La-Z-Boy Incorporated (LZB) Q3 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the La-Z-Boy Fiscal 2012 Third Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kathy Liebmann, Director of Investor Relations of La-Z-Boy Inc. Ms. Liebmann, you may begin.

Thank you, Jackie. Good morning, and thank you for joining us to discuss our fiscal 2012 third quarter results. Present on the call are Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer; and Mike Riccio, our Chief Financial Officer. Kurt will begin today's call, and then Mike will speak about the financials before turning the call back to Kurt for his concluding remarks. We will then open the call to questions. A telephone replay of the call will be available for one week, beginning this afternoon. These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles to communicate with investors about the company's current operations and future prospects. We will make forward-looking statements during this call, so I will repeat our usual Safe Harbor remark. 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. Good morning, everyone, and thanks for joining us. Yesterday afternoon, we reported our third quarter results for fiscal 2012. We posted an increase of 8.4% in consolidated sales, led by a strong performance in our Upholstery segment and a 70% increase in consolidated operating income. Additionally, same-store written sales for the La-Z-Boy Furniture Galleries network increased 8.6%. And our retail segment significantly improved its results, recording a slight operating loss of 1.1% on a 6.7% delivered sales increase on our base 67 stores. Although the environment for furniture remains challenging, we've maintained a disciplined mindset and approach all along that we would control the controllables. And the changes we have made to our business are delivering results even in this economy. We continue to execute against our strategy to achieve growth, retail profitability, and positive conversion, in other words, a higher margin on incremental volume. And our performance demonstrates we are on a successful path to meeting our objectives. Now let me take a few minutes to discuss our wholesale operations. For the quarter, sales for the upholstery segment increased 10.7%, $249 million versus last year's third quarter. And the operating margin increased to 9.1% from 8.2% in the comparable period last year. We believe the increase in sales, combined with the increase in same-store written sales for the La-Z-Boy Furniture Gallery network, continues to give credence to our assertion that we are indeed gaining market share. In fact, for the full calendar year of 2011, the same-store written sales comps for the Furniture Gallery network was almost 10%. We are pleased with our brand platform as we believe it's driving a more interested and qualified consumer to our stores. At the same time, our product and merchandising team is doing a great job to further entice the consumer. We're growing our in-home design program, which presents significant opportunity for us, and are continuing to expand the network of La-Z-Boy Furniture Gallery stores by opening additional stores in the new design and converting existing ones. All in all, a lot of positive on the sales side, and we will continue to -- and we will continue our focus on increasing volume throughout the segment. On the operating side, we have a lean and efficient structure, including our Mexico-based cut-and-sew facility, which is on track to deliver the expected savings for the year, an incremental $8 million to $10 million over last year. Going forward, our operating platform is positioned to allow us to convert well on increased volume. Importantly, because we freed up floor space throughout the La-Z-Boy-branded facilities when we moved the cutting and sewing work to Mexico, we have the ability to grow our business substantially without adding any brick or mortar. We would have to add some equipment and additional employees. The manufacturing space already exists in our current facilities. As we mentioned last quarter, on an annual basis, we continue to believe, with adequate volume and stable raw material costs, our Upholstery segment’s operating margin can approach the low double-digit level. In our Casegoods segment, sales for the quarter declined 3.4% to $34 million compared to last year's third quarter. However, even on a decline in volume, our operating margin improved to 5.4%. As we talked about in the past, the Casegoods business, specifically bedroom and dining room, is more challenged in this environment compared to Upholstery due to the higher comparative cost of full-room groups. That said, we've noticed an uptick in our occasional business, as well as in the home entertainment area, which dovetails nicely with the Upholstery category. We plan to debut a number of new styles and collections in these categories at the April Furniture Market in High Point. Moving forward, with a solid cost structure in place, our team is completely focused on driving sales in the Casegoods segment. At the same time, with cost continuing to escalate in Asia, we plan to increase our production at our U.S.-based facility in Hudson, North Carolina, which will enable us to leverage our fixed cost structure. With the majority of Casegoods line competing in the mid- to upper-middle price point, as the economy improves, we believe we are well positioned to capitalize on those consumers beginning to consider more aspirational purchases. Now let's turn to the Retail segment. For the quarter, delivered sales for the retail segment increased 32.3% over the prior year period to $58 million. And delivered sales for the 67 stores that were included in last year's third quarter increased 6.7%. The additional sales increase mainly reflected the acquisition of the 15 Southern California stores a year ago February, but we are pleased with the almost 7% increase in the 67 stores, particularly in light of the fact that we continue to move the segment closer to profitability. This quarter marked the 12th consecutive quarter of operating performance improvement compared with the prior year's quarter as we decreased our loss to $646,000, or a negative 1.1% operating margin, from a loss of $2.8 million in last year's comparable quarter, or a negative 6.2% operating margin. During the quarter, we increased the average ticket to an increase in items per ticket, as well as dollars per item. These metrics clearly demonstrate that we are improving our selling processes. Our team is selling more complete room groups, which is partially a result of the growth of our in-home design business. Additionally, improved merchandising strategy helped to drive a 2.2 percentage point increase in our gross margin in the Retail segment. We have said over the last year's call that our stores have to generate between $2.8 million and $3 million in sales, on average, to achieve profitability. At this point, with the tight cost structure throughout the Retail segment, our primary focus is to continue to drive incremental volume. You can see from our results that the sales increases this quarter helped us significantly narrow the loss in the segment. We are confident we can move our retail business into the black, particularly with the pace of progress over the last couple of quarters. Importantly, I believe the earnings power of the integrated retail model would be clearly evident, and we'll make a profit on both sides of the business on the same transaction. We are certainly on a clear path of profitability in this the segment, and we'll continue to ensure we drive sales while keeping our cost structure lean. And now I'd like to turn over the call to Mike Riccio to review our financials.

Thank you, Kurt. For the fiscal 2012 third quarter, net sales were $317 million, and as Kurt stated earlier, up 8.4% compared with the prior year's third quarter. For the quarter, net income attributable to La-Z-Boy Incorporated was $15 million, or $0.28 per share, of which $0.07 was mainly due to a reduction of certain valuation reserves against the company's deferred tax assets and $0.02 per share reflected anti-dumping duties received from the CDSOA distribution. These results compare with $10 million, or $0.19 per diluted share, including a $0.06 per share tax benefit and income of $0.01 per share in anti-dumping duties received in last year's third quarter. With respect to the anti-dumping duties, the government has been holding back an excess of $150 million in duties, and as said, it would begin dispersing the funds in early March. However, with the potential for ongoing appeals by companies outside of the original petitioning group, it is uncertain as to whether or not they will begin payments at that time. Based on the percentages we have received to date, if the money is paid out, we would expect to receive somewhere between $15 million and $18 million. For the quarter, cash provided by operating activities was $38 million, and we ended the quarter with $148 million in cash and $112 million of availability under our amended revolving line of credit. Our total debt stands at $30 million, leaving us with a net cash position of $118 million. Capital expenditures for the quarter were about $3.3 million and are expected to be in the range of $15 million to $18 million for the full year, reflecting upgrades to our IT systems, including our ERP implementation, investments in transportation equipment, the normal replacement of machinery and new stores. During the quarter, we purchased approximately 270,000 shares of stock in the open market under our existing authorized share repurchase program. It has approximately 4.9 million shares remaining. Going forward, based on anticipated cash flows, we'll continue to be opportunistic in the marketplace with respect to share repurchases and are mindful of offsetting dilution from share options. As we noted when we reported our first quarter results for fiscal 2012, we expected our valuation reserves relating to a foreign jurisdiction to also reverse during the fiscal year, which did indeed occur this quarter. Going forward, for modeling purposes, you should use a 36% tax rate for the quarter. And for fiscal 2013, we expect our effective tax rate to be in the range of 36% to 38%. During the third quarter of fiscal 2012, we deconsolidated our last Variable Interest Entity due to the expiration of the operating agreement that previously caused us to be considered its primary beneficiary. So in future periods, its results will no longer be reversed in the non-controlling interest line and we’ll no longer report its retail sales as part of our consolidated results. Also as a reminder, in last year's third quarter, the 15 Southern California stores were not part of the company-owned retail segment, and that market was a VIE. So its results were consolidated on our P&L and not in our Retail segment. At that time, they were losing money and those losses were reversed in the non-controlling interest line of our income statement, and therefore, were not included in our net income attributable to La-Z-Boy Incorporated and the EPS line. Additionally, our tax rate was abnormally low in last year's third quarter. So when you're comparing this year's third quarter to last year, as well as this year's fourth quarter to last year's fourth quarter, it would be necessary to focus on the operating income line rather than the EPS line to see the true performance of this company. As you will note, our operating income was almost -- was some 70% higher in this year's third quarter versus last year. And speaking of the fourth quarter, I'd like to once again remind everyone that this year's fourth quarter will be a normal 13-week quarter versus the 14 weeks that were included in last year's fourth quarter when we had a 53-week year, so you'll need to factor that into your thought processes. I will now turn the call back to Kurt for his concluding remarks.

Thank you, Mike. I'll now -- before concluding the call, I want to take a few minutes to discuss where we are in terms of opening additional stores throughout the La-Z-Boy Furniture Gallery network. Over the next 18-month period, between our dealer base and the company-owned Retail segment, we plan to open between 12 and 18 stores. With some of these being remodels or relocations, this will translate into an expected 3% to 4% net store growth over this time period with the company accounting for about 30% to 40% of this activity. Branded distribution is a key pillar of our integrated retail strategy, and demographic research supports having an additional 75 to 100 La-Z-Boy Furniture Gallery stores throughout North America. Not only is the company planning to expand its store system, but our dealer bases as well. After a difficult few years, this is an encouraging sign vis-à-vis how our dealer base views the world with respect to the economy, the consumer, the success of our brand platform and the opportunity that exists to drive volume with new stores. In a couple of weeks, the company will open a new store in the Chicago market, with a new design and layout. Currently thereafter, we will open another new store in St. Louis. We have done some work to slightly tweak the format from the initial design that exists in the Providence market, and we'll continue to test that format over the next several months. Additionally, 2 weeks ago, Chain Store Age announced the winners of its 30th annual Retail Store of the Year design competition, and we are delighted that our Warwick, Rhode Island La-Z-Boy Furniture Galleries store won an award in the Hard Lines Under-15,000 Square Feet category, a testament to the on-trend design of our new concept format. We are also frequently asked about uses of cash, and our current thinking is as follows. First, we will invest in the business to drive growth. Second would be stock repurchases, and third would be dividends. Making investments in the stores is probably the best way to drive growth at this juncture even if we have not fully penetrated the existing markets in which we operate. However, we are being very deliberate and selective in terms of store openings, and we'll ensure that we have the right locations with the right leases before we make our commitments. I'd also like to make a brief comment about the deconsolidation of the VIEs this quarter. The consolidated VIEs had been complicated for many reasons, not the least of which has been the accounting-related event. We are pleased we are no longer consolidating any VIEs and, more importantly, a vast majority of stores composing each VIE are still open, profitable and are operating in strong markets. Going forward, we do not have plans to consolidate additional VIEs and would look to another resolution if it appeared to become necessary to do so. In closing, it was a good quarter, and we're pleased with our performance and progress. Our team has done an excellent job in moving this company forward. Without question, with a strong brand and store system, coupled with a lean and effective operating structure, we believe we are well positioned to capitalize on an improving economy. The heavy lifting is behind us, and now it's all about driving sales. Importantly, we will continue to invest in our business to ensure we deliver on our strategic objectives of growth, retail profitability and positive conversion so that we can provide a solid return to all of our stakeholders. We want to thank you again for being on the call today, and now I will turn things back over to Kathy.

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

[Operator Instructions] Our first question is coming from Budd Bugatch of Raymond James Financial.

Kurt, Mike, Kathy, this is actually Chad filling in for Budd. First, regarding the retail comps, very nice gain against a tougher comp in the prior year than you had last quarter. Kurt, you talked about higher average ticket and improved close ratio. Can you share with us whether traffic was positive or negative? And could you quantify at all for us any of those metrics? Or maybe not in isolation but relative to where they were, say, last quarter or a year ago or give us some color around those?

I'll take a shot at that, Chad. The 3 things that we saw in the quarter that were positive: the average ticket, the improvement in our In-home business and our improvement in our gross margins. And we give some color on the gross margin, but we're not going to go into detail about each of those metrics on a call, but we'll try to give you the pluses and the minuses each time during the quarter. Our traffic was similar to prior quarters. It was slightly down. And it is a feeling of ours that part of that is driven by the consumer getting more information on the Internet before she shops, and maybe not shopping as many stores, but we've seen a pattern all year of our traffic being slightly down even though our system has had a 10%-plus increase. So it was nothing out of the ordinary, but it was down for the quarter.

Okay. That's helpful. And I know you haven't been in the practice of giving formal guidance for a while. In absence of that, can you share with us any color around business trends in the month of February, and probably specifically, a read on how business trended over the Presidents' Day weekend?

Ladies and gentlemen, please stay on the line, we are experiencing some technical difficulties. [Technical Difficulty]

Did you hear the question? I just wanted to get a sense of the February business and the Presidents' Day in particular?

Okay. We would comment that the Presidents' Day sale period, although we have not heard from all of our La-Z-Boy store owners as to their results, but the Presidents' Day sale period was fairly solid, and we're encouraged by that. But I'd also remind everybody that, really, it's the last major holiday until Memorial Day. And we go through a period -- even though Easter is a holiday, it's not a strong retail holiday. So the sale period for Presidents' Day was solid. But one weekend out of 13 weeks doesn't make the quarter, so we've got to see how the rest of the quarter plays out. But so far, the momentum has been consistent with what we have experienced for the last few quarters.

Okay. And last question for me. I noticed inventory was down year-over-year on an increase in sales. Can you talk a little bit about what drove that? And are you comfortable with where you are from an inventory perspective? And how should we think about that number going forward?

I believe last year, we were having some more challenges with on-time supply from some of our fabric suppliers, and so we took a stronger position prior to Chinese New Year to make sure we had fabric on hand to deal with that. That evened out a little bit more. I don't think you can anticipate much changes, really, in our inventory or working capital as we go forward. We're fairly in line with where we need to be. Obviously, if business goes up, we would increase our inventory proportionately. But we're really in a good place right now with our metrics.

And Chad, you need to remember that our finished goods inventory is mainly reflective of Casegoods, and we're just keeping in line with where we're at in our business as well.

Our next question is coming from Matt McCall of BB&T Capital Markets. Matthew S. McCall - BB&T Capital Markets, Research Division: So I'm just following up on some of the previous questions. One of the things you've mentioned, Kurt, several times that I'm trying to get a handle on, is the opportunity with ticket going forward. You've mentioned in the past that if you get someone taking advantage of the In-home Design services, the average ticket goes up. Can you talk about the trends there, maybe what percentage of customers are taking advantage of that and remind us again what the benefit of ticket is when you have someone take advantage of those services?

So we've been implementing the In-home Design program across the whole network, both independently and with our own company-owned stores. And it's really providing a service to people that they need, they're surprised about, it's complementary. And it really provides a better sale for the consumer and gets you more repeat business because she's more happy with the transaction. Essentially, I think our range throughout the entire network will probably -- on the low side are doing 12% to 15% of the total business in, In-home, in stores that had not have a mature program. And we're probably somewhere in the 30% to 35% range with people who've been doing this a long time, and have made a solid commitment to it. So there is a range of performances here with the degree of commitment the operations have made to the In-home business. What we have talked about in the past is as people come into the store and buy off the floor, the range of that purchase can be around $1,500 on average. And that's, again, the entire network. However, if we get an appointment and the consumer wants to redo the entire room and we have a chance to get in the home and professionally assist her, that ticket moves somewhere between $4,000 and $5,000. So there's a big difference in the sales, and we're doing all we can to push that percentage up. We probably had a 10% to 12% increase in the percentage of our total business done in the In-home this year, and we think there's more room to expand that in the next year. Matthew S. McCall - BB&T Capital Markets, Research Division: So you said 30% to 35% for those stores that have had it for a while. How many of your stores have had it for a while, or anything in that category?

Well, having it and really maximizing it and pushing it and having qualified designers and -- it takes a while to get that, the program, ramped up. And I would say the average is more in the mid- to low 20s, not in the 35% range. But it's improving all the time, and people are understanding its value. And it's another service that differentiates us from the competition. Matthew S. McCall - BB&T Capital Markets, Research Division: Okay. Then as I look at the incremental margins, pretty strong both sequentially and year-over-year. And I know Mexico's starting to flow through. That’s helping to grow back the numbers there, but it's also interesting that you brought up -- moving some production back into the U.S. and expecting to see some benefits on the flow-through there. Can you just walk us through how we should look at the incremental margins, really, I guess both on a near-term basis, as we’re still seeing some benefits, but also as we move through the cycle, because it's a bit tough to model, and in a good way, because you're putting up some good numbers?

That was one question, Matt? Or was that a series? Matthew S. McCall - BB&T Capital Markets, Research Division: I don't really know if I actually asked a question.

Okay. So really, we have not changed our position. We think our incremental margin can be in the 20% to 30% range on any given period of time, and that would depend on which business segments the increase in volume came through. It would depend on what happens to raw materials. And so there are some caveats with that. But the 20% to 30% range is what we're comfortable with today. I would also say, in the Casegoods business, we're going to be introducing a few groups in April in our American Drew portfolio that we will be making in Hudson, North Carolina, where we make the Kincade product today. At the upper-level price ranges of the Casegoods, we believe we could be as competitive as China when something has more design to it and more work. We're not competitive on promotional bedroom and things of that nature with the way we have our factories set up. But we do think in the better goods, we get can be as competitive, and we're going to introduce those groups here this spring. Matthew S. McCall - BB&T Capital Markets, Research Division: Okay. I want to sneak one more in. Mike, you mentioned that there's an extra week last year, so we need to adjust for that. And it sounds like an assumption of normal seasonal patterns would be reasonable given what you're seeing in recent weeks. So remind us what our expectation should be for normal seasonal patterns. We haven't had many normal seasonal patterns recently, so just remind us what that would be going into next quarter.

Well, we've always said our fourth quarter is our strongest quarter for sales, so it'll -- except for the one year that everything went upside down in fiscal 2009, where things dramatically went down. I think that's pretty much held true for the last decade, at least. So we expect to have the same seasonal change this quarter, as we always have. We just want to make sure it's reflective of 1/14 of a quarter. 1/13 is about 7%. So I just want people to be making sure they understand that lever as we move into the fourth quarter.

Yes. And really, Matt, the seasonality hit for us is really the first quarter. That's when we see a -- so historically, our performance has been the weakest in the first quarter and the strongest in the fourth quarter. And we don't -- and that is our delivered sales, not necessarily our written, but we don't see that pattern changing this year.

Our next question is coming from Brad Thomas of KeyBanc Capital Markets.

I wanted to start off talking a little bit about advertising. It's clear that Brooke Shields has been a nice catalyst for you all to get new customers into stores. Could you just talk a little bit about advertising in the quarter? Was there anything you did differently? And as you look forward, is there anything that you think that you may change? And just remind us where you stand in terms of your agreement with Brooke Shields and when she may be up for renewal.

So Brad, we did not -- I would say we did not do anything abnormal this quarter. We -- this is the first quarter we anniversaried Brooke, so I think the campaign is continuing to gain momentum. And in fact, our intent is, particularly if we can come to an agreement with our independent dealers relative to this question, our intent would to be increase the amount of time we're on television next year starting in the fall from 18 to 24 weeks. And as long as they would fund their portion of it, La-Z-Boy would be prepare to do the same because we do think it's being effective. But we haven't made that arrangement yet, but we're -- we have a meeting in March to try to work through that. And so we are in negotiations right now with Brooke and her team, and we would have expectations that our relationship with her will continue for some time.

And just to follow up on that, you mentioned that you think customers are coming into stores more prepared, more qualified because of the use of the website and web advertising. And then you all have a very helpful site, and as well as, I believe, a mobile site. Maybe you could just talk a little bit more about what you guys have today, where do you think you need to improve and where you think you stand relative some of the competition.

Well, we continue to invest heavily in our Internet activities, in our use of social media, in new programs. I think one of the big changes we made this quarter is we went to zip code-based pricing on our site for our dealers who are fulfilling sales through the Internet. And given their margin requirements and their different freight situations, they have the ability to do that, and we saw a nice lift there. So it's becoming an increasingly higher percentage of our total spend in marketing, and I would suspect that trend would continue. So we are a big believer that the Internet is one of your faces to the consumers today, and you've got to stay up with the competition and you've got to continue to invest in it, enhance it and give it more reasons to stay on the site longer. And we will continue to do that.

And then just one last one. I apologize if I missed this, but I was hoping you can update us on where raw materials are playing out for this year, what your expectations are on the dollar increases. And can you show the way you break it out? And then any plans for price changes and whether or not that's related to raw material expectations?

We've been saying consistently this year that our raw material prices are going to be up somewhere between $15 million and $18 million. And unfortunately, we've been right because that is what we've seen. Our bias for next year is that raw materials will probably moderate a little bit. But our bias is also that they will be up again. To what degree, we're in the final stages of trying to clarify that. Our basic philosophy on that our own organization needs to find cost reductions, better efficiencies, grow the business to be able to take care of internal expenses we have with wage increases and 401(k) contributions and bonuses and things of that nature. But when it comes to raw materials, I think there's a need to have that passed on to our customers. I don't think anybody in the furniture business is making so much money that they can continue to absorb the increase in raw materials. And so we'll just have to see how that plays out, but there's no indications that it's going to be going down. It's just a matter of the degree for next year that it may go up. So we would address that with our merchandising.

Our next question is coming from that Todd Schwartzman with Sidoti & Company. Todd A. Schwartzman - Sidoti & Company, LLC: Just a follow-up on the raw materials, Kurt. What percent of cost and what percent of raw materials are poly and energy based?

Todd, we don't really get into the specifics of all that. We give some clarity on that in our 10-K on what our largest raw material components are. But we just have not gotten into the specificity of going into each category and talk about – especially when it deals with energy, because you have freight components. And then everything you buy that's going to the plant have some freight component to it that will be adjusted through if energy costs go up. But we're not giving any more clarity on that right now. Todd A. Schwartzman - Sidoti & Company, LLC: So the informal forecast of things, perhaps up a little bit next year maybe moderate a little bit. Is that taken in context of the situation in the Middle East remaining stable?

Well, I believe that there's been a lot of talk about all kinds of things with energy costs, and where it could go and everything. So if fuel prices would go up, double where they're at now, or a 40% increase of what they are, I'm pretty sure all of those will have to contend with the same issue. I'm not sure that we think that the Middle East situation remains stable, but we're cognizant of that as we go through those things. And it will affect container prices. It will affect freight delivery. We’ll have to look at that issue as we go forward and make the appropriate changes if that gets more significant.

Todd, I want to be sure when we say it moderates, so if it's going to be up $18 million this year and it's only up $10 million or $12 million next year, that would be a moderation. So we're not saying it's going to moderate below last year. It's still, we believe, going to be up. We're just not totally done with our analysis as to what degree. Todd A. Schwartzman - Sidoti & Company, LLC: Right. I get that. I just wanted to make sure that, that initial analysis does not factor in any type of global supply shortage.

No, it doesn't. But I would have to say that if the predictions are to come true that, that the gas gets to be close to $5 this summer, that is not good for our business. It's not good for the consumer. It takes away discretionary dollars. And so we've got a mindful eye on that. Todd A. Schwartzman - Sidoti & Company, LLC: Okay. Fair enough. And I may have missed this. You may have said it and I missed the beginning of the prepared remarks. What was the organic delivery retail comp for Q3?

The organic delivery comp is the 6.7%. And I do think that there is some confusion, and I hope we find it -- clarify that. I'm going to take another attempt at it. We give, in our disclosures, the written comps for the entire network, the 309 stores. We don't break out our written comps for our own retail business, but we give the entire network. And then we tell you the delivered comp in our owned retail business. And there is really a 45- to 60-day lag between the written and the delivered in the business that we run. By the time -- we can ship product in 3.5, 4 weeks. It gets delivered over a couple of days. The dealer has to make an appointment with the consumer. So that transaction can take 6 weeks. So we're giving you 2 different sets of information, and there's always going to be a 45- to 60-day lag factor.

And this will be the last quarter that we'll worry about the previous year's 67 base stores. As of the fourth quarter of next year, we'll have the 15 Southern California stores in both this year and last year. Todd A. Schwartzman - Sidoti & Company, LLC: So that comp, that 6.7%, was identical to the prior year comp, correct?

Todd, I was comparing with the stores that we had in the fourth -- the third quarter.

67 stores we had a year ago, we try to give you because Southern California confuses the numbers. So yes, the 67 stores we had a year ago, the same 67 stores this year, we had a 6.7% delivered comp in that business. Todd A. Schwartzman - Sidoti & Company, LLC: Which matches the prior year delivered comp, the 6.7%?

Yes. Todd A. Schwartzman - Sidoti & Company, LLC: Okay, because I saw that reference, but it was referring to the last -- to fiscal '11. On the advertising front, could you take a stab -- would you care to take a stab at the total ad spend for fiscal '13?

Well, Todd, we'll give that disclosure in our 10-K. We don't usually give that out in interim quarters. But it is a required disclosure for us to give. And we've -- I can't remember the number, but it's $50-something million last year. And as we -- and we have to gross up what we do with our third-party dealers, independent dealers, through that. So, it’ll probably will go up as we've added more weeks. And...

But it's going up because of our sales. But we're also spending more money to be on the air with Brooke as much as we can. So it's not going to be up anything like $15 million or $20 million, but it'll be up. It shouldn't be up dramatically as a percentage of sales.

Correct.

But it'll be probably in that $50 million, $55 million range. Todd A. Schwartzman - Sidoti & Company, LLC: Okay. And that assumes that you re-up with Brooke?

So Todd, you're talking about this year? We haven't finalized our numbers for next year yet. Todd A. Schwartzman - Sidoti & Company, LLC: Yes, I was looking at '13. So is there any evidence -- I don't know how you could really break this out, but is there any anecdotal evidence or otherwise that the Brooke Shields campaign is having any kind of impact on average ticket?

Well, I would say that we've had a larger increase than the base business in certain categories such as sofas and accessories and occasional chairs, which is what she's talking about in the advertising, that we do more than recliners, that we can do the full room. And there is a direct correlation between the types of furniture that she's marketing for us and our sales results. So, I would say there is a direct correlation, yes, sir. Todd A. Schwartzman - Sidoti & Company, LLC: Okay. And lastly, promotional activity upcoming, how should we think about that versus prior year?

The furniture business is a promotional business, and we're on sale every weekend. So I don't know how much more can be intensified in the industry than it is today with credit and free TVs and things of that nature. But we're comfortable with the path we're on. We watch our competition, and try to find the lane that we want to play in. And we think we have found that right now, and we'll be making some minor tweaks to our efforts next year, but nothing major. Todd A. Schwartzman - Sidoti & Company, LLC: Have you toyed with the idea much of putting select products on sale in a given month for a particular promotion versus everything in the store, x percent off? Or is that something that you re-evaluate on an ongoing basis?

We re-evaluate it, and if we do some that the entire store is not on sale all the time. There's times in the year when we have recline-only sales, when we have leather sales, when we have coupon sales. So yes, you can't stay with the same promotion 7/24. And it would lose its effectiveness with the customer. So we mix up the bag quite a bit.

[Operator Instructions] Our next question is coming from Barry Vogel of Barry Vogel and Associates.

I've got a couple of questions. Considering the fourth quarter is seasonally the best quarter of the year and considering this phenomenal move towards breakeven in Retail, which, of course, has been hurting the company for so many years, why wouldn't you be profitable in the fourth quarter retail?

Well, we haven't said we would or wouldn't, so I --

I was trying to say why wouldn't you given what I just said?

In terms of seasonality, Barry, seasonality is segment oriented, too. So the third quarter is a pretty good quarter for us at Retail, and so we'll just have to see. But we're just not giving guidance on especially any segment, but we think that sales have to be at a certain level in order for us to get to the breakeven, and that just remains to be seen.

All right. Because if you only lost $646,000 in the third quarter and $240 million -- $49 million in revenues -- I'm sorry, $58 million in revenues, and seasonally, the fourth quarter, as you say, is stronger, I would think that you should be able to be in the black in the fourth quarter in Retail.

Well, let me try to clarify that, Barry. Seasonally, it's stronger for the wholesale business because of your delivering out your -- after Christmas, your Presidents' Day, all those sales. It's not seasonally better in the written business in Retail than the November to January period. But if you do the math, we lost $650,000 in our Retail business. And if you would take the high end of the conversion we've given at that 30%, we would have needed to do another $2 million, $2.5 million last quarter to be positive. And so the bar is slightly above the $60 million a quarter range. And then if we get there, we would expect to convert on it and be profitable.

But every quarter has its oddities. We’ll have store openings and those types of things, so it's all relative.

Okay. All right. Now as far as -- you made a comment, Kurt, I believe, about double-digit operating margins, I wasn't sure -- that you're headed towards that. I wasn't sure if that was Upholstery in the fourth quarter. Or is that Upholstery next year? Because you were talking about Upholstery at that time.

That's correct. And we -- what we all were doing, Barry, is reiterating that we have been talking for some time here about our upper end of our targets for each of our various segments. And so we've talked about approaching the double-digit level in Upholstery on an annual basis. We've talked about staying in the mid-single-digit range for our Casegoods business. And we've talked about, as a first target, getting retail profitable. And once we do that, we will probably establish another target as to where we think that our operating margin can grow to over the next couple of years. So really, that has been consistent with what we've been saying for a couple of years.

Okay. Now given your extremely liquid balance sheet and significant cash generation, which was very powerful giving -- given the fact that the economy is not that great, housing activity is not that great, so you've really done a great job internally on things you didn't control. So given all of those things and given the list of uses of cash, growth investments, stock purchases and dividends, to me, all 3 of them could be done simultaneously if you believed that -- if you believe that you're on the right track to continue your performance and given your liquidity right now. So why aren't you willing to do all 3 simultaneously?

We haven't said we would or wouldn't. We just gave you the order of magnitude of priorities. And so we continue to discuss this with our Board. We continue to look at opportunities and investments to grow our business. We did buy a little bit of stock. And we're not ruling out anything. We're just not prepared yet to make a commitment that everything in the world is right and we have great visibility and things are going to stay 100% rosy forever.

Well, they're not rosy right now, frankly.

I understand that. That's part of our concern.

Now growth investments you're making because you're spending money. You're capital spending, so you are doing that. So the -- and you are buying some shares. The only thing you haven't done is a dividend.

That's correct.

And that would be a sensible thing to do given that fact that the investment -- the investors want dividends for all the right reasons. So I would think you would seriously consider having a dividend.

We'll certainly take that under consideration.

[Operator Instructions] Our next question is coming from Asad Abbas [ph] of abel.com [ph].

I'm calling from Northern California. And the question was, La-Z-Boy Galleries only carry living room furniture, basically. Have we given some thought to carry children's furniture also and combine with the lead product?

Well, I think the question is a little larger one. We decided many years ago that we wanted to be a specialty store. And a specialty store narrows its focus and tries to be good at a portion of the business rather than the entire business. And what makes La-Z-Boy a little unique is the emphasis on living room/family room furniture. We do sell some other furniture through our in-home design programs of our other Casegoods companies, including youth furniture. But our stores are not 40,000-foot boxes and prepared to compete on the level with big-box stores. That's not where we think we have a strategic advantage. And certain consumers like shopping in smaller stores. Certain consumers like the big boxes. And we think the range of the size of stores that we have dictates that we focus our efforts on a certain portion of the furniture business, not the entire furniture business.

There are no further questions at this time. I'd like to hand the floor back over to management for any closing remarks.

Thank you, everyone, for being on the call this morning. If you have any follow-up questions, I am available. Please give me a call. Have a good day. Bye-bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you, all for your participation.