La-Z-Boy Incorporated (LZB) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to La-Z-Boy Fiscal 2018 First Quarter Results Conference 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 your host Kathy Liebmann, Director of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Rob. Good morning and thank you for joining us to discuss our fiscal 2018 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 this morning'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 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 the fiscal 2018 first quarter. While our results came in lower than anticipated and we were disappointed after having turned in such a strong finish to fiscal 2017, we do not believe there is a systemic issue with the business. Rather, the performance for the period was primarily reflected of lower volume going through our plants and the challenge of absorbing fixed costs. Although, we posted a consolidated sales increase for the period, much of it was a result of acquisitions and therefore that additional volume did not go through our manufacturing plants. We also had an increase in SG&A as a percent of sales during that period, which we intend to better manage moving forward given shifts in volume. Finally, going forward, a normal quarter without the seasonality factor and with 13 weeks of production as opposed to quarter one’s 12 weeks, our average quarterly sales should be $30 million to $40 million higher than this current quarter and our ratios on SG&A and absorption should correlate with our normal patterns. Let me assure you, our manufacturing operations are lean and efficient. Our productivity has been in an all-time high and we have demonstrated consistently that when we have adequate volume, we perform at a high level. And as we move through August, volumes have returned to our planned levels and I'm confident that as a year unfolds, the efficiencies of our supply chain will be evident in our results. Before I talk about the three business segments for the quarter, I will take a few minutes to talk about what we are doing to expand our business in the future. The work we are doing on the e-commerce front is the most notable and the opportunities before us are exciting, particularly as we will have a dual strategy to reach two distinct groups of consumers. Our 4-4-5 store build-out program, one of our key growth strategies over the past four years has been essential as we expand the La-Z-Boy Furniture Galleries store network across North America to fully penetrate the distribution landscape associated with our core consumer demographic. To-date, we have made significant progress with 4-4-5. In addition to opening new stores, we have reached the second four in our moniker of $4 million in average revenue per store in the third-year of our strategy. Additionally, with many remodeled and relocation projects undertaken throughout the past four years, we have improved the overall quality of the store network with a 116 stores in the new concept design format. Moving forward, we will continue to open stores in key locations. As we have discussed in the past, the La-Z-Boy Furniture Galleries stores showcase our full line of furniture, display full room groups complete with accessories, highlight customization opportunities with our broad array of fabrics and leathers, and provide the consumer with the access to our complimentary design services. When consumers shop in our stores, we have the opportunity to sell multiple pieces and/or a complete room group and increase the average ticket. In turn, the consumer leaves as the more satisfied customer with a beautifully designed room. That said, with the online furniture sales growing rapidly, particularly among millennials and the Gen X crowd, over the past year La-Z-Boy has developed a multi-faceted strategy to participate in and leverage the trend to drive our growth. In evaluating the online landscape, the demographic of the consumer who purchase most frequently online and La-Z-Boy’s strengths and competitive advantages, we have created a framework to pursue three e-commerce opportunities. The first is to increase online sales of La-Z-Boy Furniture through la-z-boy.com and other digital companies. The second is to leverage the strength of our world-class global supply chain to support other e-commerce brands, and the third is to invest in new online companies. I’ll take a few moments to more fully discuss each of those strategies. First, the La-Z-Boy brand opportunity. La-Z-Boy is the most powerful brand in the industry and while research tells us that the majority of our core customers continue to shop in the stores, most are spending a lot of time online, researching products beforehand. So we believe we need to have a best-in-class digital presence to make it easy for consumers, particularly new consumers to discover and experience our brand. To that end, we have been making investments in our website and e-commerce platform to optimize sales through la-z-boy.com. Additionally, there are opportunities to increase revenue with the La-Z-Boy brand with other online players with significant traffic and who provide a great experience for our potential customers such as Wayfair. We are also exploring potential opportunities with Amazon marketplace that would complement and support our existing distribution. With the investments we are making in la-z-boy.com, we are experiencing an increased traffic to the site as well as more engagement. Additionally, we have enhanced our product displays on Wayfair in terms of description, photos, and videos, and we have seen an uptick in sales. In short, our objective is to make the brand come alive online and ensure it is omnipresent, no matter which path the consumer takes, where they click and buy on our site, on that of a distribution partner, or purchase in-store. Second, we believe we have a world-class global supply chain, which is perfectly suited to be a supplier for e-commerce brands and businesses. Our North American manufacturing footprint provides a combination of efficiency, flexibility, speed-to-market, and rapid customization that is highly coveted and valued in the e-com space and we have secured supply agreements with third-party e-commerce brands and are in discussion with others. This would increase revenues and margin dollars for La-Z-Boy Incorporated. And third, investing in new online players. While the La-Z-Boy brand is extremely powerful, it has a core demographic and we recognize the brand has not effectively reached all consumers, particularly millennials and Gen X consumers who are looking for non-traditional brands and experiences. To broaden our reach among these demographics, we are exploring opportunities to connect with this younger customer and to generate sales, which would be additive to the existing La-Z-Boy business. Our initial approach has included investments in early stage companies with strong brands and business models, one of which contributed to our earnings this quarter. Due to competitive reasons and that these are smaller private companies, we are not disclosing additional details on these investments at this time. We do believe these investments are an effective use of our capital and when coupled with our supply chain strengths and advantages, the combination will make these brands successful and provide a strong return for our shareholders. These three opportunities are coming together to form an exciting and comprehensive e-commerce strategy for La-Z-Boy that will position the Company for its next wave of growth in what is a dynamic environment. While it still is premature to discuss the impact of sales that income these initiatives will create, I look forward to providing more periodic updates with – more definitive information on how things are progressing with these initiatives. Now I'll turn to a brief discussion on our three business segments. First, our Upholstery business. For the quarter, sales in the Upholstery segment increased 2.6% to $274 million and the segments operating margin declined to 8.5% from a 11.4% in last year's first quarter, which included a 0.9% benefit from a legal settlement. The sales increase for the quarter was primarily the result of the Wholesale business we required in the UK and Ireland early this calendar year and that product is not manufactured in our U.S. plants. As mentioned earlier, due to less volume following through our manufacturing facilities, it was difficult to absorb our fixed cost, which also now include as a component of SG&A, depreciation on various technology investments for our ERP system and other costs associated with our e-com platform. On the products side, we started to manufacture the new Duo collection that we introduced at the April High Point Furniture Market and have started our initial shipments. We expect full penetration on retail floors in the fall with the collections supported by a comprehensive marketing campaign. Duo is a revolutionary new product line that perfectly combines the stylish and the sophisticated look of stationary furniture with the comfort and ease of furniture that reclines at the push of a button. We believe this Group has a great potential based on the feedback we’ve received from our dealers and as a testament to the innovative spirit that remains at the core of La-Z-Boy and the excellent work coming from our R&D team. And for the quarter and into August, we continue to see a shift towards higher ticket and higher margin items including leather and our power products. As I mentioned earlier, we continue to build out the La-Z-Boy Furniture Galleries store network along with our independent dealers. For fiscal 2018, we are planning for approximately 27 projects including eight net new stores and we expect to end the year with about 138 stores in the new design format and over 355 stores in total. During the first quarter, across the network, three stores were opened, two stores were closed and one was remodeled. While we continue to face some challenges from our real estate perspective in certain markets, we believe we will ultimately reach our goal of delivering 1.6 billion retail enterprise through our store system particularly as we improve the average store performance. And finally, for the first quarter of fiscal 2018, written same-store sales for the La-Z-Boy Furniture Galleries network increased 0.7%. Now let's turn to Casegoods. Sales in the Casegoods segment for fiscal 2018 first quarter were $25.5 million, an increase of almost 2% from last year's first quarter and the operating margin for the segment increased to 10.7% from 8.6% in the comparable period of fiscal 2017. We are experiencing better traction with our product portfolio, which now features more transitional collections. And with an excellent global supply chain in place, we are servicing customers better than improved in stock position. The Kincaid Plank Road collection introduced at the April Furniture Market and perhaps the most exciting Group in Kincaid in years is on the water and is expected to reach retail floors by October. We are also having a lot of success with the Kincaid casual dining program, which is being sold through the La-Z-Boy Furniture Galleries store system as well as through other furniture dealers. And American Drew introduced some very relevant groups at the market as well. All-in-all with a pure import model in place and a solid product line up, the Casegoods business is positioned well going forward. Moving on to our retail business, sales for the fiscal 2018 first quarter increased 15.5% to $110.5 million with the majority of the sales increase coming from acquired stores. On the core base of 122 stores included in last year's first quarter delivered sales declined 1.1% versus the prior year mainly due to a decrease in traffic which was somewhat offset by an increase in the average ticket as when consumers shop in our stores we have the ability to sell more custom, furniture and provide more design services. For the period, the segments operating margin decreased to 1.6% from 2.3% in last year's comparable quarter, primarily due to an increase in the SG&A expense as a percent of sales stemming from lower delivered sales for our core stores and the inability to leverage fixed costs. During the quarter, the Company opened two new La-Z-Boy Furniture Galleries stores, one in Natick, Massachusetts, and one in Merrillville, Indiana bringing that company-owned store count to 145 of the 348 stores in the network. I will now turn over the call to Mike to review the numbers for the quarter in a little more detail. Michael?

Thank you, Kurt. Consolidated sales for the fiscal 2018 first quarter were $357 million, up 4.8% from $341 million in last year's first quarter. Consolidated operating income for the quarter was $16.3 million versus $22.5 million in the fiscal 2017 first quarter. And the consolidated operating margin was 4.6% in the current period versus 6.6% in last year's quarter. The Company reported net income attributable to La-Z-Boy Incorporated of $11.7 million or $0.24 per diluted share versus $13.8 million or $0.28 per diluted share in the prior year period. Fiscal 2018 quarter's results included a $0.03 per share benefit in other income for an investment gain and last year’s first quarter included a $0.03 per share benefit from a legal settlement. As Kurt mentioned earlier, as part of our e-commerce strategy, we are making investments in early stage companies with strong brands and business models. At the end of the first quarter, these investments included cost basis preferred shares of two privately held companies. One of these investments already provide a return, and we recorded a $0.03 per share benefit this quarter. At 2017 fiscal year-end, we held a convertible debt security for one of these companies. And when the Company completed a second round of funding during our first quarter, this debt converted to preferred shares at a higher valuation and we realized a gain in other income. Our consolidated gross margin decreased 0.4 percentage points in the first quarter compared with fiscal 2017 first quarter. This was primarily the result of the decline in margin in our Upholstery segment stemming from supply chain inefficiencies due to lower volume going through our La-Z-Boy plants compared with last year's first quarter. Additionally, last year's quarter had a 0.7 percentage point benefit from a legal settlement which Kurt mentioned earlier when speaking about our Upholstery segment. Partially offsetting these factors was an improvement in the Casegoods segment gross margin as well as a 0.9 percentage point improvement due to the change in our consolidated sales mix as our Retail segment is increasing in size and it carries a higher gross margin compared to the Wholesale segments. SG&A as a percent of sales increased 1.6 percentage points in the first quarter of fiscal 2018 compared with the same period of fiscal 2017. As noted a moment ago, as our retail business becomes a larger component of consolidated sales, in this quarter, the acquired stores constitute a large portion of this growth. 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 quarter, this accounted for a 1.2 percentage point increase in our SG&A expense. Additionally, the increase of SG&A expense as a percent of sales during the quarter was the result of the fixed nature of many of our Retail segments cost in relationship to the decline in sales of stores opened a minimum of 12 months. Advertising expense as a percent of sales was 0.6 percentage points higher for the quarter compared with last year's first quarter as we increased our marketing spend to support our retail stores and enhance our share of voice in selected markets. Offsetting increases in SG&A were incentive compensation cost as a percent of sales that were 0.4 percentage points lower in the first quarter of fiscal 2018 versus the comparable period a year-ago. Incentive compensation costs were lower primarily due to a decline in our consolidated financial performance against our incentive based targets, during the first quarter of fiscal 2018, compared with the first quarter of fiscal 2017. Turning to the balance sheet. During the quarter, we generated $19.5 million in cash from operating activities. We ended the quarter with $120 million in cash and cash equivalents, $33 million in investments to enhance returns on our cash, and $6 million in restricted cash. We also spent $9.1 million in capital expenditures is $15.9 million to pay for the UK acquisition that closed back in January. Paid $5.3 million in dividends and spent $11.5 million purchasing, 0.4 million shares of stock in the open market under our existing share purchase program. This leaves us with 8.3 million shares available for purchase in the program. Based on cash needs 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. Our effective tax rate for continuing operations was 35.6% for the quarter, compared with 35.7% from last year’s first quarter. Our effective tax rate varies from the 35% statutory rate, primarily due to the state taxes, plus the benefit of the U.S. manufacturing deduction and foreign earnings in jurisdictions were lower tax rate than the U.S. I'll now turn the call back to Kurt for his concluding remarks.

Thank you, Mike. As I mentioned earlier, we are working on a number of initiatives to expand our business through a dual strategy to reach both our core customer as well as the new and younger consumer through a multi-faceted e-commerce strategy that will pave the way for the next tier of growth and I look forward to updating you on the progress we are making. At the same time, we are also looking forward to moving into what is a typically stronger selling fall period, which will be able to leverage the efficiencies of our supply chain in terms of procurement and manufacturing efficiencies. I thank you for your interest in La-Z-Boy and being on our call today. And I will turn things over to Kathy for the Q&A. Kathy?

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

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

Good morning, Kurt. Good morning, Kathy. Good morning, Mike. Thank you for taking my questions. Just to make sure I understand in Note 14, and Mike your conversation on the investment gain, that's related to the new strategy. Is that correct? Just to be sure that I…?

Yes.

Okay. So it's part of the multi-faceted strategy that you talked about in the MD&A as well.

Correct.

When do you think you're going to give us some update on that strategy and maybe put some more meat on the bones of what's happening and what we can expect?

I think that depends, Budd on how fast things accelerate. We've been working on a lot of these things for the past year and are just getting to a point where there's some business opportunities that we feel good about and substantial enough to talk about it today. And also we are in discussions with Amazon, about Amazon marketplace, but don't have a final proposal that we're ready to go forward with yet. So it could be a little bit a while before we put some numbers out there. We don't want to put out a number that we can substantiate or support, so as the business progresses and we have something substantial to talk about, we will certainly update our investors on those numbers.

Okay. And just talking about retail, the Company-owned retail, we've been now – I think if my math is right five quarters, consecutive quarters, but we haven't been able to post comparable delivered sales – positive delivered sales. What's going on there? When do you think we will start to see that turn? What kind of initiatives that we’ve got kind of – get that positive end?

Well, I think to start-off, Budd, I think for the last six months, if you take out the difference between the 13-week fourth quarter of this year and the 14-week quarter a year-ago, our average delivered sales has been down less than 1% for the last six months. And while we are not thrilled with that, I think in environment that we're in and in comparison to a lot of our peers, that is not a terrible performance. We've done a lot on our design programs. We're doing a lot more on spending more time with each customer that comes in to the stores. We are doing a lot to enhance the website to get more traffic into the stores. So there is a lot going on. Our decline a year-ago at this time was in the mid-single digits and so we've brought it down from there, it's almost even sales, and we are working hard for the balance of year to get on the plus side of the ledger.

Is there anything of that – do you think there is any advertising issue there? You spent a little bit more on advertising this quarter, is there anything on that that’s concerning you?

Well, we believe some of the improvement we've made from a year – year and a half ago with our same-store sales is the result of our up spend in certain markets. So we think that's been positive. The overall business isn't up as much as we'd like to keep the SG&A or keep the marketing expense at a steady level, but we are seeing positive results in certain markets from our up spend work we’ve done.

Can you enlighten this along with what those, what those improvements are in some of the markets, you don’t have to identify the markets or how much, but what kind of positive results have you had in the high spend markets?

Well, I think Budd in any organization that has 150 stores you're going to have a wide range of performances from certain markets being up close to double-digits and other markets down single-digits. So we run that range as a system, but I don't really want to talk about particular markets or throw out numbers that aren’t meaningful in the contacts of the entire system.

Okay. And for me just Upholstery at 8.5% operating margin is certainly nothing to be ashamed off, but 11.4% on your weakest quarter last year was extraordinary performance. What concerned me there in some of the reading of the MD&A was the idea that you had higher depreciation for the ERP and it just begs the question or it prompted the question is there now even more volatility in the system because of the ERP and the higher fixed costs that requires even a higher ratio of volume for the first quarter? Is that something we look forward?

Good question. Just a point of clarification in last year's Upholstery margin that – well I think you mentioned 11.4%, there was almost a point there that was the legal settlement.

Okay. Correct.

The comparison is about 200 basis points, which is – I'm glad you pointed out 8.5% is nothing to be embarrassed about in the Upholstery business. But Budd, we've been making a lot of investments and we're making an investment right now in our new innovation center and those investments come eventually with more depreciation. So the entire enterprise has to grow in order to us to absorb that. So there is a little bit of – nothing that we're concerned about and not saying that 8.5% is going to be our normal margin in Upholstery for the year. But yes, there is as you're trying to improve things and investing that comes with a cost that is not one-time that it is spread over future years.

Okay. And just lastly for me, the cost of pricing equation, what's happened in costs now? What are you seeing? And you did raise prices, I think in the spring, so where are we now?

So where we sit right now is we saw some increase coming in most all of our major commodities in the springtime. Didn’t know how much they would really be as the year unfolded. So we took a price increase at the April market that went into effect starting – on August 1. And it's been our practice as raw material costs go up that we adjust our prices accordingly with margin in it to offset that. And we believe from what we know today about our cost increase, we have adequately covered that. If raw materials would continue to go up perhaps after the first of the year, we may not have taken enough and we would look at that, but right now we think we're in reasonable shape.

Okay. Thank you very much. Good luck on the balance of the year.

Thank you, Budd.

Our next question comes from the line of Brad Thomas with KeyBanc. Please proceed with your questions.

Thank you. Good morning, Kurt, Mike and Kathy. Just a follow-up on some of Budd’s questions. Kurt, I was hoping you could talk maybe a little more about the cadence through the quarter and how August is playing out thus far and give us little more color on how the La-Z-Boy stores are doing versus some of the dealers that you are selling to?

Well, first to comment on overall business, Brad. There was no noticeable pattern or geographic softness throughout our North American business, but it just a general lack of activity at the beginning of the summer. And we don't know whether this was inventory related or just cautious ordering on behalf of our dealers because we don't get the kind of information on 60% of our customers that we get on the Furniture Gallery business. But the end result was the slight decrease in the wholesale volume and it wasn't geographically centered, it wasn't a certain month, it was just for the first 60 days, 75 days of the quarter we weren’t – where we wanted to be. But as I say, the encouraging news is that we have loaded our Upholstery plants for the month of August at our planned levels, and we are experiencing an improvement to our order rates as we've gone through the month of August. So can't really explain the hiccup, but we're glad to see we're back at a level that we're more comfortable with.

Got it. And when we look at the revenue growth in the Upholstered segment, I think 2.6%, what’s the organic number for revenue growth for the segment?

The organic number was essentially flat and the gain and our growth was primarily the UK, which I think we've got pegged at around $6 million a quarter for that business. And so with more stores and certainly we expect it more out of the organic side that we didn't get. But it's not like it was off 10% or 15%. It was around – the combination of La-Z-Boy in England was nearly flat.

Gotcha, and just one more comment on sales. Kurt, I believe you said that the current quarter if we were to extrapolate it out would imply about $30 million to $40 million more in revenue per quarter going forward? Did I hear you right there and any other nuance that we should take into consideration as we think about revenues going forward?

No, that has been consistent with our history. If you look back in the last five or six years, we end our year in April and typically the fourth quarter is always our largest year – our largest quarter and then we go into the first quarter that is typically our lowest sales quarter. We have the seasonality factor and we have the fact that we only manufacture for 12 weeks of the quarter instead of 13, because we have a plant shutdown for vacations and maintenance work. And so you just apply another week to our business of deliveries and the seasonality factors eliminated, so the $30 million of $40 million and you could go back historically and see that and that's what we're projecting for the balance of the year that that is the run rate of the business, if we follow the traditional norms that we've had in the past.

Gotcha. And I'm just getting some questions about this myself from the comments, I just to follow it through – I mean that would imply the fourth quarter could be down 3% or 4% in terms of revenues year-over-year, if this run rate continues. Am I doing the math right there, Kurt?

No, I’ve given you an average range and again in the fourth quarter because we deliver out all the holiday goods in February and all, you will still have the proportional quarterly differentials that we have with the first quarter being 21% or 20% of our business in the fourth quarter. It's not a straight 25% of our business every quarter. So we are not making a prediction or a forecast on the fourth quarter, but I'm just making the really the statement that if it was a typical quarter and we had $30 million or $40 million more volume, some of the problems that raise their head during this quarter would have been covered by the extra volume and the extra absorption.

Gotcha. Gotcha. Well, I've not asked a lot of questions; maybe just ask one more sort of high level around margins. Kurt, the Company’s done a really good job over the last couple of years, driving margin expansion, even in a number of quarters, where sales were down or written same-store sales were down, this quarter is obviously not your best for a margin perspective. As we look forward, can you help us think about the margin outlook for the Company and maybe what volume level of organic growth is necessary to sustain or expand margins? How should we think about margins going forward?

So I would give you a couple of comments on that Brad. First of all, we believe that 8.5% plus operating margin for our Company is in the first quartile in the Furniture business and taking it from the 3% up here has been a nice trajectory. Incremental improvement above that, it's more and more difficult. But we're not saying we can't do it. The other thing that we're challenging ourselves on is there a tradeoff between margin improvements in growth. And so we want to grow faster than we've been and if we have to invest a little more to do that, but it doesn't have our margin go up, to the degree it's been going up the last few years. We may accept that. We have no intentions of our margin going backwards, but maybe a little more investment in certain things would help our growth trajectory and in the long-term give us more margin dollars over the next few years. So we're always balancing that choice. And I think you'll see as the bounce back to better margins in the balance of the year. But the farther you go up the ladder on this margin issue, if you want to stay competitive and offer a good value, it gets a little more difficult and but I think our team is up to that challenge and our plans are to continue to pursue the things that put us in this position, in the first place.

Very helpful. Thank you so much, Kurt.

Thank you, Brad.

[Operator Instructions] Today’s question is coming from the line of Anthony Lebiedzinski with Sidoti. Please proceed with your questions.

Good morning, everyone and thank you for taking the questions. So Kurt, I just wanted the first follow-up on your earlier comment that you've seen improved order rates so far in August. Did you mean to say that this was a sequential improvement from the normal seasonal slowdown or in fact is there a year-over-year increase that you've seen in the order rates?

I didn't mean to imply either one of those thing. I meant to imply that it's back to a normal pace, which is an uptick over what we saw in the first quarter and since we don't give forward guidance, if I'm not going to comment it on whether it's up or down to last year, but it's – the sequential uptick is much higher and obviously would have to be for us to get the $30 million and $40 million uptick in the quarter that compared to the first one.

Okay. Thanks for that clarification. And as you look to pursue more sales through the online channels, how does that specifically affect your margin profile and also just to follow-up on that as far as returns, I would imagine would likely be higher, there would be restocking fees that you might look to charge the third-party retailers that you sell into, can you talk about that please?

Well, I don't know that I'm going to talk specifically to your questions Anthony, but I – if you don't get into the game and understand how things work, it's hard to sit on the outside and say well what about this and what about that. So we're in those discussions and having those dialogues about how we approach this. But there's no denying that the online channel is going to take a bigger part of the furniture space moving forward. And for us, the real gain here if it would work this way, which we don't have a bias yet whether or not, but our initial experience has been the customer that is buying furniture online has a slightly younger profile than the core customer that's walking into the La-Z-Boy stores. So if we gather a new customer that we're not attracting with the stores and there's no cannibalistic effect and it adds volume to us, which we would think we could get at our normal margins, we think it would be a win. But we need to have more experience and more evidence before we make that statement that that is the way it's going to be. And so we're trying to cast a wide net on this Internet strategy to figure out where the best play is both for the La-Z-Boy brand, but more importantly for our broader company and our portfolio companies to play in that don't have the same brand pressure with distribution that La-Z-Boy does.

Got it, okay. And then you also talked about the lower store traffic, I would imagine that more people are doing their research online before coming into the stores. Once those people are in the stores, I know you talked about higher average ticket, does that also imply that you're seeing higher conversion rates as well?

That is correct. Most of those statistics have been going up in the last few years as our traffic has been going down slightly. So the customer we believe does more research online. I think that normal industry thinking is customers used to shop three or four perhaps five stores before making a decision. And now with all the research online, she may only be shopping one or two, so she's more predisposed to buy and comes in with ideas of what she wants and questions of how certain things work. And so the opportunity to upsell either through our customization or In-Home Design and to close at a higher rate is what it's going to take because I don't think a reversal in traffic is going to happen here in the short-term. So you have to make more out of each customer that walks in the door.

Okay. That makes sense. And lastly as far as ad spending, so you increased that and going forward do you plan to change significantly the media mix or is it kind of more of the same as far as how you're looking to spend your advertising dollars?

No I don't think we've been evolving the change. We're spending more digitally and we're spending more on social media and I think and less on print. So I think that trend will evolve, but it won't be a dramatic shift. And just for clarification when we give our total advertising number that's both retail and wholesale. So with our Tier 2 program and with our Live Life Comfortably campaign with Brooke, we're supporting that from the wholesale side and we've added more markets with our acquisitions. So we have more advertising just to support the six new markets that we’re in based on our acquisitions. So both of those things are playing and we won't see – I don't think a dramatic change in our overall advertising percentage. It could go up some over the year, but hopefully we'll get the commensurate volume to keep that at a reasonable level.

Got it, all right. Thank so much and good luck.

Thank you. End of Q&A

Thank you. At this time, I will turn the floor back to management for further remarks.

Thanks very much for participating on our call today. If you have further questions, you can give me a call. Have a great day. Bye-bye.

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