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La-Z-Boy (NYSE:LZB)

Q1 2012 Earnings Call

August 24, 2011 8:30 am ET

Executives

Kathy Liebmann - Director of Investor Relations and Corporate Communications

Louis Riccio - Chief Financial officer and Senior Vice President

Kurt Darrow - Chief Executive Officer, President and Executive Director

Analysts

Chad Bolen - Raymond James

Bradley Thomas - KeyBanc Capital Markets Inc.

Todd Schwartzman - Sidoti & Company, LLC

Matthew McCall - BB&T Capital Markets

Operator

Good morning, ladies and gentlemen. Welcome to the La-Z-Boy Fiscal 2012 First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kathy Liebmann, Director of Investor Relations of La-Z-Boy Inc. Ms. Liebmann, you may begin.

Kathy Liebmann

Thank you, Jackie. Good morning, everyone, and thank you for joining us to discuss our fiscal 2012 first quarter results. Present on the call are Kurt Darrow, La-Z-Boy's 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 President and Chief Executive Officer. Kurt?

Kurt Darrow

Thank you, Kathy. Good morning, everyone. Yesterday afternoon, we reported our first quarter results for fiscal 2012. We posted a 6.4% consolidated sales increase for the quarter, a 9.7% same-store sales comp for the La-Z-Boy Furniture Galleries network of stores and a delivered sales comp of 10.4% in our company-owned retail segment for the 68 stores we had in last year's first quarter. We also continued to make progress in our retail segment, marking the 10th consecutive quarter of improved performance. And importantly, excluding the valuation reserve reduction, we improved our operating income by more than $5 million in fiscal 2012 first quarter versus last year's first quarter.

Given the first quarter is typically our slowest volume period due to seasonality issues associated with the summer months, overall, we are encouraged by these numbers. It goes without saying, however, that the volatility pervading in the financial market is unsettling to the consumer, and we remain cautious given the macro economic environment. Against that backdrop, we are continuing to work to drive traffic to the store system, while at the same time working to further improve the efficiencies of our various operations to ensure profitability.

As we move into the fall, which is typically a stronger selling season for furniture, we believe we are well positioned to improve our performance by leveraging the lean operating platform we have created. Additionally, our balance sheet remains strong, our service position is excellent and we continue to be pleased with our new brand platform and marketing campaign.

On the upholstery side of the business, sales increased 7.7% to $217 million versus last year's first quarter, and our operating margin increased slightly to 5.1%. Our Mexico-based cut-and-sew facility continues to improve its efficiencies and is delivering results, although the level of savings this quarter was impacted by a negative currency adjustment due to the peso devaluation. Additionally, our new advertising campaign featuring Brooke Shields continues to drive qualified traffic to our stores and dealer base, and we have seen a lift in our web traffic as well. Our margin for the quarter, however, was impacted by a slight shift in our sales mix when we saw consumers demonstrate more caution, slightly modifying their buying habits and purchasing fewer higher-priced items. For the period, the composition of sales was more heavily weighted to major upholstery and stationary items rather than the more expensive leathers and our core recliner product where we generate a better gross margin. During the quarter, we also experienced an increase in transportation costs and incentive compensation levels versus the prior year. In total, these 2 items represented a $1.3 million differential versus last year's first quarter.

And I mentioned a moment ago, we believe the new marketing campaign is driving qualified traffic to our stores and to our dealers. Five new commercials will be rolled out this fall, building the momentum of the campaign. For the year, our advertising spend on the Brooke Shields campaign will be approximately $3 million higher versus fiscal 2012. But because the campaign was launched in last year's third quarter, specifically in November, the additional $3 million will all be recognized in the first half of fiscal 2012.

On an annual basis, we continue to believe, with adequate volume, our upholstery segment can operate with a low double digit operating margin, reflecting our lean operating platform as we experienced in the fourth quarter when we posted a 10.3% margin.

Turning to our casegoods segments. Sales for the quarter declined 7.4% to $34 million compared with last year's first quarter when we had the very successful launch of the Nickelodeon youth collection by Lea. Lower volume levels and higher raw material and finished goods costs impacted our operating margin, which declined to 1.6%. We did institute a price increase across all of our casegoods brands late in the first quarter, which is expected to improve our profitability going forward. Although there have been quarters with sales increases over the last couple of years, in general, compared to the upholstery business, the casegoods business is more challenged in a difficult macro economic environment given the higher-priced nature of wood and room groupings and their replacement timeframes.

On the sales side, we have had success in opening a number of new accounts across all of our brands and believe the expanded footprint on dealers' floors position us well going forward. On the operating side, our team continues to fine-tune our operations and look for ways to better balance production to garner greater efficiencies across the segment. Now let me turn to the retail segment.

For the quarter, delivered sales increased 38.3% to $48.8 million over the prior year period, and delivered sales for the core 68 stores that were included in last year's first quarter increased 10.4%. The additional sales increase mainly reflected the acquisition of the 15 Southern California stores this past February. In addition to the double-digit sales increase on the core store base, we continue to make progress in our operating performance, posting an operating loss of $3.4 million, versus $4.9 million in last year's comparable quarter.

During the quarter, our conversion rate continued to improve. With relatively flat traffic, we increased our close ratio, reflecting better selling process and a more qualified customer entering our stores. Additionally, promotional activity and better merchandising tactics drove an increase in our gross margin in this segment. While we continue to work to bring our sales to occupancy ratio into better alignment, our remaining cost structure throughout the operation is tight. And this, combined with improved selling and merchandising processes, has driven improved results in the segment. As an example, we acquired the 15 stores in Southern California this past February. Up until that point, they operated as a VIE and were losing money. After we instituted our processes throughout the base of stores, their performance improved and they essentially broke even in this first quarter.

Driving sales and making our retail segment profitable are our top priorities. Once profitable, the advantage of the blended wholesale retail margin inherent in the integrated retail model will fuel profitable growth. And this model is a key pillar of our focus on proprietary or branded distribution where we believe we have the greatest opportunity to drive sales and grow the business as the distribution landscape continues to change.

Last quarter, as an example of our ongoing commitment to invest in our business to drive growth, we mentioned we were introducing a new store concept. Over the past several weeks, we opened 2 new concept stores in the Providence, Rhode Island market. One store is brand new and the other is a renovation of an existing store. Although too early to draw any conclusions, we are pleased with the performance of the remodeled store compared with its performance of last year. The new format with a more modern look and feel is designed to enable the consumer to more easily navigate her way through the store, which is organized by style categories rather than specific room or product type. Importantly, the format is designed with the objective of enabling us to increase the average transaction per customer by enhancing the look of the furniture and highlighting the customization opportunities that are available.

Those independent dealers who have seen the new concept are excited about it, and once we go through some fine-tuning, we will formally roll out the concept with all new stores planned for opening in the future. Going forward, as part of our longer-term remodel strategy, the new format will be phased in as financially prudent throughout the 300-plus store network over an expanded period of time. I will now turn the call over to Mike to bring you through the numbers and some of the more unusual items for the quarter. Michael?

Louis Riccio

Thank you, Kurt. For the fiscal 2012 first quarter, net sales were over $280 million, up 6% compared with the prior year's first quarter. And for the quarter, net income attributable to La-Z-Boy Inc. was $45.5 million, or $0.85 per share, of which $43.4 million, or $0.81 per share, was attributable to the reversal of certain valuation reserves against the company's deferred tax assets. In last year's first quarter, we essentially broke even. The reduction in the valuation allowance was primarily the result of the company's positive cumulative taxable income generated over the past 3 years. This reversal of certain valuation reserves obviously affected our effective tax rate for the quarter. With our federal deferred tax assets pretty much reinstated, our effective tax rates should be in the 38% to 40% range for the remainder of the year, not taking into account any other discrete items. We do believe that our valuation reserves relating to our foreign jurisdiction totaling approximately $2.5 million will reverse in the third or fourth quarter of this year as well.

Now I'd like to take a moment to talk about the Southern California stores, which were previously accounted for as a VIE and now are accounted for as part of our retail segment. In general, the results of the VIE impact our operating margin and go as far as the net income line. Then the results are reversed out through the noncontrolling interest line, net of tax, and are not included in our net income attributable to La-Z-Boy Inc. or our earnings per share number. So in the past, the Southern California store sales were included in the consolidated sales number but not accounted for in any of our 3 major segments. Today, their sales remain in the consolidated sales number but are in the retail segment sales line because they're part of the company-owned retail segment.

Additionally, their operating income or loss was also included in the consolidated operating income line. Previously, the results, whether profitable or lost money, were not included in our earnings per share attributable to La-Z-Boy Inc. number because they reversed out through the noncontrolling interest line. As of the fourth quarter, performance of the Southern California stores impacts our earnings per share attributable to La-Z-Boy because they are no longer a noncontrolling interest.

So in short, there's no change to the consolidated sales number, but there is an impact, one way or another, to the earnings per share figure depending on performance. And importantly, when you do your modeling, you need to ensure that your assumptions for earnings or losses from those stores are removed from the noncontrolling interest line and, instead, go through the P&L all the way down to earnings per share. With only 1 VIE left that has 8 stores and portions of our overseas joint ventures now the only items going through the noncontrolling interest line, we do not expect this adjustment to be as substantial as it had been in the past and, in fact, it could be a subtraction from net income.

Now let's shift to the balance sheet. For the quarter, cash provided by operating activities was $3 million. We ended the quarter with $110 million in cash and $101 million of availability under our revolving line of credit. Our total debt stands at $31 million, leaving us with a net cash position of about $80 million. Our inventory for the quarter is higher than last year, reflecting higher raw materials, primarily purchased cover, to ensure we are in a good service position as we move in to the stronger fall selling season. Capital expenditures for the quarter were about $3 million and are expected to be in the range of $15 million to $20 million for the full year, reflecting upgrades to our IT systems, including our ERP implementation, investments in transportation equipment, the normal replacement of machinery and our new stores. Kurt?

Kurt Darrow

Thanks, Mike. As I mentioned at the outset of the call, the operating landscape for our industry remains challenging given the volatility in the financial markets and the discretionary nature of furniture purposes -- purchases and, as a result, we remain cautious regarding the consumer. However, we are moving in to what is historically a stronger sales period and believe we are well positioned to increase our market share given the strength of the La-Z-Boy brand, our product offerings, our new advertising campaign and our vast network of proprietary distribution outlets. Additionally, with a lean operating structure, we are poised to convert well on the additional volume.

We are confident we have the right business model going forward and are pleased our performance has allowed us to reverse a portion of our valuation reserve against our deferred tax assets. Importantly, we will continue to invest in our business to ensure we return value to our shareholders through profitable growth. The heavy lifting of making significant changes to our business structure is behind us, and the changes made are bearing fruit. Investments in our brand, in our store system, innovation, IT and transportation will continue as a means to both support and grow the business going forward. We want to thank you for being on our call today, and I'll return the call back to Kathy.

Kathy Liebmann

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.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Budd Bugatch of Raymond James Financial.

Chad Bolen - Raymond James

This is actually Chad filling in for Budd. In the release, you guys called out several factors that negatively impacted the upholstery margin. And kind of looking ahead and thinking about some of those buckets, I mean, I presume you'd be getting some relief on the transportation costs or commodity costs at least at some point. And then it sounds like you've got another quarter where you'll be seeing increased marketing spend year-over-year. I guess, how do we think about some of the other issues? Is the mix issue something you see persisting? And then what about the higher incentive comp? Was that more of a one-time thing, or is that sort of a new run rate we should be using?

Kurt Darrow

Excuse me. Good question, Chad. We tried to call out in the remarks today that the transportation incentive comp levels were about $1.3 million, but we will get some relief on the transportation side as we adjusted our rates to our customers. The incentive comp, which, depending on performance, might go through the year this way. If you remember last year, we didn't make any money in the first quarter, so we weren't booking much incentive comp during that time. So that could be continuing. On the marketing side, we talk about the $3 million extra spend here in the first half. About 1/3 of that was spent here in the first quarter, and the balance will be spent in Q2. But we believe, based on our sales performance and our store performance compared to what we've seen in the industry, it is paying dividends. The mix issue was a surprise to us. We didn't think -- that wasn't in our plan. I'm not positive it will continue in that direction. If it does, we will have to make some adjustments. But I just think it was a temporary adjustment as we changed some of our merchandising tactics. So our plan is that will come back into a more normal situation, and that won't be a drag on us throughout the whole year.

Chad Bolen - Raymond James

Okay. Great, that's very helpful. And Kurt, you also mentioned in your commentary you continue to see improved conversion rates, which is encouraging, although traffic was sort of flattish. Can you give us a sense of, I guess, on those metrics, were they relatively consistent during the quarter? Is it -- did it get better, or did it get weaker as the quarter progressed? And then, obviously, in early August, we had a lot of volatility in the stock market and quite a bit of negative news surrounding the whole debt ceiling debacle. Did you see a significant step down or change in consumer behavior in the month of August related to all that?

Kurt Darrow

Actually, Chad, as we went through the quarter, we had more strength in June and July than we had in May at retail. So there was momentum building as we went through the quarter. In terms of what's happened the last few weeks, I guess our best point of reference is when a similar situation, not exactly to the same degree, but when it happened in late 2008, we saw an immediate 20% to 25% drop in sales, and it stayed there for an extended period of time. We have seen nothing to that magnitude today. We have seen a normal run rate of the business and have not seen the customer totally pull back, although I'm not -- I'm pretty positive that none of the news is good for the consumer and their confidence, but right now, she hasn't decided to stop shopping, and we'll see how the fall plans out here.

Chad Bolen - Raymond James

Okay. Last question for me. I mean, I know you've talked in the past about being pretty comfortable having a nice cash position given a lot of the macro uncertainties out there, and the stock has pulled back pretty significantly and I think it's now trading below book value. Have you or the board changed your thinking with regard to repurchasing shares?

Kurt Darrow

We look at this every 90 days. In fact, at our board meeting this afternoon, after our shareholder meeting, we will be discussing it. We have a number of options that we want to consider. At the same time, given the volatility of the markets, we want to make sure that we don't do anything that would change our solid financial position. So we will be talking about it today and try to evaluate our options and what's in the best interest of the company and our shareholders.

Operator

Our next question is coming from Matt McCall of BB&T Capital Markets.

Matthew McCall - BB&T Capital Markets

Actually, I wanted to follow up on a couple of questions. When you look at the upholstery business year-over-year, just simple math here, revenue up $12 million, operating income up only about $1 million. You called out some of those items, and I think you talked about the outlook going forward. Can you help us understand the impact of mix? Can you quantify that impact? Can you quantify the impact of the peso? I saw that you broke out 0.4 points in the Q from freight, and you've given some more insight on that -- on the incentive impact, but what about those other items? And can you help us understand how to make those adjustments going forward?

Louis Riccio

So Matt, on the peso issue, the reason we called that out in the discussion of our savings in Mexico is -- not that it was a huge number, it was probably about $0.5 million to the gross margin line, but if it continues to devalue, then, as we talked about in the first quarter -- or the fourth quarter, we're talking about that as it was devaluing that it would impact our savings somewhat. So we just wanted to make sure everyone understood that it wasn't the greatest source of our impact there, but if it keeps devaluating, it could be $2 million for the year if it stays at the same rate. If you think that -- but the peso changed throughout of all last year, so when you compare it to last year, the second half of the year was a little stronger than the first half of the year, so it just really depends on how the economy works on that, and how we end up with it. But it was probably about $0.5 million this quarter.

Matthew McCall - BB&T Capital Markets

Okay. And then the mix impact and just specifically upholstery on your profitability?

Kurt Darrow

We're not going to quantify that, Matt. We -- because there's pricing, there's discounting, there's mix, there's all kinds of things. And we try to give you -- between the things we've given you, we've given you almost $3 million of reasons why we didn't have quite the same conversion that we would have expected. Part of those we think are corrected and will not carry in, and part of those could continue based on what happens to the currency and our incentive comp side.

Matthew McCall - BB&T Capital Markets

Okay. All right. Got it. So it was interesting to hear your last comment when you said what we're seeing is basically normal seasonality. I think if you looked at the headlines in the news services, they're really focusing on the cautious outlook in your business outlook or your commentary there. So as we look forward, I think the normal progression into the stronger seasonal period is up about 15%, if I look back historically that's about where consensus is. So I know you don't give guidance, and no offense here, but the headline or the business outlook seems to be a little bit counter to what you just said to the earlier question about normal seasonal patterns playing out. So if you can just clarify?

Kurt Darrow

Matt, I would answer that, that in this regard, we -- it's only been a couple of weeks. And as I said in my comment, I don't think any of this news is really good for the consumers. So I think 3 weeks doesn't make the year, and we've got to be mindful of what's going on. I think the furniture business, in general, will have a better idea of what all this is meant to the consumer after Labor Day weekend. I think Labor Day weekend is either the second or third highest sales holiday in the year for us. And if we go through that weekend and everybody is at or comps or beats last year, then I would say the normal seasonality for the fall, we probably would start to plan that way. If we go through the holiday and sales are off 20%, then I think some planning is going to have to be adjusted. So I think it's too early and too new to give you a firm projection. We'd like some more spacing to get beyond what's happened the last 3 weeks before we really clarify anything, and I think Labor Day will be a big read.

Matthew McCall - BB&T Capital Markets

Got it. And the last question. You talked about the anticipated cost savings in Mexico. Can you help us -- and this kind of goes back to the peso question. Mike, can you help us understand what the expectation is for the progression of that cost savings through the rest of the year and maybe if the peso doesn't change from here, what the net impact would be for the remainder -- remaining 3 quarters?

Kurt Darrow

Well, Matt, we advised last quarter that if the peso changed, that would diminish our savings. And we've told everyone that we believe we can garner -- if we can get the volume that we've planned, we can garner $9 million to $10 million worth of savings on an annual basis. And while it won't be an even flow quarter-to-quarter, it'll be more in the first half of the year savings on a progression than it would be in the back half. But to Mike's point, if we got all $10 million in actual savings from operations, then the peso affect is $500,000 a quarter going forward, our net savings is only going to be $8 million. That's kind of the brackets of the -- of our Mexico operation.

Kurt Darrow

But we are getting the savings that we -- forgetting the valuation issue of the peso, we are getting the savings that we expected throughout Mexico. But for this quarter, unfortunately, it just wasn't as high as we wanted to be because of the peso.

Matthew McCall - BB&T Capital Markets

Got it. And I'm sorry, I'll sneak one more in. The price cost, the inflation impact, going forward, you quantified some of the hit in the past, what would the anticipation be this year?

Kurt Darrow

What we're seeing right now is it's on par with last year. Unless something would change in the back half of the year, we're probably going to experience somewhere between $18 million and $20 million worth of price increases across raw material increases across all of our business. That includes casegoods. That includes all of our upholstery businesses. But that is what our read is at this moment of what we're facing.

Matthew McCall - BB&T Capital Markets

But there are price increases in place that weren't in place last year, correct?

Kurt Darrow

That is correct. That is the big difference. And we had to adjust pricing this quarter in our casegoods business, and we had to adjust some pricing this quarter in our transportation rates to our customers. So both of those things, we did not get much help in those 2 areas in the first quarter, and then we'll get some help in the second, and they will be fully implemented in the third and fourth quarters.

Operator

Our next question comes from Todd Schwartzman of Sidoti & Company.

Todd Schwartzman - Sidoti & Company, LLC

Just to clarify, Kurt, and I do agree that 3 weeks do not make a year, but just to clarify, you said that you're hopeful that the mix issue won't be a drag for the rest of the year. Has the phenomenon abated at all in August thus far?

Kurt Darrow

I don't have any specific data yet to see from the -- what's been selling at the stores to tell you that, Todd. We had seen a slight improvement at the end of the first quarter, and I would think that would continue as we go into the second quarter. But you don't know, and it's hard for us to make a call on that.

Todd Schwartzman - Sidoti & Company, LLC

Okay. So again, Labor Day really will be much more telling?

Kurt Darrow

That's correct.

Todd Schwartzman - Sidoti & Company, LLC

And you've talked the -- on the retail side, you talked about the relative strength in June, July versus May. With the Furniture Galleries' written comps up 9.7% for the quarter, what was the pacing by month?

Kurt Darrow

I don't have that in front of me. We're giving you the quarter, and every one of the stores has a different pacing, depending on what part of the country they're in. And obviously, it isn't 0 in May, and 25% in July, but it's probably in the range of mid-single digits in May and low-double digits in June and July to get to the average. But I don't have that information right here in front of me. I think the important thing is we've put 2 quarters back-to-back of double-digit increases in the whole system, and I think that is outpacing what we're seeing with the rest of the business right now.

Todd Schwartzman - Sidoti & Company, LLC

Okay. And on uses of cash, where you rank reinstatement of a dividend vis-a-vis share buybacks at this point. And I know you're meeting later today.

Louis Riccio

We're not -- we look at everything individually and see where we're at. The problem with the dividend is with the way the last couple of weeks have gone and what everyone feels comfortable about going into the future, once you reinstate a dividend, you pretty much want to be out there for a long time with that and not have any changes to it. So our premise right now on that would be to kind of wait to see what the economy does and are we going to rebound or not what's going to happen and get a clearer picture of the future before we start thinking about those types of decisions. But we will talk about it again today. But to sit there and rank, I'd say what my original has always been we'll invest in the business to grow and to be more profitable before we do anything else and then the rest of the stuff will be based on the current market and what our strategies are there. And that's what we discuss every time we go to the board and have those meetings.

Todd Schwartzman - Sidoti & Company, LLC

Okay. And also, if any of you could please speak to the long-term strategic fit of casegoods. Whether you see that as a core operation? What's your longer-run views of the business?

Kurt Darrow

We have 2 operating companies and 4 brands in the casegoods business, and it's important part of our company. They've done a great job the last few years of getting the business model realigned, so it can be profitable. It's just a much more challenging business today because of the replacements, the time cycles and because it's a higher ticket. And so I don't sense that our casegoods team is performing any worse or better than the average in the industry. But it's also harder in the casegoods business to differentiate yourself from other people because we're all getting our product, most of it, from Asia. We do have a domestic plant left that gives us some differentiation. But it's a very competitive business. A lot of the businesses is done direct with major retailers. And so we're adapting our strategy to fix the -- to fit into the day's business cycle, but it's producing positive earnings. It's producing positive cash, and it's part of our strategy going forward.

Operator

[Operator Instructions] Our next question is from Bradley Thomas of KeyBanc Capital Markets.

Bradley Thomas - KeyBanc Capital Markets Inc.

Wanted to follow-up on the price increase that you put through last quarter. Could you just help quantify the impact of it on this quarter? I'm assuming you still had some orders they've been put through before the price increase went in. How much did that help in this quarter?

Kurt Darrow

Brad, we took a price increase in I think it was the 1st of March. And so probably, some of the orders in May that got delivered out were at the old prices. But it was, I think by and large, fully in effect for June and July. But you have to remember, July was only a 3-week month because we were shut down for a week and June and July are our lowest-volume months. So did we get a full benefit of it in the quarter? Probably not. Is going to be dramatically different as we move forward? I don't think so. We have -- as I said -- we said earlier, we felt that we took enough prices, and now with what we've done this quarter with our casegoods, we have felt that we have taken enough price to make up for the impending increases that we're going to have in raw materials.

Bradley Thomas - KeyBanc Capital Markets Inc.

Right. And then -- and you've made it very clear that the price increases are intended to offset the increases in material and transportation that you're seeing. Last quarter, I think it was characterized as about a 2% increase on average. With the incremental increase in casegoods, what does that look like across your product mix?

Kurt Darrow

I think we've said it was 2% to 3%, depending on the business unit. And since the upholstery business as a percentage of our business is so much higher than casegoods, the casegoods business won't -- it won't be a -- it won't change the overall percentage of the corporation's increase. So at the maximum, if you take our billion-plus dollars of sales and you put the 2.5% to 3% on, you're going to get in the $25 million to $30 million range, and we need that to cover what we're seeing and to hold our margins and protect our profitability. So that's the range you can think about.

Bradley Thomas - KeyBanc Capital Markets Inc.

Okay. Got you. And so as we look at gross margin at a consolidated level -- this is the first year-over-year increase in over a year -- it would seem like you have an ability to sustain that level of increase, especially as you move into quarters that generate a higher level of volume, is that reasonable to believe? Or are there any factors that you're seeing that could lead to a moderation, what the expansion was [indiscernible] ?

Kurt Darrow

Well, I think what we would be mindful of right now, Brad, is if our mix would change and we saw a higher percentage of the lower part of our line where our gross margins aren't as strong. If that got worse than we saw in the first quarter or had a substantial change because that's what the consumer was intending to buy, that could have an effect. But truly, yes, the second quarter was a full quarter of margin and with more volume and with a 13 versus 12 week quarter going forward, we would not expect our margins to go -- our gross margins to go down as we head into the balance of the year.

Bradley Thomas - KeyBanc Capital Markets Inc.

Great. And as you think about this mix issue that we saw during the quarter, are there other times that you can think of in the company's history where you've seen a similar impact? And do they tend to be temporary, or does it tend to be a phenomenon that occurs when the consumer's weakening? Or are there any anecdotes or examples that you could point to?

Kurt Darrow

That's a good question, Brad. And I would say that I don't recall one off the top of my head of what we saw this time, but I'd also tell you we have a lot better intelligence and us owning stores that we see it a lot earlier than in the past. So I think we're just more in tune to it now and watch it more closely. But I can't recall off the top of my head if there's been something like this in the last few years that we've called out or that was as significant as what we saw here in the first quarter.

Bradley Thomas - KeyBanc Capital Markets Inc.

Okay. And then just lastly, looking at SG&A up about $3 million year-over-year. You've given us a number of reasons why that would have been up about 4.5%. I mean, it stands to reason that, that should moderate as we go through the year. Is that a reasonable assumption? And then what are the areas that you would really maybe look to pull back on if we do -- did start to see some softness out of the consumer?

Kurt Darrow

So to answer the first part of your question, we would probably see a upspend in SG&A in the second quarter as we -- it would be the last quarter that we have the expense for the brand platform that we didn't have in the last year, and I would think the SG&A would then moderate to levels that we had in Q3 and Q4.

Louis Riccio

Right. And Brad, the $17 million increase in sales would also -- there is some variable portion of our SG&A so -- why the dollars went up more than some of the individual items that we talked about. We were mainly talking about the items that were more one-offs because of the difference in the quarter. We'll have some dollar increases because of the variability of our SG&A.

Operator

There are no further questions at this time. I'd like to hand floor back over to Ms. Liebmann for any closing comments.

Kathy Liebmann

Thank you, everyone, for participating on our call this morning. Should you have follow-up questions, I will be available. Have a great day.

Operator

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

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