LA-Z-BOY INC - Quarter Report: 2008 January (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549-1004

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR QUARTERLY PERIOD ENDED JANUARY 26, 2008
COMMISSION FILE NUMBER 1-9656

LA-Z-BOY INCORPORATED

(Exact name of registrant as specified in its charter)

MICHIGAN		38-0751137
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1284 North Telegraph Road, Monroe, Michigan		48162-3390
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (734) 242-1444

None
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, accelerated filer, non-accelerated filer, and small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Outstanding at January 26, 2008
Common Shares, $1.00 par value		51,417,087

 

 

LA-Z-BOY INCORPORATED
FORM 10-Q THIRD QUARTER OF FISCAL 2008

TABLE OF CONTENTS

				Page
				Number(s)
PART I Financial Information (Unaudited)
Item 1.		Financial Statements
		Consolidated Statement of Operations		3-4
		Consolidated Balance Sheet		5
		Consolidated Statement of Cash Flows		6
		Consolidated Statement of Changes in Shareholders’ Equity		7
		Notes to Consolidated Financial Statements
		Note 1. Basis of Presentation		8
		Note 2. Interim Results		8
		Note 3. Reclassification		8
		Note 4. Inventories		8
		Note 5. Goodwill and Other Intangible Assets		8-9
		Note 6. Pension Plans		9
		Note 7. Financial Guarantees and Product Warranties		10
		Note 8. Stock-Based Compensation		10-11
		Note 9. Segment Information		11
		Note 10. Restructuring		11-13
		Note 11. Uncertain Tax Positions		13
		Note 12. Variable Interest Entities		13-14
		Note 13. Discontinued Operations		14-16
		Note 14. Income from Continued Dumping and Subsidy Offset Act		16
		Note 15. Earnings per Share		16
		Note 16. Subsequent Event		17
		Note 17. Recent Accounting Pronouncements		18
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Cautionary Statement Concerning Forward-Looking Statements		19
		Introduction		19-21
		Results of Operations		22-29
		Liquidity and Capital Resources		30-32
		Critical Accounting Policies		32
		Restructuring		32-33
		Regulatory Developments		33
		Recent Accounting Pronouncements		34
		Business Outlook		34
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		35
Item 4.		Controls and Procedures		35
PART II Other Information
Item 1A.		Risk Factors		36
Item 6.		Exhibits		36
Signature Page				37
Performance Awards Goals (for Performance Cycle Ending April 2010), as amended
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
Certifications of Executive Officers Pursuant to 18 U.S.C. Section 1350(b)
Press Release dated February 19, 2008

PART I
FINANCIAL INFORMATION

LA-Z-BOY INCORPORATED

		Third Quarter Ended
										% Over				Percent of Sales
(Unaudited, amounts in thousands, except per share data)		01/26/08				01/27/07				(Under)				01/26/08				01/27/07
Sales		$	373,081			$	404,845				-7.8	%			100.0	%			100.0	%
Cost of sales
Cost of goods sold			265,078				291,322				-9.0	%			71.1	%			72.0	%
Restructuring			(632	)			—				—				-0.2	%			—
Total cost of sales			264,446				291,322				-9.2	%			70.9	%			72.0	%
Gross profit			108,635				113,523				-4.3	%			29.1	%			28.0	%
Selling, general and administrative			104,672				101,213				3.4	%			28.1	%			25.0	%
Restructuring			877				2,855				-69.3	%			0.2	%			0.7	%
Operating income			3,086				9,455				-67.4	%			0.8	%			2.3	%
Interest expense			2,148				2,750				-21.9	%			0.6	%			0.7	%
Income from Continued Dumping and Subsidy Offset Act, net			7,147				3,430				108.4	%			1.9	%			0.8	%
Other income, net			4,919				1,633				201.2	%			1.3	%			0.4	%
Income from continuing operations before income taxes			13,004				11,768				10.5	%			3.5	%			2.9	%
Income tax expense			3,876				4,823				-19.6	%			29.8	%*			41.0	%*
Income from continuing operations			9,128				6,945				31.4	%			2.4	%			1.7	%
Income (loss) from discontinued operations (net of tax)			384				(14,766	)			102.6	%			0.1	%			-3.6	%
Net income (loss)		$	9,512			$	(7,821	)			221.6	%			2.5	%			-1.9	%
Basic average shares			51,417				51,367
Basic income from continuing operations per share		$	0.18			$	0.14
Discontinued operations per share (net of tax)		$	0.01			$	(0.29	)
Basic net income (loss) per share		$	0.19			$	(0.15	)
Diluted average shares			51,590				51,609
Diluted income from continuing operations per share		$	0.18			$	0.14
Discontinued operations per share (net of tax)		$	—			$	(0.29	)
Diluted net income (loss) per share		$	0.18			$	(0.15	)
Dividends paid per share		$	0.12			$	0.12

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS

		Nine Months Ended
										% Over				Percent of Sales
(Unaudited, amounts in thousands, except per share data)		01/26/08				01/27/07				(Under)				01/26/08				01/27/07
Sales		$	1,082,911			$	1,213,382				-10.8	%			100.0	%			100.0	%
Cost of sales
Cost of goods sold			790,879				893,681				-11.5	%			73.0	%			73.7	%
Restructuring			2,447				(400	)			711.8	%			0.2	%			—
Total cost of sales			793,326				893,281				-11.2	%			73.3	%			73.6	%
Gross profit			289,585				320,101				-9.5	%			26.7	%			26.4	%
Selling, general and administrative			297,278				295,783				0.5	%			27.5	%			24.4	%
Write-down of intangibles			5,809				—				—				0.5	%			—
Restructuring			2,446				5,120				-52.2	%			0.2	%			0.4	%
Operating income (loss)			(15,948	)			19,198				-183.1	%			-1.5	%			1.6	%
Interest expense			6,365				7,890				-19.3	%			0.6	%			0.7	%
Income from Continued Dumping and Subsidy Offset Act, net			7,147				3,430				108.4	%			0.7	%			0.3	%
Other income, net			7,740				3,252				138.0	%			0.7	%			0.3	%
Income (loss) from continuing operations before income taxes			(7,426	)			17,990				-141.3	%			-0.7	%			1.5	%
Income tax expense (benefit)			(4,359	)			6,658				-165.5	%			58.7	%*			37.0	%*
Income (loss) from continuing operations			(3,067	)			11,332				-127.1	%			-0.3	%			0.9	%
Loss from discontinued operations (net of tax)			(6,050	)			(14,904	)			59.4	%			-0.6	%			-1.2	%
Net Loss		$	(9,117	)		$	(3,572	)			-155.2	%			-0.8	%			-0.3	%
Basic average shares			51,402				51,509
Basic income (loss) from continuing operations per share		$	(0.06	)		$	0.22
Discontinued operations per share (net of tax)		$	(0.12	)		$	(0.29	)
Basic net loss per share		$	(0.18	)		$	(0.07	)
Diluted average shares			51,402				51,743
Diluted income (loss) from continuing operations per share		$	(0.06	)		$	0.22
Discontinued operations per share (net of tax)		$	(0.12	)		$	(0.29	)
Diluted net loss per share		$	(0.18	)		$	(0.07	)
Dividends paid per share		$	0.36			$	0.36

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

LA-Z-BOY INCORPORATED

										Increase/(Decrease)
(Unaudited, amounts in thousands)		01/26/08				01/27/07				Dollars				Percent				4/28/07
Current assets
Cash and equivalents		$	63,175			$	17,484			$	45,691				261.3	%		$	51,721
Receivables, net			214,088				217,103				(3,015	)			-1.4	%			230,399
Inventories, net			183,935				214,151				(30,216	)			-14.1	%			197,790
Deferred income taxes—current			16,696				31,369				(14,673	)			-46.8	%			17,283
Assets of discontinued operations			278				39,354				(39,076	)			-99.3	%			24,278
Other current assets			23,309				24,847				(1,538	)			-6.2	%			19,327
Total current assets			501,481				544,308				(42,827	)			-7.9	%			540,798
Property, plant and equipment, net			179,282				192,382				(13,100	)			-6.8	%			183,218
Deferred income taxes—long term			24,574				—				24,574				—				15,380
Goodwill			49,850				55,409				(5,559	)			-10.0	%			55,659
Trade names			9,006				9,472				(466	)			-4.9	%			9,472
Other long-term assets			74,585				87,339				(12,754	)			-14.6	%			74,164
Total assets		$	838,778			$	888,910			$	(50,132	)			-5.6	%		$	878,691
Current liabilities
Short-term borrowings		$	—			$	15,702			$	(15,702	)			-100.0	%		$	—
Current portion of long-term debt			4,154				3,487				667				19.1	%			38,076
Accounts payable			61,683				58,405				3,278				5.6	%			66,242
Liabilities of discontinued operations			916				5,681				(4,765	)			-83.9	%			3,843
Accrued expenses and other current liabilities			103,387				105,636				(2,249	)			-2.1	%			118,591
Deferred income taxes			669				—				669				—				—
Total current liabilities			170,809				188,911				(18,102	)			-9.6	%			226,752
Long-term debt			146,415				148,773				(2,358	)			-1.6	%			113,172
Income taxes payable — long term			4,332				9,605				(5,273	)			-54.9	%			—
Other long-term liabilities			61,609				54,961				6,648				12.1	%			53,419
Contingencies and commitments			—				—				—				—				—
Shareholders’ equity
Common shares, $1 par value			51,417				51,372				45				0.1	%			51,377
Capital in excess of par value			207,954				207,184				770				0.4	%			208,283
Retained earnings			196,935				222,601				(25,666	)			-11.5	%			223,896
Accumulated other comprehensive income (loss)			(693	)			5,503				(6,196	)			-112.6	%			1,792
Total shareholders’ equity			455,613				486,660				(31,047	)			-6.4	%			485,348
Total liabilities and shareholders’ equity		$	838,778			$	888,910			$	(50,132	)			-5.6	%		$	878,691

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

LA-Z-BOY INCORPORATED

		Third Quarter Ended								Nine Months Ended
(Unaudited, amounts in thousands)		01/26/08				01/27/07				01/26/08				01/27/07
Cash flows from operating activities
Net income (loss)		$	9,512			$	(7,821	)		$	(9,117	)		$	(3,572	)
Adjustments to reconcile net income (loss) to cash used for operating activities
Gain (loss) on sale of discontinued operations (net of tax)			(96	)			—				3,894				(1,280	)
Write-down of assets of businesses held for sale (net of tax)			—				13,674				2,159				13,674
Write-down of intangibles (net of tax)			—				—				3,689				—
Restructuring			245				2,855				4,893				4,720
Provision for doubtful accounts			2,754				84				6,373				2,891
Depreciation and amortization			6,193				6,233				18,506				20,122
Stock-based compensation expense			1,303				479				3,165				3,211
Change in receivables			53				22,633				9,241				19,688
Change in inventories			8,645				2,808				17,897				(14,309	)
Change in payables			9,161				(9,849	)			(5,107	)			(19,228	)
Change in other assets and liabilities			147				106				(16,530	)			(15,464	)
Change in deferred taxes			3,676				(2,270	)			(2,470	)			(9,036	)
Total adjustments			32,081				36,753				45,710				4,989
Net cash provided by operating activities			41,593				28,932				36,593				1,417
Cash flows from investing activities
Proceeds from disposals of assets			456				314				7,738				25,276
Proceeds from sale of discontinued operations			150				—				4,169				33,166
Capital expenditures			(5,239	)			(5,984	)			(20,838	)			(20,994	)
Purchases of investments			(15,807	)			(5,069	)			(29,077	)			(13,461	)
Proceeds from sales of investments			15,649				3,817				30,242				11,834
Change in other long-term assets			1,701				539				2,086				343
Net cash provided by (used for) investing activities			(3,090	)			(6,383	)			(5,680	)			36,164
Cash flows from financing activities
Proceeds from debt			574				12,577				1,391				91,252
Payments on debt			(974	)			(32,540	)			(2,212	)			(111,220	)
Stock issued for stock and employee benefit plans			(13	)			567				(129	)			1,333
Repurchases of common stock			—				—				—				(6,947	)
Dividends paid			(6,229	)			(6,212	)			(18,670	)			(18,674	)
Net cash used for financing activities			(6,642	)			(25,608	)			(19,620	)			(44,256	)
Effect of exchange rate changes on cash and equivalents			(1,378	)			14				161				70
Change in cash and equivalents			30,483				(3,045	)			11,454				(6,605	)
Cash and equivalents at beginning of period			32,692				20,529				51,721				24,089
Cash and equivalents at end of period		$	63,175			$	17,484			$	63,175			$	17,484
Cash paid (net of refunds) during period — income taxes		$	(4,336	)		$	558			$	(443	)		$	17,655
Cash paid during period — interest		$	2,652			$	2,911			$	6,057			$	7,769

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

LA-Z-BOY INCORPORATED

																		Accumulated
																		Other
						Capital in								Unearned				Compre-
		Common				Excess of Par				Retained				Compen-				hensive
(Unaudited, amounts in thousands)		Shares				Value				Earnings				sation				Income(Loss)				Total
At April 29, 2006		$	51,782			$	210,826			$	246,387				($3,083	)		$	4,433			$	510,345
Reclassification of unearned compensation due to adoption of SFAS No. 123(R)							(3,083	)							3,083								—
Repurchases of common stock			(540	)							(6,407	)											(6,947	)
Stock issued for stock and employee benefit plans			135				(3,458	)			4,663												1,340
Stock option and restricted stock expense							3,959																3,959
Tax benefit from exercise of options							39																39
Dividends paid											(24,886	)											(24,886	)
Comprehensive income (loss)
Net income											4,139
Unrealized gain on marketable securities (net of tax of $0.5 million)																			1,145
Realized (gain) on marketable securities (net of tax of $0.3 million)																			(458	)
Translation adjustment																			1,418
Change in fair value of cash flow hedges (net of tax)																			(118	)
Change in additional minimum pension liability (net of tax of $0.1 million)																			319
Total comprehensive income																							6,445
Adjustment upon adoption of SFAS No. 158 for pension (net of tax of $3.2 million)																			(4,947	)			(4,947	)
At April 28, 2007		$	51,377			$	208,283			$	223,896			$	—			$	1,792			$	485,348
Stock issued for stock and employee benefit plans			40				(3,494	)			3,326												(128	)
Stock option and restricted stock expense							3,165																3,165
Dividends paid											(18,670	)											(18,670	)
Comprehensive income (loss)
Net loss											(9,117	)
Unrealized (loss) on marketable securities (net of tax)																			(229	)
Realized (gain) on marketable securities (net of tax of $1.4 million )																			(2,377	)
Translation adjustment																			36
Change in the fair value of cash flow hedges (net of tax)																			85
Total comprehensive loss																							(11,602	)
Impact of adoption of FIN 48											(2,500	)											(2,500	)
At January 26, 2008		$	51,417			$	207,954			$	196,935			$	—			$	(693	)		$	455,613

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation

The interim financial information is prepared in conformity with generally accepted accounting principles and such principles are applied on a basis consistent with those reflected in our fiscal 2007 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, but does not include all the disclosures required by generally accepted accounting principles. In the opinion of management, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments, which are necessary for a fair presentation of results for the respective interim period.

Note 2: Interim Results

The foregoing interim results are not necessarily indicative of the results of operations which will occur for the full fiscal year ending April 26, 2008.

Note 3: Reclassification

Certain prior year information has been reclassified to be comparable with the current year presentation.

Note 4: Inventories

     A summary of inventory follows:

(Unaudited, amounts in thousands)		01/26/08				01/27/07				4/28/07
Raw materials		$	68,338			$	76,269			$	69,562
Work in process			15,688				20,134				19,972
Finished goods			124,332				141,092				132,679
FIFO inventories			208,358				237,495				222,213
Excess of FIFO over LIFO			(24,423	)			(23,344	)			(24,423	)
Inventories, net		$	183,935			$	214,151			$	197,790

Note 5: Goodwill and Other Intangible Assets

In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”), trade names are tested at least annually for impairment by comparing their fair value to their carrying values. The fair value for each trade name is established based upon a royalty savings approach. Additionally, goodwill is tested for impairment by comparing the fair value of our operating units to their carrying values. The fair value for each operating unit is established based upon a combination of the discounted cash flows and the projected profitability of the market in which the entity operates.

With the decline in the housing market affecting Florida more significantly than the rest of the country, we have delayed our store growth in the market. The double-digit decline in sales over the twelve months ending in October, 2007, coupled with our change in the timing of our store build-out triggered us to evaluate our goodwill in South Florida during the second quarter of fiscal 2008, which was in advance of our normal testing in the fourth quarter of each fiscal year. We have not experienced as dramatic of a sales decline and have not

made any strategic decisions to delay store build-out in our other retail markets that have goodwill. As a result of the significant change in our valuation model for this business, we recorded an impairment charge of $5.8 million, $3.7 million after tax, which represented the entire goodwill amount, in the second quarter of fiscal 2008.

In the first quarter of fiscal 2008, we reevaluated our tax reserves relating to an acquisition in fiscal 2000. Due primarily to the lapsing of statutes of limitations, a reduction of the tax reserves was recorded. This reduction in the tax reserves was recorded as a reduction in the remaining acquired intangible assets, which consisted of trade names and totaled $0.7 million. Of this reduction $0.3 million was related to trade names of our discontinued operations and is not shown in the table that follows.

The following table summarizes the changes to goodwill and trade names during the first three quarters of fiscal 2008:

		Balance				Acquisitions,				Balance
		as of				Dispositions				as of
(Unaudited, amounts in thousands)		4/28/07				and Other				01/26/08
Goodwill
Upholstery Group		$	19,632			$	—			$	19,632
Retail Group			27,905				(5,809	)			22,096
Corporate and Other			8,122				—				8,122
Consolidated		$	55,659			$	(5,809	)		$	49,850
Trade names
Casegoods Group		$	9,472			$	(466	)		$	9,006

Note 6: Pension Plans

Net periodic pension costs were as follows:

		Third Quarter Ended								Nine Months Ended
(Unaudited, amounts in thousands)		01/26/08				01/27/07				01/26/08				01/27/07
Service cost		$	441			$	576			$	1,323			$	1,730
Interest cost			1,346				1,338				4,038				4,014
Expected return on plan assets			(1,839	)			(1,719	)			(5,517	)			(5,157	)
Net amortization and deferral			—				9				—				27
Net periodic pension cost (benefit)		$	(52	)		$	204			$	(156	)		$	614

We are not required to make any contributions to the defined benefit plans in fiscal year 2008, however we may make discretionary contributions. We did not make any contributions to the plans during the first nine months of fiscal 2008.

Note 7: Financial Guarantees and Product Warranties

We have provided financial guarantees relating to leases in connection with certain La-Z-Boy Furniture Galleries® stores which are not operated by the company. The lease guarantees are generally for real estate leases and have terms lasting from five to eleven years. These lease guarantees enhance the ability of these dealers to acquire rights to real estate in quality locations. The dealer is required to make periodic fee payments to compensate us for our guarantees. We have recognized liabilities for the fair values of the lease agreements that we have entered into, but they are not material to our financial position.

We would be required to perform under these agreements only if the dealer were to default on the lease. The maximum amount of potential future payments under lease guarantees was $14.3 million as of January 26, 2008.

We have, from time to time, entered into agreements which resulted in indemnifying third parties against certain liabilities, mainly environmental obligations. We believe that judgments, if any, against us related to such agreements would not have a material effect on our business or financial condition.

Our accounting policy for product warranties is to accrue an estimated liability at the time the revenue is recognized. This estimate is based on historical claims and adjusted for currently known warranty issues.

A reconciliation of the changes in our product warranty liability is as follows:

		Third Quarter Ended								Nine Months Ended
(Unaudited, amounts in thousands)		01/26/08				01/27/07				01/26/08				01/27/07
Balance as of the beginning of the period		$	14,258			$	16,523			$	14,283			$	19,655
Accruals during the period			4,620				4,180				12,999				12,571
Adjustments for discontinued operations			—				(405	)			—				(1,361	)
Other adjustments during the period			—				(1,650	)			—				(3,917	)
Settlements during the period			(4,411	)			(4,260	)			(12,815	)			(12,560	)
Balance as of the end of the period		$	14,467			$	14,388			$	14,467			$	14,388

Other adjustments of $1.7 million for the third quarter and $3.9 million for the nine months ended January 27, 2007 resulted from reductions in historical claims due to improved product quality, and reductions in estimated amounts required for specific currently known warranty issues.

Note 8: Stock-Based Compensation

We account for share-based compensation transactions in accordance with the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R requires all companies to measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. The fair value for the employee stock options granted during the respective periods were estimated at the date of grant using the Black-Scholes option-pricing model and are amortized on a straight-line basis as compensation expense over the vesting periods of the options. For the three and nine months ended January 26, 2008, we recorded total stock-based compensation expense of approximately $1.2 million and approximately $3.2 million, respectively. For the three and nine months ended January 27, 2007, we recorded total stock-based compensation expense of approximately $0.5 million and approximately $2.0 million, respectively.

As of January 26, 2008, there was approximately $3.5 million of total unrecognized compensation expense related to restricted stock, which we expect to recognize on a straight-line basis over an average remaining service period of approximately 2.25 years.

Note 9: Segment Information

Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group.

Upholstery Group. The operating units in the Upholstery Group are Bauhaus, England, La-Z-Boy and La-Z-Boy UK. This group primarily manufactures and sells upholstered furniture to furniture retailers. Upholstered furniture includes recliners and motion furniture, sofas, loveseats, chairs, ottomans and sleeper sofas.

Casegoods Group. The operating units in the Casegoods Group are American Drew/Lea, Hammary and Kincaid. This group primarily sells manufactured or imported wood furniture to furniture retailers. Casegoods product includes tables, chairs, entertainment centers, headboards, dressers, accent pieces and some upholstered furniture.

Retail Group. The Retail Group consists of 69 company-owned La-Z-Boy Furniture Galleries® stores (“the retail network”). The Retail Group sells mostly upholstered furniture to end consumers.

		Third Quarter Ended								Nine Months Ended
		01/26/08				01/27/07				01/26/08				01/27/07
(Unaudited, amounts in thousands)		(13 weeks)				(13 weeks)				(39 weeks)				(39 weeks)
Sales
Upholstery Group		$	282,453			$	293,709			$	806,959			$	893,704
Casegoods Group			52,660				63,127				165,126				198,317
Retail Group			49,884				61,149				141,278				165,838
VIEs/Eliminations			(11,916	)			(13,140	)			(30,452	)			(44,477	)
Consolidated		$	373,081			$	404,845			$	1,082,911			$	1,213,382
Operating income (loss)
Upholstery Group		$	19,467			$	22,651			$	47,370			$	60,438
Casegoods Group			2,222				5,721				8,399				15,163
Retail Group			(8,507	)			(6,738	)			(27,700	)			(23,222	)
Corporate and Other*			(9,851	)			(9,324	)			(33,315	)			(28,461	)
Intangible write-down			—				—				(5,809	)			—
Restructuring			(245	)			(2,855	)			(4,893	)			(4,720	)
		$	3,086			$	9,455			$	(15,948	)		$	19,198

Note 10: Restructuring

In the fourth quarter of fiscal 2007, we committed to a restructuring plan which included the closures of our Lincolnton, North Carolina and Iuka, Mississippi upholstery manufacturing facilities, the closure of our rough mill lumber operation in North Wilkesboro, North Carolina, the consolidation of operations at our Kincaid Taylorsville, North Carolina upholstery operation and the elimination of a number of positions throughout the

remainder of the organization. The Lincolnton and Iuka facility closures occurred in the first quarter of fiscal 2008 and impacted approximately 250 and 150 employees, respectively. The closure of our North Wilkesboro lumber operation, the consolidation of operations at Kincaid’s Taylorsville operation and the remaining activities occurred in the fourth quarter of fiscal 2007 and impacted approximately 100 positions. These decisions were made to help align our company with the current business environment and strengthen our positioning going forward.

During the third quarter and first nine months of fiscal 2008, we recorded pre-tax restructuring charges in cost of sales of $(0.6) million and $2.4 million, respectively which equates to income of $(0.01) and charges of $0.03 per diluted share, respectively. The benefit recorded in Cost of Sales in the third quarter of fiscal 2008 was related to the reversal of reserves for the previously announced closures of manufacturing facilities. The remainder of the restructuring charges for the first nine months of fiscal 2008 covered severance and benefits, write-down of certain leasehold improvements and other restructuring costs offset by a small gain from the sale of a property idled as part of a previous restructuring. During the first nine months of fiscal 2007, we recorded pre-tax restructuring charges in cost of sales of $(0.4) million or $(0.01) per diluted share related to a gain from the sale of a property idled as part of a previous restructuring. The write-down was accounted for in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). All other costs were accounted for in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”).

During fiscal 2008 and 2007, several of our Retail warehouses were consolidated into larger facilities and several underperforming stores were closed. Approximately 127 jobs were eliminated as a result of these closures. During the third quarter and first nine months of fiscal 2008, we recorded pre-tax restructuring charges of $0.9 million and $2.5 million, respectively, which equates to $0.01 and $0.03 per diluted share, respectively, covering contract termination costs for the leases on these facilities, severance and benefits, write-down of certain leasehold improvements in addition to other relocation costs which were expensed as incurred. In the first nine months of fiscal 2007, we recorded pre-tax restructuring charges of $5.1 million or $0.10 per diluted share covering contract termination costs for the leases on these facilities, severance and benefits, write-down of certain leasehold improvements in addition to other relocation costs which were expensed as incurred. These costs were reported as a component of operating income. The write-down was accounted for in accordance with SFAS No. 144. All other costs were accounted for in accordance with SFAS No. 146.

As of January 26, 2008, we had a remaining restructuring liability of $1.9 million, which is expected to be paid out or otherwise settled as follows: $1.2 million in fiscal 2008, $0.4 million in fiscal 2009, $0.1 million in fiscal 2010 and $0.2 million thereafter. Contract terminations resulting from the closure of several of our retail stores and warehouses resulted in our restructuring liability being paid out over an extended length of time.

Restructuring liabilities along with charges to expense, cash payments or asset write-downs were as follows:

						Fiscal 2008
										Cash
										Payments
		4/28/07				Charges to				or Asset				01/26/08
(Unaudited, amounts in thousands)		Balance				Expense				Write-Offs				Balance
Severance and benefit-related costs		$	2,177			$	1,154			$	(2,508	)		$	823
Fixed asset write-downs, net of gains			—				70				(70	)			—
Contract termination costs			1,257				(144	)			(80	)			1,033
Other			—				3,813				(3,813	)			—
Total restructuring		$	3,434			$	4,893			$	(6,471	)		$	1,856

						Fiscal 2007
										Cash
										Payments
		4/29/06				Charges to				or Asset				4/28/07
(Unaudited, amounts in thousands)		Balance				Expense				Write-Offs				Balance
Severance and benefit-related costs		$	891			$	2,537			$	(1,251	)		$	2,177
Fixed asset write-downs, net of gains			—				1,091				(1,091	)			—
Contract termination costs			—				3,441				(2,184	)			1,257
Other			—				3,964				(3,964	)			—
Total restructuring		$	891			$	11,033			$	(8,490	)		$	3,434

Note 11: Uncertain Tax Positions

We adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — an interpretation of FASB 109, effective as of April 29, 2007. As a result of the implementation of FIN 48, we recognized a $2.5 million decrease to beginning retained earnings. We have elected to continue to classify interest and penalties, accrued as required by FIN 48, as a part of income tax expense. As of April 29, 2007, the gross amount of interest and penalties due to unrecognized tax benefits was $3.1 million. An additional $0.4 million of interest and penalties was accrued through the third quarter of fiscal 2008.

The total amount of unrecognized tax benefits as of the date of adoption was $9.6 million, which included $1.7 million attributable to timing differences that once resolved will have no impact on our effective tax rate. If recognized, $7.1 million of unrecognized tax benefits would decrease our effective tax rate.

During the third quarter of fiscal 2008 gross unrecognized tax benefits decreased by $1.0 million. Of this amount $0.6 million relates to decreases in unrecognized tax positions taken in prior years, $0.2 million relates to a lapse in statutes of limitations, and $0.2 million relates to settlements with various state tax authorities. We recognized a $0.6 million benefit in income tax expense in the third quarter related to these items. Furthermore we believe that it is reasonably possible that the remaining amount of unrecognized tax benefits will decrease by $1.8 million within the next 12 months. This potential decrease relates to anticipated settlements of various outstanding issues with several taxing authorities.

Our U.S. federal income tax returns remain subject to examination for fiscal years 2005 and subsequent. In addition U.S. state returns remain subject to exam for the fiscal years 2003 and subsequent. Canadian federal and provincial returns remain subject to taxation for fiscal years 2002 and subsequent.

Note 12: Variable Interest Entities

Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46”), requires the “primary beneficiary” of a VIE to include the VIE’s assets, liabilities and operating results in its consolidated financial statements. In general, a VIE is a corporation, partnership, limited-liability corporation, trust or any other legal structure used to conduct activities or hold assets that either (a) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (b) has a group of equity owners that are unable to make significant decisions about its activities, or (c)

has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

La-Z-Boy Furniture Galleries® stores that are not operated by us are operated by independent dealers. These stores sell La-Z-Boy manufactured products as well as various accessories purchased from approved La-Z-Boy vendors. In some cases we have extended credit beyond normal trade terms to the independent dealers, made direct loans and/or guaranteed certain leases. Most of these independent dealers have sufficient equity to carry out their principal operating activities without subordinated financial support. However, there are certain independent dealers that we have determined may not have sufficient equity.

We have consolidated several dealers where we were the primary beneficiary based on the fair value of our variable interests. All of our consolidated VIEs were recorded at fair value on the date we became the primary beneficiary. Because these entities are accounted for as if the entities were consolidated based on voting interests, we absorb all net losses of the VIEs in excess of the equity at the dealerships. We recognize all net earnings of these VIEs to the extent of recouping the losses we recorded. Earnings in excess of our losses are attributed to equity owners of the dealers and are shown as minority interest on our financial statements. We had four consolidated VIEs throughout the first nine months of both fiscal 2008 and 2007.

Our consolidated VIEs recognized $14.9 million and $12.5 million in sales, net of intercompany eliminations, in the third quarter of fiscal 2008 and the third quarter of fiscal 2007, respectively. Additionally, we recognized a net loss per share of $0.02 in the third quarter of fiscal 2008 and the third quarter of fiscal 2007, resulting from the operating results of these VIEs. Our consolidated VIEs recognized $38.9 million and $34.4 million in sales, net of intercompany eliminations, in the first nine months of fiscal 2008 and fiscal 2007, respectively. Additionally, we recognized a net loss per share of $0.09 and $0.08 for nine months ending January 26, 2008 and January 27, 2007, respectively, resulting from the operating results of these VIEs. The VIEs had $0.9 million, $4.7 million and $2.8 million of assets net of elimination of intercompany balances at the end of the third quarter of fiscal 2008, the third quarter of fiscal 2007 and at the end of fiscal 2007, respectively.

Note 13: Discontinued Operations

During the third quarter of fiscal 2007, we committed to a plan to sell Sam Moore, which was a part of our Upholstery Group, and to sell Clayton Marcus and Pennsylvania House, which were part of our Casegoods Group. Due to this decision these operating units were presented as discontinued operations beginning in the third quarter of fiscal 2007.

As a result of the decision to sell Sam Moore, Clayton Marcus and Pennsylvania House and subsequent testing of the fair value of the assets remaining to be sold, we recorded a $17.5 million ($13.7 million net of taxes) impairment charge in the third quarter of fiscal 2007 that is included in discontinued operations on our Consolidated Statement of Operations. The pretax impairment charge was comprised of $3.6 million for impairment of the trade names, $7.3 million for impairment of goodwill, $0.2 million of other intangibles, $1.7 million for write-down of LIFO inventory relating to the APB 16 acquisition adjustment, $1.0 million for allowance for inventory and $3.7 million for the write down of fixed assets. During the fourth quarter of fiscal 2007, current market data indicated the fixed assets for Clayton Marcus and Pennsylvania House were recorded above fair value, which resulted in an additional $1.3 million impairment of their fixed assets.

During the second quarter of fiscal 2008, we completed the sale of our Clayton Marcus operating unit and we completed the sale of our Pennsylvania House trade name. The stock of Clayton Marcus was sold to Rowe Fine Furniture, Incorporated and resulted in a loss of about $5.8 million ($3.6 million net of taxes), of which about $3.4 million related to the intangible assets of Clayton Marcus. The Pennsylvania House trade name was sold to Universal Furniture for $1.7 million resulting in a pre-tax charge of about $0.6 million ($0.4 million net of taxes). We continued the process of liquidating the remaining Pennsylvania House inventory at discounted prices, and as a result, have recorded an additional loss, in the second quarter of fiscal 2008, of $3.0 million to write the inventory down to fair value.

On April 27, 2007, we completed the sale of our Sam Moore operating unit for $9.9 million, consisting of $9.5 million in cash and a receivable of $0.4 million, recognizing a loss in the fourth quarter of $0.3 million. The receivable was collected in the first quarter of fiscal 2008.

During the first quarter of fiscal 2007, we completed the sale of our American of Martinsville operating unit, which supplied contract furniture to the hospitality, assisted-living and governmental markets. This operating unit was not a strategic fit with our business model, which is centered on providing comfortable and stylish furnishings for the home, and was not a large enough component of our overall business (about 5% of sales) to justify our continued corporate focus and resources. We sold the business for $33.2 million, recognizing a pre-tax gain in the first quarter of fiscal 2007 of $2.1 million. This disposition qualified as discontinued operations. Accordingly, our Consolidated Statement of Operations reflects the results of operations of this divested business as discontinued operations with taxes allocated based on the operating units’ estimated effective tax rate and no corporate expenses or interest allocated. The business unit was previously included in the Casegoods Group, which was reclassified to reflect the discontinued operations.

For Pennsylvania House, the assets and liabilities have been reclassified as assets and liabilities of discontinued operations. For the quarter ended January 26, 2008, the assets and liabilities reflect the remaining accounts of Pennsylvania House, most of which will be liquidated or paid during our fourth fiscal quarter of 2008:

(Unaudited, amounts in thousands)		01/26/08				4/28/07
Assets of discontinued operations:
Receivables, net		$	238			$	7,140
Inventories, net			—				10,978
Trade names			—				5,740
Other assets			40				420
		$	278			$	24,278
Liabilities of discontinued operations:
Accounts payable		$	55			$	1,591
Accrued expenses			675				2,057
Non-current liabilities			186				195
		$	916			$	3,843

The results of the discontinued operations for Clayton Marcus and Pennsylvania House for the third quarter ended fiscal 2008 and for Sam Moore, Clayton Marcus, Pennsylvania House, and American of Martinsville for the third quarter ended fiscal 2007 were as follows:

		Third Quarter Ended								Nine Months Ended
(Unaudited, amounts in thousands)		01/26/08				01/27/07				01/26/08				01/27/07
Net sales		$	1,563			$	23,137			$	22,622			$	99,445
Income (loss) from discontinued operations, net of tax			384				(14,766	)			(1,916	)			(16,184	)
Gain (loss) on sale of discontinued operations, net of tax			—				—				(4,134	)			1,280

In the Consolidated Statement of Cash Flows, the cash flows of discontinued operations were not reclassified for fiscal 2008 and fiscal 2007. The activity of these operating units was not reclassified in the Statement of Cash Flows but was included along with the activity from our continuing operations.

Note 14: Income from Continued Dumping and Subsidy Offset Act

We recorded $7.1 million and $3.4 million as Income from the Continued Dumping and Subsidy Offset Act, net of legal expenses, during the third quarter of fiscal 2008 and 2007, respectively, from the receipt of funds under the Continued Dumping and Subsidy Act (“CDSOA”) of 2000 in connection with the case involving wooden bedroom furniture imported from China. The CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection from anti-dumping cases to domestic producers that supported the anti-dumping petition.

Note 15: Earnings per Share

Basic earnings per share is computed using the weighted average number of shares outstanding during the period. Diluted net income per share uses the weighted average number of shares outstanding during the period plus the additional common shares that would be outstanding if the dilutive potential common shares issuable under employee stock options were issued. A reconciliation of basic and diluted weighted average common shares outstanding follows:

		Third Quarter								Nine Months
		Ended								Ended
(Unaudited, amounts in thousands)		01/26/08				01/27/07				01/26/08				01/27/07
Weighted average common shares outstanding (basic)			51,417				51,367				51,402				51,509
Effect of options and unvested restricted stock			173				242				—				234
Weighted average common shares outstanding (diluted)			51,590				51,609				51,402				51,743

The weighted average common shares outstanding (diluted) for the nine months ended January 26, 2008 excludes the effect of options to purchase 0.2 million shares because the net loss for the nine months ended January 26, 2008 would cause the effect of options to be anti-dilutive.

The effect of additional options to purchase 2.7 million and 2.3 million shares for the quarters ended January 26, 2008 and January 27, 2007 with a weighted average exercise price of $15.50 and $16.61 respectively, were excluded from the diluted share calculation because the exercise prices of these options were higher than the weighted average share price for the quarters and would have been anti-dilutive.

Note 16: Subsequent Event

Several of our debt agreements require that certain financial covenants be met. As of the end of the third quarter, we were not in compliance with the fixed charge coverage ratio requirement under our revolving credit facility. Because we anticipated not being in compliance with our covenant, subsequent to our quarter end, we entered into a new debt agreement and terminated the former agreement. On February 6, 2008, La-Z-Boy Incorporated (the “Company”) and most of its domestic subsidiaries (collectively, the “Loan Parties”), entered into a $220 million Credit Agreement (the “New Credit Agreement”) with Wachovia Capital Finance Corporation (Central) as administrative agent and lender, and the financial institutions named therein (the “Lenders”). The New Credit Agreement supersedes and terminates the $150 million dollar Credit Agreement dated as of March 30, 2004 (subsequently amended to $100 million) among La-Z-Boy Incorporated, the banks listed therein and Wachovia Bank, N.A., as administrative agent.

The New Credit Agreement is secured primarily by all of the Loan Parties’ accounts receivable, inventory, cash deposit and securities accounts, and substantially all patents and trademarks, including the La-Z-Boy brand name.

The New Credit Agreement is a revolving credit facility with a commitment of $220 million subject to a borrowing base of certain eligible accounts receivable and inventory. The New Credit Agreement also allows for the issuance of letters of credit. Interest under the New Credit Agreement will initially be set at LIBOR plus 2.0% for the first six months and thereafter will fluctuate from LIBOR plus 1.75% to 2.25%.

The New Credit Agreement also includes prohibitions on the Loan Parties’ and all of the Company’s other subsidiaries’ ability to grant security interests to other parties, subject to certain exceptions. The New Credit Agreement includes customary representations and warranties of the Loan Parties and their subsidiaries, imposes on the Loan Parties and their subsidiaries certain affirmative and negative covenants, and includes other typical provisions. Availability under the New Credit Agreement will fluctuate based on a borrowing base calculation consisting of eligible accounts receivable and inventory. Certain covenants and restrictions, including a fixed charge coverage ratio, would become effective if excess availability under the New Credit Agreement falls below $30 million.

The New Credit Agreement contains customary events of default, including nonpayment of principal when due, nonpayment of interest after a stated grace period; inaccuracy of representations and warranties; violations of covenants; certain acts of bankruptcy and liquidation; defaults of certain material contracts; certain ERISA-related events; certain material environmental claims; and a change in control (as defined in the New Credit Agreement). In the event of a default under the New Credit Agreement, the Lenders may terminate the commitments made under the New Credit Agreement, declare amounts outstanding, including accrued interest and fees, payable immediately, and enforce any and all rights and interests. In addition, following an event of default, the Lenders could exercise remedies with respect to the collateral including foreclosure and other remedies available to secured creditors.

Initial borrowings under the New Credit Agreement were utilized to repay the outstanding private placement notes in the principal amount of $121 million, along with a make-whole premium of approximately $6 million, which will be expensed in the fourth quarter of fiscal 2008, accrued interest of approximately $1.3 million, and fees related to the New Credit Agreement of approximately $2 million, which will be capitalized and amortized over the life of the debt. The Company intends to use any future borrowings for general corporate purposes.

Note 17: Recent Accounting Pronouncements

FASB Statement of Financial Accounting Standards No. 157

The FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. In February 2008, the FASB decided to issue a final Staff Position to allow a one-year deferral of adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The FASB also decided to amend SFAS No. 157 to exclude FASB Statement No. 13 and its related interpretive accounting pronouncements that address leasing transactions. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, with early adoption permitted for all assets and liabilities that have not been specifically deferred.

We are currently in the process of determining the impact this pronouncement may have on our financial statements. This statement will be effective for our fiscal 2009 year-end.

FASB Statement of Financial Accounting Standards No. 159

The FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which allows a company to choose to measure selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.

We are currently evaluating the impact SFAS No. 159 will have on our financial statements. This statement will be effective for our fiscal 2009 year-end.

FASB Statement of Financial Accounting Standards No. 160

The FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS No. 160”), is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Earlier application is prohibited. SFAS No. 160 requires that accounting and reporting for minority interests will be re-characterized as non-controlling interests and classified as a component of equity. SFAS No. 160 also establishes reporting requirements that provide disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This statement applies to all entities that prepare consolidated financial statements, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary.

We are currently evaluating the impact SFAS No. 160 will have on our financial statements. This statement will be effective for our fiscal 2010 year-end.

FASB Statement of Financial Accounting Standards No. 141(R)

The FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations, (“SFAS No. 141(R)”), which replaces FASB Statement No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations that occur during or after fiscal years that begin after December 15, 2008.

We are currently evaluating the impact SFAS No. 141(R) will have on our financial statements. This statement will be effective for our fiscal 2010 year-end.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis is an integral part of understanding our financial results. This Management’s Discussion and Analysis should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. We begin the Management’s Discussion and Analysis with an introduction to La-Z-Boy Incorporated’s key businesses, strategies and significant operational events in fiscal 2008. We then provide a discussion of our results of operations, liquidity and capital resources, quantitative and qualitative disclosures about market risk, and critical accounting policies.

Cautionary Statement Concerning Forward-Looking Statements

We are making forward-looking statements in this report. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations. More specifically, forward-looking statements include the information in this document regarding:

future income, margins and cash flows		future economic performance
future growth		industry and importing trends
adequacy and cost of financial resources		management plans

Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes,” “plans,” “intends” and “expects” or similar expressions. With respect to all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those anticipated or projected due to a number of factors. These factors include, but are not limited to: (a) changes in consumer confidence; (b) changes in demographics; (c) changes in housing sales; (d) the impact of terrorism or war; (e) continued energy price changes; (f) the impact of logistics on imports; (g) the impact of interest rate changes; (h) changes in currency exchange rates; (i) competitive factors; (j) operating factors, such as supply, labor or distribution disruptions including changes in operating conditions or costs; (k) effects of restructuring actions; (l) changes in the domestic or international regulatory environment; (m) ability to implement global sourcing organization strategies; (n) fair value changes to our intangible assets due to actual results differing from projected; (o) the impact of adopting new accounting principles; (p) the impact from natural events such as hurricanes, earthquakes and tornadoes; (q) the impact of retail store relocation costs, the success of new stores or the timing of converting stores to the New Generation format; (r) the ability to procure fabric rolls or cut and sewn fabric sets domestically or abroad; (t) those matters discussed under “Risk Factors” in our most recent Annual Report of Form 10-K and subsequent Quarterly Reports on Form 10-Q and factors relating to acquisitions and other factors identified from time to time in our reports filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements, either to reflect new developments or for any other reason.

INTRODUCTION

Our Business

La-Z-Boy Incorporated manufactures, markets, imports, distributes and retails upholstery products and casegoods (wood) furniture products. Our La-Z-Boy brand is the most recognized brand in the furniture industry, and we are the leading global producer of reclining chairs. We own 69 La-Z-Boy Furniture Galleries® stores, which are retail locations dedicated to marketing our La-Z-Boy branded product. These 69 stores are part of the larger network of La-Z-Boy Furniture Galleries® stores, which includes a total of 336 stores, the balance of which are independently owned and operated. The network constitutes the industry’s largest single-branded

upholstered furniture retailer in North America. These stores combine the style, comfort and quality of La-Z-Boy furniture with our in-home design service to help consumers furnish certain rooms in their homes.

In addition to our company-owned stores, we consolidate certain of our independent dealers who did not have sufficient equity to carry out their principal business activities without our financial support. These dealers are referred to as Variable Interest Entities (“VIEs”). During the fiscal 2008 third quarter, we had four VIEs, operating 34 stores, in our Consolidated Statement of Operations. During the third quarter of fiscal 2007 we had four VIEs, operating 29 stores, in our Consolidated Statement of Operations.

Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group. Below is a chart that shows the organizational structure of La-Z-Boy segments.

In terms of revenue, our largest segment is the Upholstery Group, which includes La-Z-Boy, our largest operating unit. We import cut and sewn fabric kits to complement our leather kits that allow us to take full advantage of both the cost-saving opportunities presented in Asia and the speed to market advantages of a United States manufacturing base. The Upholstery Group sells furniture mainly to La-Z-Boy Furniture Galleries® stores, general dealers and department stores.

Our Casegoods Group today is primarily an importer, marketer and distributor of casegoods (wood) furniture as well as operates two manufacturing facilities in North Carolina.

The Retail Group consists of 69 company-owned La-Z-Boy Furniture Galleries® stores in eight markets. These markets range from the Midwest to the East Coast of the United States and also include southeastern Florida.

According to the May, 2007 Top 100 ranking by Furniture Today, an industry trade publication, the La-Z-Boy Furniture Galleries® stores network ranks as the largest retailer of upholstered single-brand furniture in the U.S. One of our major strategic initiatives is to expand the retail opportunities of the La-Z-Boy brand name in the United States and Canada by opening new stores, relocating stores to better locations and converting existing stores to our New Generation store format. Currently, 213 stores are in our New Generation format. Slightly more than half of the 336 stores in the network—the majority of which are independently owned—are concentrated in the top 25 markets in the U.S. We will attempt to increase our market penetration over the next few years in the top 25 markets, allowing our dealers and company-owned stores to create operating efficiencies, particularly in the areas of advertising, distribution and administration.

The chart below shows the current structure of the La-Z-Boy Furniture Galleries® store network.

Additionally, we have an extensive La-Z-Boy in-store gallery program with 168 in-store galleries. During the first quarter of fiscal 2008, we began rolling out a new model for our in-store galleries referred to as our Comfort Studios. Comfort Studios can be smaller and more adaptable than the current in-store gallery model. Over the past nine months we have converted approximately 119 in-store galleries and 67 general dealers to our new design and expect to convert approximately 154 more in-store galleries and general dealers into Comfort Studios by the end of fiscal 2008. Kincaid, England and Lea also have in-store gallery programs.

Highlights of Our Current Quarter

All of our segments experienced a decline in sales when compared with the third quarter of fiscal 2007. This can be attributed to the overall weak consumer demand and the decline in the U.S. housing market. We continue to aggressively focus on advertising and merchandising of our product in an attempt to reverse this trend. In addition, we have focused on cutting costs and will continue to do so as needed to keep our expenses in line with revenue.

For the remainder of fiscal 2008, we plan to continue to take the following actions to grow sales and improve the operating results for the Retail Group as well as to take advantage of synergies between the company-owned markets:

	•		Continue to consolidate information systems and eliminate redundant processes. We are currently in the process of consolidating our information systems into one system and expect to complete this process by the end of this fiscal year.
	•		Expand our in-home design service, which has increased the average sale per customer where employed, such that a higher percentage of our overall business is generated using this service.
	•		Improve our gross margins based on better merchandising and pricing of product and services.

On February 6, 2008, La-Z-Boy Incorporated (the “Company”) and most of its domestic subsidiaries (collectively, the “Loan Parties”), entered into a $220 million Credit Agreement (the “New Credit Agreement”) with Wachovia Capital Finance Corporation (Central) as administrative agent and lender, and the financial institutions named therein (the “Lenders”). The New Credit Agreement supersedes and terminates the $150 million dollar Credit Agreement dated as of March 30, 2004 (subsequently amended to $100 million) among La-Z-Boy Incorporated, the banks listed therein and Wachovia Bank, N.A., as administrative agent.

The New Credit Agreement is secured primarily by all of the Loan Parties’ accounts receivable, inventory, cash deposit and securities accounts, and substantially all patents and trademarks, including the La-Z-Boy brand name.

Initial borrowings under the New Credit Agreement were utilized to repay the outstanding private placement notes in the principal amount of $121 million, along with a make-whole premium of approximately $6 million, which will be expensed in the fourth quarter of fiscal 2008, accrued interest of approximately $1.3 million, and fees related to the New Credit Agreement of approximately $2 million, which will be capitalized and amortized over the life of the debt. The Company intends to use any future borrowings for general corporate purposes.

Results of Operations
Analysis of Operations: Quarter Ended January 26, 2008
(Third Quarter 2008 compared with 2007)

		Quarter Ended
(Amounts in thousands, except per share amounts and percentages)		01/26/08				01/27/07				Percent change
Upholstery sales		$	282,453			$	293,709				-3.8	%
Casegoods sales			52,660				63,127				-16.6	%
Retail sales			49,884				61,149				-18.4	%
Other/eliminations*			(11,916	)			(13,140	)			9.3	%
Consolidated sales		$	373,081			$	404,845				-7.8	%
Consolidated gross profit		$	108,635			$	113,523				-4.3	%
Consolidated gross margin			29.1	%			28.0	%
Consolidated S,G&A		$	104,672			$	101,213				3.4	%
S,G&A as a percent of sales			28.1	%			25.0	%
Upholstery operating income		$	19,467			$	22,651				-14.1	%
Casegoods operating income			2,222				5,721				-61.2	%
Retail operating loss			(8,507	)			(6,738	)			-26.3	%
Corporate and other			(9,851	)			(9,324	)			-5.7	%
Restructuring			(245	)			(2,855	)			91.4	%
Consolidated operating income		$	3,086			$	9,455				-67.4	%
Upholstery operating margin			6.9	%			7.7	%
Casegoods operating margin			4.2	%			9.1	%
Retail operating margin			-17.1	%			-11.0	%
Consolidated operating margin			0.8	%			2.3	%
Income from continuing operations		$	9,128			$	6,945				31.4	%
Diluted income per share from continuing operations		$	0.18			$	0.14				28.6	%
Income (loss) from discontinued operations		$	384			$	(14,766	)
Diluted income (loss) per share from discontinued operations		$	—			$	(0.29	)