Kathy Liebmann - Director of Investor Relations and Corporate Communications Kurt L. Darrow - Chairman, Chief Executive officer and President Louis M.

Riccio - Chief Financial officer and Senior Vice President

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division Budd Bugatch - Raymond James & Associates, Inc., Research Division Unknown Analyst Todd A.

Schwartzman - Sidoti & Company, LLC Jack C. Stimac - BB&T Capital Markets, Research Division John A.

Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Thank you, Jackie. Good morning, and thank you for joining us to discuss our fiscal 2012 second quarter results.

Present on the call 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.

These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles to communicate with investors about the company's current operations and future prospects. We will make forward-looking statements during this call, so I will repeat our usual Safe Harbor remark.

While these statements reflect the best judgment of management at the present time, they are subject to numerous future risks and uncertainties, as detailed in our regular SEC filings. And they may differ materially from our actual results due to a wide range of factors.

We undertake no obligation to update any forward-looking statements made during this call. And with that, let me turn over the call to Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer.

Kurt?

Thank you, Kathy. Good morning, everyone.

Yesterday afternoon, we reported our second quarter results for fiscal 2012 which included a 5% increase in sales, a 9.2% same-store sales growth for the La-Z-Boy Furniture Galleries store system, an increase in our gross margin, positive cash generation, and more than doubling of our operating income to $12 million. All in all, a very strong quarter, with our team executing well against our targeted objectives of growth, retail profitability and conversion.

Before discussing the quarter, I would like to take a moment to put some context around the operating environment and La-Z-Boy's positioning within it, particularly for those of you who may be new to the story. It's been a difficult few years for the furniture industry on the heels of what was a challenging start to the decade with so many changes occurring throughout the business.

Today, macroeconomic challenges persist, with low consumer confidence, a weak housing sector and volatility in the financial markets. Against that backdrop, over the past several years, we undertook a number of strategic initiatives to ensure we operate profitably in this lower-volume environment.

To name a few of the major changes we made: We sold 6 companies that were not core to our business, we paid down our debt, strengthened our cash position, transformed our La-Z-Boy manufacturing facilities to operate with a cellular platform, moved our La-Z-Boy cutting and sewing operations to a new lower-cost facility in Mexico, consolidated warehouse across the company and restructured our retail operation, establishing a path of continuing performance improvement as we work towards making the segment profitable. Today, we are an efficient producer, positioned to convert well an additional volume as we demonstrated this quarter.

Also, during this period, we believe we have gained share in the marketplace based on our same-store sales numbers. Additionally, with the strength of our brand, ability to deliver custom furniture quickly, quality and style of our product and the service the consumer receives from us, we further believe La-Z-Boy is well-positioned to capitalize on the eventual strengthening of the economy.

The balance sheet is strong, providing flexibility to invest in the business and we are focused on the 3 key objectives I mentioned a moment ago: Sales growth, retail profitability and conversion on that growth. The ability to leverage today's cost structure, we believe we can make an additional 20% to 30% on the additional volume, depending on which business segment generates the increased sales.

Finally, we are focused on branded or proprietary distribution. And we believe it offers the greatest opportunity for us to profitably grow our business, giving the changing distribution landscape; and I will touch on that in more detail when I discuss our retail segment.

Now let's turn to our wholesale operations. For the quarter, sales for the upholstery segment increased 7.3% to $241 million versus last year's second quarter, and the operating margin increased to 8.7% versus 7.6%.

On the operating side, in addition to the lean structure at our U.S. facilities, our Mexican-based Cut-and-Sew operation is on track to deliver the incremental $8 million to $10 million of savings over last year's level.

As referenced a moment ago, this efficient structure allowed us to realize a healthy conversion on the additional volume we experienced during the quarter. On the marketing side, we continue to be pleased with the success of the "Live Life Comfortably" campaign, featuring Brooke Shields for the La-Z-Boy branded business.

We believe it is driving a more qualified consumer to our stores and dealer base, and it has been an important factor in our near double-digit sales -- same-store sales growth we achieved throughout the network of stores this quarter. And importantly, for the calendar year, same-store sales are up 9.3%.

We have continued to build our library of commercials, and over the summer, we produced 5 new commercials. Three have already been aired and the remaining 2 will be phased in over the next several months as we continue to build momentum with this platform.

The creative [ph] behind this campaign has been great, and Brooke has proven to be an excellent brand ambassador for us. Our advertising spend for the second quarter was some $2 million more than in last year's second quarter, as we launched the campaign in November.

Moving forward, our advertising spend will be more consistent with the prior 12-month period, as we have anniversary-ed the first year of this campaign. On an annual basis, we continue to believe, with adequate volume, our upholstery segment's operating margin can approach the double-digit level.

In our casegoods segment, sales for the quarter declined 9% to $36 million compared with last year's second quarter. However, on lower volume, we made more money in this segment, posting a 5.5% operating margin, reflective of our variable cost structure, cost-containment measures instituted throughout the business, and the price increase that was implemented last quarter to offset rising material cost.

Without question, the casegoods business continues to be more challenged in this environment, given the higher price nature of the product line. However, our team remains committed to providing our dealer base with excellent service and merchandising assistance, and we believe as a result, we are well-positioned to begin growing again in the category as the market strengthens.

Now let me turn to our retail segment. For the quarter, delivered sales for the retail segment increased 34% to $53 million over the prior year period, and delivered sales for the core 68 stores that were included in last year's second quarter increased 6%.

Additional sales increase mainly reflected the acquisition of the 15 Southern California stores this past February. The results for the period also marked the 11th consecutive quarter of operating performance improvement compared with the prior year, as we decreased our loss from $4.4 million in last year's comparable quarter to $2.7 million in this year's quarter.

During the period, our conversion rate continued to improve and our average ticket increased as well. Again, we believe this is reflective of a more qualified consumer entering the store, combined with better selling processes.

Our sales associates are not only closing more sales, but are also increasing the ticket by selling more complete rooms including accessories. For the quarter, these factors, combined with improved merchandising strategies and assortments that resonate with the consumer, help fuel a 3.5% increase in our gross margins.

Although we remain -- although work remains to make our retail profit segment profitable, we are consistently moving in the right direction and I have every confidence we have the correct model to continue the progression towards profitability. Over the past several years, we have changed selling process and merchandising strategy, while significantly reducing our cost structure, and these moves have driven improved results in the segment.

At this juncture, we are still facing challenges with respect to our sales-to-occupancy ratio. As we continue to renegotiate leases where possible, our primary focus is to drive additional sales volume throughout the segment.

As I’ve pointed out in the past, once our retail segment becomes profitable, earnings power of the corporation will change dramatically as we will benefit from the blended wholesale retail margin that defines our integrated retail strategy that's focused on proprietary or branded distribution. Before turning the call over to Mike to discuss our numbers in more detail, I'd like to take a moment to talk about our store expansion plans.

Over the next 18-month period, between our dealer base and the company-owned retail segment, we plan to open 12 to 18 La-Z-Boy Furniture Galleries stores. Some of these stores being remodels or relocations, this will translate into an expected 3% to 4% net store growth over this time frame.

After several years of closing stores, we are encouraged by the expansion plans throughout the system. Demographic research reveals that La-Z-Boy Furniture Galleries store network could have another 75 to 100 stores throughout North America to profitably penetrate the various markets.

And building out the store system is a component of our strategy to focus on proprietary or branded distribution. During our conference call last quarter, we discussed the new store format being piloted in the Providence, Rhode Island market.

Although too early to quantify its success, we are seeing an improvement in our custom business, our percentage of in-home design sales and an improvement in our average ticket. Many of our larger dealers have visited the stores and are interested in opening new stores or converting existing stores into the new format.

We are in the final stages of tweaking the concept and the company plans to open 2 stores in this format over the next 6 months: One in the Chicago market and the other in the St. Louis market to continue our testing.

Finally, in fiscal 2013, the company plans to open 4 to 6 stores and our independent dealers are slated to open the balance of the planned stores over the next 18 months. Plans to open new stores and roll out the new-store concept are 2 examples of the moves we are making to invest in our business to drive incremental growth.

I will now turn the call over to Mike to review our financials.

Thank you, Kurt. For the fiscal 2012 second quarter, net sales were $308 million, up 5% compared with the prior year's second quarter.

For the quarter, net income attributable to La-Z-Boy Incorporated was $8 million or $0.15 per share compared with $4 million or $0.07 per share in the comparable quarter last year. In October, we did sign a $150 million amended-credit agreement, which extended the term of the credit facility to October 2016.

The agreement has more favorable terms which will save us money, and our improved financial condition allowed us to obtain less-restricted-debt covenants under the amended agreement. For the quarter, cash provided by operating activities was $15 million, and we ended the quarter with $118 million in cash and $113 million of availability under our amended revolving line of credit.

The total debt stands at $31 million, leaving us with a net cash position of $87 million. Also, subsequent to quarter-end, we did receive $1.4 million in anti-dumping, or CDSOA monies, which will be reflected in our next quarterly release.

Capital expenditures for the quarter were about $5 million and are expected to be in the range of $15 million to $20 million for the full year. Reflecting upgrades to our IT system, including our ERP implementation, investments in transportation equipment, normal replacements of machinery and new stores.

During the quarter, we purchased 185,000 shares of stock in the open market under our existing authorized share purchase program. It has approximately 5.2 million shares remaining.

Going forward, based on anticipated cash flow, we will continue to be opportunistic in the marketplace with respect to share repurchases. I'd like to take a moment to talk about a few things that you should consider when you do your modeling going forward.

First, our effective tax rate for this year will be in the 36% to 40% range, not including any past or future adjustments to our valuation reserves. This compares to a lower tax rate of 33% last year, and the effective rate for the third quarter was 23%.

The stabilization of our go-forward tax rate is due to the reversal of our federal valuation reserves in the first quarter. Additionally, with the Southern California stores now part of our company-owned retail segment, the losses they incurred prior to us owning them are being reversed in the noncontrolling interest line, and therefore, were not included in our net income attributable to La-Z-Boy Incorporated or our earnings per share number.

Because both of these numbers, the tax rate and the reversal of the VIE losses last year, were significant, when you look at the third and fourth quarter, you'll have to focus on the operating income line rather than the EPS line to see the true performance of the company. Before turning the call back to Kurt, I'd like to remind everyone that we will have 52 weeks in fiscal 2012 versus the 53 weeks we had in fiscal 2011.

And specifically, our fourth quarter will have only 13 weeks versus the 14 weeks we had in last year's fourth quarter. I'll now turn the call back to Kurt for his concluding remarks.

Thank you, Mike. While the macroeconomic environment remains challenging and inconsistent, we believe we are making the correct moves to position ourselves to continue to improve our performance.

While we do not believe the current environment is reminiscent of the late 2008 and early 2009 period, it is likely the industry will not see significant lift in activity until both consumer confidence and housing strengthens. In the meantime, our focus remains on driving sales through our brand platform, making our retail segment profitable and ensuring that our operating structure is lean so that we can convert on our additional volume.

Today, most of our companies operate in the mid-market level. We believe it's a competitive advantage at this time, and we will continue to invest in our business and deliver improved performance.

We want to thank all of you for being on our call today, and I will turn things back to Kathy for the Q&A session.

Thank you, Kurt. We will begin the question-and-answer period now.

Jackie, please review the instructions for getting into the queue to ask questions.

Let's talk a little bit about retail. You talked about -- I just want to make sure my numbers are right -- you talked about 3% to 4% net new stores at the end of the 12 to 18 months period.

So that's 10 to 12 new stores, is that the right way to think about that?

That's correct.

Okay. And how many of those might be dealer?

And how -- what’s the range of dealer and company-owned?

Well, we tried to clarify that a little bit on our comments, and some of the -- some of our projections are a little tenuous, and that all the leases probably aren't signed yet, but some of them are pretty close to being signed, both at the dealer level and our level. It will probably, at this point, be a little larger than our current split of the business, so I would say as a rule of thumb, maybe we would be opening 35%, 40% of the stores and our dealer opening -- our dealers opening 60%, 65%.

I think that ratio probably will hold that way for a couple of years.

Okay. And in the square footage growth, will it be consistent?

What are the sizes of the stores, the selling square footage of the new stores that will open?

Well, that all depends on the kind of box we can find and our size store is -- we're having a little bit of difficulty. You can find very small stores, less than 5,000 feet; or very big stores, over 40,000 feet, neither one of which appeals to us.

So our ideal square-footage-per-selling is in the 12,000, 13,000, 13,500 feet. Sometimes the building has to be 15,000 to 16,000 feet to have a little bit of a backroom and things of that nature.

But they will be on average 13,000 to 15,000 feet.

Okay. When you look at the stores in -- I know, the Providence store is new.

What have you liked about it? What have you not?

What have you thought you could do better? What are the opportunities to improve on that particular design?

Budd, it's still a little early to make those calls. We've had our partners in the design firm -- design form come back and do some work on their own.

We've got some consumer excerpts from the shopping experience. And overall, we're fairly pleased with the interior layout, the impact it has on the store, the additional color that it's doing.

And the statistics on custom order, on in-home design, on the average ticket, are all trending in the right direction. But I don't think we want to make a call on 2 stores and 1 market about everything that's right or wrong with the store.

That's why we'd like to get a couple of more opened ourselves, if our dealers open a half a dozen. We are going to be changing the look of the front of the store some.

We weren't as pleased with the outcome of the front as we were the interior. There isn't the balance between the 2 that we'd like, so we'll be doing some changes to that.

But overall, we're in the 85%, 90% range of being satisfied with what we developed.

Okay. I've got a few more questions on that, but I'll come back at that.

But just the last -- my last area, just talk a little bit about the CDSOA. You said you received some monies after the end of the quarter.

And where does the CDSOA process reside right now? What's going on?

I know there's been a recent decision in the court case. And I'm not sure what else has happened beyond that.

From our standpoint, Budd, not a lot has changed. The money received this year is them cleaning up the years and making pretty much one of the final payments on the ongoing process.

The thing that's still tied up with the courts and the appeals is the $150 million to $170 million that's being held by customs. And we get updates on that regularly, but there's all kinds of ebbs and flows to it.

And really, we're just waiting on some decision from the government on what they're going to do. So I cannot give you much more clarity other than to say of that -- based on what we've received in the past, of that $150 million to $170 million pool that's out there, we think we're entitled to receive somewhere in the range of 10% to 12% of that.

And we just pretty much received that money last week, right before Thanksgiving.

And how much was that, Mike?

$1.4 million.

So that will go into the third quarter?

Yes.

I wanted to just talk a little bit more about the performance at retail and the strong same-store sales results. Now I know you're getting success with the Brooke Shields campaign, but also doing a better job of executing in the stores.

Kurt, I was hoping you could just give us an update on where stores are performing in terms of that close rate, in terms of that improved attachment? And what your expectations are as we start to anniversary the improvements that you started to put in place last year?

Good questions. I think, Brad, that you also have to think that not only are we and our company-owned segment approaching the double-digit same-store sales increase, but the system, overall, is moving in that direction.

And exactly, what all of our independent dealers are doing in their individual stores for their selling processes and training everything, I can't speak to. So I think there's some good things going on there, but certainly, I think, the -- some changes that we've made with our merchandising, the service position we're in delivering over 90% of our goods in 4 weeks and the marketing program, have touched all 309 stores in a manner that has helped them perform to the degree they have been.

And we would expect continued improvement on both the average ticket and the close rate. I believe we don't have a whole lot of room for continued gross margin improvement.

We want to see some consistency. We've got it up to the highest level we've ever had.

How much more of that we can get, we're debating. But clearly, there's work to be done on the ticket -- on building the ticket and closing the sales on the traffic that we're getting into it -- or that we're getting into the store.

And those are the 2 highest priorities for our retail team.

And then with respect to advertising. It seems pretty clear that the increased advertising is paying off.

You noted that in the second half of the year, the advertising level will be more consistent. What is it that keeps you from wanting to invest a little bit more in advertising?

I think it's a combination of things. First of all, in our national campaign, we are -- we have a co-op arrangement with the independent dealers and their stores.

And so we're pooling our money to buy time on national cable. And I think we're on the air today, 22 to 24 weeks a year, right now, prior to all the major holidays.

We would need some cooperation from them to add some more weeks and some more investment there, and we have a meeting with them in the early spring to talk about that. We started out less than this.

We've had some success, and we've agreed to move it up and we may do that again. We just think there's a balance between how much we can spend and how much that we're going to get a return on, and we're going to keep notching that lever up.

But we want to do it gradually. And we are a fairly large advertiser when it comes to the home furnishings industry.

And Brad, but a couple of million, or $5 million or $6 million more in marketing on a national basis, up against all the other people who advertise in the world, is not going to make a significant -- give us a significant larger share or voice.

Got you. And just one more follow-up on the casegoods business, as you all were able to drive a nice improvement in the profitability in the segment, and despite the sales being down.

Do you think that can continue when we move into third quarter and the fourth quarter?

I don't believe we can continue to lose sales, lose volume and increase our margin. There's a line of demarcation there that that doesn't work.

And I wouldn't expect our casegoods businesses to experience that kind of downward draft here in the second half of the year. There were some particular things that happened in the quarter.

We're still anniversary-ing some strong numbers that we experienced with our Nickelodeon collection, as we sold it into our retail partners. So there is a fixed component to our cost structure in casegoods even though a lot of it is variable, and as the volume the decreases, that fixed percentage becomes higher and higher.

So that's not part of our plan to continue the trend we had in the second quarter.

This is actually Jack Stimac filling in for Matt today. I guess if I could follow up on retail -- and I'm sorry if I missed this, but last quarter, you had talked about how traffic was flat.

This quarter, did you comment on traffic? I mean, was the increased same-store sales, was that purely an improvement in close ratio?

Or was -- how was traffic?

We commented in the queue that our traffic was slightly down, so the majority of our improvement in this quarter was conversion, was margin and was the average ticket. I would caution you though that a lot of the research we're getting and things that we're seeing from other retailers is, due to the consumer spending a lot more time on the Internet and finding out a lot more information and being better-educated when she goes to shop, the probability that she's going to shop the same number of stores that she did 5 years ago, I think, is diminishing.

So while traffic still is an important number to watch, I think the customer eliminates or adds to her shopping basket based on some information she gets from the Internet, and they may not be shopping as many stores that they did in the past. So the traffic number is, I think, has got to be looked at in that context.

Okay. And then, on the new store initiative.

So how much of that -- you said 4 to 6 are going to be company-owned, and you said 2 of those will be the new concept. Is that right?

No, what I said was we're going to open 2 in the next 6 months and we're going to open 2 within this fiscal year and then we're going to open 4 to 6 in fiscal '13. To this point, all had probably won, because it was already underway.

This is not company-owned, but in something else. All but 1 of the 12 to 18 stores in the next 1.5 years are going to be in the new format.

We're that positive about it, and like I said, we're 85%, 90% where we want to be. So most of our dealers want to build the new concept, and that's what you'll see as we roll out new stores.

Okay. And then as you roll those out, I'm assuming you don't have any capacity issues so far?

No. That will not be a problem.

Okay. And then, I guess, you kind of outlined what your expectations are for incremental margin.

Maybe if you could kind of break that up by segment? And then, you've outlined the savings that are expected from the Mexico Cut-and-Sew facility.

Are there any other expected savings that you can quantify? Or is the anticipated incremental margin purely due to volume?

Well, I think there's 2 separate questions there. We are -- we don't really break out our incremental margin expectations by segment.

But obviously, if all of our increase came through the stores that La-Z-Boy itself owns, and we could capture the improvement in retail and the improvement in wholesale, that would be the highest margin return for the company. The math works that way.

That's not what's going to happen, but that's the way it works. And as far as savings, we are -- we have developed a culture at La-Z-Boy and a mindset about eliminating waste and being lean, taking out nonproductive steps in our processes, and our team is delivering very well against our targets for cost savings.

Cost savings that don't affect our service, cost savings that don't affect the quality of our product, but cost savings that just make us more efficient. And we're getting a lot of dollars every quarter on those programs.

None of them, however, have the magnitude of something like Mexico. And we don't have another $5 million, $10 million, $15 million project in one fell swoop that we can talk about.

But we have a significant number of savings each quarter that we're doing in the various projects throughout our entire operations.

If we could maybe talk in upholstery about where we are, I guess, in this fiscal year would be a good time period to look at for raw materials. And is that coming in more or less with where you expected in light of the pricing you took last quarter?

And how is that sort of playing up and playing out? And then as a follow-up to that, you mentioned the 10% EBIT target and we know about Mexico.

Will that alone drive this thing to 10%? Or what are the key variables, other than volume, obviously, that get us to that number?

Well, John, the -- I'll answer the second part of your question first. Volume is the key that's going to get us there.

We have to leverage our fixed cost at a higher level and typically, we do have higher sales in the second half of the year than we do in the first. So we would expect to see an improvement first half to second half in that margin, strictly on volume alone.

As far as the raw materials are concerned, we -- I think we told everybody in the last couple of quarters that we expected $16 million to $18 million of raw materials this year, and we're getting that. There's some evidence that there could be slight abatement to some of those costs here in the second half of the year.

No matter what the abatement may be, it's still going to be significantly higher than last year. And so that's playing out pretty much as we expected.

So but we have all these components of costs outside of raw materials, like wages and benefits and other things that the company wants to do. And those go into our cost component along with the materials.

And then we have cost savings and pricing to offset them. And we're trying to balance all of those things to make sure we stay competitive, aggressive, and also improve our margins as we go forward.

And Kurt, I believe you referenced some mixed pressure in upholstery over the last, I don't know, several quarters. If I'm on error on that, correct me.

But what did you see in the latest quarter's concerns mix?

Well, you have a good memory. But it wasn't a multiple quarter issue.

It was primarily the first quarter in the summer, which we have low volumes. We only have 12 weeks of production, we have the seasonality issue.

And sometimes, we have to be a little more aggressive on our pricing to keep some business coming in, to run our factories at an acceptable level. You don't have as much volume to spread that mix over.

So it was primarily a first quarter issue. In the second quarter, we saw things come back to a much more normal pace and don't anticipate that being a problem in the third quarter.

Great. And then, maybe, a bigger-picture question.

But we read about how costs in China are inflating. And the gap, depending on what product line is, I guess, narrowing between U.S.

and Asia in general. What -- certainly, when we went the other way, it didn't seem to help the furniture business, I'm curious as to whether you have any long-range thoughts about what you're seeing now and how that may impact your business over the next, say, 5 years?

That is a broad, long-term question, John. We never took our upholstery business out of the U.S.

So it isn't like we have quite a bit to come back here. The biggest component for us is all the fabric and leather business left the U.S.

and went to Asia. And so that is the one component I don't think is going to be coming back to the U.S.

anytime soon. In fact, we believe that the timing of when we did our Mexico Cut-and-Sew operation was right on target, because as we get more efficient there and the prices continue to go up in China, we may be able to do even more in Mexico than we originally planned.

So the fabric and leather business, I think, is going to stay over in outside of the United States, let's just say, for the time being. And the casegoods business, John, there were so many of our facilities in the industry closed down.

A lot of them were old. All the new equipment, all the environmental issues with that.

And that's a scenario that hasn't played out yet. We have been bringing some product into our remaining casegoods facility at Kincaid because the prices in China have gotten to the point where we're just as competitive here.

So we'll have to see how that plays out. But I don't think it would have a significant impact on us, primarily due to the fact that we never moved our upholstery -- we never purchased or developed any fabric, stationary, reclining, motion product from China in the first place.

We kept it all here in the States.

And then lastly, on casegoods, you mentioned the Nickelodeon comparison, but as you look at our casegoods' presence today on retail floors, is that stable? Has it been shrinking over the years?

Has it been shrinking at all recently? I guess the question simply is, is the decline in casegoods revenue that we're seeing the same number of slots, or just the velocity's lower because casegoods sales are weak?

Or is your presence at retail net shrinking?

I would answer that, John, in the following manner: Our casegoods presence has probably shrunk over the years primarily because that the major retailers have the ability to go direct. And we used to sell a lot of them.

But now that they have the ability to go direct -- and that's the proper thing for them to do, but it has affected our business. I think the second part of the question is, we're positioned with our casegoods at the mid to upper-mid price points.

And particularly, the one part of the industry that has probably suffered the worst the last few years is the higher-end casegoods business. And I would not call us high-end, but Kincaid and American Drew are positioned slightly above the mid-market, and that market has had the biggest challenge, but I think it also has a strong opportunity to rebound.

So I don't think it's the presence on the retail floors or the slots we have with retail. I just think it's the velocity of those slots isn't what it was prior to 2008.

Most of my questions have been addressed, but I guess, first on, on the traffic decline for the quarter. Kurt, I know you don't give numbers, but maybe, directionally speaking, I just want to get a sense of the decline that you saw.

And I do get what you said, by the way, about the change in the number of stores the consumer shops. However, relative to Q1, how was the Q2 decline?

It was fairly consistent, Todd. And again, we are only giving you a small snapshot.

We've got the traffic on the 86 stores that we own, but we don't get regular traffic numbers from the other 220 stores. So we're just a representative sample of that.

So the traffic for stores throughout North America, I don't have that number. And it's something we're watching, but nothing we're alarmed at.

Kurt, I'm also interested in hearing about the headway that you're making with regard to your in-home design service. Looking at the increase that you've seen and you've been seeing, in average ticket, how do you attribute that?

If you had to rank the factors, how much is advertising, how much is the in-home design? How much of that is just a better, qualified customer that may be a direct result of advertising?

And any other factors that you might care to mention?

Well, the honest answer to that question is, Todd, really we don't know. And the other answer would be, depending on what part of the team you talk to, they would take credit for all the improvement.

And it's probably a combination of all things. Our in-home program delivers a higher ticket, almost 3 times the ticket we would get in the stores.

But if you relied too much only on in-home, and don't take care of that customer that wants to buy the day they're in the store, then your overall volume may slip, and we don't want that to happen either. The fact that perhaps the customer, due to the marketing we've been doing with our "Live Life Comfortably" campaign, the customer that comes in has a clear understanding of what we offer and the types of things we can provide.

We may be getting a little better customer into the store that has more money to spend. And so all of those factors, I think, play into it, that we measure them all, we watch them all, but which one has the most definite influence and which one is the big driver right now.

I think, you could toss a coin up and you would be half right and half wrong on any one of the 3 elements.

Got it. And on inventory, where do you see finishing the year?

Right now, we don't intend to be much more than we were at the end of last year. We have the ebbs and flows of the quarters based on business increasing, usually in the fall and winter, so we raised our finished goods inventory a little bit to cover that.

And then we have Chinese New Year, which we usually have to buy ahead in order to make sure that we're not caught when they shutdown. By the end of the year, we should be back to somewhere in the neighborhood of last year's levels.

We don't expect any significant increase unless volumes just go through the roof, and we'll have that because of volume increases.

Okay. And also on the share buyback, you said, I think, 5.2 million shares remain?

Is that accurate?

Yes.

Okay. If there are any additional repurchases in the back half of the year, will that, do you think, be largely offset by issuance for options?

Right now, we're just looking at where the market stands and what we can do. We're trying to look at dilution as the stock price goes up and making a call what's the best balance of buying the shares back.

But we’ll look at all of those things. And if we do have a lot of people start electing to exercise options and everything and increasing shares outstanding, we'll consider that when we look at how much money we want to spend on that in the future.

Kurt, I want to go back to the share repurchase. Because you did list on the last conference call, your guidelines, the way you want to use your cash: First was investing in the business, the second was IT upgrades, transportation upgrades, and then the stock buyback.

What changed the Board's mind? All of a sudden, you're buying back shares when you had deferred from doing that, when the stock price was very attractive and you were improving your operations.

Why did your attitude change?

I don't think, Barry, our attitude changed at all. I think we gave you the magnitude of our priorities, and I think as the business improves and we generate more cash, our ability to do more than one of our 3 planks would kick in.

We've always said our first priority is to reinvest the money in the business, and we're doing that. But right now, we're -- given our cash flow and given where our CapEx is at, we're generating pretty decent cash returns and we just think it's prudent to not only invest in the business, but be opportunistic about our share repurchase.

So it wasn't ever a priority change. It was just that we got a little more bandwidth now, and we're trying to use it.

But having said that, it looks to me like you're going to be generating reasonable cash this year. And if we have any improvements in the housing transactions in this country, which is likely to happen at some point, you're going to make a lot of money, and you’re going to improve your returns on your assets considerably.

Where would the common dividend be in terms of possibility? The reason I say that, is the marketplace really wants yield more than any time since I've been in this business, and you don't have a yield.

Where would the dividends fit in and what would it take for you to pay a dividend?

Again, I would go back to the same prioritization project. I would tell you right now, Barry, if I could find 50 places to open stores, and they were all great rents and they were in the markets that we need them, I think that would be the best use of our cash to get the extra stores, to get the extra volume.

If we can't find those and we continue to generate cash, the proportion that we use for growth of our business, stock buybacks and the dividend, they're all on the table. We have never said one is foreboden [ph], what we have said is our prioritization has been as we've explained.

So we'll just have to see how the year plays out and how the economy is improving. And certainly, that is in our horizon, but nothing that we're prepared to discuss in any detail at this point.

I just want to quantify something, on the price increases -- I'm sorry, the cost of raw material increases versus price increases and cost savings, I think you had alluded to the fact you had hoped to offset these $16 million to $18 million this year with the cost savings and the price increases. Is that what you were trying to explain when you answered the question by somebody else?

Well, it is. But I want to also be clear that we believe that the cost savings that we generate from the business help us give wage increases and pay bonuses, raise some benefit programs.

That is our responsibility to find. When it comes to raw materials, we believe the majority of that, you have to pass on through pricing.

So we look at it in a 2-tier stage: There's pricing and there's cost savings you have to generate to overcome your cost-of-living-wage-inflation type of thing, and also your raw materials.

And do you think your price increases will offset the raw material costs increases this year?

We do.

Okay. And Mike, I have a question for you.

It's a small matter. Out of the $28 million long-term debt on your balance sheet, what percentage is the revolver and what interest rate are you paying right now on the revolver, if you're borrowing money from the revolver?

I think we have $20 million, is what we stated -- as was borrowed on our revolver right now. And that interest rate based on our current, I think, is LIBOR plus 150 is what we're able to borrow off of.

What is the current rate?

I don't have that on top of my head. It's a small number.

I don't know -- I don't have the LIBOR rates at the top of my head. I don't keep track of those, Barry.

But it's probably less than 3%, it's probably more in the 2%, 2.5%. But it's not a significant number for us right now, but I probably shouldn’t quote my numbers because our treasurer keeps up with that.

I don't.

Okay. And as far as the attitude on using the revolver, are you flexible there?

In other words, if you have an opportunity to do something on behalf of the shareholders, would you borrow money on the revolver?

With $117 million in cash, I don't think we're going to be jumping into anything that's going to spend a lot of money anytime soon. But we have -- the reason we redid the revolver and it’s extended out to 2016 is in case we do need that, we have it available to us, and the $113 million available on that line, we feel is pretty strong presence of our liquidity.

And I would have no problem leveraging up to some level if I needed to, if the opportunities were there.

Thank you, everyone, for being on our call today. Should you have any follow-up questions, you can give me a call, I will be available.

Have a good day.