La-Z-Boy Incorporated (LZB) Q1 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the La-Z-Boy Fiscal 2014 First 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 Incorporated. Ms. Liebmann, you may now begin.

Thank you, Christine. Good morning, and thank you for joining us to discuss our fiscal 2014 first 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 1 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 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 first quarter results for fiscal 2014. Our sales and earnings performance continues to demonstrate the strength of our brand, the product offering and overall business model, which combines lean production with an integrated retail strategy. As we have mentioned in the past, the first quarter is typically our weakest due to seasonality. Yet we doubled operating income on a 5.8% sales increase, posted same-store sales for the La-Z-Boy Furniture Galleries stores of 12.7%, turned in a third consecutive profitable quarter on our retail business and generated $13 million in cash. At the same time, we continue to purchase shares in the open market and pay a dividend. With housing and consumer confidence trending upward, we are optimistic about the future of La-Z-Boy Incorporated and our ability to capture ongoing market share gains while growing profitably and returning value to our shareholders. Now let me turn to a discussion of our 3 operating segments. First, the wholesale upholstery segment. For the first -- for the fiscal 2014 first quarter, sales in our upholstery segment increased 7% compared to last year's first quarter. And our operating margin improved to 8.7% versus 6.5% in the prior quarter. Before I get into a discussion of the drivers for the quarter, let me address the difference between our written same-store sales number of 12.7% for the La-Z-Boy Furniture Galleries network of stores versus our wholesale sales increase of 7% in upholstery. First, let me remind everyone that the La-Z-Boy Furniture Gallery network represents about 40% to 45% of the sales within the wholesale upholstery segment. Second, there are timing issues each quarter between when orders are written and when they are delivered. On average, there was a 4- to 6-week lag between the time we receive an order in the wholesale business and when it is actually delivered. Obviously, with our domestic manufacturing platform, giving us a speed-to-market advantage, orders written early in the quarter, either stock or custom, are delivered within the same quarter. But when orders are written later in the quarter, particularly custom orders, they tend to roll as a delivered sale into the following quarter. So all of July's orders show up in our same-store sales written number but not in our reported volume for the wholesale or company-owned retail segments because those reported numbers reflect our delivered sales. And that is the case for this quarter. We had strong written July sales throughout the network, and this created an increased backlog as we moved into the second quarter. You may remember we had a similar situation when we reported our fiscal 2012 fourth quarter results. For that quarter, our same-store written sales were up 10%, with delivered sales in our upholstery segment were only up 0.8%, and our retail segment sales were actually down. When we reported our fiscal 2013 first quarter, our upholstery sales were up 9.5%, and our retail segment posted a 17% delivered sales increase, representing the fourth quarter orders flowing through to the first quarter in addition to the ongoing order rate. This is what we are experiencing for this quarter as well. There were written orders that simply didn't get delivered within the first quarter, and they will roll in -- as they will roll as delivered sales into the second quarter of fiscal '14. Finally, the strong written same-store sales numbers also speaks to the fact that the La-Z-Boy Furniture Galleries network is performing at a higher level than the industry average, although our major accounts are also doing quite well with the La-Z-Boy line. On the merchandising side, our efforts have been focused on the steady cadence of product introductions, featuring stylish and on-trend stationary offers that work in multiple rooms in the home in addition to our iconic reclining selection. Our increased lifestyle looks are resonating with a broader audience. The merchandising and marketing synergies are evident as sales increases continue in the stationary category. We are also pleased with the ongoing success of our recliner offering, particularly the growth we are experiencing in our power segment. Our exclusive independent dual motor system is a unique feature in the marketplace, and customers are responding positively. In total, our stationary product and power offerings are the fastest-growing categories. Our conversion on incremental sales for the quarter were strong, demonstrating the operating efficiencies of our facilities, and more importantly, the potential of what we can achieve with further increases in volume. As we mentioned last quarter, we have the ability to manufacture between 250 million and 300 million in additional volume throughout our existing 5 La-Z-Boy branded facilities without adding any brick or mortar. Our plans are to continue to invest in our Live Life Comfortably advertising campaign. This year, we will be on the air for 30 weeks, more than twice as many weeks from the time we launched the campaign 2.5 years ago. We believe this is paying dividends, and we are continuing to invest in additional avenues to broaden awareness with a heavy emphasis on digital to enhance our Internet presence. We are also investing in our La-Z-Boy Furniture Galleries store system. Last quarter, when we reported, we talked about our 4-4-5 strategy, 400 stores, averaging $4 million per store in 5 years. That would bring the store network to about $1.6 billion at retail. This compares today to an average of about $3.7 million per store, pacing at about $1.15 billion for today's 312 stores. Building our branded distribution channel is the mainstay of our growth strategy right now given the performance of the La-Z-Boy Furniture Galleries store system. There are markets throughout North America that need additional stores, as well as there being a number of dark markets. With our stores as successful as they have been over the past 2-plus years, our dealers are interested in opening new stores, and together with them, we will aggressively work on the execution of our build-out strategy. For fiscal 2014, the network, both the company-owned and dealer base, is planning on approximately 20-store projects, including new openings, remodels and relocations. Going forward, all stores will be in the new concept design format with today's number -- which today numbers 16 of the 312 stores. In our first quarter, 1 new store was opened, 1 was relocated and 2 were closed. For fiscal 2015, the network, including the company and dealers, plan to open between 20 and 25 projects. Now let me turn to casegoods. On the casegoods side of the business, challenges remain. The wood portion of the furniture industry was the hardest hit in the macroeconomic downturn and has been the slowest to rebound. However, we believe it will be the biggest beneficiary as housing continues to strengthen. Our team is working on refreshing our product line through all 4 of our casegood companies and continues to introduce more contemporary and transitional furniture to appeal to a younger consumer and better reflect the more casual environment found in American homes today. This month, we will begin to ship groups that were introduced and well-received at last April's Furniture Market. Although the casegoods segment posted a decline in volume for the quarter, it maintained its profit -- some profitability due to the high variable cost structure associated with the business. And now let me turn our discussion to the retail segment. Our retail segment posted its third consecutive quarter of profitability and 18th consecutive quarterly improvement over prior year performance. For the period, retail delivered sales increased 16% compared with the first quarter of 2013. The Southern Ohio stores contributed 11.5 percentage points of our 16% sales increase during the quarter. We earned about $2 million in the segment, with a 2.9% operating margin for the quarter, versus a loss of $2 million in last year's first quarter or a negative operating margin of 3.5%. Our team has done an outstanding job in turning around this business. With a profitable retail operation, the value and potential of our integrated retail model is evident. Combining a double-digit operating margin target in our wholesale upholstery segment and a mid-single digit operating margin in the retail segment brings us to a blended margin in the teens, which is a strong number for our industry. With continued success across our business, we believe the earnings power of the corporation will be showcased with the integrated retail model, particularly as we execute against our 4-4-5 strategy and grow the network of stores, including the company-owned portion, where we anticipate owning about 40% of the stores to the network in the next 5 years. During the quarter, we experienced increases in traffic and average ticket, as well as strength in most other retail metrics. We also had a more favorable merchandising mix, which drove gross margin improvement for the period. Ongoing volume increases will allow us to continue to absorb the high SG&A associated with retail business and improve our performance. At the same time, however, as we noted a moment ago, we do plan to open additional stores to grow the business. And as we do, there will be initial start-up costs associated with that activity. I will now turn over the call to Mike to go through our financials.

Thank you, Kurt. Consolidated sales for the fiscal 2014 first quarter were $319 million, representing a 5.8% increase over last year's first quarter sales of $302 million. Consolidated operating income about doubled to $14.8 million from $7.6 million in the fiscal 2013 first quarter, and earnings per diluted share were $0.18 versus $0.08 per diluted share in the prior year's quarter. For the quarter, our consolidated operating margin increased to 4.6% from 2.5% in last year's first quarter, reflecting volume increases, which enabled us to leverage our fixed cost on the manufacturing side of our business, which drove the gross margin, while volume increases in our retail segment allowed us to leverage SG&A expenses. The combination of these 2 factors led to an improvement in the consolidated operating margin. During the quarter, there were 2 large items that impacted our SG&A expense. First, incentive compensation costs for the period were $2.6 million higher than in the comparable period of fiscal 2013. As I mentioned last quarter, compensation costs as a percentage of sales should not be significantly different this year versus fiscal 2013. However, the appreciation in our stock price this quarter increased our cost by close to $1.2 million as some of our share-based compensation awards are liability-based awards, and their cumulative expense to date is adjusted at the end of each quarter based on the share price on the last day of the reporting period. Second, we had a change in the provision for doubtful accounts representing a $1.9 million decrease when compared to last year's first quarter. The changes reflect the improvement in the financial health of our customer base, which is decreasing our exposure. This is driven by the ongoing same-store sales increases in the La-Z-Boy Furniture Galleries stores network of stores, which have experienced over the past -- I'm sorry, as experienced over the past 2-plus-year period. Our receivables also declined by $21 million during the quarter. During this reporting period, we generated $13 million in cash from operations. We ended the quarter with $140 million in cash and cash equivalents, $28 million in investments to enhance returns on our cash and $13 million in restricted cash. We used cash during the quarter to pay our $0.04 per share dividend, and we also purchased approximately 365,000 shares of stock in the open market under our existing authorized share purchase program. And we have 3.8 million shares remaining in the program. Our plans are to continue to maintain our buyback activity. During the quarter, our inventories increased primarily as a result of preparation for the fall selling season when we increase our levels of raw materials to improve our in-stock position. Additionally, our finished goods inventory in our upholstery segment increased due to strong order levels that resulted in units built during the latter part of the quarter, which had not shipped by the end of the period. Capital expenditures for the first quarter of 2014 were $3.2 million compared with $5.2 million in last year's first quarter. We did begin construction of our new World Headquarters but spent less than anticipated due to wet weather slowing the project start. We anticipate making up time or catching up with the construction schedule, which is estimated to run over the next 16 months. We expect total CapEx for fiscal 2014 to be in the range of $60 million to $65 million, reflecting normal CapEx for new stores, transportation and equipment, routine maintenance and our ongoing cost relating to our ERP implementation, as well as costs for the new building. The total projected cost of the new headquarters is about $57 million. And lastly, our effective tax rate for the first quarter of fiscal 2014 was 35.5% compared to 37% for the first quarter of fiscal 2013. And for the year, we are expecting our tax rate to be in the range of 35% to 36%. And now I will turn the call back to Kurt for his concluding remarks.

Thank you, Mike. Before closing, I'd like to take an opportunity to mention something that is near and dear to us, our partnership with the Ronald McDonald House Charities. This organization does great and important work for sick children and their families. I'm very proud to say that yesterday, after annual international conference, La-Z-Boy was given their Outstanding Stewardship Award, an honor that celebrates partners who exhibit the highest level of support to the Ronald McDonald House mission. The award recognizes how deeply we have embedded the Ronald McDonald Charities mission within our company, as represented by the product and financial contributions made by the company and our dealers, and as importantly, by the significant engagement our employees and our dealers' employees have created with local houses across North America. We have had a 5-year relationship with the Ronald McDonald organization, and we are the official provider of furnishings for the Ronald McDonald House Charities across North America, and then recently, this relationship has expanded to Australia and New Zealand, as well as Asia. For La-Z-Boy, with our vision to help people live life comfortably, what could be more fitting than providing that comfort to families at a time when they need it like never before? We will continue to support the organization, and we thank our La-Z-Boy Furniture Gallery dealers for their ongoing commitment and their support to the local Ronald McDonald House Charities in their individual communities. In closing, La-Z-Boy is the most recognized brand in the industry, and our positioning within the marketplace is solid. Our operating platform is lean and efficient, and our retail model is working and growing. Both will be leveraged with volume as we continue to grow and capture market share. We feel positive with respect to a bright future for La-Z-Boy Incorporated and are confident we have the right strategy in place to drive profitable growth for the long term as the macroeconomic environment, particularly the housing market, improves. We appreciate all of you being on our call today, and I will turn things over to Kathy for the Q&A.

Thanks, Kurt. We will begin the question-and-answer period now. Christine, please review the instructions for getting in the queue to ask questions.

[Operator Instructions] Our first question comes from the line of Budd Bugatch with Raymond James. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Congratulations on the recognition by Ronald McDonald foundation for La-Z-Boy.

Thank you, Budd. Budd Bugatch - Raymond James & Associates, Inc., Research Division: I guess, first, I want to go to the sales issue that you talked about, Kurt, a little bit and kind of drill down on that at retail. I think if you do the math, though, the -- and the math you gave us, the company-owned retail other than the acquired stores were up about 4.5% or $2.6 million, and yet the system same-store written was up 12.7%. First, I guess, was the company performance of the company-owned stores similar to the system performance? And can you maybe give us a little bit more color as to what you expect in Q2 and Q3?

Well, Budd, we tried to outline that in my opening remarks, that we had a strong July and that didn't all get delivered. The company stores on average are performing at the rate of the network. Some months we're better than the networks; some months, the network is better than us. But there's not a big gap between there. And July is a particularly interesting month in that -- of orders not getting delivered quickly because we also take the first week off for vacation, and we don't have production for that -- for the week of that. So essentially, anything sold over the 4th of July weekend and after that is going to get delivered in August. So we're just trying to give some context to the different metrics. Budd Bugatch - Raymond James & Associates, Inc., Research Division: So those orders -- so the company stores performed in line with the overall system for July as well?

Yes. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. Second question, obviously, casegood has been an area of declining sales performance. And congratulations on at least making a profit in that with significantly declining sales. And I know you addressed it with what you're trying to do in casegoods. Any thought as to where the volume for the year in casegoods comes in? Is it going to be flat or are we going to be up for the year? Or can you see any light at the end of the tunnel that's maybe not an oncoming train?

Well, I think, Budd, there's a macro issue with the casegoods industry in general, and then I think I've got some specific company issues that we're trying to address with our product refresh. But I would be -- I don't want to make any predictions about the year's volume. Obviously, we think with some of the changes we've already made, there's more change that we're going to make with refreshing the product lineup. We'll try to get some momentum. But our casegood companies, particularly Kincaid and American Drew, have been traditionally over assorted with big collections, and a lot of them are big traditional collections. And we're just not getting the velocity in those collections that we used to. So we need to change course a little bit, and that's what we're trying to accomplish. Budd Bugatch - Raymond James & Associates, Inc., Research Division: So Hammary and Lea are performing better than Drew and Kincaid?

Well, Hammary is the best-performing part of our casegoods business, and probably Lea is one of the tougher areas for both growth and profitability. So we're doing some work on that business as well. Budd Bugatch - Raymond James & Associates, Inc., Research Division: I see. Mike, if you could help me, I've got just a couple of other questions. On the SG&A, if I try to find where I can find the incentive comp differential in the financials, I go to the cash flow statement and look at the stock base compensation to try to see that. And I don't see that $2.6 million delta. First, can you help me, is there a place to find it other than the overall SG&A expense in the financials? And secondly, what is the outlook now for the year?

So we made some comments about the liability-based compensation costs that we have that we have -- they actually go to our accrued expense line item versus our equity line. And so some of that is going through other liabilities. So the compensation that you're seeing is the ones that are share based, which we actually issued shares versus units on. And that difference, all goes to the SG&A through all the segments and through corporate where the liability and the share base go through equity and other current liabilities. Budd Bugatch - Raymond James & Associates, Inc., Research Division: So the short answer is we can't find it, and we won't see it in any of the individual...

That's correct. I've tried to give some -- and the outlook for the rest of the year, if stock price stays consistent, we won't see a significant change. If our stock price goes up $5 during the year, then we'll see an additional cost there as well. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Can you give us maybe some flavor as to what it is per dollar of share price improvement or decline?

We haven't given that out. Actually, if you look at our footnote disclosure in our 10-Q, you can get a little bit more understanding of the stock compensation. It does give you a little bit more flavor than the cash flow, but it's not -- it doesn't spell out everything which you would like, I'm pretty sure. But if you saw that we have $1.2 million that we talked about for this quarter going up, and our stock price went up a couple of dollars, so you can get some flavor for it based on that, Budd. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Is it an average base or is it just the ending price? How does that work?

It's the ending price. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. And finally for me, I guess, is CapEx. Can you kind of parse for us this year the building versus the IT and new stores and the like? I mean, where does the -- where will the building show up most in the year?

That's a good question. I mean, we really believe that the $20 million to $25 million on CapEx will be our normal cost for everything else other than the building. If the weather holds up, we should have a pretty good pull this quarter because we're buying all the larger material items like steel and doing some other things that will be the larger purchases. But we've just been having some rain issues that kind of put off the schedule a little bit. But I would assume that we'll start picking up some pretty good steam here on that, Budd. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. So Mike, so the biggest CapEx quarter, you think, will be this quarter for the year?

No. Probably the second and third quarter because we'll start putting in a lot of the large foundational issues.

But Budd, you can think about it in terms of normal CapEx between $20 million to $25 million and the building CapEx between $35 million and $40 million, depending on how the expenses flow.

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

I wanted to just kind of tie some of these comments together here and just ask about contribution margin. I mean, obviously, there were a number of expense items like the incentive comp that came up that delivered revenue a little bit lower than the written revenue, yet the contribution margin, 41% here in the quarter. Could you just speak to that specifically?

Well, I think one of the big turnarounds obviously was retail going from losing money to making money. And so the contribution there was a significant difference between the prior year. But we just are running our factories efficiently, watching our expenses and having -- and we had a favorable merchandising mix both at the wholesale and the retail side and selling higher mix of profits that have -- or higher percentage of product that have a higher margin. So there wasn't any one thing, Brad. And I don't want you to start modeling that we can do 40% every quarter, but we do think that as we use our additional capacity and leverage with volume, our SG&A at retail, we will have strong conversions.

Great. So just to put into context, in terms of the outlook for the balance of this fiscal year, as we've talked in the past, Kurt, it seems like a 20% to 30% contribution margin is what we should be targeting for our models. Anything that's changing here? I mean, that retail segment does continue to be very strong for you. I mean, anything that makes us think that -- do you think that we should be may be closer to that 30% as we move out? Or I mean, are there onetime items like incentive comp, like the ramping up in the headquarters that maybe knock it down a little bit? Any help for our models would be appreciated.

Yes. Well, the ramping up of the headquarters is mostly all capital, so there won't be a lot of expense. And we have this issue, Brad, that we've tried to talk about is, if all of our growth is incremental, then we should convert pretty well. But we're going to start having some growth with opening new stores and doing some other thing that will actually cost us some money to get. So the conversion on that is not going to be. And I would just say, unless we average this conversion for the next couple of quarters, the range that we gave you, the 20% to 30%, is still where we're comfortable with today. And we'll -- we would change that opinion if we get a few more quarters of any different results. But right now, that's as strong as we feel that we can commit to.

Great. If I can just ask one last question on your ongoing dialogue with the independent franchise La-Z-Boy stores. It seems to me that the performance at retail is very strong company-wide. Brooke Shields is helping to drive more traffic. And you've got a very exciting new store format. You mentioned this year that there are probably 20 to 25 new projects. What are you hearing in terms of the appetite to kind of invest some capital and either grow those independents or undertake projects? I mean, what are you hearing from your partners as the company continues to improve its results?

Good question. And just a slight correction. Our stores are licensed outlets, they're not franchise. So I want to be sure that's clear. But our dealer organization, particularly our dealers that have multiple stores, are all on board about expanding the network, remodeling old stores. And the only reason there's only 20 projects right now, a typical project takes a year to 18 months from the time you make the commitment to getting all the leases or the land purchases and everything like that. So we're building a backlog. We're building momentum. I think most of our dealers and La-Z-Boy agree on the targets and the markets that have opportunities and the stores that need to be moved or remodeled. So yes, we're -- I think the one challenge that everybody has in their own individual markets, as well as the company, is making sure we find the right real estate at affordable prices. And there's a lot of due diligence that goes into that, and we don't want to get back into a situation that our occupancy costs are out of sync with our volumes. So everybody's being prudent about that. But no, there's -- I think there's a similar thinking of the minds about what this opportunity looks like and what the next few years could hold for growth and the build-out of the store program.

Our next question comes from the line of Matt McCall with BB&T. Matthew Schon McCall - BB&T Capital Markets, Research Division: Actually, I want to follow up on that last question, volume versus mix. Can you give us any more color on -- you did -- I think Brad mentioned the 40% incremental. Was -- can we just take the midpoint of the long-term range, 20% to 30%, and say that there were 15 points from mix? How should we look at the impact of mix? And I really want to understand what that impact could be going forward incrementally.

Well, I don't have much of a different answer, Matt. I would tell you that as we've said before, that if all of our increase came through company-owned stores and was all in our better margin upholstery goods, we would make a better conversion. If all of it comes through other parts of our business and we sell a lot more inexpensive recliners, it's not going to be as good. So we haven't seen this mix change of the higher-margin things long term yet. We haven't seen that maybe will or won't stay in that range. So we're reluctant to say this is a trend yet until we get a little bit more traction. But we have various gross margins on all of the products throughout La-Z-Boy Incorporated. Some are at a level to use as advertising vehicles and are tight margins, some are longer margins. And we look for the blend to give us the margins that's necessary to run our business profitably. And when we -- that blend tips to the higher side of the items that have more margin, we'll get a little higher conversion. When it tips to the lower side, we won't. So until -- I don't want everybody to start thinking that we're going to repeat this kind of conversion quarter after quarter. It's just something that happened this quarter. And if it continues to be -- to head into that direction, we'll give you a lot more input on it next quarter.

But it also has to do with the first quarter being our lowest volume quarter, and with the 7% growth in upholstery business and running our plants more efficiently, it just did more for us this quarter than it would every other quarter because you're in a lower denominator when you're looking at the numbers of sales. Matthew Schon McCall - BB&T Capital Markets, Research Division: Right, okay, okay. Kurt, I know you're not willing to call it a trend yet, but can you -- is there any way to call out how the mix of high-margin products has trended? I know you talked about power. I'm assuming that accessories is another one. You've got these areas that are obviously helping the margins. And Mike, I get your point, definitely. But is there a -- even though you don't want to call it a trend, can you see some evidence of a potential trend building with the percent of high-margin products growing over the past few quarters?

Matt, I'm not going to say anything more about it. It's -- we've got 7 businesses, and they all have different characteristics and margins. And it all depends how the business flows through, and this is the largest conversion we've had for some quarters. So I just -- I wouldn't get carried away with it yet. And if it starts to be something that we think has legs and will help you with your models, we'll give you a lot more granularity next quarter or the following quarter. But we just don't have anything more to report on right now. Matthew Schon McCall - BB&T Capital Markets, Research Division: Okay, that's good. So I think you mentioned a 5-year target, 40% of the stores would be owned. If I use the 4-4-5 plan, that implies about 160 owned stores. Help me understand which you plan to -- I guess the make or buy question, how many you're going to open on your own, how many you plan to convert? And do you have -- I know you said that there are some markets that are understored, but going from 93 to 160 is a big jump in 5 years, at least it appears to be a big jump. But do you have those markets identified already that are in need of that many stores?

So let me give you some color on that. I can give you -- you'll be happier with this answer than you were the previous one because I can give you a lot more detail. So there's 3 avenues for the company and as the network evolves. Well, first of all, in most of our existing markets, we need a few more stores. So not a lot. We have a couple of markets like Boston and South Florida that could use 4 to 5 more stores. But every market we're in has some movement going on, one here, one there. So that's the ongoing business that would give us a number of stores. We started last year in the Pittsburgh market and put 3 stores in. And they're doing quite well. This year, we're into Southeast Michigan, and we're going to open 4 stores in a year's time in Southeast Michigan. Next year, we have plans right now to look at the Minneapolis/St. Paul market. And so we've got some of those dark markets where we believe the La-Z-Boy stores would benefit us from. And then we have had some more activity with dealers inquiring about leaving the system, about retiring, about doing something different and we're in negotiations on. So it's a combination of building up our existing markets, having a number of new markets and probably acquiring a few of our current licensees if it's mutually beneficial. Matthew Schon McCall - BB&T Capital Markets, Research Division: Okay. Yes, that was a good answer. The distribution center effort, I haven't heard an update there in a while. And you rolled out, I don't remember, how many distribution centers throughout the country, and were transitioning your stores and also the licensee stores. I just -- is that fully rolled out, the full benefits being recognized? And then the second part of the question is are there any other kind of efficiency drivers that you're pursuing? You mentioned occupancy costs, for instance. Is that still an opportunity to move forward?

Well, the first part of the DC is we are opening a new DC in the fall, probably late October, in Columbus, Ohio. And it will service about 25 stores, reaching from Pittsburgh to Lexington to Detroit. And it would be our fifth major regional distribution center. And collectively, those 5 DCs are servicing about half of all the stores in the network. So they service all of the company stores and then will service about 50 to 55 independent stores starting in '14. So that has been a good program for us, for our dealers. The in-stock position that they get from being in a warehouse of that nature as opposed to doing it on their own has been very beneficial for their volume. And so we're pleased with -- we had some growing pains in the beginning, but we're pleased with that, the way that program has worked. Efficiencies, we're always working on. We're always trying to look for ways to be more efficient without compromising product quality or product specification. And while we don't, Matt, have a project we can tell you that's $20 million or something like that, in the aggregate, we've got a lot of $100,000 projects that are going to continue to help us get leaner and get more efficient. And our DNA from our operations team is pretty intense on making sure we get that accomplished.

But I would say on the occupancy, we've gotten the brunt of that already, and we'll continue to tweak that. And our main focus is ensuring that on any future occupancy costs, they stay in line with our goals.

Our next question comes from the line of Todd Schwartzman with Sidoti & Company. Todd A. Schwartzman - Sidoti & Company, LLC: Could you speak to the timing of the ongoing rollout of the new store design concept, and also, when you do hit your goal of 400 stores, what you anticipate the mix of the new concept will be?

So every store from this point on, Todd, will be in the new concept. Whether it's a remodel, a relocation, a new store, that is the format of the future for us. And I think everybody is on board with that. And the timing just again depends on real estate and things of that nature. But this 20 to 25 projects a year is probably the pace of what the organization will be on, and that gets us close to our target of -- if we can continue that. I just -- the other part of your question? Todd A. Schwartzman - Sidoti & Company, LLC: Well, just to be clear, so the 296, the 296 stores currently that are not in the new format, those are -- there's no plans for the conversion on those, is that accurate?

No, no. When we get to the end, we will be closer to -- in the 5 years, when we get to the 400, we'll be closer to probably 60-40. So actually, we've had -- we now have 3 cons -- we have 3 different eras of stores in our system. A bulk of them are what we call the new-generation format, and that's been the format we've rolled out the last 10 years. And most of those stores are in good shape, are performing well, still represent the brand, still pay off the promise that Brooke is making. And as long as they're kept up-to-date with accessorization and color and carpet, we are not focused on those. We have about 60 stores -- 50 to 60 stores that were a generation before that. They're very old. They're very tired. They don't represent the brand. Those 60 stores and the 80 new stores are really our focus. And so the mix over time we'll get it probably in 5 or 6 years to about 50-50, 60-40, with the new generation and the new design concept. And we want the older stores over this period of time to go by the wayside. Todd A. Schwartzman - Sidoti & Company, LLC: In the first quarter, there was a net store closing of one store. When do we get to -- which quarter maybe -- if you can kind of put it on a timeline, which quarter do we see net store openings as the rest of this year plays out?

I can't give you that. I mean, lots of times, things flow quarter-to-quarter and -- but you might see for a while a little net store reversal or a backup here because we're adamant about the old stores getting out of the system. So the company closed a couple of stores that didn't represent the brand professionally, and we haven't found a replacement. But we weren't -- we were unwilling to re-lease it for another 5 years and not stay with our program. So there's a cleansing thing that has to get done here, but we think we've got enough other momentum that it shouldn't be material. And as we get through the older stores, everything from that point would be a net gain. Todd A. Schwartzman - Sidoti & Company, LLC: And which 2 stores were closed in the first quarter?

We can -- Kathy can get back to you on that. I don't have that right in front of me. Todd A. Schwartzman - Sidoti & Company, LLC: Okay. Also, I just want to just briefly revisit the concept of power upholstery. How much of your upholstery goods now ships with that power component?

Well, I don't think we want to give out that information competitively, and we have power on a majority of our recliners. We have power on motion sofas. We have power on sectionals. But I'm -- I just -- we're just reluctant to share that. Todd A. Schwartzman - Sidoti & Company, LLC: I guess is the growth in those particular SKUs equipped with the power? Is that you growing at some multiple of your overall upholstery sales?

It's growing faster than our overall upholstery sales. And it has a much higher ticket. Todd A. Schwartzman - Sidoti & Company, LLC: Is it growing 3, 4, 5x as fast potentially? Or is the base still like -- I guess what I'm getting at is the base still that small such that it can be growing at a multiple of your consolidated upholstery shipments?

Let's just leave it, Todd, that our power business is growing faster than the rest of our business.

[Operator Instructions] And our next question comes from the line of Christine Korver [ph] with Discern Capital.

A couple of questions. First, I just want to follow up on the new store design. Of the 16, I know it's not too many of your total store base, but how are they performing relative to some of the other stores in your base?

So they're performing better. We have a mix of them, and the company owns probably half of them and our independent dealers own the other half. We will probably give some more detail on them in the next 6 months of the performance and then compare it. We wanted to get enough stores to make it a real comparison. We want them to be open for a while to see the differentials. And we have them in small markets. We have them in larger markets. We have them being remodels. We have a number of different things going on. But suffice to say that they're performing well enough that the whole organization is in lockstep going forward to open those. So we'll give you some numbers on that in a quarter or 2. But we want to get some time behind us before we start. We don't want to oversell it or undersell it. We want to have a good base of the right number of stores and the right timeline after the grand openings to tell you what they're doing.

Okay, fair enough. And then can you talk about trends geographically, any pockets of strength and maybe talk about the competitive environment and what you're seeing, especially from a promotional stance and who you're taking share from?

So that -- the question about share is very hard to pinpoint. The industry doesn't have that great of numbers because there's so many private companies in our industry of who's doing what and what their volume is. But we can tell from floorspace we're getting and emphasis dealers are putting on the line that we're growing faster than a lot of our competitors. I just -- as far as the promotional activity, I don't think it's changed when you're on sale and you offer 50% off your sale price and you give free delivery and financing and throw in a TV. I'm not sure how much more promotional the industry can get. So that's not how we go to market, but there is -- this is a very competitive industry, and there's a portion of it that is very price focused. And so the condition hasn't changed much, but there's not a lot of room to go to be more promotional.

And then geographically, are there any pockets of strength that you saw during the quarter?

Well, I think that's a relative term. The markets that were hit the worst in 2008 and '09 are showing some of the best turnaround, but they had a long way to go to come back. So just as a comparison, if you took the state of Iowa, our business did not go down a whole lot during the crisis because they really didn't have a housing crisis. And it's steadily going up, but there's not a big swing. When you compare that to California, which went down 40% and now you're seeing maybe 20% increases in California coming back, but they still might not be back to their peak where they were in 2007 and '08. So there is a corollary between who is hurt the worst and how they're coming back as opposed to the steadier states that didn't go quite through the housing crisis.

Okay. And then just lastly, a quick follow-up on the casegoods business. Can you give us some idea of the timing and when you think the business is going to be where you want it to be from a merchandising standpoint?

So that will probably take us probably a good 18 months, 3 more markets to get the lines refreshed. And that doesn't mean we won't be making progress. That doesn't mean we won't have some groups that we think will change our trajectory. But to replace groups and have dealers get them off their floors and get new ones out, it takes some time. So I think you're looking for 1 year, 1.5 years of new product introductions before we make that complete transition.

Our next question comes from the line of Barry Vogel with Barry Vogel & Associates.

You've been building up to this for quite a while. Now you're really doing a great job. First, if I want to ask you about capital allocation for the company going forward and I listed 4 categories, one would be internal growth, two would be acquisitions, three would be dividend increases and four would be share buybacks, how would you list them in order of appeal?

Well, truthfully, Barry, I'd like to generate enough money so that we could do them all.

I understand that. But could you...

Obviously, we haven't been -- we haven't changed our thinking about that. We are always going to lean, number one, to use our capital to help grow our existing business. And so if we had a chance to -- if we could find 100 locations tomorrow and wave a magic wand, we would spend our capital to get these stores open. It's just not that easy. Secondly, we've been ramping up our stock buyback and have plans to continue to be opportunistic in the marketplace with shares. And it's 9 months ago that we restated the dividend and hope we can get back on a track record of paying a dividend for 100-some quarters like we did before we stopped it. So we haven't changed. As far as acquisitions, we would look at various things. We think we've got a lot on our plate to accomplish, and there's a lot of upside, and we don't want to take our eye off the ball. But if something came along that we thought fit strategically and would be accretive to us, which is what we think a lot of the buying some of the licensed stores back would be a good use of an acquisition, we would do it. But we're not out looking and trying to do anything different. We've got a lot of growth potential left in our core business.

Now one would think given your cash generation, given -- in this economic climate, which is still not the greatest in the world, given your balance sheet, given your poultry dividend, that certainly, a dividend increase...

What kind of dividend?

The dividend increase.

He said poultry.

What did you call our dividend?

I was using the world poultry.

The phone broke up, I wasn't sure what you were saying.

Sorry about that. Given your balance sheet, your current situation relative to the industry, everything is going right for you. Why don't you raise your dividends every year, at least a modest amount?

Well, we haven't been through a full year yet, Barry. And we talk about it every quarter. And as the business continues, we certainly will consider that. But we just started paying the dividend, and I think to raise it 6 months after you started is probably not consistent with the way we're thinking. But certainly, that -- we're going to -- we're not going to hoard cash at the expense of dividends or buybacks here as we go forward. We've got a nice balance sheet today, and we don't really need to add to it. But we'll also got to do things in an orderly and consistent fashion, and we will take that into consideration.

Now given your underutilized capacity in the 200 -- $250 million to $300 million, can you give us some idea what the upholstery operating rate was in the first quarter?

Well, there's 2 different ways to measure that. One, given the employee count we have and everything, we're running at a -- close to 100%. The fact that we have some unused space is where we get $250 million to $300 million, and that space would have to be built out with cells. That space would have to be -- we'd have to hire new people and get them trained. But essentially, Barry, that space is the space that occupied cut-and-sew in our 5 domestic plans before we moved to Mexico. So that can all be turned into production as the demand comes up. And we believe it is. If we hadn't, we would have made some other decisions. But we believe we will utilize the majority of that over the next few years.

Well, if that's the case and your upholstery group did $255 million in revenues in the first quarter, do you have enough capacity to take that number higher as the year progresses?

Yes, absolutely.

Okay. I have a couple of questions for -- well, 1 question -- 2 questions for Mike. Last year, I believe your pension contributions were about $23.5 million, and I think it was voluntary, that number. Can you give us a better idea of what it would be this year?

So $20 million of it was voluntary. The other $3 million, we have to make. But the -- we are pretty well funded now on what our assets are versus our liabilities. So we'll make contributions if we need to, to keep that funding kind of evened out if we paid fees and other costs that have to be paid out of pension assets that we'll rebalance. But those fundings will be inconsequential to our capital requirements over the next couple of years. We have relooked at how we are doing our investments versus how we're doing our liabilities, and we've changed more to a liability-driven investment philosophy, which is mirroring our liabilities with our assets, so they move together as the market changes. So we don't, right now, anticipate having significant contributions to our pension plan. If it is, it'll be $1 million, $1.5 million, $2 million a year just to cover the expenses to keep the assets in line with liabilities.

All right. So this year, it might be $1 million to $3 million?

It may be nothing. It just depends on how it works out.

And can you give us a good idea of what your D&A for the year now looks like?

It's -- we've been averaging somewhere in the $24 million, $25 million range. And we will probably continue there. When we start depreciating the new building we'll give a better clarity on that, whether that impacts it or not. But we've been pretty consistent at $24 million, $25 million range over the past couple of years.

Ms. Liebmann, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you, everybody. If you have follow-up questions, please give me a call, and I will be available. And have a great day. Thank you.

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