La-Z-Boy Inc (LZB) 2017 Q3 法說會逐字稿

Greetings and welcome to the La-Z-Boy Incorporated FY17 third-quarter results 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. Thank you. You may begin.

Thank you, Jesse. Good morning and thank you for joining us to discuss our FY17 third-quarter results. With us today are Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer, and Mike Riccio, our Chief Financial Officer. Kurt will begin today's call, and then Mike will speak about the financials, before turning the call back to Kurt for his concluding remarks. We will then open the call to questions.

A telephone replay of the call will be available for one week beginning this afternoon. 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 FY17 third-quarter results. For the period, we posted increases in sales and earnings per share. We also generated almost $39 million in cash from operating activities, and delivered a healthy 11.5% operating margin in our upholstery segment, the highest for the third quarter in more than a decade, demonstrating the efficiencies with which we are running our operations and the effectiveness of our supply chain initiatives.

We're also continuing to invest in our Business to drive long-term sustainable growth. During the quarter, we acquired nine La-Z-Boy Furniture Gallery Stores in the northeastern Pennsylvania market, acquired the distribution rights for the La-Z-Boy brand in the UK and Ireland, and earlier this month announced we would invest in our largest La-Z-Boy branded manufacturing facility, located in Dayton, Tennessee.

While the external environment as it relates to the consumer, and home furnishings specifically, has been somewhat inconsistent in terms of buying patterns, we continue to look for ways to grow our Business profitably, and are analyzing our marketing and merchandising strategies to increase our visibility in the marketplace, while ensuring we continue to offer consumers a relevant product offering at attractive price points.

As we move through this period, we're operating from a position of great strength. We have an excellent brand, the strongest in the industry, we know our core customer, our speed-to-market proposition has never been better, our operations are efficient, we are building out the La-Z-Boy Furniture Gallery store system through our 4-4-5 Strategy, and we are simultaneously increasing the size of the Company-owned store base where we benefit from the combined margin inherit in our integrated retail strategy. Additionally, our balance sheet remains strong, giving us the financial flexibility to make the necessary investments in our Business, to maintain our competitiveness, drive growth through existing operations, make smart acquisitions, and allow us to develop the next set of strategic initiatives to take La-Z-Boy into the future.

I will now turn to a brief discussion of each of our operating segments, first, our two wholesale segments, Upholstery and Casegoods. In our Upholstery segment, our supply chain continues to drive further improvements in procurement, manufacturing, and logistics, and helped drive an improvement in our operating margin for the period. It has also enabled us to greatly improve our service, delivering custom furniture in about four weeks time. We are proud of this competitive differentiation in the marketplace, and the scale with which we achieve it.

Moreover, consumers are thrilled to be able to customize their home with a wide range of fabrics, leathers, and many other options, while receiving their furniture with such speed. Our ERP system is also playing a role in this process through exceptional inventory management and a tighter workflow, which is contributing to plant productivity increases.

Making investments in our operations is critical to maintaining our competitiveness. Earlier this month we announced we would invest $26 million in our Dayton campus, our largest La-Z-Boy branded upholstery facility, responsible for approximately $400 million of annual revenue. The Dayton facility, which is the only plant that manufactures furniture in all three upholstery categories -- recliners, motion sofas and sectionals, and stationary upholstery -- makes nearly 90% of the various frame styles in the Company's manufactured branded product line. The campus also has supply centers for metal stamping and wood fabrication that provide materials for the Company's four other US La-Z-Boy branded sites.

The scope of the project will run in two sequential phases over a three-year period, and will be funded through our normal CapEx program. The first phase will include the construction of a new state-of-the-art innovation center, followed by various upgrades and renovations throughout the upholstery plant and supply centers in phase two. Our Company roots are steeped in innovation, and today that spirit remains at our core. We are making this investment to ensure we maintain a high innovation quotient throughout the Business, and continue to bring revolutionary products to the market and that we are able to attract the best engineering talent to our team, as we expand our Business.

With respect to the upgrades we are making across the plant and supply centers, ongoing investment is essential, as we continue to enhance productivity and efficiencies to drive profitability. Importantly, there will be no disruption of service to our customer base related to the renovation process.

And finally, as mentioned earlier, during the quarter we closed on an agreement to acquire the distribution rights for the La-Z-Boy brand in the UK and in Ireland. We fully transitioned that business to La-Z-Boy Management on January 3. We believe we have the opportunity to expand the business in these markets, with enhanced investment in brand marketing and digital initiatives.

For the third quarter, written same-store sales for the La-Z-Boy furniture galleries network were flat versus last year's comparable quarter. As we have spoken about over the last two quarters, as we continue to build out our stores in fill-in markets, we are seeing some cannibalization occur, which impacts the same-store sales number. For the quarter, we believe same-store sales would have been approximately 1% higher without the cannibalization.

In particular, we are seeing an impact to Company stores to a higher degree than it does the independent dealer-owned stores as, at least for now, the Company has been more active in adding additional stores to existing markets. And for the Company, in addition to benefiting from the retail profitability on the added volume from the additional stores, we also realize the wholesale profitability on the volume going to our manufacturing plants.

With respect to our 4-4-5 Strategy, we, along with our independent dealers, are on pace to complete approximately 23 projects for FY17. These include new stores, remodels, and relocations, and we expect to end the year with eight new stores for a total of 346 La-Z-Boy Furniture Gallery Stores, with 110 in the new concept design format.

During the third quarter, the network opened three new stores, relocated one store, and remodeled three. For the fourth quarter of FY17, projected store activity includes two new stores and two closures throughout the network.

FY18 will begin our fifth year of our 4-4-5 Build-out Strategy. While we are pleased with our results to date, given the significant progress we have made, both in terms of the stores we have added, remodeled and relocated, we do not anticipate we will reach the 400 store goal by the end of the five-year period.

In FY18 we plan to open 10 to 12 net new stores, brining us to almost 360. And beyond that, we will continue to find locations in the more challenging real estate markets, primarily New York, Boston, and Miami.

Our average store performance across the network is still right around the $4 million mark, with same-store sales down slightly for calendar-year 2016. As we changed out the old format stores and have more new design concept stores, as well as new generation stores, the two newer format types are performing very well, close to the same average rate. Our ultimate objective is 400 stores averaging $4 million in revenue per store to deliver $1.6 billion at retail throughout the store network. However, over time, if we increase our average revenue per store even with fewer stores, say 365 stores at $4.2 million on average for example, the La-Z-Boy Furniture Gallery's network will deliver a robust $1.5 billion at retail.

We still believe there is room for 400 stores across North America, and we have every intention of reaching that milestone, but it will not be in the condensed time frame we initially outlined. As we increase the size of the La-Z-Boy Furniture Gallery network, and simultaneously upgrade the overall system by minimizing the number of old stores, we will be able to flow more volume through our plants and leverage the fixed-cost structure of our facilities, and improve the profitability of the wholesale business.

Before turning to Casegoods, I would like to spend a moment talking about England, our other upholstery company. England has been a solid contributor to La-Z-Boy posting consistent growth in sales and earnings. It has unique model unlike any other in the industry, in that it delivers custom furniture in 21 days or less. We have an outstanding team at England and they are doing an excellent job of expanding the business, not only with their existing dealer base, but also accelerating its presence throughout the western portion of the United States. In short, England has been a great performer.

Now let's turn to Casegoods. Long term, our Casegoods business is positioned as well as it has been in a long time. Operationally, we have a pure import model for our wood furniture, which has made us more competitive. Our product portfolio across our three Companies has been completely refreshed, allowing it to have a broader appeal. Our supply chain team is making a difference here, too, as we are in a 97% in-stock position on our best-selling groups, allowing us to service customers on an average ship time of six days. While our operating margin for the quarter declined slightly as a result of softer sales, we are confident that the Casegoods business is poised for an improvement in sales and earnings going forward.

Now let me discuss our Retail segment. In our Retail segment, delivered sales increased almost 11% in the quarter versus last year's comparable quarter. For the core 119 stores included in last year's third quarter, delivered sales for the segment declined 8.1%, compared to an increase of 6.6% in last year's third quarter. During the period, on lower traffic, conversion was flat, the average ticket increased fueled by higher design sales. While the Retail segment was challenged during the third quarter from a volume perspective, our integrated retail strategy has proven to deliver a healthy double-digit operating margin through the combined wholesale /retail margin associated with it.

We continue to make targeted investments in marketing to drive our growth. For the period, while we were indeed successful in certain markets, we were unable to overcome the challenges presented by the greater retail arena, and our overall sales for the core stores declined, reducing our ability to absorb the fixed costs of that segment. However, because we are seeing our marketing initiatives work in certain markets, we believe our strategy is on the right track. Continuing along this course is the correct way to proceed moving forward, so that we win with our core customer, and ensure that we have an appropriate share of voice in our various markets.

As mentioned earlier, in the third quarter we acquired nine stores in northeastern Pennsylvania, which we reported on during the last conference call. They are expected to deliver $35 million in annual sales before eliminations.

We also opened one new store and remodeled two as part of our ongoing 4-4-5 store build-out strategy, and the Company plans to open two new stores in the fourth quarter. At the end of the third quarter, the Company owned 142 of the 346 La-Z-Boy Furniture Gallery stores. And we believe that when we are finished with the 4-4-5 buildout, we could own approximately half of the stores. I'll now turn the call over to Mike to speak about our financial performance.

Thank you, Kurt. Consolidated sales for the FY17 third quarter were $390 million, up 1.6% compared with last year's third quarter. For the period, the consolidated operating margin decreased to 8.4% from 9.1%. The Company reported earnings per diluted share [to the] La-Z-Boy Incorporated of $0.47 compared with $0.43 per diluted share in last year's third quarter.

Our consolidated gross margin improved 1.5 percentage points in the quarter compared with last year's third quarter, with about two-thirds of it a result of changes in our consolidated sales mix due to the increased weighting of our Retail segment, which carries a higher gross margin than our wholesale businesses. Our gross margin in our Upholstery segment improved due to supply chain efficiencies, as well as a shift in our product mix, where we sold more motion units with power and more recliners.

Selling, general, and administrative expenses as a percent of sales increased 2.2 percentage points in the FY17 third quarter compared with the same period a year ago. Here, too, the increasing size of our Retail segment is contributing to the increase, with 1 percentage point of the quarter's increase stemming from the growth of our Retail business. This reflects the higher percentage of sales for SG&A at Retail, compared to the wholesale segments. Additionally, the increase in SG&A as a percent of sales was also the result of the fixed costs associated with the Retail business, primarily occupancy and admin costs, relative to the decline in sales for the stores that have been opened for at least 12 months.

As Kurt discussed earlier, we increased our advertising spend across our markets, and did not obtain the commensurate lift in sales we were expecting. Therefore, our advertising expense as a percent of sales was 0.6 percentage points higher in this year's quarter than in last year's third quarter. For the period, legal fees were 0.6 percentage points lower as a percentage of sales in this year's third quarter versus last year.

In the FY16 third quarter, we incurred fees that did not recur this year, primarily related to a legal matter that required fewer resources this year as we waited a court ruling on our affirmative defenses. As we previously reported, we recorded a pre-tax charge of $5.5 million in the fourth quarter of FY16 as a result of a jury verdict against the Company in a contract dispute. In January of this year, the court rejected affirmative defenses that the Company had asserted. We expect judgment on the verdict to be entered by the court in the near future, and we will then be able to pursue an appeal. If the judgment is ultimately upheld, the Company will pay the judgment and no royalties on certain products sold through the end of calendar 2021, and we have been accruing additional royalties based on that judgment.

For the quarter, we incurred a higher loss in corporate and other versus last year's third quarter due to higher incentive compensation costs and professional fees. Some of our share-based compensation awards are liability-based awards, and their cumulative expense is adjusted at the end of each quarter based on the stock price of the last day of the reporting quarter. Incentive share-based compensation costs were higher in the third quarter of FY17 compared with the same period a year ago due to a $5.55 increase in our stock price over the third-quarter FY17 compared with a $7.15 decrease in our stock price over the third quarter of FY16.

Now let me turn to the balance sheet. For the quarter, we generated $39 million in cash from operating activities. We ended the period with $110 million in cash and cash equivalents, $30 million in investments to enhance returns on our cash, and $9 million in restricted cash. During the quarter, the Company invested approximately $20 million acquiring nine La-Z-Boy Furniture Gallery Stores, spent $5.3 million in capital expenditures, paid $5.4 million in dividends, and spent $5.3 million to purchase approximately 200,000 shares of stock on the open market, which leaves 3.1 million shares available for purchase in our program.

Just as a side note, although we recorded the acquisition of the UK licensee, we are not required to pay for the acquisition until 90 business days from the closure of the deal. We expect to make the cash payment of approximately $16 million late in the fourth quarter.

We expect our CapEx for the full FY17 year to be approximately $30 million. We are beginning construction on our new innovation center and other upgrades to our Dayton campus this month. We expect these construction projects will continue into the fourth quarter of FY20. As Kurt mentioned earlier, we estimate these projects will cost about $26 million, and will be part of our normal CapEx, which also includes transportation, equipment, and maintenance. We will be opportunistic with respect to our share purchase program, given these uses for cash, our operating cash flows, stock market conditions, and other opportunities that may come up to invest in the Business to drive growth.

Our effective tax rate for the third quarter was 29.4% compared with 36.2% in the third quarter of FY16. Our effective tax rate varies from the 35% statutory rate, primarily due to state taxes, less the benefit of US manufacturing deduction and foreign earnings in jurisdictions with lower tax rates from the US. Our effective tax rate was lower in the third quarter of FY17, primarily due to a tax benefit for state job tax credits in Tennessee and a tax benefit for releases of valuation allowances relating to certain US state deferred tax assets. These discrete items lowered our effective tax rate by 5 percentage points in the third quarter of FY17, which equates to about $0.03 per share.

As a reminder, last year's fourth quarter had 14 weeks compared with this year's fourth quarter which will have 13 weeks. As a reference point, that equates to about $30 million in sales. And now I'll turn the call back to Kurt for his concluding remarks.

Thank you, Mike. We believe we have significant opportunities ahead of us. We are completing our 4-4-5 store build-out strategy to fully penetrate the North American marketplace and grow our Company. Innovation will remain at the forefront of our Business, as we bring exciting new products to the market. And we are developing the next set of strategic initiatives to take our Company into the future.

As we begin our 90th year in business, we are proud of our Company's heritage and its values, the innovative spirit and work ethic instilled by our founders that remain with us today and continue to permeate every facet of our Company. With a unique model in place, where we are a manufacturer, retailer, and importer, we have many avenues to drive growth, coupled with a solid balance sheet and intense financial discipline to continue to deliver long-term sustainable growth for our shareholders. We want to thank all of you for being on our call this morning, and I will turn the call back to Kathy to begin the Q&A. Kathy?

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

(Operator Instructions)

Budd Bugatch, Raymond James.

This is Bobby filling in for Budd. I appreciate you taking my questions.

Good morning, Bobby.

I want to touch on the delivered comp for the quarter. Mike, can you give us any color on how big of an impact cannibalization was on that comp? Or is it the same magnitude as you estimate for the same-store written comp?

Bobby, this is Kurt. Let me handle that one. What you have to remember with our business model is, a lot of our furniture is not delivered until 4 to 5 weeks after it is sold. And so we have this inconsistency of what is going on quarter to quarter. Certainly, over a longer period of time, if you write it, it will eventually get delivered. But there is not a one-to-one correlation.

Let me give you a corollary. We reported this quarter that the same-store sales for the network was flat. But the delivery for the Company stores was down 8%. A year ago the same quarter, the written sales for the network were down 1.5% but our delivered comparison was up 6.6%. So there is a lag factor.

Obviously, if we are writing even at a minus 3%, our deliveries are not going to stay at a minus 8% or something like that. If you will go back and chart our history of what we have been giving you, there is always a little bit of a gap. Both positive and negative when we compare the two numbers. Because one is the entire network and one is just the Company-owned portion.

That makes sense. Was the lag factor greater this quarter? Or was it maybe some of the timing? I remember when we spoke last quarter, business improved as you exited the quarter. Was it the timing of business getting better created where the beginning was not as good and it improved throughout the quarter? So the lag even was more of an impact?

The lag was earlier. If you read some other things coming out from the government, January was probably the toughest month of the three-month period for the industry. So, prior to Christmas, if you add the 4 to 5 weeks prior to Christmas, and heading into the New Year we probably did not write at the rate that we wanted to. So it did not deliver in the quarter. Which [means] there is a hold order of deliveries that will be delivered in early February.

Okay. Do you have any color on what the backlog is for us to think about when we model?

We give our back log out once a year, at year end. And are not giving it quarterly.

Okay. Fair enough. And then maybe, Mike can you update us as we think about the raw material environment for calendar year 2017 what you are seeing? And maybe where your latest thoughts are?

For our largest raw material products, which is steel and poly, there will probably be some pressure on that. And then the second half of the year that we are seeing. But we will continue to monitor that and if it is significant, we will obviously have to look at our pricing. And come out with higher prices in order to compensate for that. But that is mainly where we are seeing the pressure is steel and poly.

You are speaking about the pricing would be at the April market? You have to monitor it until then? Or you thinking of keeping pricing at the similar levels today and maybe the October market? How should we think about your ability to pass through price?

Bobby, it would be the magnitude of how big the increases are. If we are not certain there will be material, we would not do anything. But if they are material, we would take the increase in April. If they are coming in throughout the year, and you wait until the October market, and you pretty much don't get any benefit been until the following year. It would be too late in the year cycle to get any benefit from it. So, most likely if raw material increases are where they think may be we would take some pricing adjustments in April.

Okay. I appreciate all the color. Best of luck moving forward, and I will jump back in the queue.

Thanks Bobby.

John Baugh, Stifel.

I would start with the Retail. I appreciate the vertical model, and [making] wholesale with Retail. That having been said, you're down materially in the EBIT in that segment year-to-date for the nine-months as well as the latest quarter. If I read it right, it is the lack of leverage on the fixed cost with traffic being down. Then you mentioned, you are trying to advertise, but it did not lift.

I am trying to look out and wonder what is your strategy? You talked about tweaking advertising. Does that mean raising advertising? Reducing advertising? So we get positive leverage on that expense? Where other than revenues lifting can we get any marginal leverage in the Retail side of the business? Thank you.

Well you know, John, the retail business is a high fixed cost business with its rents and other associated expenses. I just want to be clear. This up spend that we have done in certain of the markets -- not all markets, but certain markets -- was successful for the most part. But it is not every single market. And it does not affect every single store the same. The basic fact was our same-store sales being slightly negative for the quarter did not absorb the fixed cost. And we are going to continue to work at not only more spend but is the message we are advertising right? Are we buying in the right media?

The media now it's hard to figure out how much to spend on digital, TV, print. And we are always analyzing, always tweaking just like any other retailer. We are going to do some experimentation. We are not really going to announce to our competitors exactly what we are going to do in which markets, but we are not going to stay with a pat hand.

Okay and you have had really good margins on the Upholstery side. And you deleveraged in Case Goods and Retail and it sounds like both of those deleverages are due to lack of revenue. How do we think about the next year? What is the opportunity to continue to leverage the Upholstery segment margin? And perhaps make up for some of the deleveraging in the other two segments?

Well I believe, John, that we need volume in each of our categories, to substantially change our earnings. Now, depending on when the savings come from the productivity and the procurement our supply chain is doing, it could go up. But it is already up probably one of the highest levels in the industry. So to go up dramatically without any more volume is probably not in the cards. But we also don't see it going down. Our supply chain team has found ways year after year here for the past three or four years to really be more efficient, deliver faster, deliver on time, and wring out some cost in the business and we expect that to continue.

Okay and then the last question. I know in the Retail segment numbers can be moved around by acquisitions and then timing of new stores. Could you walk us through again, how the acquisitions, including the nine stores you just bought will influence the numbers? As well as whether there is any timing in the nine-months latest quarter of opening store versus the prior year? And or any changes on that moving forward? Thank you.

So your last question first. I don't there is a significant difference in Q4 of openings and remodels for us. But we try to give you some inclination that we do report same-store sales for the network. And we also give you the core stores. The stores that were open for 12 months in the prior-year, we try to give you our delivered comp there. So the difference between that and our total sales, which was up 11% I think, shows you the difference that the acquisitions were making.

One other thing, we give you the gross sales. So in the case of Pennsylvania, we said it was $35 million. And that would show up in the Retail segment. The Company-owned Retail segment. But half of that volume we were already earning a profit on. And making the sales. So there is a $17 million or a $17.5 million elimination going on in corporate. In aggregate, this is just an example that's not the right number. But an example, we may have said that we acquired $60 million worth of sales for all the stores we bought last year. But it is only a net gain to the corporation of $30 million because we were already their supplier.

Yes. That's helpful on the revenue side. I was wondering on the margin side how acquisitions have favorably or unfavorably impacted the percentage EBIT margin of retail?

My comment on that is all of the stores that we purchased in the last year had a higher operating margin than our average. So they should all be accretive to the P&L. And the problem with our sales is not with the acquired stores. A lot of it is with some older stores that we have that aren't anniversarying their previous year.

And Kurt are those stores not only coming in at a higher average but then there is some leverage opportunities on top of that?

Sure. The ones that are going into our DCs and the ones that we supply the management oversight and the accounting oversight and all, we have learned over time to have a slightly more profitable model. Because of being [well] consolidated and a broader Company than an individual owner.

Right. Thanks for taking my questions and good luck.

Thank you John.

Brad Thomas, KeyBanc Capital Markets.

Hi this is [Sumit Desai] for Brad. Good morning Kurt, Mike and Kathy. And thanks for taking our questions. It is great to see that written trends accelerated in the quarter. And you commented a little bit on January being a bit softer. Could you comment a little bit more on the trends you are seeing out there in terms of traffic and ticket? And how you are feeling about the upcoming year?

So we have been pleased with the direction of the business once we got out of January. On the Company owned, which is the only thing that we have hard numbers for, on the Company owned stores over Presidents Weekend we were very satisfied with our results. So I don't know what the rest of our customers did. I don't know what the rest of even our Furniture Gallery network has done right but the pace of business in February is a little more positive than it was in January. With that said, I would caution you, too, that one weekend does not make a quarter. But we are pleased that we had a successful Presidents Day sell through.

That is encouraging to hear. Could you provide an update on investments that you have made in e-commerce and omni channel and how you see that aspect of your business evolving?

So I think we have previously discussed the investment we have made in updating our eComm systems. And the money we spent somewhere in the neighborhood of $7 million to $9 million but that was a year or a year and half ago. We have one of the better engines to run our e-commerce platform today. And are continuing to invest in people and other talent to keep up with what is going on in this space.

Okay great. Thank you.

You are welcome.

Anthony Lebiedzinski, Sidoti and Company.

Good morning. Thank you for taking my questions. First I just wanted to touch on the cannibalization. Is this in any one particular market? Or is this across the store base that you are seeing the cannibalization impact?

So, Anthony, I think the way to think about that is, you would hope that as you go into a market, your first store is always the one that is in the best part of the market. And then as you add stores two and stores three, they are still very financially viable. But they are probably not as good as the first store. But the aggregate of the three, particularly if you are making the manufacturing profit as well, is better than just keeping the one store in the market.

So we have used the example previously of Richmond, Virginia. We have a great store there on Broad Street near the mall. I think it was pacing somewhere between $5 million and $6 million. But there was a whole other side of town that we were not penetrating to the degree we thought.

Just for argument sake, let's say we opened the second store and it did $4 million. But it took $1 million away from the first store. But now the company is doing $8 million in that market instead of $5 million or $5.5 million. And it is incrementally profitable because you have a lot of the same fixed costs of delivery and advertising and everything else going on. So we have been doing that in a number of markets to cover the market adequately and take care of the customer. But also have the size to compete against the other competition.

Our history would show year two of that, whenever the first store hit was taken, it starts to come back some. Because the newness of the second store is not as important in year two and three. So we would see that come back. As long as we continue to open stores in markets where we already have them, you will see some cannibalization. And most of our opportunities going forward are building out markets we are already in.

Got it. Thank you for that clarification. So, also as far as the 400 store target. I know you said you will not complete that by the end of FY18. Any ballpark estimate as to when you think you could achieve that target?

No. I am unable to provide that. Because, one of the reasons we did not make the 400 in the time frame that we originally outlined is the cost of real estate in various markets is, as one of my folks have told me, in some places is astounding. We are going to be very cautious. We are not going to make real estate investments to hit an arbitrary number of 400.

Unfortunately, for some other players in the market, there is lots of real estate coming on the market from people who had problems and are exiting. So there is more things opening up. For us it is not a matter of the money from the Company's side or even our dealers. It is the event of finding the right location at the right price at the timeline that we need it. And there is really no way to predict that. But I know everybody still has opportunity on their horizon. And I am pretty positive over the next few years we will get to the 400.

That makes sense. And switching over to Upholstery. When I look at the sales to external customers those were down 1.6% in the quarter. They're down year to date. So when you look at your distribution system, where is the greatest weakness in those sales to your external customers?

Well our data would show that the family owned rural furniture dealer that has been a core base of customer for us for a long time, they are struggling a little more than the rest of our distribution segments. They don't seem to have the wherewithal to over market or to over spend or their capabilities on the Internet are not as sophisticated as larger dealers. So I don't think this is just a La- Z- Boy problem. I think this is an industry trend where more small dealers are having challenges and/or going out of business unfortunately. But that is where we see our challenges. Our business with the stores and our major accounts are positive. But they are not positive enough to make up the deceleration we are seeing from our other channel of distribution.

Okay got it. And lastly, what is the expected tax rate for your fourth fiscal quarter please?

We are still shooting for the 36%, Anthony, but we continue to work on that. The problem is, we never know if some of the states are going to take some of our programs in or some of the credits that we are trying for or that we are trying to get will be accepted. So, we are cautious about that. But we will continue to keep trying to get benefits out of our taxes. Mainly in the state arena. But I don't know of anything that will change it dramatically from the 36% at any given quarter as we work through it. So I don't have any better information to give you but we will continue to try to bring it down. I just don't have anything that I can put my clock to at this point in time.

Okay. Thank you.

Thank you.

It appears we have no additional questions at this time. So I would like to pass the floor back over to Ms. Liebmann for additional concluding comments.

Thank you for your interest in La-Z-Boy Incorporated. Give me a call if you have any further questions and have a great day. Goodbye.

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