La-Z-Boy Incorporated (LZB) Q4 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the La-Z-Boy Fiscal 2017 Fourth Quarter and Full Year Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Kathy Liebmann, Director of Investor Relations and Corporate Communications. Please go ahead Ms. Liebmann.

Thank you, Rob. Good morning and thank you for joining us to discuss our fiscal 2017 fourth quarter and year end results. With us today are Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer; and Mike Riccio, our Chief Financial Officer. Kurt will begin today's call and then Mike will speak about the financials before turning the call back to Kurt for his concluding remarks. We will then open the call to questions. A telephone replay of the call will be available for one week beginning this afternoon. Slides will accompany this presentation and are available for viewing through our webcast link. These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles to communicate with investors about the company's current operations and future prospects. We will make forward-looking statements during this call, so I will repeat our usual Safe Harbor 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 material -- 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 results for fiscal 2017 and the fourth quarter. We are pleased with the way we ended fiscal 2017. Our fourth quarter delivered a strong finish to the year, reflecting the culmination of many strategic initiatives, gaining momentum, coupled with the efficiencies of our manufacturing platform. Throughout the year, we continue to make strategic investments in the business to drive long-term growth. We increased the La-Z-Boy Furniture Galleries network as part of the 4-4-5 store build-out plan and acquired 14 La-Z-Boy Furniture Galleries store from independent dealers, adding to the growth of our company-owned retail business. We also purchased the La-Z-Boy wholesale business in the United Kingdom and Ireland, broke ground on a new innovation Center in Dayton, Tennessee, enhanced and invested in our digital platforms, and introduced exciting new products. And in March, we celebrated La-Z-Boy's 90th year in the business, an impressive milestone in our company's history. While we are proud to share many of the same attributes and values with those our founders established in 1927, over the span of almost a century, a lot has changed, providing our team with the best of both worlds as we honor our past and embrace the future. With product innovation and a world-class global supply chain at our core, this powerful combination will carry us into the future and propel us into new areas to tap growth. Before reviewing the quarter, I will run through a few highlights for full fiscal 2017 year. As a note, last year -- fiscal 2017 included 52 weeks versus fiscal 2016, which included 53 weeks, with the additional week occurring in the fourth quarter and resulting in approximately $29 million of additional sales for the year based on the year's average weekly sales. For those of you new to our story, our fiscal year ends on the last Saturday of April and every five to six years due to the way the calendar works, we have an extra week in our fiscal year. While the retail environment for residential furniture was challenging during 2017, our strong financial position allowed us to maximize short-term opportunities and focus on our long-term strategy. In fiscal 2017, we generated $1.5 billion in sales and increased the consolidated gross margin, operating income, operating margin, and diluted earnings per share. We also generated $146 million in cash from operating activities, allowing us to return a combined $57 million to our shareholders through share purchases and increased dividend. We also spent $36 million on acquisitions and $20 million on capital expenditures. We ended the year with a strong balance sheet, access to lines of credit, and virtually no debt, providing us with the financial flexibility to continue to invest in the business to drive long-term growth, profitability, and return to shareholders. On that note, I am pleased to report our Board of Directors approved an increase of 6 million shares to our share purchase authorization, demonstrating their confidence in the company's ability to successfully execute its growth strategy on generating ongoing strong free cash flow. Now, let me review the fourth quarter. We had a solid finish to the year with our earnings performance for the quarter demonstrating, among other things, two key points; one, the strategic initiatives implemented throughout the year are coming to fruition, gaining momentum, and delivering results; and two, that we are able to leverage planned efficiencies with volume. I would also like to note that all three operating segments contributed to the excellent performance for the quarter with improvements in operating income as well as operating margin. I will now take a few moments to discuss the three operating segments; first, our Upholstery business. For the quarter, sales in the Upholstery segment decreased 2.9% to $325 million versus $335 million in last year's fourth quarter. For the segment, the additional week in last year's quarter resulted in approximately $23 million in additional sales. For the fiscal 2017 period, the Upholstery segment posted an operating margin of 13.5%, the highest quarterly performance in more than a decade for that segment, reflected -- reflective of the ongoing savings our supply chain team is delivering, coupled with productivity improvements stemming from the ERP system. These advancements, combined with the increased volume we experienced during the quarter, demonstrate the efficiencies our plans can achieve. Importantly, productivity gains are improving our service to customers with 92% of orders being shipped from our La-Z-Boy-branded facilities in four weeks or less, a significant improvement over two years ago. We are able to accomplish this through better information obtained from the ERP system, which allows us to manage inventory and workflow more efficiently. As a reminder, a key differentiation for La-Z-Boy in the marketplace and what we believe to be one of our competitive advantages is the ability to offer mass customization, almost 1,000 different covers between fabrics and leathers on about 175 styles with speed. There is no one in the industry that offers customization with the scale and speed that we do. And while I'm talking on the subject of quick shipping, I will spend a few moments talking about England, where we generally ship orders in 21 days or less, utilizing unique manufacturing and distribution process that is unparalleled in the industry. The company has been expanding its sales and profitability and has been a solid contributor to our organization with excellent prospects for the future. Several weeks ago, England's corporate office in New Tazewell, Tennessee was destroyed in a fire in the middle of the night. Most importantly, no one was hurt and we are very thankful for that. Disaster recovery plans were enacted immediately and our plants located a couple of miles away were up and running the next morning. England's data center adjacent to the corporate office, which stores, manages, and processes its orders, was intact and production and shipping continued without any disruption as a result of the incident. We have relocated all office personnel in the customer service center, which were housed in the corporate office to temporary space in the England plant, and essentially, the business did not miss a beat. This is a testament to the systems in place throughout our organization to protect it and to assure we are able to continue to service our customers. I would like to acknowledge and thank the team at England as well as many individuals throughout our company, all of whom mobilized immediately and worked together to produce an excellent outcome for our business. Now, turning back to the La-Z-Boy business, as a result of a greater emphasis on premium products, we experienced a shift during the quarter to higher margin, higher ticket items, including power and leather. Additionally, with innovation remaining at the forefront of everything we do, at the April High Point Furniture Market, we introduced Duo, a revolutionary new product line that features the sophisticated look of stationary furniture with the unexpected power to recline at the push of a button. Designed to have broad appeal, Duo bridges the gap between style and function, requiring no compromise. The collection was very well received by our dealers. It's expected to reach the retail floors this fall and will be supported by a comprehensive and integrated marketing campaign that will include national TV as well as print and digital advertising. We are making investments across our digital platforms to create an omnichannel offering and an experience with the consumer that makes reaching and purchase -- researching -- and purchasing across our retail channel as easy as possible. In short, we will meet the consumer wherever she wants to shop, whether that be on a desktop or mobile sites or in a La-Z-Boy dealer store. We have experienced a steady increase in traffic to our website as well as a higher engagement on a site based on the number of products people are viewing and the amount of time they are spending on our site. We believe this is generating more interest in the La-Z-Boy brand and driving traffic to our various dealers, where the majority of our La-Z-Boy upholstery sales still take place. Once consumers are in the stores, our conversion rate is positive. With the trend in online shopping growing, we will continue to allocate resources to ensure consumers can browse through our broad assortment with ease, customize products to their liking, and leverage our design services to create a room of their dreams. Additionally, digital personalization is the key area of focus, and we recently enhanced those capabilities across our digital marketing channels and on la-z-boy.com to expand our consumer base and deliver more highly individualized messages. With respect to our 4-4-5 build-out strategy, we along with our independent La-Z-Boy Furniture Gallery dealers, have made significant process -- progress over the past four years in terms of adding and improving the quality of the network by converting older stores into the new design concept form, our newest format and a better reputation of the brand today. During fiscal 2017, across the entire network, 23 projects were completed, including new stores, relocations and remodels. We ended the year with nine net new stores. For fiscal 2018, we are planning for approximately 26 projects, including seven net new stores and expect to end the year with about 140 stores in the new concept design format and 354 overall. As we have mentioned before, while we are disappointed that we will not reach the 400-store objective in the five year time period as originally planned, we are unwilling to compromise our rigorous store evaluation process in order to achieve that number. In particular, we are facing challenges from a real estate perspective in several markets, namely New York, Boston, and Miami. Our ultimate goal, however, is to deliver a $1.6 billion retail enterprise through the store system. And with improved store performance, we believe that, over time, we can reach that level with fewer stores, if necessary. For the fourth quarter of fiscal 2017, written same-store sales for La-Z-Boy Furniture Galleries network increased 2.4% on top of a 2.2% increase in last year's fourth quarter. As a note, written same-store sales are calculated on a calendar basis and are not impacted by the extra week in any reporting period. Now, let me turn to Casegoods. Sales for the 2017 fourth quarter were $26 million, a decrease of 1% from last year's fourth quarter revenue of $26.3 million. The one additional week in the fiscal 2016 quarter resulted in approximately $2 million of additional sales in the quarter based on the average weekly sales for the year. The operating margin for the segment increased to 7.8% versus 6.2% in the comparable period of fiscal 2016. And for the full fiscal year, the segment achieved an operating profit of 8.6% versus 7.5% in fiscal 2016. At the April High Point Market, we introduced a strong collection from American Drew and what we consider to be our best introductions from Kincaid in years, with both receiving a favorable response from retailers. With the pure import model, a strong global supply chain, and domestic distribution capabilities in place, we're servicing customers better, have expanded the profitability of the business, and established a solid platform to drive growth. Moving on to retail, sales for the fiscal 2017 fourth quarter increased 8.1% to $118 million versus the prior year fourth quarter sales of $109.2 million. The prior year's quarter included an additional week, representing approximately $8 million in sales based on the average weekly sales for the year. On the core, 121 stores included in last year's fourth quarter, delivered sales decreased 8.2% compared with an increase of 13% in the prior period. Decline was primarily the result of the additional week in sales from last year's fourth quarter. We were, however, pleased to have increased the operating margin in the segment to 6.5% from 5.8% in last year's quarter. For the past two quarters, we have been talking about the up-spend for advertising in a number of our retail markets to capture a greater share of voice, particularly in those markets where competitors have opened stores and have ramped up their marketing efforts. We have started to see positive results from the additional investments we are making and continue -- with the increased traffic to our website and other digital platforms, consumers are entering our stores more engaged. During the quarter, we experienced an increase in the average ticket, driven by an increase in design sales and custom orders. During fiscal 2017, the company opened seven La-Z-Boy Furniture Galleries stores, closed two, acquired 14 stores from our independent dealers who retired and remodeled three, bringing our company-owned store count to 143 with 52 in the new design concept. The stores acquired throughout the year were quickly integrated into our portfolio and accretive from the start. For fiscal 2018, we are planning to open five net new stores in the company-owned segment. Sales from the company-owned La-Z-Boy Furniture Galleries stores provide the company with the greatest level of profitability due to our integrated retail model where we benefit from the combined margin, earning a profit on both the wholesale and the retail sales. Additionally, as the retail business becomes a larger portion of our overall business, we will benefit from it -- its increasing size, capturing more of the profit on sales of our products. I will now turn our call over to Mike to review our full year financial results.

Thank you, Kurt. I'll quickly review our numbers for the fourth quarter since Kurt already spoke about our performance by segment. Consolidated sales for the fiscal 2017 fourth quarter were $413 million, down 1% from $417 million in last year's fourth quarter. As Kurt mentioned earlier, the fiscal 2016 fourth quarter included one additional week, which resulted in approximately $29 million of additional sales in the quarter. Consolidated operating income increased 25% to $43 million compared with $34 million in the fiscal 2016 fourth quarter with the consolidated operating margin increasing to 10.4% from 8.2%. The company reported net income attributable to La-Z-Boy Incorporated of $28 million or $0.57 per diluted share versus $23 million or $0.45 per diluted share in the prior year period. Last year's period included a $0.07 per share charge related to a legal matter. Consolidated sales for the fiscal 2017 full year were $1.52 billion, essentially flat versus last year. Again, the fiscal 2016 full year included 53 weeks with the extra week resulting in approximately $29 million of additional sales based on the average weekly sales of the year. For the year, consolidated operating income increased to $131 million from $122 million in fiscal 2016 with the consolidated operating margin increasing to 8.6% from 8%. The company reported net income attributable to La-Z-Boy Incorporated of $86 million or $1.73 per share diluted -- per diluted share in fiscal 2017. This compares with fiscal 2016 net income of $79 million or $1.55 per share, which included a $0.07 per share charge for a legal matter. Our consolidated gross margin improved 1.7 percentage points in fiscal 2017 versus fiscal 2016, reflecting improvements in all three business segments. We experienced gross margin improvement of 0.9 percentage points for the year due to the change in our consolidated sales mix, as retail now comprises a higher percentage of our overall business and carries a higher gross margin compared to the wholesale segments. In Upholstery, supply chain efficiencies, favorable changes in our product mix and leveraging the benefits of our ERP system and our branded upholstery plants improved the segment's margin. Our retail segment benefited from increased custom and design orders, which generated a higher gross margin and sales of our stock units. And our Casegoods segment improved its gross margin due to the lower promotional activity related to discounted product and lower ocean freight expense. Additionally, fiscal 2017 included a 0.2 percentage point benefit related to a favorable legal settlement with most of that benefit occurring in the first quarter of fiscal 2017. SG&A as a percent of sales increased 1.1 percentage points in fiscal 2017 compared with fiscal 2016. As noted a moment ago, as our retail business becomes a larger component of consolidated sales, our SG&A as a percent of sales will also increase as retail carries a higher level of SG&A compared to the wholesale businesses. For the year, this accounted for a 1.2 percentage point increase in our SG&A expense. Advertising expense as a percent of sales was 0.8 percentage points higher for the year as we increased our marketing spend to support our retail stores and enhance our share voice in selected markets, as Kurt discussed earlier. Also the increase of our SG&A expense as a percentage of sales during the year was the result of the fixed nature of many of our retail segment's cost in relationship to the decline in sales of stores opened a minimum of 12 months. Offsetting increases of SG&A were professional fees and legal costs that were 0.7 percentage points lower as a percent of sales for the year versus fiscal 2016. Now, turning to the balance sheet, during the quarter, we generated $55 million in cash from operating activities and for the year, we generated $146 million. We ended fiscal 2017 with $142 million in cash and cash equivalents, $33 million in investments to enhance returns on our cash, and $9 million in restricted cash. During the second week in May, we finalized our payment for the U.K. and Ireland business, which used approximately $16 million of our year end cash balance. For fiscal 2017, our capital allocations include share buybacks, dividends, capital expenditures, and cash used for acquisitions. For the full fiscal year, we spent $36 million to purchase 1.4 million shares, including 400,000 shares in the fourth quarter. This leaves 2.7 million shares in the program in addition to the 6 million shares authorized by the Board yesterday, giving us 8.7 million shares authorized for purchase, or approximately 18% of the total outstanding shares. Based on cash flows and other capital needs to invest in the business to drive growth, we plan to continue to be opportunistic in the market with respect to buyback activity. We also paid $21 million in dividends, returning a total of $57 million to shareholders when combined with our share repurchases. In addition, we invested almost $36 million in the business to acquire independent dealer stores as well as the $16 million in cash I referenced earlier that we spent subsequent to year end on the U.K. business. We will continue to use our cash prudently during fiscal 2018 with our first priority to invest in the business to drive growth; the second to pay our dividend; and depending on how much we spend on those first two items, the third would be to buy shares. Our effective tax rate for continuing operations was 33.5% for fiscal 2017 compared to a 35.3% for fiscal 2016. Impacting the fiscal 2017 rate was a net tax benefit of $1.4 million, primarily from the release of valuation allowances relating to certain U.S. state deferred tax assets and state tax credits. As in discrete items, the effective tax rate for continuing operations in fiscal 2017 would have been 34.6%. We believe that our fiscal 2018 tax rate will be around 35.5% due to some state credits and other earnings in jurisdictions outside the U.S. Before turning the call back to Kurt, I'd like to go through several items that are important for fiscal 2018. Raw material economics, we are seeing some increases in pricing for fiscal 2018 versus fiscal 2017. As we have discussed in the past, when this occurs, we pass through those increases to customers. At the April High Point Furniture Market, we enacted a price increase in our branded business that will take effect in July to coincide with the time we expect to see cost increases. Capital expenditures, we expect capital -- we expect total capital expenditures for fiscal 2018 to be in the range of $50 million to $55 million. For fiscal 2017, there were about $20 million, not including acquisitions. The increase to CapEx relates primarily to the construction of our new innovation center and other upgrades to our largest manufacturing campus in Dayton, Tennessee, which we expect to continue into fiscal 2020. The innovation center is expected to be completed in March of calendar 2018 and we estimate that we will incur approximately $14 million related to its construction this fiscal year. We're also anticipating increased CapEx spending this fiscal year related to machinery and equipment and expansions to our England plants as well as a new corporate office building to replace the one lost in last month's fire. With respect to sales for fiscal 2018, we need to keep in mind two things; first, our first quarter is typically the weakest in terms of sales and earnings due to a general slowdown throughout the furniture industry related to the summer period. As a result of this, the majority of our manufacturing facilities will close for one week in July for vacation and maintenance. With lower volume during the period, in addition to the one week without production and shipments, we historically convert a lower rate during the first quarter. Second, as a reminder, in the early part of fiscal 2017, we acquired 14 stores; one in May, four in August, and nine in November. Sales from these stores are not considered to be incremental or representative of organic growth, but will begin showing comparative sales for these acquisitions in the second half of our fiscal year. And they don't convert the same way as incremental sales because we acquire all the costs associated with the business. And finally, when thinking about 2018, keep in mind the benefit related to the legal settlement that are referenced in gross margin discussion equated to $0.04 per share, of which the majority was reflected in the first quarter of fiscal 2017. And the discreet items that affected the tax rate for fiscal 2017 provided a $0.03 per share benefit. So, as we look at fiscal 2018, we have approximately $0.07 per share headwind to overcome even if our operations perform at the same level. And now I'll turn the call back to Kurt for his concluding remarks.

Thank you, Mike. Before closing, I would like to take a moment to recognize the entire La-Z-Boy team for their hard work. Everyone contributed to our excellent fourth quarter performance and I would like to thank all our employees for their dedication and commitment to the company. There are many exciting opportunities before us. We intend to leverage our industry-leading, agile, and lean global supply chain, as well as our product innovation abilities to continue to grow the brand and expand beyond it. We are focused on bringing great products to life through whatever channels consumers prefer to interact with us and at the same time, we are committed to offer a flagship digital experience on la-z-boy.com, an incredible growing network of La-Z-Boy Furniture Galleries stores as part of our 4-4-5 initiatives and to partner with key online and offline retailers. Our talented team is dedicated to starting off the next 90 years with as much ingenuity as our founders and I look forward to updating you on our strategic initiatives as La-Z-Boy continues to evolve. I want to thank you, again, for your interest in La-Z-Boy and will turn the call over to Kathy to provide some instructions for getting into the queue for questions. Kathy?

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

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

Good morning. This is Budd getting in for Bobby. Congratulations on the -- on your fourth quarter. It was very impressive margin and overall performance. Kurt, could you give us maybe a little bit more color on the retail traffic and ticket? You talked about higher margin, higher ticket business. Maybe give us a feel for how the quarter developed in terms of traffic and ticket.

Budd, our story is fairly consistent with the last few quarters, and I think fairly consistent with what's going on in the industry. We all are seeing slightly less traffic and have been for some time. We believe the customer is doing a lot more of research online before shopping. So, therefore, she shops at fewer stores, which means she is more predisposed to buy when she comes in. So far, we've been able to take that less traffic, convert at a higher level, and convert at a higher ticket, which negates the negative traffic that we see in the majority of our stores. So, it's a continual story of making sure that you work really hard to get all the share of wallet you can from any customer that comes in. But with less traffic coming in the doors, you have to make sure you convert at a higher level. And we've been doing that, both in the company-owned stores and with our independent dealers as well.

And is the ticket in the company-owned stores and the dealer stores relatively comparable? And can you give us a feel for where that sits today on average?

I think it is fairly comparable across the entire network, but I don't have readily available data right now on the ticket of our independence. I'm sure we have that information somewhere and can provide it at a later date, but I don't have it here with me this morning.

And how about on the company-owned stores, can you provide us with an average ticket on there?

Budd, I'd have to -- I don't have that, either. But again, we've talked about -- there's one ticket that we write if the customer buys straight from the store and there's another ticket, which is probably three times as much if they get into our in-home design program. So, obviously, the stores that have higher percentage of design sales are going to have a higher average ticket. And that ranges throughout the entire system, fairly broadly as well. But I don't have either one. We have said that the ticket in walking into the store is typically around $1,500 and the ticket on in-home design is between $4,000 and $5,000. So, it's the percentage of how much you do in each area that would end up giving you the end result.

And where does that percentage lie now? And what is that -- what's happened to that percentage?

The percentage continues to go up. I think in the company-owned stores, our percentage of in-home is pushing 30% or maybe higher. So, it's a primary focus because, again, it's an edge of difference between us and a lot of other furniture retailers.

Okay. A couple of other quick questions. Upholstery margin was particularly exciting to see that. And the ERP was, I think, pointed out as a reason for that. And you said it was in flow. Was that showing up an indirect and has, therefore, then showing up in gross margin? And how was that -- how do you connect the dots on that?

Well, I think it all starts with the ERP system and our supply chain team doing an incredible job on forecasting the thousand fabrics and leathers we have and having them in stock, and having the inventory in stock at all times and having no disruptions with our people in the plants waiting for materials is one of the bigger benefits we've had. So, its addition -- in addition to the ERP work and all, it's having the -- our workforce not have to have downtime waiting for materials. And the productivity on the per units made per man-hour work is continuing to increase every year and it's pretty impressive for us right now.

So, of the potential gains from ERP, have we seen most of them, are there some -- much to come yet?

I think we've -- I think we have a big part of it behind us and embedded in our projections going forward. With any new system, you get better at all, the bells and whistle it has and the utilization of it and I think we will see some more. But I think, early on, and now we're -- finished our second full year of using it at the plant level, we probably picked up a lot of the immediate low-hanging fruit and we'll have incremental gains beyond that.

Okay. And lastly for me, capital expenditures for the year came in, I think, $10 million below what Mike had pegged as the target for the year. I think you've said $30 million and it came in at $20 million and next year, it's at $55 million. What was the essential difference? And is part of the $55 million a catch-up of the $20 million to $30 million? And does that happen earlier in the year?

That's correct. We thought we would break ground on the innovation center earlier. We thought we would get some of the machinery in the plants and updated and now obviously, we've been working also on the plans on the England plant expansion and obviously now, their new headquarters. So, that all kind of came together at once and we would hope we would get all those projects substantially completed. Probably, the England office wouldn't be done till sometime late next spring because we still have some decisions to make on where to build it and the insurance claim and all that. But yes, there was nothing really new in the plan, but the flow of the timing of it. I think you could take the two years together and say that would probably be a more accurate average of somewhere around $35 million, $40 million a year. It's kind of similar, Budd. I think to this two year cycle when we built the new headquarters, it was elevated for that period of time, then went back to a more normal run rate.

Obviously, everyone is grateful that there was no loss of life at England and certainly impressed by the fact that they recovered so quickly. You mentioned insurance, does that going to cover the cost of the new headquarters?

Well, I think -- yes, I mean, I -- in general basis, the policy gives us if we built the same size building at today's replacement cost under today's standards, we wouldn't have much out of pocket, but we'd probably build a slightly larger building, not a lot. The built -- the business is growing. They have more people. They have a few more needs. But it should be covered substantially by insurance.

Okay. We can talk about the timing of that later. Thank you. I'll have [ph] the seat to others. Thank you.

Okay. Thank you, Budd.

The next question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Please proceed with your question.

Yes, good morning and thank you for taking the questions. Certainly a great job in the quarter. I was wondering if you could give us any sense as to the progression of written same-store sales. During the course of the quarter, Easter fell later this year. But if you could give us any color as to how the trends evolved during the quarter that would be very helpful.

Anthony, I don't think there was any meaningful differential between taking into account seasonality between February or April or -- we saw a steady, slightly above flat performance for the whole quarter, which finished with the 2.4% increase for the quarter on top of the 2.2% last year. So, there wasn't like it all happened in February and we were hanging on by a thread in April. It was a steady flow and that's continued here into this first quarter of next year, just a pretty steady cadence, not wild swings. And of course, you've got to temper the -- when we say the pace of business for the time of year that we're in. And typically, the summer months are traditionally not as robust as the fall and winter. And that is -- and you can see from our historical financials that there's a significant difference in the volume in our fourth quarter compared to our first quarter. One is seasonality; and two is, we only operate our plants 12 of the 13 weeks during the quarter because of vacation and shutdown. So, that's -- that contributes to it as well. But that doesn't mean that the pace of business is a whole lot different than what we saw in the fourth quarter relative to the season that we're in.

Right. I understand. Thank you for that. And Mike I think you also mentioned that the lower ocean freight expenses helped the quarter. I was wondering if you guys could quantify that and how do you see ocean freight cost for fiscal 2018?

We mainly talked about for the Casegoods segment because of almost all their finished goods come in on the ocean freight. So, -- and since their volume is not as large as some of the other divisions, it tends to affect their margin more than other places. Right now, we're just waiting to see what happens over the summer and whether or not they take things out of capacity or not. But we're not seeing any major change. I'm assuming it won't stay where it is. But that's kind of a quarter-by-quarter thing for us right now and don't really have a forecast in the future on that. It really depends on the shipping lanes, what they keep in capacity and what happens to the oil.

Our bias right now, Anthony, is we will not get a benefit on ocean freight next year, not that it will necessarily go up, but we don't think it's going to go down anymore. So, we got a new baseline, so that's probably a onetime incident for us.

Got it, okay. And then switching over to the retail segment. So, the segment margin was up in the quarter, but down for the year versus fiscal 2016. Is the expectation that the retail segment margin will go up to where it was in fiscal 2016 over time? How should we think about that?

I think you have to step back, Anthony, a little bit and think about what's going on in retail. There's a lot of changes -- and going on in the broad retail sector, particularly in the apparel area. And so what the future looks like here, we'll have to make some judgment on it in a while. But we are navigating a pathway here, not only for our retail business, but also the business overall. Our -- we can make more margin in some of our businesses, but will come at the expense of sales or we could get more sales and maybe keep our margin flat. And so we're making those judgments because we think we need a balance of growing and margin. And as our company has improved our operating margin to 8.6%, we are one of the top tier, top quartile companies operating profit-wise in the industry. So, we're making judgments -- and I wouldn't say daily, but on a lot of the initiatives and all about how much to invest to get sales, how much to say we may not get a return, so we'll hold the money into the margin area. And so that probably will be the pattern for the year. We do have -- one of the reasons the margin was down in retail last year is we did have to spend more marketing dollars as we talked about in the up spend and that will continue this year and we should see that. And -- so -- and we had the acquisitions in the first half of last year, which caused some disruption and challenges as well. So, we -- we're not trying to chase sales with no return as you could see from our past five or six year's history, but the higher you get in the stratosphere, you need to make those judgments because we think growth is equally as important as is manning our margin today.

All right. Thank you so much.

Thank you, Anthony.

Our next question is from the line of Brad Thomas with KeyBanc Capital Markets. Please go ahead with your question.

Good morning Kurt, Mike, and Kathy. A couple of questions if I may. First of all, I just want to follow-up on the new Duo line. And Kurt, I was hoping for anymore color that you could provide in terms of how orders are shaping up and how much that could add to floor space that you have with retailers and potentially sales this year.

Brad, that's a great question and it's really too early for us to make any predictions and even talk about it. We're not going to be shipping the bulk of that product until September. And our customers are getting used to ordering things and getting them in three and four weeks. So, there hasn't been a need to overextend their buying patterns to place a lot of orders on Duo. We will get it out there. We should see the orders come in. We'll probably have more color on this in -- at our -- on our August call. We have high expectations. We -- obviously, it'll be in all of our La-Z-Boy stores and all of our Comfort Studios, which is about 70% of our distribution. So, it will get a fair representation to the consumer. We're not worried about that. And then we'll have to see. We have a lot of enthusiasm around it. We think our team executed a beautiful piece of furniture that has hidden function. And if the reaction at market is any indication, we feel pretty good. But the market is not the end consumer and we'll have to see how she votes. And we'll -- after we get through the fall selling season and have the product out there and enough places to make a difference, we'll have a better read.

Great. And then to follow-up on a topic of advertising. It sounded like you would do an incremental advertising push around the timing of that launch or shortly after the Duo launch. I guess, can you talk about -- would you -- are you going to be doing any incremental? And if so, what might the timing of that be?

No, I didn't use the word incremental. We are going to use our national advertising platform to expose this product, which most manufacturers can't do. We have cut commercials with Brooke Shields. We showed those commercials at the market and they will air with the strength of our national advertising program behind it. But it won't necessarily be at a higher incremental spend than we've had, but it will be a significant spend because it will probably be a majority of our fall launch.

Got you. And so when I look at advertising expense as a percentage of sales in the last few years, it's been moving up. Is that something that might be able to move more consistently as a percentage of sales going forward? Is that what you're implying here, Kurt?

I doubt it will move more consistent or actually go backwards because in that total number we share is our retail business. And as we add more stores and to have more markets wherein as a percentage, the advertising will go up. But remember, we get the benefit of the higher gross margin at retail as well. So, I'm kind of grown to accept that both our marketing and our IT budgets are not going to be going the other way for some time.

Got you. Well, that's a good segue to my last question. Kurt, could you just give us an update in terms of how you feel about your e-commerce platform and what the next investment you think you may need to make into that platform could be?

So, we feel good about the progress we're making. We're investing a lot in our digital presence. We're doing all 3D renderings on our products. We're getting the entire line of what we sell in our stores, including case goods and accessories eventually online. We understand the importance of it. Our traffic, our time on the sites, all that is improving. We are selling product through la-z-boy.com. We are a provider of all our divisions on Wayfair. And I can assure you, we're not going to ignore this space and not be a participant in those areas where we think we offer something of value and it doesn't cannibalize the things we're doing with our regular dealers.

Very helpful. Thanks so much.

Thank you, Brad.

Our next question is from the line of Dillard Watt with Stifel. Please proceed with your questions.

Thanks. Good morning. Wanted to talk a little bit more on advertising and specifically, I know in the last quarter, there's a fair bit of discussion about some of the heavy outfits that you were doing in it. It sounded like it was -- I think you said work in pockets, but it wasn't maybe something you were going to do a little bit on a broader scale. It -- but maybe it sounded like there's a little bit of a change based on the comments on today's call. So, any change there of what you're seeing of the effectiveness of that heavy up spending and you're willing to do it?

Yes, it's a great question, Dillard and I'll just take you back a year ago when we started it. It takes a while to build momentum and the cumulative reach and frequency has to build over time. So, this is a hypothetical. But really, in the first quarter, when we spent the money, we didn't see any immediate sales. And the next quarter, we saw a little more, the third quarter continued. And I think it manifest itself in the fourth quarter to say, hey, this has paid off over a longer time frame and so we are going to continue, but that's not to say it worked the same in every market. Some markets we had more success than others; in some markets, we did have the success we want. So, that's not a function perhaps of anything we did wrong, a function of what's going on in that market, what are the competitors doing, did they up their spend as well. So, we're testing, we're learning, we're adjusting. But I would suspect to see us stay at a slightly higher-than-average rate of marketing dollars in our retail business to make sure we're competitive in getting our message out there.

Great. And are you doing that -- and are you increasing the number of markets where you're doing that or you're sort of penetrated and it's just a matter of time to get to spend, as you say compounding on itself in a successful way?

I think there's a little more spend everywhere, Dillard. But we're still concentrating on the 12 or 15 markets where we thought we need the additional help. And some of the other markets don't have the same competitive subset and we determined that the spend there is not as necessary. So, it is a market-by-market decision and that changes based on the competitive subset and we'll react accordingly.

Okay, that's helpful. You talked a little bit about investing and balancing between retail sales growth and margin and, of course, advertising as part of that investments. But on the promotional side, we know it's been a promotional business for some time and doubt that's going to change. But anything sort of incrementally different you're seeing from a competitive or promotional front, either, as I say, from competitive standpoint or decisions your making?

No, I think you said it well. This has always been a promotional business and when you offer 50 off and free delivery and all those things, there's not a lot of room to go a whole lot farther. So, we say -- well, actually, where the -- with all the promotional activity and where we've positioned our stores and our brand, we are gratified to see the increased business in our premium products, be it power, be it leather, be it design services. So, there is a customer out there that's looking for a different value proposition. And just to be clear, Dillard, I made the comment about the trade-off between margin and sales, not specifically only to retail, but our overall business. We anticipate having more growth next year than we had this year and we're willing to invest in that. And if that comes at a little cost of less than increased margin as long as we get the growth, it'll work out positively for our EPS. But we're making those decisions on how to spend every dollar to get the maximum benefit.

Okay. Great. And then just a bit of a housekeeping question here. I think the U.K. business that you added in the third quarter was about 50 basis points of sales growth. I think it's in the Upholstery segment, specifically 50 basis points of sales growth. Is that about what you did in the fourth quarter? And is that roughly what it ought to be in the first and second before it laps here in the third?

So, the first time we ever had any benefit from the U.K. operation was the last month of the third quarter. So, the first time we recorded anything was January. And the run rate that you saw in the fourth quarter, on average -- again, based on the calendar, on average, that would be consistent with what we expect to see for the balance of the year. So, we won't overlap the contributions that the U.K. make till January 2018. And so we've got the whole year of that being beneficial to us in calendar year 2017.

Okay. So then should I think about it more of a triple that on a full quarterly basis? And do you have maybe the number for the fourth quarter handy? Or if not, we can take that and follow up later, that's fine.

Yes, I think we gave the annual business of that when we purchased it and I think you can think of it in the $7 million to $8 million range per quarter.

Okay. Awesome. Thank you very much.

Thank you, Dillard.

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for joining us today and for your participation, and have a wonderful day.

Thank you. Have a good day everyone.