Furniture Brands International, Inc. Q3 2009 Earnings Call Transcript

Furniture Brands International, Inc. (FBN)

Q3 2009 Earnings Call Transcript

November 5, 2009 8:30 pm ET

Executives

John Hastings – VP, Communications

Ralph Scozzafava – Chairman and CEO

Steve Rolls – SVP and CFO

Analysts

Budd Bugatch – Raymond James

John Baugh – Stifel

Timothy Staples [ph] – Staples Asset Management [ph]

Barry Vogel – Barry Vogel & Associates

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third-quarter 2009 Furniture Brands earnings conference call. My name is Katina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this presentation. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. John Hastings. Please proceed.

John Hastings

Thank you, Katina. Good morning, everyone. Welcome to our third quarter earnings conference call. With us today are Ralph Scozzafava, Chairman of the Board and Chief Executive Officer, and Steve Rolls, Senior Vice President and Chief Financial Officer.

During our prepared comments and the question and answer session that follows we will be making statements expressing the beliefs and expectations of management regarding future performance. Any such statements are forward-looking statements which reflect our current views with respect to future events and are based on assumptions, and therefore are subject to risks and uncertainties.

These risks and uncertainties include, without limitation, the risk factors set forth in our most recent annual report on Form 10-K filed with the SEC and all of our subsequent SEC filings. We do not undertake or plan to update these forward-looking statements even though our situation may change.

In today's call, we will also use certain non-US GAAP financial measures to supplement our US GAAP disclosures. Whenever we disclose such non-US GAAP financial measures, we provide in the company's earnings release a reconciliation of such measures to the most closely applicable US GAAP measure.

Thank you. I will now turn the call over to Ralph.

Ralph Scozzafava

Thanks, John. Good morning, everyone. We appreciate you being with us again today. I will make a few brief remarks and then turn it over to Steve Rolls to talk about our results in a little bit more detail.

Yesterday's earnings release reported that our top-line sales declined 28.9% from a year-ago and that our gross margin was 23.1%. That compares to 16.3% gross margin in the 2008 quarter. On a sequential basis, sales for the quarter were up 1.9% versus Q2. Reported results in all periods include selected items that are detailed in our earnings release.

Excluding those selected items, we achieved strong gross margin improvement this quarter compared to the 2008 quarter. That improvement in the face of some very serious economic conditions speaks to the significant progress that we're making taking costs out of the business while further strengthening our brands and investing in the success of our dealers.

I will discuss a little more about what we’re doing to grow sales and control costs in just a couple of minutes, as Steve takes us through the financials. Steve?

Steve Rolls

Thanks, Ralph. As Ralph said, sales for the quarter were down 29% versus the year-ago quarter and were up nearly 2% on a sequential basis. This is consistent with the effects of the economic downturn and the seasonal revenue patterns that Furniture Brands has historically experienced.

Our year-over-year results also reflect lower sales levels due in part to the Company's decision at the end of 2008 to exit unprofitable licensing agreements that represented approximately 3% of our third quarter 2008 sales. The remainder of the year-over-year sales decline can be attributed to two factors, generally weak consumer demand and the Company's decision to focus resources on driving longer-term business relationships with customers that can provide a fair return for our shareholders.

I'd like to help our investors understand how sales have been affected by our focus on credit quality. Our approach has been to take a view toward customer relationships that balances our sales goals with a professional assessment of credit worthiness.

Not all sales are good sales, but that's not to say that we abandon our dealers who are under financial pressure. Instead, we work with them to help halt decline in their credit standing, while continuing to support their business. While this position reduces our potential sales volumes, we’ve also eliminated the extraordinary bad debt write-offs that totaled more than $35 million in 2008.

Our reported gross margin of 23.1% compared to 16.3% in the 2008 quarter. Results for both quarters included selected items that are detailed in the press release. As Ralph said, our gross margin improved significantly after adjusting for the selected items detailed in the earnings release.

One metric that we provide in the selected items is factory downtime, which is the direct cost incurred when we idle plants on a short time basis to match capacity with demand. Factory downtime for the third quarter of 2009 was $1.4 million. That's less than half of what downtime totaled a year ago.

We understand that many investors view managing factory downtime as a normal part of a manufacturing business, so we include it as a metric to measure our progress and how we’re scaling capacity to reflect market demand. We're now in a good position to meet increased production demand as we implement more efficient lean manufacturing and through the use of multiple shifts where appropriate.

On a reported basis, SG&A is down $40 million from last year. The reduction reflects a number of charges taken in the 2008 quarter, lower compensation expense in 2009, as well as the sustainable benefits of lower headcount and a more efficient shared services organization.

Cash flow for the quarter was a positive $26.3 million, excluding the pay down of $27 million of debt. Year-to-date, we've paid down $88 million of debt. Our current net debt is $25.5 million, down nearly $200 million from the end of September 2007.

We have ample liquidity from our cash balance of $76.5 million. And we have an additional $20.8 million in availability under our asset-based lending facility. We continue to expect to achieve our guidance of being cash positive for the year excluding tax refunds and debt pay-downs.

Our company-owned retail store program continues to reflect the generally poor consumer economy. At the end of the third quarter 2009, we were operating 48 Thomasville stores and an additional 16 stores under other brands, predominantly Drexel Heritage.

Our long-term retail strategy is to own multiple Thomasville stores in good markets, where we can leverage the benefits of warehousing, advertising and management.

Of our 48 Thomasville stores, only 23 stores, which is less than half, have been under our management for more than 15 months. And these stores reported a same-store sales decline of 18% in the third quarter. This compares favorably to a 31% same-store sales decline from the 20 stores we had managed for more than 15 months during the second quarter 2009.

The sequential improvement illustrates the improved store operations, as well as the effectiveness of strong product introductions, better sales efforts, and the support of Thomasville's strong national advertising.

The 10-Q will contain additional disclosure on our retail performance.

That concludes our comments on financial results. And we will address specific questions at the end of the call. Now, I will turn it back to Ralph.

Ralph Scozzafava

Thanks, Steve. I will make a few closing comments before we open up for questions. Furniture Brands continues to make good progress on our strategic plan of building our brand power, winning with customers, delivering operational excellence, and growing and developing our people.

The worst economic downturn in our lifetimes has more than offset our achievements. Like others in our industry, we’ve been delevered significantly from when we announced the plan in the fall of 2007, which was also the start of the current recession. Since then, we've worked relentlessly to manage through the new reality.

Now, unlike our peers, we’ve not only resized our manufacturing footprint to drive costs down, we’ve transformed from a holding company to an operating company. That work was largely invisible outside of our company, but the task was huge.

We've completed much of the transition to the new shared services structure, and today we’re seeing the benefits of a much lower SG&A cost base with additional opportunities still ahead.

As much progress as we made on SG&A, our improvements in gross margin are more important. That's where we’re going to get real operating leverage, and that's the measure that tells you if Furniture Brands will be able to achieve the earnings power of our brands and exceed the historical profitability of our old business model.

Since the end of the third quarter of 2008, we've reduced our net debt by $65 million, driven improvement in our days sales outstanding, days payable outstanding, and overall in our cash conversion cycle.

We've grown our gross margin in the face of severe economic deleveraging. That could have only been done by a team that has a sense of purpose and urgency, and I'm quick to say we’re not satisfied and we’re not done.

We use three primary levers to increase gross margin, profitable sales, improved purchasing and manufacturing productivity. I'm going to touch on all three.

First, our dealers. Our best customers are the ones who value what we bring them high quality products with great brands at a great value. (inaudible) consumer insights and extensive pre-launch testing on our products with feedback from our dealers, our sales reps, our designers to create outstanding product that consumers want to buy. We've been trailblazers for more than a year in consumer insights and product testing, and our dealers like the products that test well.

Broyhill Lane, Thomasville and Drexel Heritage all introduced products at last month's High Point market that had been through this development process and the reception was very favorable. And as more of these new products get on our dealers showroom floors, it will help our top-line sales and theirs as well.

Now, our company is built on brands. We support our brands and our customers with a combination of national TV and print advertising, innovative marketing such as the Lane mobile showroom, the tour is going on right now across many of our dealers, state-of-the-art web sites that we brought to market, express ship programs, sales trainings, and significant co-op and business development budgets to drive our dealers business.

The customers that get it will leverage the value that we bring and use our brands to make a strong profit for themselves and their stores. The ones that don't often sell at price points that are too low, at poor retail margins, and end up having problems. We continue to work diligently with our customers every single day to help them win in this challenging time.

Earlier, I mentioned transition to our shared services. One of the key benefits of a centralized organization is that we can leverage the buying power of a $1 billion annual spend on things like healthcare, raw materials, source goods, shipping, and other goods and services. We're just beginning to see the benefits of the consolidated procurement program as we cycle through older contracts. Going forward, we should be able to see and achieve sustainable improvement in purchasing relative to anything that we've done in the past.

Now, our other main controllable for gross margin is manufacturing productivity. In the past two years, we've reduced our direct manufacturing overhead to meet market demand. You can see our progress in the factory downtime costs of $1.4 million this quarter. That compares to $4.2 million a year ago, when we had an oversized infrastructure and simply too many square feet of factory space.

Of course, we want to grow ourselves back to prosperity. So we’re implementing lean manufacturing sales at our Lane, Broyhill, and Thomasville domestic upholstery and case goods plants. Lean manufacturing also gives more productivity from our existing workspace and force, and also allows more flexibility in production runs, lower inventory, higher first pass quality, and fewer workplace injury. It's better for us on every key measure.

Well, with the world series just finished, I'll use a baseball metaphor and tell you that we’re probably in the third inning of getting our lean manufacturing initiatives where they need to be for us. We've built a very strong supply chain organization, and I expect this team to make great strides over the next 12 months.

Lastly, I will finish with some observations on last month's High Point market and where I see the industry heading today. The fall market was solid for us with good attendance from our key accounts. Our orders written to market were stronger than in recent past. And I think one reason is that our new product testing delivered our strongest new product line-up in quite some time, and it’s really beginning to resonate with our dealers and our national accounts. It will take more time before I’m ready to call "full recovery," but we’re seeing some real stabilization in the industry from where we sit.

Well, that concludes our prepared comments for today. We would like to thank you again for being with us and open up the lines for questions. John?

John Hastings

So Katina, if you could prompt for questions now.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Budd Bugatch representing Raymond James. Please proceed.

Budd Bugatch -- Raymond James

Good morning. For questions, one, I see the inventory is significantly lower; I think it’s as low as I've seen it back I feel about 1999, I think on a dollar term, even though the metric on a flow term is still not as low as it's been I guess third quarter of last year. My question is, is it too low? Can you give us some color on the quality of the inventory now? What are you thinking about it?

Ralph Scozzafava

Yes, I guess that what I would say, it's not too low. I think, Budd, we’re getting a lot better at our sales and operations planning process and really better at our demand and supply planning. So I would look for continued improvement from that standpoint. The real measure I like to use with it is, while inventory is declining is customer service increasing. Our orders delivered in full and on time to our dealers are really at the highest level that I've seen since I've been here. So, we like the productivity that we’re getting, and we think we’re managing it and the folks in the field are doing a good job.

As far as the quality of the inventory, it continues to get better and more current. And you've seen us take a lot of old inventory out in 2008, earlier in 2009. So I think the quality of the inventory is getting better as well. So on every key metric, that's one that we spend a lot of time on and we’re happy with.

Budd Bugatch -- Raymond James

Are there any metrics you can share with us? Customer service, full time or on time and complete or how about excess and obsolete? What's the number?

Steve Rolls

Not really, Budd, it's actually very different by business as you imagine. So in those businesses where we didn't have issues across the portfolio, but in those businesses where we had some challenges with on time and in full and things like that, we've made substantial improvements. We will continue to focus on that across the company and getting better. I mean, every little improvement you can make adds on.

I think one other thing, over time, that will help us continue to get our inventories down is what Ralph talked about in product testing. As we become more successful in introducing products that consumers want to buy, because we've asked them in advance, we'll have less slow moving inventory. I think you know, as you source some product overseas, you order something new because you believe it will sell well and if it doesn't, you have a lot of inventory you have to work down. So more successful we’re in introducing products that people want to buy, the tighter our inventories can be. So we'll keep focusing on becoming more efficient there.

And you are right. If you relate it to sales, it’s not as big as an improvement as it looks just on an absolute dollar term, but given the deleveraging in the marketplace, it’s been pretty good.

Budd Bugatch -- Raymond James

Can you give us an idea of how much of the inventory is on the water, and how much of it’s coming in?

Steve Rolls

No, we don't really break it out that way. We have tightened up what's on the water, a bit, so we’re looking at all aspects of that supply chain, if you will. We're not just looking at what's in the warehouses.

Ralph Scozzafava

Budd, you did see at market, when you came through the show rooms, we had a little bit more product, particularly case goods that are being made domestically. That does take a little bit of product off the water too.

Budd Bugatch -- Raymond James

I understand that. When I look at SG&A, and I notice the improvement year-over-year, and then I look at it sequentially and even on an adjusted or normalized basis, I think it's up sequentially by about $9.5 million from the second quarter to the third quarter. What's going on there? Anything in these numbers? Anything in a normalized number that’s unusual, or how do we think about it going forward?

Steve Rolls

As I mentioned I think in my comments here, there are some compensation differences quarter-over-quarter, different reserves going in different directions. And there are a lot of things in the third quarter you can see, so it's probably the third quarter is a little bit high relative to a going rate, but it's probably closer than second quarter. The other thing we've had throughout the year is additions of retail which adds to SG&A, so that's the good and the bad of it, right? You got higher SG&A levels with retail. We do want to grow our retail presence, but when you take over a store, it takes a little while to become fully productive.

Budd Bugatch -- Raymond James

So can you quantify any of that for us, please?

Steve Rolls

No, I mean we will break out in the Q, continue to see as you know couple quarters ago, we started to break out retail/wholesale consolidated for the company. So, you'll be able to see that in the Q when it comes out shortly.

Budd Bugatch -- Raymond James

What about the compensation differences quarter-over-quarter and how do we think about that going forward?

Steve Rolls

I think you just see that in accruals, right? On the balance sheet.

Ralph Scozzafava

I think one of the things --

Budd Bugatch -- Raymond James

After the fact, not before the fact. We won't know how to project. How do we do it for modeling purposes?

Ralph Scozzafava

As I look at it, Budd, the next two quarters are going to be more normal quarters for us, look probably more like an average of what you are seeing for the past three, so you can smooth them. That's how I'm thinking about it. I can tell you we’re not done yet with SG&A and taking costs out of the system. We still have some inefficiencies and we’re working against that as we speak. One of the things that Steve did mention about retail, as you know, as we take in stores, we’re just seeing more rent expense and all the labor and costs that go along with that. So up now to the 60 or so stores that we're dealing with, you see a little bit of that in the SG&A line.

Budd Bugatch -- Raymond James

So if we smooth the last couple of quarters, you got about $80 million a quarter. Is that about where you are thinking the SG&A will (inaudible)?

Ralph Scozzafava

No, I think it will be higher than that. We're working every day to get it down. It will be higher than that.

Budd Bugatch -- Raymond James

How do you think about it fixed versus variable now?

Steve Rolls

In the SG&A?

Budd Bugatch -- Raymond James

Yes sir.

Steve Rolls

I mean ultimately it's all variable; it's just a question of timing. You've got sales commissions in there which are very volume dependent, so you can make an estimate of what a sales commission percentage looks like. That's clearly variable.

Budd Bugatch -- Raymond James

And your average sales commission today is what?

Steve Rolls

It's probably 3% to 4%, given in that range.

Ralph Scozzafava

Yes, we’re right in the average.

Budd Bugatch -- Raymond James

Two other quick questions, when will the 10-Q be out?

Steve Rolls

It's probably either tomorrow or Monday if we haven't (inaudible) but tomorrow or Monday.

Ralph Scozzafava

Next couple, yes.

Budd Bugatch -- Raymond James

And the $20.8 million of availability, I take it that's above the cash dominion, $75 million cash dominion?

Steve Rolls

No, that's above the 62.5 threshold.

Budd Bugatch -- Raymond James

The $62.5 million threshold.

Steve Rolls

Yes, the other one is $75 million; those are the two. So there’s a $12.5 million difference between those. So if you take the higher threshold, it’s $8 million, right around that $8 million.

Budd Bugatch -- Raymond James

Okay, and your LCs were $20 million outstanding last quarter. What are they this?

Steve Rolls

It's about the same.

Budd Bugatch -- Raymond James

Okay, thank you very much.

Steve Rolls

Thanks, Budd.

Operator

Your next question comes from the line of John Baugh representing Stifel. Please proceed.

John Baugh – Stifel

Good morning. The items that are broken out, selected items, can you help us, between the SG&A, tax and cost of goods line, where these various pieces go?

Steve Rolls

Actually, we broke them out that way. The cost of goods, you've got the factory downtime and severance charges for the (inaudible) the latest quarter. As I said, factory downtime, arguably, you're always going to have some portion of that. We've really worked hard to get that down and we will continue to do that. So it's not a huge number, but it's higher than we want to see it. Severance charges are just us again readjusting our cost structure. And we’ll keep doing that to the extent that there are opportunities to do that.

Then you go to SG&A, you've got the closed store expense. Some of that would represent stores that we've taken over and have mark-to-market other SG&A related expenses. Some of its the dark stores that we continue to have that we will either buy out of at the right time at the right price, they'll sublet, tough in this market as you imagine, or they will just expire. They will go away. So over time, they will go away, just it takes a little while. Same thing with severance charges on there that we talked about earlier and impairment charges. That's just for assets that we’re preparing to sell.

John Baugh – Stifel

And then tax, I guess the valuation allowance as opposed to having a big tax credit, would your loss then offset that?

Steve Rolls

Yes, yes, those are just because we can't take credit for those. The good news is that's just accounting and that doesn't mean that credit goes away. They are long-tailed and you're able to use them in the future to offset profits. Who knows if the government decides to do a longer tax loss carry back. We have a substantial amount that could go that way.

John Baugh – Stifel

How do we think about the closed store expense number? It's nine month to-date running at $10 million. It was $23 million the year ago nine months, so it’s come down considerably. I understand it ultimately goes to zero. What would be your guess how to track the next one year, two years, three years?

Steve Rolls

Yes, probably the run rate is around $10 million a year today, so that’s basically assuming we didn't take on any more closed stores. The P&L impact of those dark stores for us today is about $10 million per year. That will dissipate over time. I can't give you those numbers right now, but they just go away. They'll be in the Q where we kind of show the tail-off of those liabilities.

John Baugh – Stifel

And then sort of following up on Budd's question on the sequential rise in SG&A throughout one of the reasons being compensation reserves, I guess that implies compensation reserve went up in the third quarter versus the second quarter. Do I have that right and if so, why?

Ralph Scozzafava

Actually, John, it went down in the second quarter just a hair. Let me give you just might take on SG&A, and this will help I think you and Budd. We pretty much went along here at Furniture Brands for -- you can go back number of years and our run rate and SG&A was about $430 million, give or take. So we've taken some pretty large chunks out of that cost structure. And you see the numbers, $200 million and what $48 million year-to-date and you can kind of project out from there.

We will continue to take costs out. It's not going to be smooth. Every quarter, it’s not going to go down sequentially. There are some charges that come in and come out, but we've demonstrated we took a large piece out of the cost structure. Working against us of course is when we take back more retail, but we know where the costs are and it's just a matter of continuing to get to them. So we’re in what I'm calling continuous improvement mode and we’re moving as fast as we can.

John Baugh -- Stifel

Bad debt you mentioned was a huge number, $35 million I think a year ago. What is it for the quarter or year-to-date in '09?

Steve Rolls

That will be in the Q, but it's probably maybe an average in the $2 million in a quarter range. So we've gotten it down considerably. We're just managing it much better. As you can see, our DSOs are down pretty significantly. So it's just much better management. You'll always have bad debt even in good times, as we know, but it's come down in line.

John Baugh -- Stifel

And then where is your EBIT breakeven revenue number today? Where do you think it will be after you implement whatever restructuring or cost reduction efforts you have underway now?

Steve Rolls

Yes, I'm not sure I can give you that number. There's a lot of variables. We've talked about this before. We have initiatives going on all the way down the balance or the income statement from the top-line, cost of goods sold and SG&A, so I think you would probably have to do that math.

John Baugh – Stifel

And then give us a flavor for the trend in the quarter, Labor Day, what you've seen since Labor Day. You noted the sequential sales improvement. I don't know how that, precisely how that’s tracked seasonally, but usually the Labor Day period and the kickoff for fall is stronger than the dead summer months. But give us some kind of color for what you're seeing in October as well as the trend in the last quarter.

Ralph Scozzafava

Sure, John, I can give you a shot at that. It’s kind of what you saw a little bit in High Point, other than the emotion, which is much more optimistic now than I've seen it in the last, call it, two years. I thought intangibly, lot of folks have talked about Labor Day was solid increases, we saw that in our stores; we saw good performance on a relative basis. And coming out of High Point, we had what I would consider the best market for us that I've seen. We've gotten good response to new product and so on from dealers. So we’re seeing our order rates ticking up, which is a good early sign for us. So, we’re encouraged. We’re coming into, as you mentioned a period that for us seasonally is good. So we’ll look forward to more in Q4 and a stronger Q1 on a sequential basis. That's how we're thinking about our business.

John Baugh -- Stifel Nicolaus

Any quantification on orders? You mentioned that it improved, improved relative to what, second quarter, year-over-year?

Ralph Scozzafava

Yes, just improved. We look at orders as you can imagine every week and we’re just seeing order rates tangibly increase over the last number of weeks, and it's probably the last couple of months. Now, many of those orders shipped, as you know our longer lead times, some will ship this quarter; some will ship next quarter. It's case goods, it will ship a little later usually, but we’re seeing our backlog going in the right direction, which we haven't seen in a while.

John Baugh -- Stifel Nicolaus

I'm sorry. Is that comment year-over-year or is that let's say the orders September being --

Ralph Scozzafava

It's sequential, John. I think the main thing is we’re managing the business. As you ask about breakeven points and so on, we’re interested in run rates, we really are. With all that's happened economically and things that are outside of our control, we’re looking at run rates as it relates to getting down expenses, increasing sales, and then of course beyond that, it's always the balance sheet too.

Operator

Your next question comes from the line of Timothy Staples [ph] representing Staples Asset Management [ph]. Please proceed.

Timothy Staples -- Staples Asset Management

Good job on the gross margins. That's heartening. I'm going to harp though on the SG&A and follow-up with the other two questioners. I’m concerned about it, and I think that we need more information. We've got a net asset charge as we get a net sequential increase of about $9 million. I personally would like some more information on what that‘s breaking that into buckets or whatever, because that’s a material increase and it concerns me.

Ralph Scozzafava

Again as I mentioned, some of that’s due to severance or to compensation changes from quarter to quarter. I think, if you go back to the first quarter, the third quarter is a little more similar to that. So we keep focusing on reducing SG&A. We’ll keep making progress, I think, in the fourth quarter and throughout next year and the next couple of years frankly doing that.

Timothy Staples -- Staples Asset Management

$80 million is too low? Is $85 million too high or what? Our models are kind of shot, when you get a $9 million increase, it's hard to model this thing.

Ralph Scozzafava

Right. And that's why I don't think you pick any specific quarter. You have to look over longer periods of time, so.

Timothy Staples -- Staples Asset Management

So could I get some number or no? I mean, $85 million or quarterly or annualized of $330 million or something or --?

Ralph Scozzafava

I think if you wanted to use a range of somewhere between Q1 and Q3, you would have numbers that would be close.

Timothy Staples -- Staples Asset Management

Take the three previous quarters, add them up and divide by three?

Ralph Scozzafava

I think Steve's point about Q1 being one end of the spectrum and probably Q3 being another end.

Timothy Staples -- Staples Asset Management

Okay, that's helpful. The window for insider buying for common stock, when does that open to the open market?

Ralph Scozzafava

Insider buying?

Steve Rolls

Monday.

Ralph Scozzafava

Three days from Monday or Tuesday.

Timothy Staples -- Staples Asset Management

Do you anticipate it will open then?

Ralph Scozzafava

Yes, that's the plan.

Timothy Staples -- Staples Asset Management

Will we see insider, some insiders stepping up and buying?

Ralph Scozzafava

We can't answer that.

Steve Rolls

Can't answer that, but I can tell you that I am our largest individual shareholder, so I have stock that I bought with my own money. So I don't know. I think we’ve ownership requirements for our leadership team and our Board. And if folks want to step up, I think that's a good thing.

Timothy Staples-- Staples Asset Management

Net debt, can you give a net debt number at year-end anticipated?

Steve Rolls

No, but we continue to look to reduce that. We've kept it, we've kept a high cash balance; we've done that for, what geez, a year or two now. We expect to continue to do that so we made good progress, we will keep making progress.

Timothy Staples -- Staples Asset Management

Do we anticipate that still under $25 million?

Steve Rolls

Again, I can't give you that number, but

Timothy Staples -- Staples Asset Management

You don't anticipate that number significantly growing from where it was at Q3?

Steve Rolls

The net debt number? No.

Timothy Staples -- Staples Asset Management

Okay. CapEx next year, any preliminary notions significantly below depreciation and amortization in 2010?

Steve Rolls

No, again, I can’t give you guidance there. It's not a very capital intensive business today because we don't need to add a whole lot of capacity, as you can imagine. So a lot of our expenses are maintenance expenses. Things that we would see going forward are perhaps capacity in Asia that we have, and we've talked about expanding, and perhaps systems expenses in terms of modifying our systems environment. So other than that nothing really of note.

Timothy Staples -- Staples Asset Management

Even asking a question that’s open-ended whether the CapEx is going to be more or less than depreciation and amortization?

Steve Rolls

Well, it has tended certainly to be less than depreciation.

Timothy Staples -- Staples Asset Management

Can you comment more broadly on your faith in the long-term value of this business to earn returns in a more normalized environment? Do we’ve the operating leverage now where if you get back half the sales you lost, the company is seeing almost historical levels of profitability. I'm not looking for specific earnings projections, but just some of the comment, your own faith in, the cost cutting that has been done and just generally where that gets you in a more normalized business environment.

Steve Rolls

Yes, that's a good question, a little bit similar to something Budd asked earlier in terms of the fixed and variable nature of our SG&A. So if you look at that, I mean, the more you grow, obviously, you have to add costs, but we’re pretty lean and we're trying to get leaner on the SG&A side we will. We won't be adding a lot of that cost into there anytime soon.

So if you look at that, you've got sales commissions, so just do some of your own math on that, I'm not telling you these are the numbers. Even if you had $100 million of sales, you've got gross margin; much of that drops to the bottom-line. So we truly have built a lot of leveragability into the business. We don't need to add a lot of assets, obviously an increase in sales, you get an increase in AR and inventory, but we continue to focus on improving at that level as well. I don't think we’re different than a lot of companies and a lot of industries. You've got a lot of leveragability built into business, and we're going to keep trying to put more in.

Ralph Scozzafava

Yes, and one thing to think about with leverage we've seen a sales decline in the range of a lot of our peers. And you've seen our gross margins actually grow in this period. As we do that and continue to work on SG&A, which we know is critical, to me, the leverage point becomes very, very powerful. And it's a matter of predicting and estimating what the revenue will be. I go back to 2008, which was also a very tough year in the recession, and we were $1.740 billion, I think we were a better company today; I think our products are getting better; I think we’re getting more capable. And when the market returns, we’re going to get more than our fair share of it. It's a matter of leverage.

Steve Rolls

Even if you think about the COGS side of things, we’re predominantly single ship today and our intent over time would be to leverage our factories and move into second shift or possibly even third shift, so there is some leveragability there for volume. We do have relatively fixed overhead, so as you add volume, you can tend to do even better than your gross margin, because it's really your variable costs that go up for those produced goods as opposed to source goods.

Timothy Staples -- Staples Asset Management

One follow-up and I'll get back in the queue if I have anything else. On the concept of a stock buyback, with your net debt level so low, is your financial management so conservative that approaching your banks or your financing agents or whatever and asking for the possibility of buying back stock is not something you really want to do, or is that an absurd notion or what?

Steve Rolls

That's just something we couldn't comment on, as you could imagine.

Timothy Staples -- Staples Asset Management

I'm sorry, no. Why couldn't you comment on that? I don't quite understand that. I'm talking about the company buying back stock, not insiders buying in the open market.

Steve Rolls

I understand that. That's a pretty large signal that I don't think we usually talk about unless you've actually made a filing.

Timothy Staples -- Staples Asset Management

What's a pretty large signal?

Steve Rolls

Whether the company is intending to buy or wanting to buy back stock.

Timothy Staples -- Staples Asset Management

Okay, so it's not yes or a no, it's just a --?

Steve Rolls

That's right. That's right.

Operator

(Operator instructions). Your next question comes from the line of Barry Vogel representing Barry Vogel & Associates. Please proceed.

Barry Vogel -- Barry Vogel & Associates

Good morning, gentlemen. I want to go back to that closed store expense issue. I wrote down, when you were talking about it, Steve, that it’s a run rate of about $10 million a year. If we look at the first three quarters, it’s about $5.3 million, which would imply, if you’re right, a very sizable fourth quarter number, like $4 million to $5 million. I just want to understand the difference between the $10 million run rate and if you get to that, you have another large closed store expense in the fourth quarter?

Steve Rolls

No, it's a good question, Barry. There are actually charges that go both ways. So occasionally this doesn't happen very often occasionally where we’ve a dark store, we will open it back up as something else, as a Thomasville store. For example, you may have had a Lane store that shut down and then you open it back up as a Thomasville store. Also occasionally, we will buy out of our remaining lease obligations if the price looks right to us. So there are things that can kind of go both ways on that.

Barry Vogel -- Barry Vogel & Associates

But $10 million seems like a large number considering things are stabilizing a little bit, and seems that the worst of the recession is behind us.

Steve Rolls

No, I agree with you, but that's the legacy in terms of the stores that we’ve had to take over that are dark, so we’re on the lease. And until the lease runs out or we buy out or we open that back up, it's a dead store cost for us. It's predominantly leased; there are some other costs in there, but it is predominantly lease expense.

Barry Vogel -- Barry Vogel & Associates

Now is this non-company-owned stores as well as company-owned stores?

Steve Rolls

Well, they are all company-owned at this point. I mean most of those would have been stores that we were on the lease. Either the lessor and then sublet or we guaranteed the lease for one of our customers. And when they went out of business, we decided that we keep the store open or not? So we do have kind of a rigorous financial analysis. And if we can't do better than that dead store cost, we will close it down and then we mark-to-market the lease.

Barry Vogel -- Barry Vogel & Associates

But you are including the 64 company-owned stores. Am I correct?

Steve Rolls

No, no, if they are open, that's not part of that. These are closed stores.

Barry Vogel -- Barry Vogel & Associates

Okay, closed stores. So you commented, I think in the last call or the last two calls ago that there are about 90 stores that are involved in your guarantees. Is that accurate?

Steve Rolls

I mean the Q will have more information in the next day or two.

Barry Vogel -- Barry Vogel & Associates

Since we’ve you on the line here, could you tell us what the closed store expense liability is at the end of September?

Steve Rolls

Yes. It's going to be in the 10-Q as well.

Barry Vogel -- Barry Vogel & Associates

You won't give it to us on the call?

Steve Rolls

You'll get it tomorrow or the next day.

Barry Vogel -- Barry Vogel & Associates

All right. I want to ask you another question about the number of plants you have right now because sometimes it’s hard to keep score. How many case goods plants are operating in the United States right now?

Ralph Scozzafava

We have a total of 13 plus 2 overseas. Case goods, we’ve case goods in North Carolina, we've got two or three that are running full till now. Yes, Hickory Chair as well, right.

Barry Vogel -- Barry Vogel & Associates

How many stores, how many case goods plants do you have in the United States?

Ralph Scozzafava

Total of three.

Barry Vogel -- Barry Vogel & Associates

That's it? Three?

Ralph Scozzafava

Yes.

Barry Vogel -- Barry Vogel & Associates

And how about upholstery plants in the United States?

Ralph Scozzafava

Well, you've got some that are combined plants.

Barry Vogel -- Barry Vogel & Associates

You can combine them. How many? I’m just looking for a number.

Steve Rolls

Total of 13. Total of 13, and of those 13 I will break it all the way out for you. Total of 13, two of those are dedicated exclusively to case goods, one is dedicated pretty much to ready to assemble There is one that does case goods and upholstery, and the balance are upholstery.

Barry Vogel -- Barry Vogel & Associates

And looking at it realistically do you think you really have any more closures in the future potentially?

Steve Rolls

We will always evaluate that, so we can't kind of give you what that looks like. But we’re always evaluating potential synergies in our manufacturing.

Ralph Scozzafava

Barry, I can tell you that what we've done in the past, the future will not look that way.

Barry Vogel -- Barry Vogel & Associates

Okay, one last question. What was your capacity utilization in the third quarter of your factories in the United States?

Ralph Scozzafava

We haven't really given that.

Barry Vogel -- Barry Vogel & Associates

Okay, thank you very much. Oh, one other question on inventories. You sort of did not tell us what your goal for inventories was at the end of December versus where it is now.

Steve Rolls

No, we don't do that.

Ralph Scozzafava

We haven't done it, Barry, I can tell you, it will be lower. And then of course our business at some point will grow and then our challenge is going to be to continue to hold and reduce inventory. So that's a fluid discussion and we're just looking to be really, really productive.

Barry Vogel -- Barry Vogel & Associates

So I guess you get an A++ for balance sheet management, but the sales management you still need a lot of improvement, the way I look at it. So best of luck, keep on doing, you're doing good job.

Steve Rolls

Thanks, Barry. I appreciate it.

Operator

Your next question comes as a follow-up from the line of Timothy Staples representing Staples Asset Management. Please proceed.

Timothy Staples -- Staples Asset Management

Follow-up on Barry's question. You guys have a rock solid balance sheet. I haven't seen anything quite like it. Current assets at 3.5 times current liabilities. You got to feel pretty good about your financial position

Ralph Scozzafava

We do. We will keep focusing on it, I can tell you that. It's never good enough from our perspective.

Timothy Staples -- Staples Asset Management

It certainly provides a certain context for my point about a company stock, looking for the company to buy back stock. You can appreciate that. I take it.

Steve Rolls

I understood your question.

Ralph Scozzafava

Yes, absolutely.

Timothy Staples -- Staples Asset Management

It's a great way to add long-term value. I mean, frankly, there is people like me that look at this business and the brand names and the value in this business and think the Street is frankly crazy for pricing it at $3.35 or $3.85 a share when you look at the long-term value, historically what you've earned, some of these cost cuts obviously are permanent, that goes without saying. It seems a bit crazy to me, when you look at the strength of the balance sheet to think that Furniture Brands is not going to be around when we've reached the inflection point of a recession.

Ralph Scozzafava

Right.

Steve Rolls

Sounds like you're a buyer, Barry.

Timothy Staples -- Staples Asset Management

Well, I am not Barry, but Barry is probably a buyer too, I'm thinking. I'm Tim.

Steve Rolls

Sorry.

Timothy Staples -- Staples Asset Management

Let me just follow up. Because maybe the Street is partly looking at this. What are the execute fees? Talk about the execution risks on some of these consolidation and centralization moves of the cost cutting moves. Your time to market is going to be longer because of distribution center closings, higher shipping costs because of longer distances the freight is going. Can you comment on some of the execution risks and reassure the market that you've got that under control and the analysis you've done on all these things, centralization of accounts receivable collection and/or payable handling of receivables and payables, etc.,?

Ralph Scozzafava

Yes. I guess I can take a shot and then Steve can talk to you about a couple of areas. Lot of the centralization that we did and have completed is now all behind us, and we’ve been able to manage the business without, I’d say, any hiccups. And a lot of the reason for that really, Tim, is that we did a lot of back office consolidation. So you can imagine going from nine HR systems to one, how efficient that is, centralizing credit and collections and accounts payable. You see our cash balance because we’re able to manage it in one location very professionally. What that allows our brands to do is to focus on the commercial things that they do best, which is design great product, take that product to market, work with dealers, those kinds of things. So it’s a little bit of a separation of duties, and it allows our folks to focus on the things that they are expert at. So, that's really what that it's been about. And that gives you a ton of efficiency, because you eliminate duplication, you aggregate your scale, you're able to do things once instead of nine times, and you're able to get better pricing for anything that you outsource.

Now, as far as any executional risk about product flowing and moving, I think we’re better at moving product, both within our facilities and also source products today, than we ever have before, we're on the ground with our own operations in Asia, not just our factories, but our sourcing operations. And we're able to do things now again through one central best practices resource than nine brands trying to do it ad hoc themselves. So there's a lot that goes with that executionally that's helpful.

Timothy Staples -- Staples Asset Management

Just want to clear, this was a strategic imperative that began before and a strategic vision that began or operational vision or whatever, that began before the recession?

Steve Rolls

Yes, but it didn't start implementing before the recession. On the HR side did but --

Ralph Scozzafava

In concert. What's funny is and I mentioned in my comments. We introduced the strategic plan in October of '07 and now we all know that December of '07 is I guess what's been earmarked as the start of the recession, so here we are.

Steve Rolls

We will keep focusing on making further improvements there, both in cost as well as perfecting the way we do things, standardization, so we keep looking at it.

Timothy Staples -- Staples Asset Management

Okay. My final question is, is there any estimate of the additional annualized savings we've got from cost savings moves across the organization, entire organization?

Steve Rolls

No, we really haven't done that.

Timothy Staples -- Staples Asset Management

Is that single digit millions, or is that double digit millions? How much more there is to be squeezed potentially (inaudible)?

Steve Rolls

Well, again, we haven't done that, other than to say we continue to focus on getting cost out, so….

Timothy Staples -- Staples Asset Management

You won't bite on that wonderful question of single digit versus double digit?

Steve Rolls

No, sorry.

Timothy Staples -- Staples Asset Management

Okay. Any other comments there? I heard Ralph wanting to comment.

Ralph Scozzafava

No, I was just chuckling, Tim. It's a great question. It’s a question I ask around here every day. And then the earlier comment about, I think Barry made about sales management, I'm going to invite him to our next leadership team meeting and talk to our guys about driving revenue. I think he would be very motivating.

Timothy Staples -- Staples Asset Management

Okay, thanks a lot. Thanks.

Operator

With no further questions in queue, I would now like to turn the call back to management for closing remarks.

Ralph Scozzafava

I think we had a good Q&A session. I want to thank everybody for being with us today, for being interested in our business and our company.

Operator

Ladies and gentlemen, this does conclude the conference call. We thank you for your participation. You may now disconnect.

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