La-Z-Boy Incorporated (LZB) Q3 2017 Earnings Report, Transcript and Summary

Greetings. And welcome to the La-Z-Boy Incorporated fiscal 2017 third quarter results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kathy Liebmann, Director of Investor Relations and Corporate Communications. Thank you. You may begin.

Good morning, Jessy. Good morning and thank you for joining us to discuss our fiscal 2017 third quarter results. With us today are Kurt Darrow, La-Z-Boy’s Chairman, President and Chief Executive Officer; and Mike Riccio, our Chief Financial Officer. Kurt will begin today’s call and then Mike will speak about the financials before turning the call back to Kurt for his concluding remarks. We’ll then open the call to questions. A telephone replay of the call will be available for one week beginning this afternoon. Slides will accompany this presentation and are available for viewing through our webcast link. These regular 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’re 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 fiscal 2017 third quarter results. For the period, we posted increases in sales and earnings per share. We also generated almost $39 million in cash from operating activities and delivered a healthy 11.5% operating margin in our Upholstery segment, the highest for the third quarter in more than a decade, demonstrating the efficiencies with which we are running our operations and the effectiveness of our supply chain initiatives. We are also continuing to invest in our business to drive long-term sustainable growth. During the quarter, we acquired nine La-Z-Boy Furniture Galleries stores in the Northeastern Pennsylvania market, acquired the distribution rights for the La-Z-Boy brand in the UK and Ireland, and earlier this month announced we would invest in our largest La-Z-Boy branded manufacturing facility located in Dayton, Tennessee. While the external environment as it relates to the consumer and home furnishings specifically has been somewhat inconsistent in terms of buying patterns, we continue to look for ways to grow our business profitably and are analyzing our marketing and merchandising strategies to increase our visibility in the marketplace, while ensuring we continue to offer consumers a relevant product offering at attractive price points. As we move through this period, we are operating from a position of great strength. We have an excellent brand, the strongest in the industry, we know our core customer, our speed to market proposition has never been better, our operations are efficient, we are building out the La-Z-Boy Furniture Galleries store system through our 4-4-5 strategy, and we are simultaneously increasing the size of the company-owned store base where we benefit from the combined margin inherent in our integrated retail strategy. Additionally, our balance sheet remains strong, giving us the financial flexibility to make the necessary investments in our business, to maintain our competitiveness, drive growth through existing operations, make smart acquisitions and allow us to develop the next set of strategic initiatives to take La-Z-Boy into the future. I will now turn to a brief discussion of each of our operating segments. First, our two wholesale segments, Upholstery and Casegoods. In our Upholstery segment, our supply chain continues to drive further improvements in procurement, manufacturing and logistics and helped drive an improvement in our operating margin for the period. It has also enabled us to greatly improve our service delivering custom furniture in about four weeks’ time. We are proud of this competitive differentiation in the marketplace and the scale with which we achieve it. Moreover, consumers are thrilled to be able to customize their home with a wide range of fabrics, leathers and many other options, while receiving their furniture with such speed. Our ERP system is also playing a role in this process through exception inventory management and a tighter workflow, which is contributing to plant productivity increases. Making investments in our operations is critical to maintaining our competitiveness. Earlier this month, we announced we would invest $26 million in our Dayton campus, our largest La-Z-Boy branded upholstery facility responsible for approximately $400 million of annual revenue. The Dayton facility – which is the only plant that manufactures furniture in all three upholstery categories, recliners, motion sofas and sectionals and stationary upholstery – makes nearly 90% of the various frame styles in the company’s manufactured branded product line. The campus also has supply centers for metal stamping and wood fabrication that provide materials for the company’s four other US La-Z-Boy branded sites. The scope of the project will run in two sequential phases over a three-year period and will be funded through our normal CapEx program. The first phase will include the construction of a new state-of-the-art innovation center, followed by various upgrades and renovations throughout the upholstery plant and supply centers in phase two. Our company roots are steeped in innovation and today that spirit remains at our core. We are making this investment to ensure we maintain a high innovation quotient throughout the business and continue to bring revolutionary products to the market and that we are able to attract the best engineering talent to our team as we expand our business. With respect to the upgrades we are making across the plant and supply centers, ongoing investment is essential as we continue to enhance productivity and efficiencies to drive profitability. Importantly, there will be no disruption of service to our customer base related to the renovation process. And finally, as mentioned earlier, during the quarter, we closed on an agreement to acquire the distribution rights for the La-Z-Boy brand in the UK and in Ireland and fully transition that business to La-Z-Boy management on January 3. We believe we have the opportunity to expand the business in these markets with enhanced investment in brand marketing and digital initiatives. For the third quarter, written same-store sales for the La-Z-Boy Furniture Galleries network were flat versus last year's comparable quarter. As we’ve spoken about over the last two quarters, as we continue to build out our stores and fill in markets, we are seeing some cannibalization occur, which impacts the same-store sales number. For the quarter, we believe same-store sales would have been approximately 1% higher without the cannibalization. In particular, we are seeing it impact the company stores to a higher degree than it does the independent dealer-owned stores as at least for now the company has been more active in adding additional stores to existing markets. For the company, in addition to benefiting from the retail profitability on the added volume from the additional stores, we also realize the wholesale profitability on the volume going to our manufacturing plants. With respect to our 4-4-5 strategy, we, along with our independent dealers, are on pace to complete approximately 23 projects for fiscal 2017. These include new stores, remodels and relocations and we expect to end the year with eight new stores for a total of 346 La-Z-Boy Furniture Galleries stores with 110 in the new concept design format. During the third quarter, the network opened three new stores, relocated one store and remodeled three. For the fourth quarter of fiscal 2017, projected store activity includes two new stores and two closures throughout the network. Fiscal 2018 will begin our fifth year of our 4-4-5 buildout strategy. While we were pleased with our results to date given the significant progress we have made both in terms of the stores we have added, remodeled and relocated, we do not anticipate we will reach the 400-store goal by the end of the five-year period. In fiscal 2018, we plan to open 10 to 12 net new stores, bringing us to almost 360; and beyond that, we will continue to find locations in the more challenging real estate markets, primarily New York, Boston and Miami. Our average store performance across the network is still right around the $4 million mark, with same-store sales down slightly for calendar year 2016. As we change out the old format stores and have more new design concept stores, as well as new generation stores with two newer format types are performing very well, close to the same average rate. Our ultimate objective is 400 stores averaging $4 million in revenue per store to deliver $1.6 billion at retail throughout the store network. However, over time, if we increase our average revenue per store, even with fewer stores, say 365 stores, at $4.2 million on average, for example, the La-Z-Boy Furniture Galleries network would deliver a robust $1.5 billion at retail. We still believe there is room for 400 stores across North America and we have every intention of reaching that milestone, but it will not be in the condensed time frame we initially outlined. As we increase the size of La-Z-Boy Furniture Galleries network and simultaneously upgrade the overall system, by minimizing the number of old stores, we will be able to flow more volume through our plants and leverage the fixed cost structure of our facilities and improve the profitability of the wholesale business. Before turning to Casegoods, I would like to spend a moment talking about England, our other upholstery company. England has been a solid contributor to La-Z-Boy posting consistent growth in sales and earnings. It has a unique model, unlike any other in the industry, in that it delivers custom furniture in 21 days or less. We have an outstanding team at England and they are doing an excellent job of expanding the business, not only with their existing dealer base, but also accelerating its presence throughout the western portion of the United States. In short, England has been a great performer. Now, let’s turn to Casegoods. Long-term, our Casegoods business is positioned as well as it has been in a long time. Operationally, we have a pure import model for our wood furniture, which has made us more competitive. Our product portfolio across our three companies has been completely refreshed, allowing it to have a broader appeal. Our supply chain team is making the difference here too as we’re in a 97% in-stock position on our best-selling groups, allowing us to service customers with an average ship time of six days. While our operating margin for the quarter declined slightly as a result of softer sales, we are confident that the Casegoods business is poised for improvement in sales and earnings going forward. Now, let me discuss our Retail segment. In our Retail segment, delivered sales increased almost 11% in the quarter versus last year's comparable quarter. For the core 119 stores, included in last year's third quarter, delivered sales for the segment declined 8.1% compared to an increase of 6.6% in last year's third quarter. During the period, on lower traffic, conversion was flat, the average ticket increased, fueled by higher design sales. While the Retail segment was challenged during the third quarter from a volume perspective, our integrated retail strategy has proven to deliver a healthy double-digit operating margin through the combined wholesale/retail margin associated with it. We continue to make targeted investments in marketing to drive our growth. For the period, while we were indeed successful in certain markets, we were unable to overcome the challenges presented by the greater retail arena and our overall sales for the core stores declined, reducing our ability to absorb the fixed costs of that segment. However, because we are seeing our marketing initiatives work in certain markets, we believe our strategy is on the right track. Continuing along this course is the correct way to proceed moving forward, so that we win with our core customer and ensure we have an appropriate share of voice in our various markets. As mentioned earlier, in the third quarter, we acquired nine stores in Northeastern Pennsylvania, which we reported on during the last conference call. They are expected to deliver $35 million in annual sales before eliminations. We also opened one new store and remodeled two as part of our ongoing 4-4-5 store buildout strategy and the company plans to open two new stores in the fourth quarter. At the end of the third quarter, the company owned 142 of the 346 La-Z-Boy Furniture Galleries stores and we believe that when we are finished with the 4-4-5 buildout, we could own approximately half of the stores. I will now turn the call over to Mike to speak about our financial performance.

Thank you, Kurt. Consolidated sales for the fiscal 2017 third quarter were $390 million, up 1.6% compared with last year's third quarter. For the period, consolidated operating margin decreased 8.4% from 9.1%. The company reported earnings per diluted share attributable to La-Z-Boy Incorporated of $0.47 compared with $0.43 per diluted share in last year's third quarter. Our consolidated gross margin improved 1.5 percentage points in the quarter compared with last year's third quarter, with about two-thirds of it a result of changes in our consolidated sales mix due to the increased weighting of our Retail segment, which carries a higher gross margin than our wholesale businesses. Our gross margin in our Upholstery segment improved due to supply chain efficiencies as well as a shift in our product mix where sold more motion units with power and more recliners. Selling, general and administrative expenses as a percent of sales increased 2.2 percentage points in the fiscal 2017 third quarter compared with the same period a year ago. Here too, the increasing size of our Retail segment is contributing to the increase, with one percentage point of the quarter’s increase stemming from growth of our Retail business. This reflects the higher percentage of sales for SG&A at Retail compared to the wholesale segments. Additionally, the increase in SG&A as a percent of sales was also the result of the fixed costs associated with the Retail business, primarily occupancy and admin costs, relative to the decline in sales for the stores that have been open for at least 12 months. And as Kurt discussed earlier, we increased our advertising spend across our markets, and did not obtain the commensurate lift in sales we were expecting. Therefore, our advertising expense as a percent of sales was 0.6 percentage points higher in this year's quarter than in last year's third quarter. For the period, legal fees were 0.6 percentage points lower as a percentage of sales in this year's third quarter versus last year. In the fiscal 2016 third quarter, we incurred fees that did not recur this year, primarily related to a legal matter that required fewer resources this year as we waited a court ruling on our affirmative defenses. As we previously reported, we recorded a pretax charge of $5.5 million in the fourth quarter of fiscal 2016 as a result of a jury verdict against the company in a contract dispute. In January of this year, the court rejected affirmative defenses that the company had asserted. We expect judgment on the verdict to be entered by the court in the near future and we will then be able to pursue an appeal. If the judgment is ultimately upheld, the company will pay the judgment and no royalties on certain products sold through the end of calendar 2021 and we have been accruing additional royalties based on that judgment. For the quarter, we incurred a higher loss at corporate and other versus last year's third quarter due to higher incentive compensation cost and professional fees. Some of our share-based compensation awards are liability-based awards and our cumulative expense is adjusted at the end of each quarter based on the stock price of the last day of the reporting quarter. Incentive share-based compensation costs were higher in the third quarter of fiscal 2017 compared with the same period a year ago due to a $5.55 increase in our stock price over the third quarter of fiscal 2017 compared with a $7.15 decrease in our stock price over the third quarter of fiscal 2016. Now, let me turn to the balance sheet. For the quarter, we generated $39 million in cash from operating activities. We ended the period with $110 million in cash and cash equivalents, $30 million in investments to enhance returns on our cash and $9 million in restricted cash. During the quarter, the company invested approximately $20 million, acquiring nine La-Z-Boy Furniture Galleries stores, spent $5.3 million in capital expenditures, made $5.4 million in dividends and spent $5.3 million to purchase approximately 200,000 shares of stock on the open market, which leaves 3.1 million shares available for purchase in our program. Just as a side note, although we recorded the acquisition of the UK licensee, we’re not required to pay for the acquisition until 90 business days from the closure of the deal. We expect to make the cash payment of approximately $16 million late in the fourth quarter. We expect our CapEx for the full fiscal 2017 year to be approximately $30 million. We’re beginning construction on our new innovation center and other upgrades to our Dayton campus this month. We expect these construction projects will continue into the fourth quarter of fiscal 2020. As Kurt mentioned earlier, we estimate these projects will cost about $26 million and will be part of our normal CapEx which also includes transportation, equipment and maintenance. We will be opportunistic with respect to our share purchase program given these uses for cash, our operating cash flows, stock market conditions and other opportunities that may come up to invest in the business to drive growth. Our effective tax rate for the third quarter was 29.4% compared with 36.2% in the third quarter of fiscal 2016. Our effective tax rate varies from the 35% statutory rate primarily due to state taxes less the benefit of US manufacturing deductions and foreign earnings in jurisdictions with lower tax rates than the US. Our effective tax rate was lower in the third quarter of fiscal 2017 primarily due to a tax benefit for state job tax credits in Tennessee and a tax benefit for releases of [indiscernible 21:52] allowances relating to certain US state deferred tax assets. These discrete items lowered our effective tax rate by five percentage points in the third quarter of fiscal 2017, which equates to about $0.03 per share. As a reminder, last year’s fourth quarter had 14 weeks compared with this year's fourth quarter, which will have 13 weeks. As a reference point, that equates to about $30 million in sales. And now, I’ll turn the call back to Kurt for his concluding remarks.

Thank you, Mike. We believe we have significant opportunities ahead of us. We are completing our 4-4-5 store buildout strategy to fully penetrate the North American marketplace and grow our company. Innovation will remain at the forefront of our business as we bring exciting new products to the market and we are developing the next set of strategic initiatives to take our company into the future. As we begin our 90th year in business, we are proud of our company's heritage and its values, the innovative spirit and worth ethic instilled by our founders that remain with us today and continue to permeate every facet of our company. With a unique model where we are a manufacturer, retailer and importer, we have many avenues to drive growth, coupled with a solid balance sheet and intense financial discipline to continue to deliver long-term sustainable growth for our shareholders. We want to thank all of you for being on our call this morning and I will turn the call back to Kathy to begin the Q&A. Kathy?

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

Thank you. [Operator Instructions] Our first question is coming from the line of Budd Bugatch with Raymond James. Please proceed with your question.

Good morning, guys. This is Bobby filling in for Bud. I appreciate you guys taking my questions.

Good morning, Bobby.

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

So, Bobby, this is Kurt. Let me handle that one. So, what you have to remember with our business model is a lot of our furniture is not delivered until four to five weeks after it’s sold. And so, we have this inconsistency of what is going on quarter-to-quarter, certainly over a longer period of time, if you write it, it will eventually get delivered, but there is not a one-to-one correlation. So, let me give you a corollary, so we recorded this quarter that the same-store sales for the network was flat, but the delivery for the company stores was down 8%. A year ago, the same quarter, the written sales for the network were down 1.5%, but delivered comparison was up 6.6%. So, there’s a lag factor. So, obviously, if we are writing even at a minus 3%, our deliveries aren’t going to stay at a minus 8% or something like that. So, you will go back and chart our history of what we’ve been giving you, there is always this little bit of a gap, both positive and negative, when we compare the two numbers. Because one is the entire network and one is just the company-owned portion.

Okay, that makes sense. Was the lag factor greater this quarter or was it maybe some of the timing – I remember when we spoke last quarter, business kind of improved as you exit the quarter. So was it kind of just the timing of business getting better created where the beginning of the quarter business wasn’t as good and it kind of improved throughout the quarter, so the lag even was of an impact.

Well, it’s probably a little – the lag was a little earlier. So, January – if you read some of the things coming out from the government, January was probably the toughest month of the three-month period for the industry. So, we probably – prior to Christmas, if you add the four to five weeks, prior to Christmas and heading right into the new year, we probably didn’t write at the rate we would have wanted to do, so it didn’t deliver in the quarter, which means there is a hold order of deliveries that will be delivered in early February.

Okay. Can you give me a color on what the backlog is then for us to think about when we model?

So, we give our backlog out once a year, Bobby, at year-end and are not giving it quarterly.

Okay, fair enough. All right. And then maybe – maybe Mike – can you maybe update us on – as we think about the raw material environment for calendar year 2017, kind of what you guys are seeing and maybe where your latest thoughts are?

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

You were speaking about – the pricing would be at the April market, so you have to monitor till then or are you thinking maybe even keeping pricing at the similar levels today and maybe out the October market. How should we think about your ability to pass through price?

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

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

Thanks, Bobby.

Thank you. The next question is coming from the line of John Baugh with Stifel. Please proceed with your question.

Good morning, team. And thanks for taking my questions. I guess I’d start with the retail. And I appreciate the vertical model and making wholesale with retail. That having been said, you’re down materially in the EBIT in that segment year-to-date for the nine months as well as the latest quarter. If I read it right, it’s the lack of leverage on the fixed cost with the traffic being down. And you mentioned you’re trying to advertise, but it didn’t lift. So, I’m trying to look out and wonder what is the strategy. You talked about tweaking advertising. Does that mean raising advertising or reducing advertising, so we get positive leverage on ad expense or where – other than, obviously, revenues lifting, can we get any margin leverage in the retail side of the business? Thank you.

As you know, John, the Retail business is a high fixed cost business with its rents and other associated expenses. I just want to be clear, so this up-spend that we’ve done in certain of the markets, not all markets, but certain markets was successful for the most part, but it isn’t every single market and it doesn’t affect every single store the same. So, the basic factor was our same-store sales being negative, slightly negative for the quarter didn’t absorb the fixed cost. And we’re going to continue to work at not only more spend, but is the message we’re advertising right, are we buying in the right media, the media now, it’s hard to figure out how much to spend on digital, on TV, on print, and we’re always analyzing, always tweaking, just like any other retailer. So, we’re going to do so experimentation. We’re not really going to announce to our competitors exactly what we’re going to do and which markets, but we’re not going to stay with a pat hand.

Okay. And you’ve had really good margins on the Upholstery side and you de-leveraged, obviously, in Casegoods and Retail and it sounds like both those de-leverages are due to lack of revenue. How do we think about, say, next year, what is the opportunity to continue to leverage the Upholstery segment margin and perhaps make up for some of the deleveraging in the other two segments?

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

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

Your last question first, I don’t think there’s a significant difference in Q4 of openings and remodels for us, but we try to give you some inclination that we do report same-store sales for the network and we also see it give you the core stores, the stores that are open for 12 months in the prior year, we try to give you our delivered comp there. So, the difference between that and our total sales, which was up 11% I think, shows you the difference that the acquisitions were making. One other thing, though, we give you the gross sales. So, in the case of Pennsylvania, we said it was $35 million, and that would show up in the Retail segment, the company-owned retail segment. But half of that volume, we were already earning a profit on it, making a sale. So, there is a $17 million or $17.5 million elimination going on in corporate. This is just an example. That’s not the right number. But in the example, we may have said that we acquired $60 million worth of sales through all the stores we bought last year, but it’s only a net gain to the corporation of $30 million because we were already their supplier.

Yes. That’s helpful on the revenue side. I guess I was wondering on the margin side how acquisitions have favorably or unfavorably impacted the percentage EBIT margin at Retail?

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

And, Kurt, are those stores not only coming in at this higher average, but then there’s some leverage opportunities on top of that?

Well, sure. The ones that are going into our DCs and the ones that we supply the management oversight and the accounting oversight and all, we have learned over time to have a slightly more profitable model because of being all consolidated in a broader company that an individual owner.

Great. Thanks for taking my questions. Good luck.

Thank you, John.

Thank you. Our next question is coming from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi. This is Sumit Desai on for Brad. And good morning, Kurt, Mike and Kathy. And thanks for taking our questions.

Good morning.

It’s great to see that written trends accelerated in the quarter. And you commented a little bit on January being a bit softer. Could you comment a little bit more on the transitioning out there in terms of traffic and ticket and how you are feeling about the upcoming year?

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

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

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

Okay, great. Thank you.

Welcome.

Thank you. Our next question is coming from the line of Anthony Lebiedzinski with Sidoti. Please proceed with your question.

Good morning. Thank you the question. First, just wanted to touch on the cannibalization. Is this in any one particular market or is this across the store base that you are seeing the cannibalization impact?

Anthony, I think the way to think about that is you would hope that as you go into a market, your first store is always the one that is in the best part of the market. And then as you add stores two and stores three, they’re still very financially viable, but they are probably not as good as the first store. But the aggregate of the three, particularly, if you are making the manufacturing profit as well, is better than just keeping the one store in the market. So, we’ve used the example previously of Richmond Virginia. We had a great store there on Broad Street near the mall. I think it was pacing somewhere between $5 million and $6 million, but there was a whole other side of town that we weren’t penetrating to the degree we thought. So, just for argument sake, so let’s say we open the second store and it did $4 million, but it took $1 million away from the first store, but now the company is doing $8 million in that market instead of $5 million or $5.5 million and it’s incrementally profitable because you have a lot of the same fixed costs of delivery and advertising and everything else going on. And so, we’ve been doing that in a number of markets to get the – to cover the market adequately and take care of the customer, but also have the size to compete against the other competition. Our history would show year two of that, whenever the first store hit was taken, it starts to come back some because the newness of the second store is not as important in year two and three, so we would see that come back. So, as long as we continue to open stores in markets where we already have them, you would see some cannibalization. And most of our opportunities going forward are building out markets we’re already in.

Got it. Yes, thank you for that clarification. So, also as far as the 400-store target, I know you said you will not complete that by the end of fiscal 2018, any sort of ballpark estimate as to when you think you could achieve that target?

No. I wasn’t able to provide that because one of the reasons we didn’t make the 400 in the time frame we originally outlined is the cost of real estate in various markets is, as one of my folks had told me, in some places is astounding. And so, we’re going to very cautious. We’re not going to make real estate investments to hit an arbitrary number of 400. Unfortunately, for some other players in the market, there is lots of real estate coming on the market from people who’ve had problems and are exiting. So, there’s more things opening up. But, for us, it’s not a matter of money from the company side or even our dealers. It’s the event of finding the right location at the right price at the timeline we needed and there’s really no way to predict that. But I know everybody still has opportunity on the horizon and I am pretty positive over the next few years we’ll get to the 400.

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

Well, our data would show that the family-owned rural furniture dealer that has been a core base of customer for us for a long, long time, they’re struggling a little more than the rest of our distribution segments. They don’t seem to have the wherewithal to over-market there – to overspend or their capabilities on the Internet are not as sophisticated as a larger dealer. So, I don’t think this is just a La-Z-Boy problem. I think this is an industry trend where more small dealers are having challenges and/or going out of business unfortunately. But that’s where see our challenges.

Got it.

Our business with the stores and our major accounts are positive, but they’re not positive enough to make up the deceleration we’re seeing from our other channel or distribution.

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

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

Okay, thank you.

Thank you.

Thank you. It appears we have no additional questions at this time. So, I’d like to pass the floor back over to Ms. Liebmann for any additional concluding comments.

Thank you for your interest in La-Z-Boy Incorporated. Please give me a call if you have any further questions. And have a great day. Bye-bye.

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