there will be other acquisition opportunities ahead of us.

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

Thank you, Kurt. As a brief conclusion to Kurt's discussion about the fourth quarter, consolidated sales for the FY16 fourth quarter were $417 million, up 11% compared with last year's fourth quarter. As Kurt mentioned earlier, the FY16 fourth quarter included one additional week, with the extra week increasing sales by approximately 8 percentage points.

Consolidated operating income increased 16% to $34 million compared with $30 million in the FY15 fourth quarter, with the consolidating operating margin increasing to 8.2% from 7.9%. The Company reported net income from continuing operations attributable to La-Z-Boy Incorporated up $22.7 million or $0.45 per share, which as mentioned earlier, included the previously announced $0.07 per share charge for a legal matter.

This compares with last year's fourth-quarter results of $19.8 million or $0.38 per diluted share, which included a $0.01 per share restructuring charge and a $0.01 per share of anti-dumping income related to the Company's case goods segment. As a note, the accrual for the legal matter had a 1.3 percentage point impact to our consolidated operating margin for the quarter.

Consolidated sales for the FY16 full year were $1.53 billion, up 7% or $100 million higher than last year. The FY16 year included 53 weeks, with the extra week increasing sales by approximately 2 percentage points.

For the year, consolidated operating income increased 19% to $122 million compared with $103 million in FY15 with the consolidated operating margin increasing to 8% from 7.2%. The Company reported net income from continuing operations attributable to La-Z-Boy Incorporated of $79 million or $1.55 per share, which included the previously announced $0.07 per share charge for a pending legal matter and a charge of $0.01 per share for the restructuring related to the Company's case goods segment.

This compares with FY15 results of $67 million or $1.28 per diluted share, which included a $0.02 per share of anti-dumping income related to the Company's case goods segment. Again, the accrual for the legal matter had a 0.4 percentage point impact to our consolidated operating margin for the year.

Our consolidated gross margin improved 2.8 percentage points in FY16 versus FY15, reflecting improvements in all three business segments. Additionally, we experienced gross margin improvement due to the change in our consolidated sales mix, as retail now comprises a higher percentage of our overall business and carries a higher gross margin compared to the wholesale segments.

In upholstery supply chain efficiencies, favorable changes in our product mix and leveraging the benefits of our ERP system in our branded upholstery plants improved this segment's margin. Our retail segment benefited from increased custom and in-home design orders, which generated a higher gross margin than in-store sales. And our case goods segment improved its gross margin due to the transition to an all-import model.

SG&A as a percent of sales increased 2 full percentage points in FY16 compared with FY15. Professional fees and legal costs were 0.5 percentage points higher, primarily due to the legal fees and the $5.5 million accrual for the pending legal matter associated with a lawsuit over a contract dispute. We also had increased spending for our continued ERP implementation and new e-commerce website.

The pending legal matter referred to earlier is currently under review by the court. And the court could overturn the verdict which could result in the entire accrual being reversed. Additionally, if the verdict is overturned, that decision could be appealed which could result in additional expense in future periods in defense of that appeal.

We also had higher cost for depreciation, associated with our new world headquarters as well as higher incentive compensation costs, primarily due to the improved financial performance this year against an incentive-based targets compared with our performance last year against its targets. And as I mentioned in my discussion of gross margin, as retail becomes a larger part of our consolidated business, our SG&A as a percent of sales will increase because retail carries higher SG&A expenses when compared to our wholesale segments.

Before turning to the balance sheet, I'd like to go through a few items that are important for FY17. First, raw material economics. We do not see meaningful increases over FY16, although steel prices have increased over the past month and could have an effect on us after our current contracts expire.

Second, capital expenditures. We expect total capital expenditures for FY17 to be in the range of $35 million to $40 million. For FY16, they were about $25 million. The increase to CapEx relates primarily to upgrades to our plants and machinery equipment in order to maintain our competitive edge. CapEx does not include store acquisitions.

Turning to the balance sheet. During the quarter we generated $43 million in cash from operating activities and for the year we generated $112 million. We ended FY16 with $112 million in cash and cash equivalents, $34 million in investments to enhance returns on our cash and $9 million in restricted cash.

For the full FY16 year, we spent $44 million to purchase 1.7 million shares, including 600,000 shares in the fourth quarter. This leaves 4 million shares in the program for purchase and based on cash flows and other capital needs to invest in the business to drive growth, we plan to continue to be opportunistic in the market with respect to buy-back activity.

We also paid $18 million in dividends, returning a total of $62 million to shareholders when combined with our share purchases. We will continue to use our cash prudently during FY17 with our first focus to invest in the business to drive growth, the second to pay our dividend and depending on how much we spend on those first two items, the third will be to buy shares.

Our effective tax rate for continuing operations was 35.3% for FY16. Impacting the rate for the year was a tax benefit of $0.3 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 FY16 would have been 35.6%. For modeling purposes we expect our effective income tax rate to be in the 36% range for FY17.

Before I turn the call back to Kurt, I'd like to remind you of two things. First, FY17 will be a 52-week year so please keep that in mind as you think about next year.

Second, our first quarter is typically the weakest in terms of sales and earnings due to a general slow-down 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 the period, in addition to 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. As we execute a multi-pronged growth strategy today, our team remains nimble and is at work developing the next set of initiatives to drive growth well into the future. While it is premature to expand further upon the potential of those initiatives, I am invigorated by the creativity, the thought processes and the analytics our team is applying to the ongoing development of our strategic growth initiatives. Importantly, we challenge ourselves every day to ensure we are fluid in our decision-making as the competitive landscape continues to change.

Though there have been many twists and turns through the decades, today our Company is positioned as well as it has ever been. Our brand remains the most recognized in the industry. Our distribution network is vast and varied, and we are providing consumers with many options to learn about our product and shop for it.

I'm very proud of our team who operates the business with vigor and an innovative spirit. And I'm confident the path ahead will be exciting as we continue to drive sales and earnings while investing in the business to provide long-term sustainable growth and earnings momentum.

I want to thank all of you for your interest in La-Z-Boy Incorporated and will now turn the call over to Kathy to provide instructions for getting into the queue for questions. Kathy?

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

(Operator Instructions)

Brad Thomas, KeyBanc Capital Markets.

Thank you, good morning, Kurt, Mike and Kathy and congratulations on another great year here.

Thank you, Brad.

A couple of questions, if I could. The first was around the update of your web and mobile sites. Kurt, I was wondering if could you share any early learnings of perhaps how the customer is using the site differently and how these upgraded sites might benefit your business going forward.

I think two of the large measurements that you watch with your web traffic and access to the site is, are you actually having increased traffic. And number two, how much time are they spending and what are they looking at. So we believe that the longer they spend on the site, the more probable they are going to shop for our products.

We're seeing increases in both of those and also finding that they're using all types of different devices to communicate with us. Being able to have a broader view of the customer and how she wants to interact has been valuable. And we watch those other two metrics pretty closely.

Great. And then with respect to ERP, a couple of questions about it. For one, could you quantify some of the benefits that you might be starting to see here in FY17? And then could you give us an update on what the next steps are in terms of the roll-out and if there are any quarters that we might be more mindful of potential risks, if you're changing things over within the retail store itself? Thanks.

I think it's very obvious to us that the largest benefit right now, in addition to some financial benefit from being more efficient, but our ability to service the customer has improved dramatically. Our on-time shipping percentage is at an all-time high. Our late orders are at an all-time low. We're shipping 95%-plus in four weeks or less.

The availability to consistent data and the availability to see end-to-end has been a great benefit, for not only the Company but actually for all of our customers and dealers who interact with us. I think that's the biggest take-away so far that we have. Again, as I said, in addition to the efficiencies and productivity.

We are in the final stages of the E1 implementation and we're putting in the front-end of the system. Any time that you touch legacy systems and change them over and have as many users as we have, there could be some risk. But we are taking the same approach with this implementation as we did with the plants and the supply centers. We're taking one bite at a time. We're not trying to go the Big Bang theory. We're not going to put all of our systems to a change-over at once.

We wouldn't anticipate any kind of huge risk or one quarter where there's a huge financial drain to us. Our experience over the last five years of going through this journey has made us very cautious and disciplined about how we do this. Something could happen, but that's not in our view right now, Brad.

Great. And then just to connect the dots with the updates on ERP and the balance sheet, I believe in the 10-K it shows your backlog down about $20 million from $71 million last year to $51 million at the end of this past year. Can you help us connect the dots on how much that's efficiencies versus perhaps what you're seeing out there in terms of customer demand?

Well, our customer demand has remained steady based on our results. And we did have growth, so the majority of that reduction in backlog is not having late orders and hitting our promise dates and cleaning up things that had been out there longer than they should have been. So most of that is an acceleration of service which took our backlog down.

Perfect. I'll turn it over to others. Thanks so much and congratulations again.

Thank you, Brad.

Budd Bugatch, Raymond James.

Good morning, Kurt; good morning, Mike; good morning, Kathy. Congratulations as well.

Thanks, Budd.

I think if I understood right, the increase in sales for the extra week was 8% and I think that was probably evenly spread across segments. Is that a right way to think about that?

Yes, but on average the 8% is across all segments, yes.

Okay. And I hear the increase in sales. If I missed the increase in earnings because of the extra week, I apologize, but I didn't hear how that factored into earnings. Were there any accounting issues that might not get repeated with a 52-week year?

No, we had our normal sales in conversion on those sales based on our cost. Nothing really was out there that we would want to call out on this call.

So nothing to be concerned on average. And if you did quantify the extra EPS impact of that, Mike, what would that be? I'll do the math but -- and I haven't done it yet because I thought there might be some vagaries in that.

I think the math is there. It's pretty much our conversion based on the sales and using our tax rate. I don't have that number off the top of my head.

Okay. You talked about the elevated CapEx for the year. How does that factor in through the quarters? Have you already started to see that? Is it more evenly spent? How is that going to flow through the year quarter by quarter or period by period?

It will be pretty evenly throughout the four quarters, Budd. We do anything we can for machinery and everything, we try and do it in the first quarter when we do our shutdown so it will be less disruptive in the plant. But a lot of these equipment changes that we're doing as well and any remodels we're doing at our plants, will be done outside of the production environments so that they should not have any issues there. But we try and do these pretty much evenly throughout all four quarters.

And Kurt, where do you need upgrades in the equipment? Is it La-Z-Boy? Is it England? Is it both? What's the competitive edge you're trying to achieve there?

I think to think about this differently, Budd. We have older plants because we've had them a long time. And we probably under-invested in them to keep them fresh, and simple things as bathroom remodelings and a roof and air conditioning and some of the other things that just need to have happen.

So equipment-wise our routers wear out everywhere. We run our equipment hard, we run it a long time, but some of it's time to replace. Also in there is continuing to upgrade our transportation fleet, particularly at England, with new equipment as well.

So it's just we have a big infrastructure and we have to keep it modern. We don't want to get behind. So we're going to, over the next probably two years, touch every one of our manufacturing facilities with some much-needed refresh and some maintenance things that have been put off.

And so as we look, this is more of a two-year elevation, is that the way to think about it?

Well, it could be, depending on timing of things, depending on weather. The good thing is most of our plants are in the south so they don't have to take the winter off for building and all. We don't -- we're looking to sequence this. We're out getting bids on certain things.

It isn't tightened down to where I can give you those specifics, budd. But suffice to say, our CapEx will be a little bit higher, given that the enterprise is continuing to rise and there's CapEx in there for stores and other things. I think this CapEx percentage, as a percentage of sales, is not much different than five years ago we were spending $25 million. We're $400 million larger and we got to continue to reinvest.

Okay. Mike, I've got projecting like $28 million in depreciation in D&A for the year. Is that a reasonable number or did you give a number? I don't think I heard that either.

No, that's a reasonable number. That's about the range we're going to be in.

Oh, okay. And last question for me is advertising. You elevated it a little bit this year. You had more retail. How does that factor in and what do you think for this year?

Budd, I think we did elevate the dollar spend, but I'm not sure the overall percentage spend on all of our marketing for all of our brands and all of our companies, I don't think it was up percentage-wise very significantly. The one change that we have on our horizon for next year is there are certain markets where we think we've got an opportunity to raise our share of voice where we're not as pleased with some of the traffic counts we're getting into certain DMAs. So we may do some testing and learning about how we can attack those things. But we're not doing it nationwide or on a wholesale basis, we're picking targeted things where we think we have some opportunity.

Okay, I'll let others go from here. Thank you very much.

Thank you, Budd.

Matt McCall, BB&T Capital Markets.

Thank you, good morning, everybody.

Good morning, Matt.

Start with the upholstery margin. I think if we strip out the legal, it's over 13%. I wasn't expecting that, so good job. Can you talk about the outlook from here? Is there a way to look at that from a conversion standpoint? I don't really know -- because one of the things you brought up, Kurt, was that the S-C-O, I think you said, or SCO supply chain issues. Is that playing a part in this? I'm assuming that it is, but if it is, can you quantify the savings to date and what you expect?

I think with all of our numbers, Matt, you have to look on an annual basis. There's going to be one quarter a year that retail makes its best margin because that's the quarter it has the most volume. And the fourth quarter is in wholesale when we have the most volume. So to say that you can replicate that every quarter of the year and that's going to be our annual, that's a little bit of a stretch.

One of the things about our supply chain team that has done things is if you always have the materials on hand and your workers don't have to take any interruptions and they can work a full schedule without changeovers and everything, your efficiencies do go up. That's been a big benefit for us. And we're continuing to find ways to be more and more efficient and take costs out.

But we've also had favorable economics and favorable raw materials. That doesn't last forever either. It was a wonderful job that our operations and supply chain team did this year, there's no doubt about that. And we would expect it to continue. But I'm not sure year after year we're going to be able to double down now that we've caught up on things that are at a run rate.

Okay. So the 13.5% -- I understand the full year view, but is it the new baseline? Or do we still -- I understand the seasonality of the business, but when you talk about a run rate of these benefits, are all of the benefits that you expect in that run rate that was in that 13.5%? Or are there more savings that are coming?

So one of the problems with talking about places where you save money and everything, we don't ever seem to talk about places that cost us money. Unless you got a different plan than we do, healthcare keeps going up, our wages are going up, all those kind of things.

We try to find efficiencies and savings to offset some of that so we can keep our values to the customer at a good level and return value to our shareholders. To give you that we could save a couple million dollars here, but our healthcare could go up $5 million. So I'm not sure I want to get into that debate.

We're comfortable that we should be in the low double-digit range of operating margin in our upholstery business. We're not prepared to raise that to 15% or anything like that. That 10% to 12%, whatever range we've been in, we believe that's a possible on an annual basis. We're going to work hard to beat it, but right now I can't give you any indication of a seismic change in our view.

Okay that's fair. But is the same true for the other two segments? Mid single-digits, I think is what we've talked about before. That's where they were, mid to high this year. Is there anything that's going to change there?

I think with volume we have opportunities to raise both of those. We just got to 6.5% in the retail business from a loss position five years ago, so we feel good about that. We don't feel that's the top. But you need to let us perform at that for a little bit longer period. As we add more stores and we acquire more stores, we would expect that to go up. But I'd like to see it go up before I tell you that we can maintain it.

Got it, that's fair.

Last question. I think you said in the release the plan is to own 40% to 50% of the stores as part of the 4-4-5 strategy. I think the goal previously was taking 30% up to 40%. Now you're bringing 50% into it. Am I missing -- was that a change in language? And if so, what has changed?

No, I think our target for the last couple of years has been right around the 40% range. We still have a lot of places where the Company can open stores. But we are surprised; we're having more interest from some of our long-standing dealers to talk to us about retiring, so that's maybe accelerated the point a little bit.

But I only think that's probably a two, a two and a half year window. And anybody that's interested will have raised their hand by then and we'll either do something with them or pass. But I don't think it's an ongoing thing that we'll be buying 11, 12, 15 stores a year every year for the next five years. We have a lot of very strong individuals and families who own the majority of the independent La-Z-Boy stores that are in for the long term. They have no interest in selling and we've got plenty to do with what we have.

Okay. I'm sorry, I want to sneak one more in, just because I thought --

You mentioned the efficiencies in the factories. You've got the material there you can get things out more quickly. I think that implies service levels are up.

As I think about same-store sales looking forward and all of the factors that go into it, your comps get a little bit tougher. Are the opportunities associated with the improved service levels, how much are they going to help going forward? How much are they making a difference in the trends at retail?

Matt, I think most of the help we got last year. That means being in-stock, servicing better, all that. But we don't have a backlog of late orders. We got that cleaned up. So that's a one-time gain, if you would.

And now to produce it we have to sell it, and that's a good position to be in because we can service better. There is not nearly the opportunity to improve our late orders with last year. We have probably less than 2% of our backlog that's outside of four weeks, so that's not a very big number.

The other thing that I think we need to think about when you talk about La-Z-Boy's growth and their sales -- and I understand this is typical with peer retailers and all. But when you look at our same-store sales -- and that is an indicator -- that's only half our business. We have thousands of other important customers throughout North America that we have no visibility into their same-store sales or their growth patterns or everything like that.

We think having half our business with the store program and half our business with the general trade is a competitive advantage. We don't derive all of our growth from just the store activity, and I want to be sure investors understand that.

Perfect, thank you, Kurt.

John Baugh, Stifel Nicolaus.

Thanks and congratulations, team, on a great quarter and year. Most have been answered, just a couple of quickies. One, I assume the one less week this year will fall into Q4?

It does.

Okay. And then I can't believe we've got this far into the call and nobody has asked about current business trends. It is seven-plus weeks since year-end and we'd heard fairly constructive things around Memorial Day, but in general still pretty sluggish trends. Anything you'd add current to what you're seeing? And I understand the seasonality and week Q1 compares.

Yes, I think you clocked it pretty good, John. I would call it inconsistent. There's pockets that are pretty good and other places that are not. Memorial Day was strong for the industry and us, as well. But that's four days, that's not necessarily a trend.

I think there's some uncertainty with the customer and some nervousness. We try to fight our way through that and find different ways to do things. Some other good data points about housing are encouraging and as well as Lowe's as Home Depot are doing, that would tell you that people are investing in their house. It's certainly not doom and gloom.

We've been challenged a little bit with our North America footprint because Canada, even though we had a reasonable increase in wholesale in the fourth quarter, our Canadian business was 3%, 3.5% behind last year on the wholesale side. We overcame that and we posted a 2.5% increase.

It would seem to me, with housing starts where they're at, with the interest rates lower, with energy lower, that it would be easier to grind out 1%, 2%, 3%. But you got to fight for it and that's what we're doing.

Understood. And then last one, maybe directed to Mike.

Is there an update on the cash amount you're comfortable carrying? It sounds like, at least in the next year or two, there might be still considerable acquisition opportunities with stores which, of course, you don't forecast. But just curious as to how we're thinking about all of the cash you're generating and what balance you're willing to carry on the balance sheet and how much might get taken up through acquisitions, or anything else we don't know about.

I think Kurt and I haven't changed our position on the $80 million to $100 million in cash is what our comfort level is. Since we have been on the acquisition mode, we do consider that in looking at what our free cash is and how we're going to invest it.

We've said consistently that if we can't find ways to invest in the business to grow it, after our dividend we'll be out there buying shares. In this last quarter we bought 600,000 shares, which was a little above what we've spent the previous two quarters, at about 400,000-some shares, or right around 400,000. So we considered that. But as we go through the summer and look at some other opportunities for some other dealers, we'll consider that into our cash flow needs and spend accordingly.

Great. Thanks and good luck.

Thank you, John.

Anthony Lebiedzinski, Sidoti & Company.

Good morning and thank you for taking the questions. So just to follow up about the Canada, the 3% to 3.5% decline. Was that in local currency or translated to US dollars?

It's translated to US dollars.

Got it, okay, thank you for that. And also, would it be possible for you to quantify the benefits from the global trading Company that you've set up in Hong Kong? What additional improvements do you expect to achieve from that?

That's all part of our larger supply chain initiative. The benefits are about service, the benefits are about logistics, the benefits are about quality and savings. So it's a multi-facetted organization we have over there that works with all of the factories where we buy our case goods and our fabrics and leathers. It's just being more organized, having it coordinated, being on the ground more frequently and then sourcing things where appropriate. We're receiving benefits.

Again, we're probably not going to try to quantify from a dollar standpoint because as I said earlier, when you start doing that we'd have to quantify all the other things that are going to be going up. We try to save as much throughout our operations through innovative ways and efficiencies. We try to save as much as we can to offset the increases that we get in other parts of our business. That's just the mind set we've had for the last five or six years and one of the reasons we've been able to grow our gross margin, as well.

Got you. And also, Kurt, you mentioned before the introduction of I-Clean. What's the potential ASP impact with the addition of that?

It's a little higher grade fabric than our average, not a lot. It's priced very competitive. But it has instead of just putting a topical spray or chemical on furniture, this is actually weaved into the yarns that have the fabric repel the spill. The other thing is it's got great colors and decorative patterns where normally most of those things are flat suedes and not the same.

So we think it's going to be fantastic and we were able to negotiate with our partner, Culp, on a launch exclusive. So La-Z-Boy has this exclusively for the first six or eight months. We think that's very important to be the first mover in this. We expect it to do very well. But I can't quantify numerically what that's going to mean.

Got it, okay.

And lastly, last year you had a small store test in the Washington DC market. Any updates on that?

We did open a store right before Thanksgiving in Logan Circle which is about three blocks from the capitol. We're learning a lot about it; it's growing in momentum. We believe there's some changes we need to make to it, both in the interior and with some of the marketing.

Our overriding belief is this trend towards moving into urban areas, both for younger people and even older retirees, we don't think it's a fad. We think it's something that's going to continue. This is the first of many of these stores that we're going to open because we don't believe those customers are going to drive out to the suburbs to where we have our other 350 stores. We're going to do our best to figure out how to serve that customer.

Got it, okay. Thank you very much.

Thank you.

(Operator Instructions)

Budd Bugatch, Raymond James.

Yes, I had a couple of follow-ups. One, you talked, Mike, a little bit about the cost increases, at least in steel, that you're potentially seeing. Any price increases implemented or expected this year to the extent that you're willing to talk about them, Kurt?

I think our strategy, our philosophy, Budd, has been -- and I think it's coming closer not just to ours, but the industry -- as wages and other things go up we got to find a way to offset that. Because the customers, that's not their concern.

But the industry doesn't make enough money to absorb raw material increases. It's been our practice that if there is enough raw material increases that we think it's going to materially affect our margins, we will take a price increase.

But right now, steel's so volatile, it went up so fast and it's coming back down some and we have a contract that we were locked in. I'm not sure where that's going to be, Budd. But philosophically, if we got a number of raw material increases and it was going to materially change our operating margins, we would take a price increase.

But have you done anything so far in FY -- (multiple speakers)

No, we haven't. And we don't have any because we've been protected by longer-range contracts, we haven't had the increases yet.

Okay.

In the past, in 2007 dividend peaked at, I think, $0.48 per annum. And looking back at a normalized pay-out rate, it was around 30%. Right now it's around 23% or so. I don't remember that I've heard you enunciate a dividend policy for investors to expect how the Board might treat dividends on a continuing basis. Is there something that you can share with us?

Well, there's really no new update there, Budd. I think the challenge for us is we could have a lot of opportunities in the marketplace for other investments. I think, from our shareholders that we talked to, their first priority for us is invest the money in the business and make a better return and grow the business. We don't want to box ourselves in, so we've raised the dividend in each of the last four years. As the business continues to expand, I wouldn't think we would get to anything of a flattening out.

They're all judgments. We have a certain amount of cash and how much are you going to put in the business? How much are you going to use to buy back stocks? And how much are you going to pay a dividend? We like the fact that we have various options.

My last question is really in regards to 4-4-5. As you correctly pointed out, you have exceeded now the middle 4, or one of the 4s. I think you publicly said that the other 4 is more challenging because of real estate markets, although I think maybe that's somewhat loosening. How do you think about that and what's next after 4-4-5?

Well, I think if you did the math, Budd, if our -- in two years our same-store -- this is hypothetical -- if our same-store was doing $4.3 million or $4.4 million and we only had 375 or 380 stores, that would still deliver the $1.6 billion. That is more probable than the 400 stores only doing $4 million. So that's how we're thinking about the economic value of that.

And then again, we have half of our business with independent retailers. And we're growing with them, particularly on the England side. We're working on our next set of growth initiatives. We're not quite ready to give any color to that, but we understand there's a point in time where we will not have the opportunity to open 30 stores a year. But that's a couple years away and we'll be ready to go with something else as that winds down.

Any comment as to when the coloring book might be such to give us those in the public arena, when you'll put some color to those thoughts?

Really, Budd, as soon as we figure it out. But I don't have a time frame for you because there's lots of things we're doing behind the scenes with testing and experimentation and discussions with other people that none of it's been finalized.

But we understand there's -- our appetite for growth is still big. You can think about another store format. You can think about international expansion. You can think about all kinds of things. We have not made a final determination of where we're going to plant the flag and go, but we will do something beyond 4-4-5.

Okay, thank you very much. Good luck for this year. Thank you very much.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Thank you, everyone, for participating this morning and your interest in La-Z-Boy Incorporated. I will be happy to schedule any follow-up calls with anyone who has additional questions. Have a great day.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.