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Furniture Brands (FBN)

Q2 2010 Earnings Call

August 5, 2010 17:00 p.m. ET

Executives

John Hastings – VP, Communications

Ralph Scozzafava – Chairman and CEO

Steve Rolls – SVP and CFO

Analysts

John Baugh - Stifel Nicolaus

Budd Bugatch – Raymond James

Maggie Gilliam - Gilliam & Company

Operator

Good day ladies and gentlemen, and welcome to the second quarter 2010 Furniture Brands earnings conference call. [Operator instructions.] I would now like to turn the conference over to your host for today, Mr. John Hastings. Please proceed sir.

John Hastings

Thank you operator, and good morning everyone. Welcome to our second 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 are therefore limited to certain risks and uncertainties.

These risks and uncertainties include, without limitation, the risk factors set forth in our Form 10-Ks and 10-Qs 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.

During today’s call, management comments will use certain non-U.S. GAAP financial measures to supplement our U.S. GAAP disclosures. Whenever we disclose such non- U.S. GAAP financial measures, we provide in the company’s earnings announcement a reconciliation of such measures to the most closely applicable U.S. GAAP measure.

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

Ralph Scozzafava

Thanks John. Good morning. We appreciate you being with us again today. I'll make a few brief remarks about our performance for the quarter, and then I'll turn the call over to Steve.

In yesterday's second quarter press release, we reported net sales of $289.5 million, a gross margin of 25.7%, and earnings of $4.2 million, or $0.09 a share. That's a significant improvement over last year's loss of $16 million and gross profit margin of 21.4% on the same sales level. We've made solid progress here, and we've also been effective in managing our expenses and our cash.

Furniture Brands' top priority going forward is increasing profitable top line sales. Sales were up slightly from a year ago, even without nearly $12 million in ready-to-assemble business. Now we like that business segment, and we have good plans to grow it, but with branded products that are a better fit for our capabilities.

In our traditional core businesses, we're seeing strength in mid-priced upholstery with Lane and Broyhill taking advantage of that dynamic. We're also seeing a rebound at the high end of the market, as designers and their clients are moving forward with projects that may have been postponed over the past year.

Much of our product spectrum between Lane, Broyhill, and our designer brands is occupied by Thomasville, and their retail store performance is one of the best pieces of news this quarter. Same-store comp sales were up 21% this quarter, and our retail gross profit continues to improve year over year and sequentially. Creating a profitable retail business segment is a key element of our long term value strategy, and the Thomasville store performance tells me we have the right team in place and they're doing good work.

Steve will now take us through the results and discuss the drivers of the financial statements. Steve?

Steve Rolls

Thanks Ralph. Yesterday's press release showed sales for the quarter of $289.5 million, up slightly from the second quarter of 2009. As Ralph said, sales in the 2009 quarter included an incremental $12 million from two lines of ready-to-assemble business that we are no longer selling. Ralph will address our RTA strategy in his closing comments.

Gross margin for the quarter was 25.7%, compared to 21.4% in the 2009 quarter. We maintained the significant improvement in gross margin that we reported in the first quarter. On a sequential basis, factory downtime increased only $1.3 million on a $33 million decrease in sales. This shows that while we're creating the right manufacturing footprint, while getting better utilization from our plants and our people. And remember that low factory downtime doesn't mean that we're at capacity. A broad increase in demand can be met at our current facilities through second shifts.

Our company-owned retail stores also continued to improve. Gross margin at our 71 owned stores and showrooms improved 240 basis points to 41.7%, and contributed an incremental 60 basis points to our overall gross margin improvement.

The incremental retail margin improvement illustrates the profit contribution of a better run retail operation. The 40 Thomasville stores we've operated for more than 15 months showed a same-store sales increase of 21% for the second quarter of 2010 versus 2009. This is the second straight quarter of a double-digit improvement in our core retail segment, and it speaks to the power of the Thomasville brand in the marketplace, and the improved marketing efforts to drive consumers to our stores and our dealers.

SG&A for the quarter was $75.2 million, which includes approximately $1 million in costs associated with closed retail stores. During the quarter we reduced by approximately $4 million a $9.1 million reserve established at the end of 2009, in anticipation of international trade compliance issues. This reduction had a small cash impact and primarily reflects our actions during 2010 to manage our potential exposure to these trade issues. Additional selected items for both quarters are detailed in a table attached to the press release.

Finally, cash at the end of the quarter was $103 million, and we were net cash positive by approximately $26 million and have more than $17 million available under the asset-based lending facility.

As we discussed last quarter, our outstanding debt is shown as a current maturity because of the bank group's waiver for our pension funding status expires in January of 2011. We improved the funding status in the second quarter when we contributed 2.3 million shares of Furniture Brands common stock, and more than $5 million in cash to the pension plan. Those contributions increased our federal tax receivable to approximately $7 million, which we expect to receive by the end of the year.

The calculation for our future funding status will be based on the plan's assets and discount rate at year end 2010. We'll have more clarity about the funding obligation and how it affects our lending facility as the year progresses.

That concludes my comments on financial results, so now I'll turn the call back over to Ralph. Ralph?

Ralph Scozzafava

Thanks Steve. I'll make a few closing comments before we open up the line for questions.

Furniture Brands' financial performance this year shows the progress we've made in reshaping this company, and it shows the importance of growing our top line sales. Our strategy for returning Furniture Brands to consistent, sustainable profitability is simple, and it hasn't changed: Build the power of our portfolio brands with products that consumers want to buy. Leverage those brands to drive traffic to our dealer stores and our own. Make our product sufficiently, safely, and with high quality, and engage our people to strive for continuous improvement.

Our sales this quarter illustrate the opportunity before our company. We steadily lowered our breakeven point and strengthened our balance sheet to sustain the company through this period of weak consumer demand. Our net cash position gives us the flexibility to support our brands and our dealers with investments in new product innovation and advertising and marketing that will drive interest and traffic.

Consumer demand is the fuel for our growth engine, and we have the right pieces in place to make it happen. Steve mentioned the ready-to-assemble business. Well, we're changing that business by creating feature-rich branded products that resonate with consumers. We've developed several proprietary features to make our ready-to-assemble product much easier to put together, in some cases taking that assembly time down from 45 minutes to less than 5 minutes, and anyone who's wrestled with one of these projects knows just how important that can be.

Now let me walk you through the programs we have in place right now to drive sales at our three largest brands. Since Lane launched its mobile marketing tour, it has visited over 130 dealers. Store traffic increases by an average of 30% when the Lane mobile showroom is at the store, and dealers frequently sell their entire stock of the showcased product in a single weekend.

In 2010, Lane's taking the same excitement to even more places where consumers are engaged and they love entertainment. I'm talking about NASCAR events, college football stadiums, NFL games. These audiences match up very well with Lane's focus on home family entertainment, and we think it's going to be a big help to the business.

Broyhill has the same mission as Lane: Drive traffic to our dealer stores. Broyhill's approach is a little bit different, but just as successful. Broyhill is now the national sponsor of the Make a Wish Foundation, and will be granting 50 furniture and room makeover wishes for deserving children across the country.

New furniture, either for a child's bedroom or family room, is a frequent request to Make a Wish. Broyhill helps make that wish come true by partnering with the local dealer to host a family shopping trip, help design the child's room, deliver the furniture, and help host a wish party for the whole family. The dealer highlights the furniture that the child picked out in the display on the showroom floor, and then Broyhill leads the PR efforts for each wish in local media, and social network covering of each wish has been extremely favorable. It's a great way to support a really good cause, and give our brand and our dealers another way to stand apart from the competition.

At Thomasville, we're using a combination of national TV advertising, targeted monthly in-store promotions, e-commerce, and the traditional hard copy look book catalog that gets consumers excited about our brand. Thomasville is unique in our portfolio because it's not just about the product and the promotion, although that's important. It's also about the in-store shopping experience.

At our own 52 Thomasville stores, we're having great success and we're constantly refining the subtle elements that are the difference between the customer's quick look-and-see visit and a longer visit that turns into a relationship. It's everything from how the consumer was greeted when they walked in the store, to the lighting, the paint, and the delivery. The steadily improving performance of our own stores tells me that our retail team has the right approach, and we're sharing that knowledge with our Thomasville dealers across the country.

Well, that concludes our prepared comments for this morning. I want to thank you again for being with us, and I'll turn it over to John so we can open the line for some questions.

John Hastings

Okay, operator, if you could please give the instructions and poll the group for Q&A?

Operator

[Operator instructions.] Your first question comes from the line of John Baugh of Stifel Nicolaus. Please proceed.

John Baugh - Stifel Nicolaus

Could you comment - the RTA decision, when precisely that took place and sort of when the anniversary, that negative sales impact, and is that going to be a similar number in the ensuing quarters?

Ralph Scozzafava

That was something that we made a decision on right toward the end of December, early January. It's cost about $25 million in net sales to us so far this year. We'll probably continue at that pace through the balance of the year. It was non-branded product and it was simply a gross margin that was plain negative, so we exited it. We've got better ideas for ready-to-assemble. What I mentioned a little bit in the prepared comments was a technology that we've branded "Assemblease", and it really kind of clicks together. So if you can imagine a customer sitting on the floor in their bedroom or living room with all those parts spread out everywhere, and screws, and dowels, and mollies and all kinds of things. We've taken that to half a dozen to up to ten click joints that simply click together and you can assemble your desk or your entertainment center or what have you very easily. We'd rather sell that kind of a product than just get into the commodity game and start flowing all kinds of goods. It doesn't make a lot of sense for us.

John Baugh

So Ralph, is it right to think of that as sort of a $40-50 million annual impact when we look at '10 to '09 in revenues?

Ralph Scozzafava

I would.

John Baugh

Okay. And then that's a lot of volume to lose out of the facility. What have you been able to do, or how have you addressed the capacity as it relates to that so that your variances don't go south on you?

Ralph Scozzafava

We're working with that right now. At that facility we also do some other product, but certainly you don't want to take all kinds of volume out of a facility, so we're working now in our supply chain, and we'll know more soon enough.

John Baugh

And then I don't want to open a can of worms with pension accounting, but it is an issue for your company, and I don't know if there's a way, and you said you'd have more clarity in the future, but I'm wondering if you could maybe hit the highlights of what the issues are, how it relates to the ABL and what maybe your options are going forward? I know you funded it with some cash and stock - maybe a best case and a worst case scenario, albeit a guess? Any color around that would be helpful. Thank you.

Steve Rolls

Sure, John. What we referred to in our comments was more of an accounting representation of an underfunded liability. So at year end it was about $115 million and our ABL restricts us to only $50 million, so at year end we were $65 million more underfunded than the ABL would allow us, but that's where we again, still had the waiver, until the very beginning of next year. That's a different number than what we really have to contribute. There are actually two measures of what you contribute. There's an IRS minimum and just a normal kind of funding minimum. Our funding minimum is significantly below that accounting underfunded amount, so in the end we don't have to put in nearly as much cash and/or stock to meet the requirements that the ABL covenant suggests. So the banks will just have to decide whether they want us to fund it or not, and that's just a discussion we'll continue to have with them.

John Baugh

And what is the ability to fund it in the future with stock versus cash?

Steve Rolls

We have the ability to put more stock in if we would like to or need to, and obviously as you can see we have a fair bit of cash as well.

John Baugh

And then any update on any divestiture activities Ralph?

Ralph Scozzafava

No. At this point we've got a portfolio of brands that we're committed to growing. We have programs in place for each one of them, plans in place for each one of them, so we have nothing to announce and we're just going to go ahead and drive our businesses.

John Baugh

And then lastly, on your supplemental retail information chart, I just want to make sure I understand it correctly. You're showing for the June quarter, and I'll just focus on the Thomasville for the moment, a $4.2 million operating loss in open stores in the quarter. Is it right then to think about, right below that, the SG&A related to closed stores, as an incremental $4 million? Or it's not. That's just net. There's no additional SG&A in closed stores? Is that correct?

Steve Rolls

Right. Not in Thomasville. Our closed stores we kind of hold somewhere else, and so yeah, we've lost, for the quarter, $4.2 million. Just one thing to kind of keep in mind, we continue to improve the performance of those Thomasville stores, many of which we took back from our dealers. So over time, as those leases mature, we'll relocate, probably most, if not all, of those stores within their markets because a number of them were put by dealers in the wrong places, that were the wrong sizes. So we've been able to improve them as we've taken them over but they'll improve more as time goes on.

John Baugh

So, Steve, over on the other retail I see almost $1 million in the quarter of closed store SG&A. Is that basically, then, capturing all of the lease exposure, and any other expenses you have on maintaining the property on closed locations?

Steve Rolls

Yeah, and it's got - occasionally we have mark-to-market adjustments. As you know we continue to evaluate lease rates on closed stores, sublease if you will, market rates. Sometimes we have opened the store back up and it's gone the other way, so there are puts and takes all along the way, but yeah, you're right. Those are the expenses of those dark stores.

John Baugh

And then I lied. I have one more. We're all aware of the macro issues that have developed in the last 60 days. Any comment on the trend business as you went through the quarter and recently? Thank you.

Ralph Scozzafava

Yeah, thanks John. I think over, let's call it throughout second quarter and first quarter, we felt like clearly we were in a recovery. Still feel that way. I would tell you probably the last 60 days - I just came back from the Las Vegas market and was with a number of dealers, and we've seen a little bit of a slowdown and I think that's part of being in the summer. It's part of being in July. I also think to your point, John, there's some macro news that people tend to react to. What we've got to do is we've got to keep bringing great product to market, be more aggressive marketing and driving traffic to stores, ours and our dealers and keep working along on the cost side of things, and I think we'll be fine.

Operator

Your next question comes from the line of Budd Bugatch of Raymond James. Please proceed.

Budd Bugatch – Raymond James

I want to go and explore, as John was, some of the retail performance. As I look at just the Thomasville stores, your SG&A was 60% as a percentage of sales, where the gross margin looks like it approached about 44%. So that's a pretty sizable gap there in a fixed cost business. Can you give us some clarity as to what may be in that SG&A that's so out of whack?

Ralph Scozzafava

Yeah, I think a couple things, Budd, and I think the biggest is the leases that we have that we're going to roll off over the next few years. We've got some pretty high lease rates, and as Steve mentioned for some pretty poor locations, so that's the first. I think the second piece of this is as we continue, and we have over the last few years, to get more stores back, we're able to put in a little bit more infrastructure, but it's hard to put in infrastructure that you can leverage when you don't have stores in contiguous markets. When you have stores in San Francisco and then you also have stores in Minneapolis it's hard to put a common warehouse in between that serves both. So we're developing, now, more efficient ways to service those stores, but you do have a little bit of cost that we certainly don't want to have in there. When the leases roll off I think we'll be able to [sell] for those with better stores, better locations, and not the excess footage that we have today.

Budd Bugatch

So on the first point, of the markets not being able to be contiguous, so your dealers have that issue too, your independent dealers. And so is that a commentary that they can't be profitable then as well? When you have a single market dealer? That would concern me if that were the case.

Ralph Scozzafava

No, I think it's just when you're running a national program like we're running, we're making sure we can supply all our dealers. We've got west coast distribution for them, we've got east coast distribution for them. A lot of times when we've taken stores back the warehouses that came with the stores were huge, and if you know someone that wants to buy some large warehouses, we have them. So we had some infrastructure that was too large, and that's what you absorb. So it's not - these aren't assets that we choose. These are assets that we had to take back.

Budd Bugatch

Warehousing cost is usually only a mid-single digit, or a low single digit kind of item on retail, so that's a bit surprising. The store occupancy would be a larger portion of that. Am I incorrect in thinking that?

Ralph Scozzafava

Store occupancy is the biggest piece.

Budd Bugatch

Store occupancy is the biggest piece. And it looks like you're doing about, if I calculate it right, and you can disabuse me of this calculation, about $175 a foot in those stores if they average about 12,000 square feet, on an annualized basis. Where do you need to be to make it profitable? If retail profitability is a key part of your strategy, where does that sales per square foot have to be to get you to profitability?

Steve Rolls

Budd, we actually - sorry because we don't really disclose our square footage - but I can tell you that our average square footage is higher than that, and that's one of the issues that we've talked about, where we've taken stores back from dealers that maybe didn't have the best ideas of where to put those and how large they needed to be. So you're right, around 12,000 give or take, is the right size, but we have some that are quite a bit larger. So that's something that we're just going to have to deal with and work through over time as those leases run out. And we'll get better and better at that. Obviously, and this is true for everybody, a little bit stronger economy will help on the top line, even in the good and the bad stores. Some of our stores make money, and some don't.

Budd Bugatch

So Steve, what's the timeframe then to roll off or get to an optimal structure in retail?

Steve Rolls

It will take a few years, Budd, because the leases, as you would expect, they run off at different periods. But it will take a few years to get there.

Ralph Scozzafava

We had the bulk, maybe this will help you, the bulk of these leases were signed in '03, '02, '04, in that kind of two three year range. They're typical ten year leases. We work feverishly to relocate stores, to sublease debt stores, and that's really the roll off schedule. You kind of do math from there.

Steve Rolls

And accordingly, when we take those stores back we evaluate them carefully and say, you know, occasionally, very infrequently in Thomasville we would shut one down and just let it go dark. It's usually the other ones. But we look at that and say, just at a retail level, can we make more money keeping it money or lose, perhaps, less money keeping it open than going dark. Obviously we keep the wholesale margin in there as well. That's not reflected in that profit number. But we try to be distinct about that and make sure we know what the retail piece is doing.

Budd Bugatch

And so the wholesale margin on - essentially your cost of sales would be the sales, the intercompany sales, from Thomasville the factory to the Thomasville-owned stores. Is that correct? And then you would get - which would offset your $4.2 million loss here is some margin times that near $15 million worth of revenues to the Thomasville -

Ralph Scozzafava

Yeah, you're exactly right, Budd, so I guess inherent in that assumption is that we wouldn't have those wholesale sales somewhere else, which that may not be the case. Obviously we'd probably have some of it but maybe not all of it.

Budd Bugatch

Yeah, that's obviously a strategic question. All right, just a couple of other nits if I could. What did cap ex look like, and what kind of projects are on the planning board now?

Ralph Scozzafava

I think the biggest ones, Budd, now, at this point, are to finish our facility in Indonesia, which we're moving forward on, and I think that's by far the most important one. We're done with phase one of it. We're in the middle of phase two. We're actually producing product there and then we're just - now by the end of Q1 we should have it fully up and running.

Budd Bugatch

And so for the year what do you expect to spend on cap ex? You spent $7.5 million in the first quarter and almost $4 million in the second.

Steve Rolls

We didn't give that guidance, but the first quarter also had a payment for our SAP licenses, which was the bulk of that. And so besides Indonesia we have maintenance capital expenditures that aren't really all that huge.

Ralph Scozzafava

I would use, Budd, $25 million to $30 million would be the total for the year.

Budd Bugatch

$25 million to $30 million, okay. That's fine. And of that, then, I would take it much of that is Semarang, or much of that's Indonesia, and then when does SAP start to bump up the cap ex means?

Ralph Scozzafava

Well, a lot of it is maintenance. Some of that, call it a third of it, and then the rest of the projects that we're talking about. SAP, and Steve can give you more information on it, is in the early early stages now of the blueprint. We don't anticipate going live - and it will be staged rollout, so it will be small pieces at a time, and that's well into 2011.

Steve Rolls

And actually, the licenses came in that first quarter, which is why we had that larger number, and probably most of our Indonesian spending will be in the third and fourth quarters.

Budd Bugatch

So you don't need more capital, then, to fund SAP as it becomes live in terms of equipment or other -

Steve Rolls

We will. We'll be spending some money on equipment. Understand that that's a long process of rolling out. We're going to have a phased rollout of SAP across our brands, so it will be over, call it a three year period, give or take, and the biggest piece was the upfront licensing fee. But we'll have some equipment costs going forward as well.

Budd Bugatch

And is depreciation - are we right to think about it as something around approaching $6 million a quarter?

Steve Rolls

Yeah, that's kind of where its - it's pretty predictable. It goes up and down with capital, but yeah.

Budd Bugatch

Okay, so this year it looks like pretty much a wash to expected cap ex.

Steve Rolls

Close, close.

Ralph Scozzafava

That's right.

Budd Bugatch

Okay, just, and lastly from me, talk a little bit about the brands. I know you don't like to get into quantification, which always is, for a company as diverse as Furniture Brands, a little bit of a frustration for we in the investment community, but you have indicated that upholstery is still stronger than case goods. Can you kind of go over, and maybe what's performing well, and what's - where is the opportunity? Where are the biggest opportunities in the company?

Ralph Scozzafava

Yeah, easy to do Budd. I think what's performing really well is upholstery, and I think you can see that - we see it in our own company. We see it across the industry. It's a relatively low purchase price for the consumer. They can fill in pieces. There's a wear-out factor and I think that's important. You can freshen a whole room with one piece. So upholstery's been very healthy for us. Case goods continues to be the problem at this point in time and I think a lot of folks that are in the case goods business are seeing that. When we see more turnover in homes, in whole homes and whole rooms get refurbed or redesigned, and I think we'll see a little bit more of that, but we're not waiting for that. We're bringing new product, got new product in Las Vegas right now. We've got a lot more new product that's going to come in High Point, in another month and a half. So the case goods piece has continued to be the lagging piece for us. The brand news that we like to see is our higher end brands, our designer brands. I mentioned the comments that that consumer's coming back, and it's almost a linear equation when we see the stock market move up, and we see people feeling better about their portfolios, the more affluent consumer tends to come back in the market. And we're seeing that on our designer brands. The sales numbers there are quite impressive.

Budd Bugatch

And when you look at the matrix of between upholstery and case goods how about between medium prices and upper prices. How does that factor in?

Ralph Scozzafava

We're seeing our upper price points perform well. Those designer brands that are selling to that high end consumer are showing significant double-digit type increases.

Budd Bugatch

So the brand that would be performing well for Furniture Brands would obviously be Lane, which is almost all upholstery with a little bit of case goods. The Broyhill upholstery, that's where the bulk of your upholstery sales are for the company, right?

Ralph Scozzafava

Yeah, in terms of volume Budd, that's where a lot of the volume is and I'll tell you those upholstery businesses are performing well. They've also been very aggressive around new product introduction and innovation. Lane has got some innovations that they're bringing to the market. They continue to improve their product and create a better value proposition. And I think some of the designs at Broyhill, some of the fabric choices, some of the frames and looks that they've been able to bring out that are more contemporary have really taken off, and that's important in this environment, and I will tell you from a placement point of view we feel pretty strong about the progress we're making getting more product on the floors with more dealers. And then our responsibility, as you heard in my comments, is to drive traffic to our dealers and get as many consumers, customers into their stores as we possibly can. That's our commitment.

Budd Bugatch

And when you said the designer brands are performing well that would be Pearson, HickoryChair, Henredon, Maitland-Smith, LaneVenture. All of them are performing well?

Ralph Scozzafava

That's our portfolio. Across the board if I agged them all up there are puts and takes in there, but for the most part, those businesses are performing as an aggregate group fairly well.

Budd Bugatch

Okay, and lastly for me, you've walked away from about $12 million a quarter of RTA business and you've walked away from some other businesses over the last couple of years. Now, as the water level has become lower, and more rocks are exposed, and you scrubbed your portfolio, is there any other major piece of business that you think you have to walk through and walk away from and call out over the next couple of quarters?

Ralph Scozzafava

As I sit here today, Budd, I don't see anything. I think we've done what we wanted to do. It's reflected in our gross margin, and it's something that we - so yes, I think we're where we need to be. We like the businesses we have. We're going to run them. And I don't see us in anything else that makes any of us question it at this point. The key now is to drive top line. Right? And it's drive profitable top line and as you well know it's about product, it's about having a great brand, it's about partnering with our dealers, and those are the things that we're doing. And we're just going to have to do more of them.

Budd Bugatch

So success in the third quarter versus the second, just if I could play a little devil's advocate, which you know I like to do, would that be - if revenues in the third quarter were higher than revenues in the second quarter, these two quarters tend to be about the same year over year as you've looked at Furniture Brands for many years.

Ralph Scozzafava

We're not going to be able to talk about a revenue number over this year. I think there's just too much in the way of economic uncertainty. Every time I pick up the paper I don't know whether I should feel better, not feel better. So we're just going to keep sticking to our knitting. We know what we have to do. It's about product, about brands, about our dealers, and that's what we're going to do.

Budd Bugatch

So despite all the good programs you've got it's still primarily a macro issue that you're facing?

Ralph Scozzafava

Well, I think we've got more work to do too. We're never going to wait for the macro. We're not doing that, that's for sure.

Hey Budd, we want to move on if we can. I appreciate you being on the call and engaging us this morning. Some great questions. Thanks.

Operator

Your next question comes from the line of Maggie Gilliam of Gilliam & Company. Please proceed.

Maggie Gilliam - Gilliam & Company

Not to beat a dead horse, but I was just wondering if it would be possible to say something about the retail business. Are you through getting rid of old inventory from stores that are closed? Or is there a little bit of unusual sales volume carrying on in the stores in the last quarter?

Ralph Scozzafava

There's none of that. Absolutely zero.

Maggie Gilliam

Good. And then, I was wondering if you could please give us a general update of where you stand in the manufacturing, how far you've gone and where you plan to go in Indonesia, Philippines, and domestically?

Ralph Scozzafava

Sure. You've seen our numbers and our gross margin growth is predominantly driven by what I'm going to call a very very strong supply chain team. They're doing a terrific job, and they're probably in the fourth or fifth inning, and, I shudder to say, fifth, of a nine-inning game. They've got a lot more work to do. The lean implementations that we've done in our own domestic facilities are really just starting, over the last couple of quarters, to deliver what we expect them to deliver. So we're excited about what could happen going forward. Now of course, that could always be mitigated by a raw material change, cost change, and we deal with that. As far as Asia, again we're excited about Indonesia and about getting inside our own facility and putting some of our higher end brand volume in there, and we think that we've got a good team in place running that facility and we want to get it up and running. You know it's a relocation for us from a different plant that we had in Semarang. We're going to move all of that production there, and potentially more. So we like that plant. We've also made significant improvements in Cebu in the Philippines, where we do another big slug of high end case goods and we like controlling that facility also. We've made progress. We've increased our gross margin. We've got more work to do, but as anyone knows who's running a manufacturing operation, it's a daily job. It's every day, every minute. Every penny counts, every minute counts, and we're getting better and better at it.

Maggie Gilliam

Do you think you've got the proper balance now among the various sourcing places?

Ralph Scozzafava

You know, that's - it's a hard question to answer because there are things out there that you don't know you don't know. We always like to think it's optimal, but we never accept that. It's not optimal. There's more we can do to partner better with some of our suppliers and of course to get our own facilities up and running. So more to do.

Operator

[Operator instructions.] You have a follow up question from the line of John Baugh. Please proceed.

John Baugh

Just a quick question on inventories. They're down nicely year over year, but there's a pretty good use of cash year to date. Any thoughts going forward with your inventory position?

Ralph Scozzafava

Yeah John, we took inventory up just a hair over the last couple of months. We had an internal project here that we called "Uptick" and it's all about being able to be ready for demand to come back. As we continue to get better at our sales and operations planning, you'll see us get more productive with our inventory. I'd anticipate by year end that we'll take inventories down. We won't put a number out there but they'll be below where they are today. And we're just going to keep working at getting better at having in-stock positions. Our in-stock positions are the best they've ever been. Our customer service levels this quarter were better than last quarter, which was the best quarter we'd ever had. So we're getting better and better at it, but the key is being stocked for our dealers. That's priority number one, and have fresh inventory, and then to Maggie's question, not get yourself in a position where you've got to take big liquidations. We don't want to be doing that.

John Baugh

And then lastly, guidance on the share count going forward?

Ralph Scozzafava

That's a tough one to answer. We just made a contribution to offset a pension issue, so we'll see how we manage through for the rest of the year. We're not sure.

Steve Rolls

And as you probably know, those shares that were contributed get averaged in over time, so the full impact on the share count takes about a year.

Ralph Scozzafava

Okay. John, thanks, and I want to thank everyone else for being with us this morning. We've done a lot, and we've got a lot more to do, and we look forward to seeing everyone, and hearing everyone, on our next call. Take care everyone.

Question-and-Answer Session

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