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Executives

Kathy Liebmann - Director of Investor Relations and Corporate Communications

Kurt Darrow - President and Chief Executive Officer

Mike Riccio - Chief Financial Officer

Analysts

Chris Thornsberry – Raymond James & Associates

Matt McCall – BB&T Capital Markets

John Baugh – Stifel Nicholas & Company

Todd Schwartzman – Sidoti & Company

Laura Champine – Morgan Keegan & Company

[Joe Zapen] – Stone Tower

La-Z-Boy Incorporated (LZB) F3Q08 Earnings Call February 20, 2008 8:30 AM ET

Operator

Greetings and welcome to the La-Z-Boy Incorporated Third Quarter Fiscal 2008 Conference Call. [Operator Instructions] It is now my pleasure to introduce your host Ms. Kathy Liebmann, Director of Investor Relations and Corporate Communications for La-Z-Boy Incorporated.

Kathy Liebmann

Good morning everyone and thank you for joining us on this mornings call to discuss our fiscal 2008 third quarter results. Present this morning are Kurt Darrow, La-Z-Boy’s President and Chief Executive Officer and Mike Riccio our Chief Financial Officer. Kurt will open today’s call with some prepared remarks on the quarter and then Mike will speak about some of the more unusual items this quarter including the refinancing of the company’s debt. Following Kurt’s concluding remarks we will open the call to questions.

As is our custom the time allotted for this call is one hour. In order to allow everyone an opportunity to ask questions please limit your questions to two and if you have follow up you may reenter the queue. The 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 provide guidance and 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 remarks. 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. They may differ materially from actual results due to a wide range of factors. We undertake no obligation to update any forward looking statements made during this call.

With that let me turn over the call to Kurt Darrow, La-Z-Boy’s President and Chief Executive Officer.

Kurt Darrow

Good morning everyone and thank you for listening in this morning. As Kathy mentioned I will begin with an update on our performance for the quarter and then Mike will speak on several financial topics before I conclude with our prepared remarks and move to the question and answer period.

Our industry continues to face challenges across the board. From foreign competition on the manufacturing side to retail bankruptcies to a challenging sales environment for all players in the business. While we cannot control the external macro economic environment and its consequential changes challenges for our industry we are determined to strengthen La-Z-Boy’s positioning in the market place so that we emerge from this period as a stronger entity than ever before.

We are focusing all of our time and attention on ensuring that La-Z-Boy remains a competitive force in the industry with leading manufacturing, distribution and retailing capabilities. The unparalleled strength of our brand coupled with a significant retail presence through the La-Z-Boy Furniture Galleries network of stores will carry us into the future where we will compete successfully in a vastly changed environment.

For the quarter we reported sales of $373 million down 7.8% from last year’s comparable period with earnings per share of $0.18. In that number is the $0.02 loss from VIE’s and $0.09 in income from the anti-dumping duties collected. While our upholstering case goods business remain profitable even on lower volume reversing the performance of our retail segment and turning it profitable remains the number one priority of our management team.

As I discussed last quarter our team spent a significant amount of time and energy over the past several years working to rationalize our portfolio, transition our case goods business and deal with many other issues impacting our industry. With much of that now behind us we are able to dedicate additional resources to improve the performance not only of our company owned retail operations but the performance of our entire network of stores.

For the quarter sales in our upholstery segment were off 3.8% year over year and our operating margin was 6.9%. We are 80% the way through our “Sell your conversion project” at our branded facilities and will complete it by the early summer with the full benefit of the cost savings expected in fiscal ’09. In addition to reducing costs the “Sell your” process will increase our speed and quality helping us to deliver on our brand promise to the consumer which includes quick delivery of custom ordered upholstery.

Additionally, we are finding new and creative ways to merchandise our product by offering smart promotions to the consumer. As always we continue to evaluate all aspects of our upholstery operations to ensure we operate as efficiently as possible. Concurrent with the dynamic environment in which we are operating we realigned our La-Z-Boy branded sales force during the quarter as part of a longer term strategic initiative to give specific support to our various distribution channels.

We consolidated our sales representatives into 46 territories across North America and changed their role from a traditional wholesale sales force to a more consultant field organization focused on retail performance. As a result we decreased the number of sales reps by about 20% to approximately 100 which will decrease our related costs by about the same amount. It goes without saying that we appreciated the support and dedication of those sales professionals who are no longer with us and we wish them all the best in their future endeavors.

Another set of initiatives underway is focused on improving our leverage of the internet. First we are increasing our traffic to our website through improved search engine optimization and paid search marketing. These actions combined with our new marketing campaign have increased unique visitors to our site over the last few months by more than 35%. Second, we are implementing tools that will encourage our customers online to provide us with their contact information enabling us to regularly send them information on La-Z-Boy products, services and sales via e-mail.

For example, during our recent arm chair quarter back national sales event we had more than 60,000 register online during the two weeks of that promotion. The third piece is to ensure the experience we provide to our consumers on the web meets their expectations. Therefore, we are working on a strategy to leverage our site with online pricing and sales capabilities. With more and more consumers using the internet to either look at furniture before purchase or to actually make a purchase we are excited about the prospects of ecommerce and believe it will not only increase our visibility but make it easier for the consumer to do business with our company.

Now let me make some brief remarks on our case good operation. In the third quarter our sales were off 16.6% year over year and our operating margin was 4.2%. With case good products at higher price points in upholstery this segment of the industry is facing greater challenges as the consumer postpones furniture purchases. We reduced our inventory during the quarter comparable to our sales decline but in this environment it is difficult to do so without price reductions. Importantly even with our inventory reduction we maintain the high level of service that our customer is accustomed to. At the same time we continue to watch our cost structure and have indeed reduced the segments headcount by approximately 20% year over year.

During the quarter our petitioning company’s including American of Martinsville where we retained the rights to receive the anti-dumping distribution collectively received approximately $7.1 million net of legal expenses and distributions under the continued dumping and subsidy offset act and certain settlements proceeds in connection with wood bedroom furniture imported from China. As of October 1, 2007, the government has secured approximately $180 million in estimated anti-dumping duties but the final amount that will be distributed depends on the actual assessment rates apply at the time of liquidation.

In addition, approximately $40 million has been set aside pending a judicial process to determine whether company’s which were not part of the original petitioning group are entitled to receive any monies. While it is impossible to know the outcome of the proceedings or the exact timing of future distributions we look forward to a resolution with the monies released to the entitled parties. To the extent there are additional distributions they are likely to be made in December of 2008 and in December in succeeding years.

Depending on the outcome of the pending litigation and the claims submitted by qualifying producers we believe that we could receive between 10% and 18% of the remaining monies that are to be distributed.

In our company owned retail segment we posted an $8.5 million loss this quarter on an 18% decrease in sales compared with last years third quarter. During the quarter we opened our fourth and final distribution center in Chicago to support our company owned store program. In mid March we will complete our IT consolidation implementing it the last market Baltimore, Washington and Tidewater. While we have taken out significant structuritive costs from our retail business the benefit is not clearly evident because of the depressed sales volume coupled with the increased fixed cost of additional stores specifically our higher occupancy costs.

I’d like to take a moment to clarify the comparison and timing issues between the same store sales figures for our entire network of furniture gallery stores and the performance of our company owned retail segment. As we noted in our press release same store written sales for our store network which includes company owned and independent stores were down 6% for the 2007 fourth calendar quarter. That compares with the 18% decline in delivered sales we experienced in the company owned retail segment for the November through January time frame.

Therefore, we are referencing different three month periods with different measurements. Additionally, we were operating our going out of business sale in Pittsburgh during last years third quarter. Approximately 6% of the 18% sales decline in this years third quarter for our company owned retail segment was related to the fact that we are no longer operating in Pittsburgh. The third factor that the sales in our overall network numbers include our Canadian furniture galleries whose performance continues to be stronger than their United States counterparts.

In our company owned segment we are operating our stores in some of the markets that have been hardest hit by the housing down turn like South Florida which represents more than 10% of company owned stores. We believe that strengthening our store system to achieve greater penetration in the markets in which we operate is the right strategy. Having said that, in this environment we are slowing down considerably on our new store openings and doing what we can do to drive sales to our existing locations.

At the same time, we are taking a step back with respect to the execution of our strategy and are analyzing every aspect of our company owned retail segment to ensure that we improve its performance even during this difficult time frame. I spoke last quarter about expanding our warehouse operations throughout North America to service our entire base of stores. Now that we have completed our own retail consolidation with 12 warehouses moving down to four we are ready to roll out this service to our independent dealers over the next three to five years.

This summer we plan to consolidate four stores based in the central Pennsylvania market into our Northeast distribution center and when all is said and done we expect to service all of our stores with 10 to 20 strategically located warehouses throughout North America. These warehouses will replace some 85 to 100 individual warehouses currently used by our dealer base today. By providing back end operational support each dealer will be able to focus on sales and providing value added services to the consumer. At the same time, it will reduce their costs and allow them to have a better in stock position due to our new structure.

With that I will turn things over to Mike Riccio our Chief Financial Officer.

Mike Riccio

Good morning everyone. I will take a few moments to review some of the financial highlights this quarter. First as we previously reported we entered into a new credit agreement which we believe will give us greater flexibility to operate our business and to grow it profitably. Our new arrangement which has only a fixed charge coverage covenant if our availability goes below $30 million is an asset based lending facility secured against our inventory and trade receivables.

As part of the refinancing there was a make whole premium paid to our private placement note holders and the company will take a charge of $6 million in the fourth quarter. Cash on our balance sheet at quarter end was $63 million almost double that of the second quarter of fiscal 2008. That is the result of the $41.6 million that we generated in cash from operating activities during the quarter which included the $7.1 million proceeds from anti-dumping monies and a more than $8.6 million reduction in our inventory from last quarter.

Although we had no exposure to Wickes or Levitz, given the difficult retail environment we incurred an increase in our bad debt expense of approximately $3.5 million as compared to the third quarter of last year. Due to some uncertainty with respect to our existing dealer base. We also sold investments and realized gains during the quarter which increased our investment income over the previous years third quarter by $2.9 million. These gains related to investments the company has in certain non-qualified benefit plans and are being used for tax purposes to offset a portion of the capital losses incurred by the sales of Clayton Marcus stock. These proceeds were reinvested.

Our SG&A expenses increased $3.5 million on the 7.8% decrease in sales. The increase in dollars relates to three significant areas; first, last years third quarter had a $1.65 million reversal of our warranty reserve that was not duplicated this year. Second, as I just mentioned we recorded an additional $3.5 million in bad debt expense during the quarter. Third, we incurred an additional $6.6 million in advertising expense due to our new tier two advertising campaign.

However, we do not anticipate our net advertising costs to be up significantly for the full year when you take into consideration the reimbursement from furniture gallery dealers which is reported in sales. As you are aware the Board made the decision at its meeting yesterday to decrease the company’s quarterly dividend to shareholders by two thirds from $0.12 to $0.04 per share. The Boards decision reflects current industry conditions and its commitment to prudent cash management.

In addition to paying down debt the Board plans to reinvest the additional cash into the business as the company continues to execute on various aspects of its strategic plan for profitable growth. In this environment the Board with use the redeployment of cash into the business to transform the company will ultimately provide a better return for the shareholders.

Our effective tax rate for the quarter was 29.8% and was affected by some discrete items related to state tax issues. For modeling purposes you should continue to use a range of 38% to 40% on continuing operations for the remainder of the fiscal year. Our capex for the year is expected to be in range of $25 to $27 million about the same as our depreciation.

I thank you for the time this morning and I’ll now turn the call back over to Kurt.

Kurt Darrow

As we continue into 2008 we are planning and managing for a difficult year for our industry. That said, we are keeping our heads down and working to control all that we can. We have important strategic initiatives being executed by talented people and we are confident we will navigate our way through this period by capitalizing on our brand, growing our proprietary network of stores, remaining a leading and efficient manufacturer, distributor and retailer and managing this company for profitable growth.

We are maintaining our guidance for the second half of fiscal 2008 and expect sales in this period to be down 4% to 8% and earning per share to be in the range of $0.06 to $0.14. the second half 2008 range does not include restructuring charges, income from anti-dumping monies, interest expense for our make whole payments on our private placement notes or gains and losses on the sale of discontinued operations. These expected results compare with a $0.30 per share from continuing operations in the second half of fiscal 2007 which included $0.11 per share charge for restructuring, a $0.14 per share gain on property and a $0.04 per share in come from anti-dumping monies.

We appreciate you being on the call today and I will turn things over to Kathy to begin our question and answer period.

Kathy Liebmann

We will begin the question and answer period now.

Question & Answer Session

Operator

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

Chris Thornsberry – Raymond James & Associates

A quick question on the guidance, if you exclude the anti-dumping stuff in this quarter you get about $0.08 to $0.09 and your guidance is unchanged at $0.06 to $0.14 that implies a loss of $0.13 to a $0.05 gain in the quarter and sales of flat to down 8% is my thinking wrong there for the fourth quarter?

Mike Riccio

Let me answer that question just to give some clarity because I knew this question would be asked. It’s our perspective on this and how we view this. We have the $0.18 out there $0.09 for anti-dumping and we have about $0.04 in there for this capital gain. We are taking that out as well as far as looking at our earnings that we earned this quarter. Since that number really isn’t part of operations and was just more of a tax advantage strategy that we had. That’s one of the perspectives we have of why we are leaving our guidance where it is.

Chris Thornsberry – Raymond James & Associates

The sales, is our thinking okay there, you are looking at flat to down 8% for the fourth quarter?

Mike Riccio

That is our perspective, yes.

Chris Thornsberry – Raymond James & Associates

Does that imply some margin decline from third quarter to fourth quarter and if so what would be driving that?

Mike Riccio

You have to look at the entire range of the guidance. We just didn’t feel it would be prudent to update the guidance based on where we currently stand. We don’t think margins are going to jump up in the fourth quarter from where they are now. We are not looking at a significant decline in margins over the next quarter. We do have some additional SG&A costs that are coming out because of our marketing campaign and those type of things. We are not seeing a major degregation of our margin at the present time. It will just figure out how low volumes go to determine how well we can operate our plan.

Chris Thornsberry – Raymond James & Associates

My last question then I’ll yield to others. Could you touch on what you’ve seen so far half way through the calendar first quarter system wide in retail what trends have been, have they accelerated, decelerated could you talk about that a little bit?

Kurt Darrow

I think our comment on that would be we haven’t seen a significant change either up or down. It’s still a very tough environment out there. We have pockets of the country that are doing better than others. This down turn is unlike others in our view in that depending on the impact of the housing market to the specific trade area it has a huge affect on sales. It is still difficult sledding out there.

Chris Thornsberry – Raymond James & Associates

Internally are you looking for any kind of bounce back from any of the stimulus packages or any of the stuff going on with the Fed lowering rates looking out maybe a year from now?

Kurt Darrow

That’s hard for us to calculate. I think every time we get a little bit of good news like that, I hear this morning gas prices might go up to $3.75 a gallon. That is not something we are hanging our hat on. I think more importantly from our perspective that the market place the consumer has to see some sign that bottom has been hit. They are starting to be some turn over off houses again. We start to get through this glut of unsold houses and get back the perspective of four to five months of houses on the market instead of 12 to 14. There are a lot of factors at work and our crystal ball isn’t any better than probably yours.

Operator

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

Matt McCall – BB&T Capital Markets

Let me jump back to the initial question. The number you are using for Q3 is essentially $0.05 and so we can deduct that to get the range for Q4, did I understand that correctly?

Mike Riccio

That’s the math that appears to be the right way to go. We are not trying to play games here, just stay within the realm of what the rules are. Yes, that would be the math of $0.18 minus $0.09 minus $0.04.

Matt McCall – BB&T Capital Markets

Just making sure I’m looking at it the same way. When you initially provided the second half guidance were you including the benefit of tax rate and it sounds like the initial question I was going to ask was the other income benefit included but it looks like you are stripping that out now.

Mike Riccio

We can sit there and talk about all kinds of things. We have a cent here a cent there and all the different expenses and pick ups. The ones that I’m bringing out to be prudent, what our guidance was the two items. That’s as far as I’m willing to go with that.

Matt McCall – BB&T Capital Markets

I’m just trying to gauge what may have changed versus your initial perception. Even though the second half guidance didn’t change what could have actually changed in the industry, that’s what I’m getting at. The warehouse changes, I know it’s a three to five year horizon, you talked a little bit about the benefit for your network of stores, what about the benefit for the company. Obviously there is going to be some changes there. Can you talk about what the benefit would be there near term or over the next five years?

Kurt Darrow

Good question, I think there are a number of benefits involved for the whole system. It will lower our cost of doing business for the entire network of which we are a part of. It will allow us the opportunity to stay in stock and better flow goods from our facilities to our warehouses. It will also have a significant change on our accounts receivables with the dealers now not carrying nearly as much inventory but us carrying the inventory and be responsible for the flow. I think you’ll see both a P&L improvement in certain areas as well as a balance sheet change as we go through the process.

Matt McCall – BB&T Capital Markets

Mike, jump a minute to your comment on the advertising expense. You said the advertising expense or spending should not be up year over year and explained why but if we just look at Q4 we haven’t anniversaried the initial increase in spending so we should still see increases year over year at least in Q4 is that correct?

Mike Riccio

It’s all component driven. The reimbursements we get from our dealers shows up in sales. The expenditures that we have on their part and ours is we are spending the money shows up in SG&A. The net advertising cost for the whole year is not going to be up significantly but the way the components are being shown it may be a little higher within the component of SG&A for the fourth quarter still.

Matt McCall – BB&T Capital Markets

I’m sorry I’m over two questions but you’ve referenced a lot about SG&A a little high and we expected but so was gross margin. If we look forward anything that sequentially should change? Remind me of the seasonal impact of Q4 versus Q3 on the gross margin line. Should we see any margin pressure there or are we going to remain in this high 28% range?

Kurt Darrow

Typically our fourth quarter has been slightly above our third quarter. That was more typical when we were 100% a manufacturer or distributor as the business has evolved and the retail seasonality’s may be a little different than the wholesale. We are not clear on exactly how that is going to change. I think the one difference on the gross margins on the wholesale side is the fact that in the third quarter we have a few more days that the facilities are closed due to the holidays.

In the fourth quarter we run pretty much full out the entire quarter because there are not any holidays with the exception of the Easter holiday. I think there may be some differential there but it wouldn’t be substantial. That is the only difference that you would see in a run rate.

Mike Riccio

Just to clarify what Kurt said. For the most part we are talking about this is now VIE’s and the retail being and the third quarter being more seasonal for them and the fourth quarter being more seasonal for manufacturing. What we are getting a little skewed on our margin in the third quarter over historical levels because of the impact of the retail on our margins.

Operator

Our next question is coming from John Baugh of Stifel Nicholas & Company.

John Baugh – Stifel Nicholas & Company

Three questions, number one you referenced doing some promotions or creative, without giving away trade secrets could you elaborate on what you are doing specifically and the impact of it?

Kurt Darrow

I think we are just looking back and trying to be a little more creative. A lot of the tried and true promotions that have been run typically with our business aren’t as effective as they used to be. One of the events was the arm chair quarter back sale that we’ve done the two weeks leading up to the Super Bowl. While we’ve always had a football or end of the year sale it wasn’t as well coordinated, it wasn’t as integrated, it wasn’t as powerful as this last sale, also including the internet component.

We are just trying to do things, learning from other people what has worked and making sure we are out there with compelling offers to the customers. I don’t really, as you mentioned for competitive reasons want to go into a whole lot more detail. We are continuing to challenge our marketing people to find new ways to reach the consumer.

John Baugh – Stifel Nicholas & Company

I’m not asking you to predict what retail volumes are going to be this coming fiscal year but if I were to give you a decline of 3% to 5% excluding the impact of exiting Pittsburgh as it was, what kind of annual pre-tax loss would you expect? What I’m trying to drive at, are there incremental things that are going to drive the costs down and what would be the offset against further erosions in volume if my assumption is right, you are down mid single digit level?

Kurt Darrow

You mentioned in the beginning you were going to ask three questions and you asked five right there in the one question. I couldn’t do justice to that question in the time allotted. What I would tell you is that we have spent the last two and one half years doing a lot of heavy lifting on retail, moving a lot of stores, remodeling stores, opening stores, changing the distribution centers, installing IT and all of that is imbedded in some of the inefficiencies in some of the losses that we’ve had going forward.

I’m particularly enthusiastic about next year and the fact that the whole focus is going to be on the four walls of the store and our execution with the consumer. We are going to work very hard at training our people at making sure the customer is taken care of, running the business tighter than we’ve been running because we’ve had all these other things happening. There are certainly some inefficiencies and some things we don’t expect to repeat this year as far as all the infrastructure issues.

We believe we have room to improve the financial performance of our retail division even without more sales.

John Baugh – Stifel Nicholas & Company

Could you provide more details on the credit line? How is the credit availability calculated, what’s the interest rate, some more color on the whole debt structure now? Importantly, how you determine on inventories and receivables what’s available for the credit line?

Mike Riccio

That’s a lot of answer there. We did file an 8-K which included the entire debt document, the facility that goes into, and its 137 pages. It’s rather lengthy. To give you a quick answer on it, we are libor plus 2% right now is our rate. There’s a prime factor of it that’s prime plus a quarter. The availability is based on what they are defining as eligible in accounts receivable and eligible inventory and there are 20 different facets within there that make that up.

To go into individual ones would be a little detailed but it is laid out in the bank agreement that was filed with the SEC that’s out there on our 8-K if you want to get some more perspective on that. I’m not trying to cut off your question its just there’s a lot more to it than just that. I’m not going to go any further.

Operator

Our next question is coming from Todd Schwartzman from Sidoti & Company.

Todd Schwartzman – Sidoti & Company

A question about labor costs. What are you seeing with respect to China labor wise and where do you see that going in fiscal ’09?

Kurt Darrow

I can’t comment directly on labor specifically. We have partners over in China, we don’t own anything specifically ourselves. An overall comment is a combination of energy costs less VAT rebates more enforcement of overtime rates. There are four or five factors that are happening in China which is making their cost rise. A combination of things I’m not sure how much the component of labor is there. The cost of doing business in China is going up.

I would counter that by saying, “Wow, its going up”; it’s going up from a very low base. Nevertheless there is some pressure on China’s cost structure at the present moment.

Todd Schwartzman – Sidoti & Company

With that said, would you say that the affect on your total cost of goods has been negligible?

Kurt Darrow

It’s been negligible to this point. I think there are some increases coming that we are going to have to deal with. Typically what we have seen in the wood business for us is you understand the cost pressure that are happening in other parts of the world when you start to get new goods and you get pricing on those compared to old goods. You start to understand what dynamics are at work. I would imagine a lot of the newer product coming out for all companies in our industry from Asia going forward would be a little more expensive. I wouldn’t call it material at this point.

Todd Schwartzman – Sidoti & Company

Back in the US where are those pockets of strength and also weakness regionally?

Kurt Darrow

We’ve talked for some time that for us the greatest pocket of strength is not really the US but Canada. We have about 10% of our stores in Canada. They are doing compared to the US extremely well. On the flip side, the markets where the sub-prime problem were most devastating and what we’ve seen has been Florida, California, and Las Vegas. Those are three big markets for us that have had further weakening than the core of the country.

Todd Schwartzman – Sidoti & Company

As far as store openings and closures in Q4, where’s the one brand new store not a relocation? Which one is expected to be closed?

Kurt Darrow

In the fourth quarter we will open two more stores in Chicago on the West side. We will open a store in Richmond and we will close one of the stores in Canada. One of the stores in Chicago is new; the other store is a replacement of a location we closed about four months ago in an adjacent market.

Todd Schwartzman – Sidoti & Company

If Canada is doing that well, why the one closure?

Kurt Darrow

The dealer that had the store decided to retire and we couldn’t find an owner.

Todd Schwartzman – Sidoti & Company

As far as the third quarter, where were the three openings and five closures?

Kurt Darrow

Specifically in the third quarter we opened a company owned store in Bolingbrook, Illinois. We relocated a company store in Chesapeake. Our independent dealers opened store in Montreal, Brandon, Florida, Tukwila, Washington and Warrensville Heights, Ohio. We had some very old stores close that were at then end of their leases and most cases new stores have taken their places. We closed an old store in Charlotte, one in Crystal Lake which is the one I mentioned before we are moving to Algonquin in Illinois and a store in Nanuet, New York.

Operator

[Operator Instructions] Our next question is coming from Laura Champine of Morgan Keegan & Company.

Laura Champine – Morgan Keegan & Company

I had a question on the dividend policy. If you hit the high end of your guidance range for this fiscal year you’ll do it looks like $0.03 positive on an ongoing recurring operations basis. Why keep the dividend at $0.16 why not eliminate it all together if you’re not covering it at that level?

Kurt Darrow

I’m not sure we agree with your math and we had a lot of extra items this year that we don’t think are going to be reoccurring next year. We certainly feel that the actions the Board took yesterday were appropriate. We believe at this point, knowing what we know about the economy and our run rate of our business that we’ll be able to earn our dividend next year and so we are not calibrating your math and believe that the two thirds cut was the correct decision given the facts that we have at this time.

Laura Champine – Morgan Keegan & Company

If $0.03 is not the high end of the range for the year maybe you can help me with my math and get me to where you think recurring ongoing operations will put you in terms of earnings for this year.

Kurt Darrow

You are imbedding in the first half of the year where we had a lot of one offs and a lot of closings and had challenges on a number of different areas. If you look at the second half of the year where we are talking about a $0.06 to $0.14 range and you would imply that going forward there’s plenty of coverage and that’s not certainly any kind of guidance for next year. We are looking at the run rate of the business today not what has transitioned throughout the entire year.

Laura Champine – Morgan Keegan & Company

Secondly, you’re VIE stores are increasing a little bit and it looks like on you P&L you have about 31% of the total store base as of this quarter. Where do you think that is a year from now, both your company owned stores and VIE’s, what percentage of the total store base do you thing will be consolidated on your income statement?

Kurt Darrow

Good question, we don’t have plans to open a lot of new company owned stores next year. I think at the present time we only have three or four in the markets we are already in and a couple of those are probably relocations. I don’t see our total store count growing there. Our current VIE’s for the most part have adequate number of store in their markets. I wouldn’t anticipate at this point with what the company owns today and our current four VIE’s I wouldn’t anticipate our store count in that segment increasing significantly next year.

If our store count overall in the whole system goes down a little bit certainly will be a higher percentage but I don’t see a significant change in ’09 to our mix of what the company is involved in compared to our independents.

Operator

Our next question is coming from [Joe Zapen] of Stone Tower.

[Joe Zapen] – Stone Tower

I just wanted a little more detail on the sequential monthly trends. If you can break that out by segment. It seems like in the furniture industry we saw a weakening on sales in January and February versus December. If you could provide a little more clarity into how your business was affected?

Kurt Darrow

I think we answered that question as far as we are comfortable in going. We don’t report monthly sales and we are just into a new quarter and have given you our best thought on our sales for the balance of the year. Our third quarter mirrored our guidance of down sales 4% to 8% and we haven’t changed that so you can see what we are thinking about for the fourth quarter. I wouldn’t want to give any more detail on that except to say that every day is a challenge out there and all of us are fighting for the consumer dollar and we don’t see any meaningful changes either up or down at the present time.

[Joe Zapen] – Stone Tower

A little bit more detail on the bad expense line. Can you talk about the customer concentration any other issues you are having you are seeing with your customer base and smaller retailers operating in this difficult environment?

Kurt Darrow

I would answer that from the perspective is we do not have a significant stake in any one customer that would be 8%, 10%, 12% of our business. Our customer base is very well spread out and we are not at risk with any one particular customer. At the same time there is pressure in all parts of the business you’ve seen recently, although we did not have any exposure to it, you’ve seen the problems with Wickes, with Levitz, with Domain and on the larger side retailers and there’s always been certainly the pressure on the small family owned companies that make up a lot of our distribution in rural America.

We are just in close touch with our customers trying to understand their concerns, trying to be prudent in our credit management but what you don’t go through one of these without having some credit issues and we are trying to be responsible in how we look at that.

[Joe Zapen] – Stone Tower

Within your retail group is there a significant amount of EBITDA deterioration coming from a concentrated number of stores or are you seeing deterioration across the board? I’m just trying to figure out if a small group of your stores are very EBITDA negative. You mentioned that stores in Canada were performing better. Can you provide any more clarity of that matter?

Kurt Darrow

We’ve had the question before and we’ve answered it in this manner. We have two or three markets that are performing above the norm. We have two markets in particular which we’ve identified that are causing us quite a bit of struggle right now. The one market we’ve been very public about has been South Florida. The other market due to a lack of sufficient number of stores is more significant that other is the greater Boston market. Everybody else is at a comparable level those two markets are much below that level.

[Joe Zapen] – Stone Tower

What percentage of your stores are in those two markets?

Kurt Darrow

About 20%, 22%.

Operator

There are no further questions at this time. I’d like to hand the floor back over to management for any closing comments.

Kathy Liebmann

Thank you for being on our call today. If you have follow up questions I will be available for the remainder of the day. Have a good day everyone.

Kurt Darrow

Thank you for listening in.

Operator

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

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