La-Z-Boy Incorporated (LZB) Q3 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, welcome to the La-Z-Boy Fiscal 2011 Third Quarter Conference Call. [Operator Instructions] It is now my pleasure to introduce Ms. Kathy Liebmann, Director of Investor Relations of La-Z-Boy Inc. Ms. Liebmann, you may now begin.

Thank you, Rob. Good morning, and thank you for joining us to discuss our fiscal 2011 third quarter results. Present on the call this morning are Kurt Darrow, La-Z-Boy's 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. As is our custom, the time allotted for this call is one hour. 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 our 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 President and Chief Executive Officer. Kurt?

Thank you, Kathy. And good morning, everyone, and thanks for joining us this morning. Yesterday afternoon, we reported our third quarter results for fiscal '11. Consolidated sales were down 4.3% for the quarter. And as we noted in our press release, approximately half of the decline or $6.6 million of $13.2 million volume decrease related to the deconsolidation of our Toronto VIE [Variable Interest Entities]. Net income for the quarter was $0.19 versus $0.21 in last year's third quarter, and Mike will speak about the difference in the anti-dumping monies received and the tax benefit in greater detail in just a few minutes. Before getting into a discussion of our three business segments, I would like to take a moment to put things into context. Several years ago, we set upon a course to make strategic changes to our company. It was clear that to be competitive, we needed to be nimble and adapt to the current operating environment that both the industry and the overall economy presented us. The initiatives we undertook were designed to ensure our company would not only survive, but thrive in what was becoming a very new and different operating environment for the furniture industry. A myriad of changes were put into place. And in addition to the success of the cellular production process throughout our La-Z-Boy branded facilities, the new operating structures of both our Casegoods and Retail segments are bearing fruit. Our Retail Group has posted eight consecutive quarters of improved operating results, and our Casegood Group has strengthened its performance as well even with the challenge in the current environment. We are also encouraged that our La-Z-Boy Furniture Galleries same-store sales was up 4.7% for the quarter, reversing a negative five-month trend, including decreased same-store sales of 7% last quarter. We noted an increase in volume during the holiday period and into January. Although it may be too early to consider this activity a trend, we are indeed encouraged with what we are seeing. As I mentioned on our conference call last quarter, La-Z-Boy is in an investment mode for growth. We've taken down our cost structure in all three business segments and are lean and efficient, allowing for a focus on positioning the company to increase its market share and to grow profitably. The initiatives in which we are investing, mainly our new brand platform, research and innovation, technology and customer care, will inevitably strengthen our company, and we are confident we'll be poised for growth when the overall macroeconomic environment strengthens, specifically as it relates to consumer confidence and housing. Now let me turn to a brief discussion of our three business segments. First, Upholstery. For the quarter, Upholstery sales were off 3.9% compared with last year's third quarter. It should be noted, however, that we were going up against more difficult comparatives, as last year our Upholstery segment was up 17 1/2% for the third quarter over the prior year period. This puts into perspective the challenges our industry has faced over the last two years, reflecting overall lower volumes and the inconsistent and unpredictable sales environment. With an 8.2% operating margin, it's clear our cellular process is delivering results. Our margins for the quarter, however, continues to be impacted by higher raw material costs, and we expect a price increase will probably be necessary to help offset the cost going forward. Our Mexico Cut-and-Sew facility is making progress on a weekly basis. We realized a cost savings this quarter and expect ongoing improvements, so that we will benefit from the operation going forward, capturing most of the cost savings that we have outlined in fiscal 2012. With respect to our new brand platform, which launched in mid-November, we are delighted with the feedback on the initial campaign and with Brooke Shields as our brand ambassador. While too early to quantify the success of the program, suffice it to say that many of our La-Z-Boy Furniture Galleries stores are reporting consumers walking in referencing the campaign, and in many cases, asking for the furniture featured in the commercials. Additionally, we have noted increased traffic on our website, which we believe is directly related to the new campaign. Overall, this is indicative of the progress being made to educate the consumer and highlight La-Z-Boy's wide array of stylish and comfortable furniture beyond our iconic recliner. If you have a few moments and haven't seen the commercials on television, I would encourage you to view them on our Home page of our website, la-z-boy.com. In our Casegoods segment, sales of $35 million were down 1.7% from last year's third quarter. However, the group posted a 4.7% operating margin, clearly demonstrating the success of the changes made to the business's operating structure last year, specifically, the warehouse, plant and business unit consolidations. Although the environment remains challenging, we have increased our floor space among our customer base, primarily the result of our excellent service and product offerings. Additionally, it appears that consumer is gradually moving to a higher-end product, the space we play in, in our Casegoods Group, and that is a distinct turnaround from what we experienced over the last two years. Again, it is too early to determine if this is a trend. But we are well positioned to capitalize on it if it materializes, given that most of our product lines fall in the medium to medium-high price range. And it goes without saying that our marketing team continues to look for ways to be innovative and to drive sales throughout the business. In our Retail segment, sales increased 9.2% to $44 million from last year's third quarter. The group made significant progress in reducing its loss for this period, decreasing it to $2.8 million for the quarter from $4.1 million in last year's third quarter. The increase in sales combined with a tighter cost structure drove the improvement to our bottom line. During the quarter, we converted better on incoming traffic, which demonstrates the effectiveness of the changes made to our selling process. We also believe our promotional activities resonated better with the consumer as did our marketing initiatives featuring Brooke. Going forward, our marketing campaign will continue to roll out over the next several months featuring different commercials and print ads, and we are confident this activity will help drive traffic for all La-Z-Boy dealers. We are still challenged by expensive leases in many of our locations, and our real estate team continues to work on renegotiations to bring our sales to occupancy expense into a better alignment. And finally, following the close of the third quarter, one of our dealers, who operated as a VIE and ran 15 La-Z-Boy Furniture Galleries stores in Southern California, retired, and we assumed responsibility for the stores in Los Angeles, San Diego and Orange County. Our Retail team has embraced the challenge of taking on the additional stores as Southern California is a market with great potential from a demographic standpoint. Once various sales, marketing and operational processes are instituted throughout the 15 stores, we are confident the results from the operation will improve. As a result of acquiring these stores, we will now have 83 stores comprising La-Z-Boy's Retail segment. And with that, let me turn the call over to Mike to make a few comments on our financial statements.

Thank you, Kurt. To summarize, the fiscal 2011 third quarter net sales were $292 million, down 4% compared with the prior year's third quarter. Net income attributable to La-Z-Boy Inc. was $10 million or $0.19 per share compared with $11 million or $0.21 per share in the fiscal 2010 third quarter. As Kurt discussed earlier, the deconsolidation at the end of fiscal 2010 of our Toronto VIE had a sizable effect on our results. In fiscal 2010, the Toronto VIE sales, net of eliminations, for the third quarter and nine-month periods were $6.6 million and $14.9 million, respectively. Our results for this year's third quarter and nine-month period do not incorporate the results from this VIE. For the quarter, our results included a $0.01 per share in anti-dumping or CDSOA [Continued Dumping and Subsidy Offset Act] money, while last year's third quarter results included a $0.05 per share number. Because our percentage year-over-year pretty much remained constant, the difference is a reflection of a decrease in CDSOA funds paid out by the government in 2010 as well as not receiving funds from a previously sold company. The CDSOA website shows that about $152 million have been collected but not paid out. Based on the percentage of previous year's payout of funds, La-Z-Boy could receive a substantial amount of the unpaid collected balance if and when it ever gets paid. Relating to raw material costs, they still remain high. And for the quarter, we paid about $4 million more for raw materials, which impacted our consolidated gross margin by 1.3 percentage points. For the fourth quarter, we anticipate about $4 million of additional costs bringing the projected increase in total year-over-year costs to about $19 million. As Kurt said, we did realize a tax benefit associated with our Southern California VIE. We recorded a reduction in our valuation reserve associated with certain timing differences, which resulted in a $0.06 per share tax benefit during the quarter. This tax benefit has reduced our overall effective rate for the remainder of the year. During the quarter, we reduced our accrual for warranty by $1.1 million as a result of a redesigning of a mechanism that historically experienced high claims activity. The new mechanism, which is used in the specialty chair, is performing well with much lower claims. And as a result, we reduced the accrual, which is made at the time the revenue is recognized. Now let's shift to the balance sheet. For the quarter, cash provided by operating activities was $29.5 million, which included an approximate $13 million decrease in accounts receivables. We ended the quarter with $110 million in cash and $89 million of availability under our revolving line of credit. Our total debt stands at $45 million, leaving us with a net cash position of $65 million. Capital expenditures for the quarter were $3.2 million and were $8.2 million for the first nine months of fiscal 2011. For the full year, we expect our capital expenditures to be in a range of $10 million to $12 million. Now before turning the call back to Kurt, I just want to remind you once again that our fiscal 2011 fourth quarter will include 14 weeks rather than 13. Kurt?

Thank you, Mike. The environment remains challenging, and certainly the industry isn't out of the woods yet. As I said before, we believe steady progress and consumer confidence and an uptick in the housing market is necessary before our industry sees a strong rebound. However, we are indeed encouraged by this quarter's increase at the La-Z-Boy Furniture Galleries store network. Moving forward, we will continue on a course with tight cost disciplines and controls throughout our operations while investing in the initiatives that we believe will position us in the marketplace to take share, drive sales and grow our enterprise profitably. Our La-Z-Boy brand leads the industry, and we will use it and our extensive network of branded outlets to highlight the merits of our furniture and the service and shopping experience we provide to the consumer. Importantly, we will begin to open new La-Z-Boy Furniture Galleries stores at a more rapid pace than the past couple of years as part of our continued investment in our brand, our future and our integrated retail strategy. We have every confidence our company is well positioned for the future, and that we will grow an ultimate return value to our shareholders. We thank you for your interest and support of La-Z-Boy Inc. and for being with us on our call today. I will now turn things over to Kathy.

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

[Operator Instructions] Our first question this morning is coming from the line of Budd Bugatch of Raymond James.

This is actually Chad pinch-hitting for Budd. Mike, in your comments here, you talked about expecting a $4 million increase in raw material costs in the fourth quarter. Is that a year-over-year figure or is that relative to the run rate that we had in the third quarter?

No, that is a year-over-year number compared to the fourth quarter of last year.

And do you think are we at about the high watermark for the year-over-year increase? Or how do we think about that as we progress into early fiscal '12?

That's a good question because we keep getting rumblings of additional price increases that are pending out there in some of the large raw materials that we're purchasing. So we're, right now, anticipating maybe some more. But we just don't know the extent of them yet as people are trying to recalibrate for our vendors and what they're going to spend money and what our costs are going to be. So we're working through that as we speak.

And, Kurt, given the improvement that we saw in the operating performance at retail this quarter and then now the addition of the California stores to the company-owned division, could you sort of give us a refresh on your thinking in terms of a breakeven point for Retail?

So Chad, the numbers don't dramatically change. As you can see over the years in our VIE segment, we weren't in a positive earnings position there. So there's some work to do in California, and the number that we have been talking about in the 20% to 25% range of volume is still where we need to be. I think we've talked before that our range of volume per store needs to be at the $2.9 million, $3 million range, and we're at the $2.4 million, $2.5 million range, although improving, but out of 12-month running basis, that's where we are at. So we still have a gap, but we're chipping away at that. The team has done fabulous work, and we've reduced our losses for eight consecutive quarters and have it now to a level where, on an integrated basis, we're earning more money on the wholesale side than we're losing on the Retail side, which was the first blush of where we wanted to get. But it's still going to take that volume uptick in combination with our occupancy reductions, which we're having some success yet. But the two things, hopefully, will go in the right direction. Our volume will continue to go up and we'll be able to renegotiate a number of leases and bring our occupancy down. And that will reduce the gap we have to profitability.

You talked about improved efficiencies in Mexico this quarter. Could you give us a sense of what we should expect? Where you're at right now, and what should we expect going forward?

I think we indicated on the last call, Chad, that we would get our $15 million of savings from Mexico with 25% to 30% in the second half of this year and the bulk of it next year. And we're on pace to do that.

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

I wanted to follow up a little bit about the performance at Retail. It seems to be an encouraging written comp as well as a total written sales result. Was just wondering if we can read into that at all in terms of, perhaps, again adjusting for that extra week that you have, perhaps the Upholstered Group (sic) [Upholstery Group] moving into positive territory in the fourth quarter.

Brad, I would answer that. Obviously, you saw in the second quarter was negative sales for the quarter of about 7%. The wholesale business was down correspondingly, because there is a lag factor. And certainly, we're encouraged by the improvement we've made this quarter. But that would have to sustain itself for the whole quarter. I'm sure that the Upholstery segment had some top line growth adjusting for the 14th week. So we're not prepared yet to predict what Retail sales might be in February, March and April. But certainly, if they stay at positive to the level they were in the third quarter, you should see some growth in our Upholstery segment.

And then trying to follow up on the advertising. It sounds like the new commercials you're running and having Brooke Shields involved is having a nice impact. Can you just remind us the level of ad spend that you're expecting during the next quarter on kind of a year-over-year basis? And as we look forward, what level of incremental advertising do you think you may want to make if we continue to see signs of at least stabilization in the industry?

Brad, I would answer that probably in three ways. One, we said there would not be substantial more cost year-over-year in our advertising. It could be in the 8% to 10% range year-over-year, but it's not anything that can't be managed. A lot of it is the arrangement we have with Brooke, the production of the commercials, which are first class, and then getting them launched and putting our money behind it. I'd also remind everybody that we have a joint campaign with our La-Z-Boy Furniture Gallery owners who contribute some of their advertising dollars cooperatively with us so that we could buy TV time nationally, which helps everybody get it at a lower rate. So one of the things that we're going to be discussing with them is, that if they're seeing the same success, their ability to commit a little more of their budget to that, which we would like to put behind the Brooke campaign. And the third answer is if we continue to see positive reaction to the campaign and momentum at Retail, we would not be adverse to putting some more money behind it to drive sales and to get a return. I'm not going to give a number on that. I think we spoke last quarter about the campaign with Brooke, in cooperation with our dealer network, was about a $20 million investment. And so far, we couldn't be more pleased with what we've seen.

From just a housekeeping perspective, as we look at that fourth quarter with the 14th week in it, what should we expect to happen to sales? Should we just run it through as an extra week coming in at the same as the average? And then what should we expect from an expense standpoint? Does that just go out to 14 weeks or do you get a little bit of extra leverage?

Brad, I think the way to model that is just add the extra week at normal sales and normal expense. Our business doesn't understand there's an extra week. We still have people to pay and expenses to do. Once you adjust it back, there's nothing to our favor or to our detriment by having the extra week.

And then just lastly, was there anything that you all did differently from a promotional standpoint during the quarter? Or did you see anything different from your competitors? There seems to be some comments in the industry that it was a little bit more competitive during the quarter.

I think a combination of things. Obviously, the whole television campaign with Brooke was different, different than what we've been doing and, candidly, different than what most of the industry does. And then we've also been doing some things, reaching out to past customers, reaching out to people who have been into the stores, where we get their names and go back to them with special offers. So a lot more targeted effort with people that we know are in the market, people that we know are considering to buy furniture. So we have tested and learned and understand a lot more about who we want to go after. So I think our marketing effort this quarter was more targeted at broadening more qualified traffic. And as a result, our team did a very good job with converting that traffic.

Our next question is coming from the line of Matt McCall with BB&T Capital Markets. Matthew McCall - BB&T Capital Markets: Kurt, I want to start with the comments you made about the higher price points, I think the only reference you made was when you were discussing the Casegoods segment. I guess, what led to those comments? Was it just in Casegoods? And do you think that it's consumers moving up or is it the high-end consumer returning? Is there any way in the data that you have that you can tell me more?

So, Matt, I would say that the comment was specifically to Casegoods, because we're positioned slightly higher with our overall portfolio of companies in Casegoods. We're positioned a little higher in that segment than we are in our portfolio of Upholstery companies. So the comment was pretty much forward. And we don't have the same insight into the Casegood business and consumer like we do at Upholstery, because we don't own stores that sell a lot of casegoods. And what we're hearing from our customers that purchase from us is the willingness to put a better furniture on the floor, the willingness to try more expensive things, a willingness to get their floors a little more differentiated. And so that's where most of the conversation is around. Our Casegoods team has received new placements from major retailers, and a lot of those have been on their higher-end group. So it's more of a willingness of our retailers to, I believe, respond to a need they're seeing in their stores with their customers. Matthew McCall - BB&T Capital Markets: Moving to the same-store sales performance. You talked about an improving conversion, a rate of conversion, and there was a question earlier about pricing. Can you breakdown any commentary in that same-store sales number with volume relative to ASP [average selling price]? Was ASP steady on a relative basis? Just trying to get a better understanding of pricing environment relative to the volume improvement you're seeing.

So in our case this quarter, Matt, the majority of our improvement had to do with the improved close rate at Retail. Traffic wasn't considerably different. Average ticket and price wasn't considerably different. And it was that we actually just converted better on the people walking into the store. And our percentage of customers buying on the first time in made the difference in our sales for the quarter. Matthew McCall - BB&T Capital Markets: And then to finally hit on the new stores comment. Was that a calendar 2011 comment where you're going to accelerate the store growth? I missed the point there. Was that far out in the future or was that we're going to start ramping up the store growth now? And then what’s kind of some number, the worst number you could put behind that?

I think the comment, overall, was that given an improving business environment, an improvement in performance of our Retail Group, the opportunity that exists in the marketplace for real estate, both our sales and our company-owned segment and our independent dealers who own La-Z-Boy stores, are back in the mode to start looking at new opportunities, remodeling some stores, moving some stores. And the numbers are very hard to give you specifics on, because it all depends on how quickly we can secure the real estate. The takeaway here is really the mood. The mood is back into a growth posture and looking for opportunities, where for the last couple of years, there's been none. So it wouldn't take a lot of activity on our part to open more stores than we have the last couple of years because we haven't done them. But to quantify that, I think over the next 12 to 18 months, if we could find the right real estate, and I'm talking about ourselves and our dealer network, I believe we could, in combination with remodels and relocations and new stores, I wouldn't be surprised if you wouldn't see 12 to 15 stores come online during that time frame. Matthew McCall - BB&T Capital Markets: About the California stores. Those 15 stores sound like -- I mean, that's a 23% increase, quick math there, on your store base, and it sounds like they're losing money. I just want to go back to an earlier question about the profitably of the Retail segment. So it sounds like some maybe near-term pressure until you get some of the -- put some efforts in place to improve the profitability there. Is that the way to look at it, maybe some near-term pressure gets better faster if you're able to address some issues.

So it's going to be a little confusing for everybody to equate the two because in our total reportable sales and the performance, this is just shifting from the VIE into the Retail network. So it's not additional sales or anything like that, it's a shifting from where it's being reported. We are fairly confident that our team -- and after a few months of assimilation and understanding that, we're fairly confident that the Retail Group will perform at a better level than was being achieved by the former owner. And so that, given the losses we had in the VIEs , we think we can improve upon that. And our anticipation is that this will not be a drag on the Retail Group. It will not add to their losses, percentage-wise. And we believe that it can be positive or, at least, at a breakeven level in a 12-month running basis after some period of assimilation here in the next few months.

And, Matt, I just want to clarify two things. One is when we obviously said we're going to -- we needed 20% to 25% more revenue in order to become profitable at Retail, it wasn't through acquiring stores, it was on organic growth. And the other one is, just to clarify also, on the losses on the VIEs, they do not hit our cents per share on net income attributable to La-Z-Boy, because they go through minority interest or as a pullout. So if we do have losses, they will go through to the bottom line going forward until we rectify and get that stabilized. Matthew McCall - BB&T Capital Markets: So just to clarify, so that would be that they weren't pulling through before, now they are, so there might be some near-term pressure. I guess I'm confused about the two answers there.

Well, the question is for the total operating profit of the company, there won't be any change because it goes through down to, I think it's net income and then we have an adjusting line item and then net income attributable to La-Z-Boy is without the VIE losses. So I'm just saying if they lost, I'm just making a number up here, if they lost $1 million last year, that number did not hit our cents per share. Now the $250,000 a quarter, whatever in that example I'm giving you, would hit our bottom line. It's not going to be significant enough to make you go crazy or anything. But I'm just letting you know, it will be a difference for how it hits the net income attributable to La-Z-Boy.

Our next question is from the line of John Baugh of Stifel, Nicolaus.

One, could you comment, there was reference in the queue to mix in Upholstery weakening in the third quarter. I was curious, did you see in your orders in the third quarter continued mix pressure? Where do you think that's coming from? Is that having to respond to an Ashley or a Best Chair operating at price points below you? Or is it the consumer still coming in and just, "I got this budget and I can't trade up on credit?" Just color around mix.

John, I would answer that in this manner. I think that the change in our mix is much more driven by the consumer than it is competition. The customer is more apt today to stick to a budget. Sometimes you have to offer in your advertised values a little better promotion to get the customer in the door. But we had a 1.1 negative change in our sales to our mix, not overly significant. That was in the third quarter, undelivered. I don't have an answer to your question on the same comparison on written, but we're just reacting to what the customer wants. The customer is certainly shopping for value. And the percentage, as we've said the last year, the percentage of the business that we're selling in the opening third of our line, from a price point standpoint across all categories, continues to be higher than normal.

And then I wanted to dive a little deeper on the raw material pricing and the timing and the magnitude. As you know, the steel guys and the foam guys are all talking and/or acting with increases. You commented that you've gone up $4 million year-over-year in the fourth quarter. Is that incorporating all of the very recent upticks in cost or not? And I guess I'm trying to get a flavor as we go into fiscal '12. And I know it's uncertain, but I'm curious about the timing of pricing. Are we going to see any pricing in Q4 that'll offset this $4 million? And then how that delta between pricing in raws may look in fiscal '12?

So, John, just to put it in perspective, as we've given it out each quarter and Mike gave a projection on the fourth quarter, we're going to absorb $19 million of raw material increases this year, over and above 2010. And that does not really include very much fabric increase. The fabric increased portion of this, because of the run up in cotton and polyester thing is just happening in this quarter. So it's our anticipation that there's going to be more raw material pressures next year. At this point, I wouldn't say it's going to be in the magnitude of the $20 million again, but it's going to be more. And the commodity market, inflation, all the things going around in the global market today just points to increased prices on raw materials. We believe, given in some cases we have 90-day contracts and we have things secured through the fourth quarter, we believe in the $4 million that I gave you, we captured all of the price increases we're going to get in raw materials this quarter. But instead of being flat probably in the first quarter with the previous year, particularly on the fabric and leather side, we think there's more to come.

And would we, as we face Q1 increases in fabric and leather, would we have pricing relief? And I'm not asking you to tip your hand on what percentage, but would we get some offset in Q1 from higher prices?

Well, certainly, that's what we're under discussions on. And until we communicate with our customers, I'm not going to reveal exactly what we have done. But last year, we anticipated that we would have more growth, we would have more savings from Mexico. That didn't all materialize. So we've absorbed quite a bit of the raw material increases ourselves, and we cannot continue to absorb an increase on those next year.

Mike, can you refresh my memory on the CDSOA percentage that you've gotten historically?

And so to put in perspective, last year, the CDSOA had $7.5 million available that they discharged, and we had $900,000 of that. So that's about 12%.

And is that post the company you sold?

Yes. We did receive -- none of the $900,000 incorporated the company we sold.

And then are we going to have the fiscal '12 52 weeks versus 53?

Yes, we will. So the fourth quarter of 2012, we'll go back to 13 weeks compared to the 14 weeks we’ll have this quarter.

And then lastly, I can't let you off on the line without asking about this beautiful Wall Street Journal article yesterday about shakedown payments. Is there any additional color you want to add to that, heard or just leave it lying?

We're just going to take the position that we're just not going to comment any further on the -- I think the Wall Street Journal article had a lot of information in it. But we're just not willing to comment on that.

Our next question is coming from the line of Todd Schwartzman of Sidoti & Company. Todd Schwartzman - Sidoti & Company, LLC: On the lease challenges, are you still seeing rents generally declining? I would think that rents are probably stabilizing right now in many markets.

Todd, the answer to that question would be it would depend on the term of your lease. If your lease has got another 10 years on it, the landlords are not very willing to renegotiate. If your lease has got a couple of years and they want an extension, they've been looking to come to the table and talk. So we're primarily talking about our existing stores and our leases. Obviously, on new stores and empty boxes, the lease rates on those are lower than our average cost today. So that's an opportunity for us. Todd Schwartzman - Sidoti & Company, LLC: Can you maybe quantify, Kurt, how many are coming up for renewal in fiscal '12 and then maybe '13 as well?

I don't have that right in front of me. But I think we said in stores that were up for renewal in the next three years was 15% to 18%. I think it was in that range. That may not be accurate, but we have that information. I just don't recall it off the top of my head.

And I think we said somewhere in the 15% to 20% range of our stores in the next couple of years. Todd Schwartzman - Sidoti & Company, LLC: Total, not per year?

Right. Todd Schwartzman - Sidoti & Company, LLC: In the third quarter, can you maybe quantify the impact, if any, of these snow storms on traffic, deliveries and so on?Well, certainly snow has been an issue, predictably, when the majority of our stores are in the East Coast, and they have really gotten hammered. And just as troublesome for us is that we've had snow in parts of the country that don't normally get snow, like Arkansas and Missouri, where we have some plants that we've had some down days. But our position right now is that we have weather-related issues every year. They don't seem to be significantly worse or better this year. The only saving grace right now is most of the storms have been in the middle of the week. And they haven't devastated the weekends. And given a quarter, even if we have to close our plants for a couple of days, we can recover and work some Saturdays and keep up with our schedules. So it's been an inconvenience. We've lost some business temporarily to that. But in order of magnitude, it's not significantly different than previous years. Todd Schwartzman - Sidoti & Company, LLC: And just lastly, can I get you to put some numbers to your improving conversion ratio?

Not at this time. We want to continue to work at it. We want to continue to model it, and we don't want to get that specific about that, the rate. But it was a significant improvement quarter-over-quarter. Todd Schwartzman - Sidoti & Company, LLC: Would that be a metric that you can foresee ever disclosing?

Perhaps, we're just not ready to do it at this point. We want to make sure that the way we do it and the way we count it and the way we have traffic and everything is as accurate as possible before we start giving out a number and have to retract.

Our next question is from the line of Barry Vogel of Barry Vogel & Associates. Barry Vogel - Barry Vogel & Associates: First of all, Mike, I have a question on operating rates and downtime. Can you give us an idea of the U.S. manufacturing operating rates for the nine months and the last quarter? And any downtime in the last nine months and the last quarter?

Barry, we don't really get into those kind of figures because, year-over-year, they're pretty consistent. We took downtime between Christmas and New Year this year, and we took it last year. Sometimes it's a day or two more, sometimes, a day or two less. But we really don't have a significance in that to comment on it, and we pretty much run our plants based on our production requirements. And we have had no unusual activity in that other than what Kurt has mentioned because of weather, we've had days here and there that we've had to shutdown. Barry Vogel - Barry Vogel & Associates: Well, if we go forward and business improves, there's been some commentary that you guys have made -- I mean, some of the conference calls that plenty -- you would have enough capacity, you wouldn't have to expand for quite some time. Is that true?

Well, that's true, Barry. We have room in our facilities to add more sales, to add more equipment, but the biggest thing is to add more skilled people. So the fact that our volume has remained flat for the last 18 months, we are in pretty good shape given our employment versus our productivity versus our run rate. If this business would tip up 10% or 15%, obviously, we’d have to hire some more people. And that's the really the governor on how quick we could come up in production. Barry Vogel - Barry Vogel & Associates: Mike, I want to go back to this raw material squeeze to clarify it. I have wrote down that you will have approximately $19 million increase in raw material cost this year versus last year. It's not clear to me if you've offset any of this with price increases. So can you clarify that for me?

Barry, this is Kurt. We did take a price increase a year ago to offset part of it. We also have ongoing cost reductions in our company that has become part of our culture here at La-Z-Boy. So between the two, we offset a portion. But we certainly didn't offset it all. Barry Vogel - Barry Vogel & Associates: Would you say -- what would be a fair number to use, approximately, as the net cost after the productivity gains and the price increases?

The number would be not enough. Barry Vogel - Barry Vogel & Associates: No, I understand that.

I'm not going to give a number, Barry. It's too hard to really calculate and look at. But suffice to say, it's not enough. And with more increases coming, we have to address that in an appropriate way. Barry Vogel - Barry Vogel & Associates: And Mike, could you tell me what the D&A will be this year? And what the effective tax rate that you said would be lower in the fourth quarter would be?

What was the first part of the question, Barry? Barry Vogel - Barry Vogel & Associates: The D&A for this year.

For this year fiscal '11, I think it was $10 million to $12 million is my comments. Barry Vogel - Barry Vogel & Associates: That was capital expenditures.

We're no different than where we were last year. It's about $23 million, $24 million for the year. We're averaging somewhere in the neighborhood of $6 million to $7 million a quarter. Barry Vogel - Barry Vogel & Associates: And you claimed that the effective tax rate, because of this stuff that occurred in the third quarter, would go down in the fourth quarter. Can you give us a number?

Right now, our year-to-date effective tax rate is around 23%. We normally try and keep our tax rate -- and our discrete items have been pretty much offsetting this year. So we haven't had too many going one way or another. So our effective tax rate for the year, we're still estimating somewhere in the mid-20 range now. That will not be the effective rate for next year. But we will maintain a lower rate for the fourth quarter, unless there's some other discrete items that I'm not aware of or that pop up to change the circumstances in our financials. Barry Vogel - Barry Vogel & Associates: Now on that tax benefit that you took in this quarter, is it proper to include that and not bring it out -- take it out as an unusual item?

Well, since there are timing differences, Barry, if we had all of our deferred taxes recorded on our books, this would just be a difference between the current provision and the deferred taxes. This wasn’t really affecting the rate. But because we have put valuation reserves on most of our deferred tax assets, when we reduce the valuation reserves, it affects our rate, when normally it wouldn't. So it's hard for me to say that's operational results. And that's an ongoing benefit for the corporation, as a whole, when we have these one-offs due to some change in circumstances. Barry Vogel - Barry Vogel & Associates: And now as far as Mexico, again, I'm not trying to beat a dead horse, but I just want to make sure that I understand your commentary. I think we were now talking or you were talking about a $15 million savings from the Mexican Cut-and-Sew operation the last time you had mentioned it. And I think you mentioned that 25% will occur in the second half of fiscal '11, and the remainder of 75% would help fiscal '12’s profitability. If that's true, and I heard that correctly, that would be a $4 million savings in fiscal '11 and $11 million savings in fiscal '12. Do I have that correct?

That's on the realm of yes. Based on what we're saying right now, that is our assumption that we have given you. Barry Vogel - Barry Vogel & Associates: And as far as your share of that tariff pool, is it safe to assume that on the $152 million, if you ever got paid, it would be about 15% of that?

We're, right now, running at 12% for this year. We've run anywhere from 10% to 12% in previous years. I will not hazard to guess what they're going to do. But I would say that somewhere in that realm of reality, if they pay out the money based on that and all the other people that are fighting to get their share of it don't win, then we should get somewhere in that area or north of it, yes.

[Operator Instructions] Thank you. There are no further questions at this time. I would now like to turn the floor back to management for closing comments.

Thank you, everyone. If you have follow-up questions, you can reach me later today, and I'll be happy to help you. Have a good day.

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