Ethan Allen Interiors Inc (ETD) 2003 Q3 法說會逐字稿

Welcome to your conference call today with Mr. Farooq Kathwari. I'd like to remind everyone that the call is in a listen only mode at the present time. We will have a question and answer session later in the call. If you wish to ask a question, you may do so by pressing star one. Again, that's star one if you ask a question. Mr. Kathwari, I'll turn the call over to you and thank you for using Sprint, sir.

Thank you. Good morning. I'm Farooq Kathwari, Chairman and CEO of Ethan Allen. I'm joined by Ed Teplitz, our Vice President and Chief Financial Officer and Jeff Hoyt (ph), our Director of Financial Reporting. Today we are reporting the results for the three and nine months ended March 31,2003. We are pleased with the third quarter and the nine months results, particularly in light of the business climate during this period.

During the quarter, the company announced a plan to consolidate three of its smaller manufacturing facilities with most of the related production being absorbed by other existing U.S. plants. In connection with this decision the company recorded a pretax restructuring and impairment charge of $13.2 million or 22 cents per share during the period. This charge is consistent with that previously announced in February 2003. A summary has been provided on the company's Web site which serves to reconcile and present our financial information for the three and nine months ended March 31, 2003 to reflect the impact this restructuring and impairment charge.

For the quarter earnings per share including the restructuring and impairment charge amounted to 30 cent or net income of $11.7 million compared to 58 cents and 23 million respectively in the prior year quarter. Excluding the restructuring and impairment charge, earnings per share amounted to 52 cents and net income totaled $19.9 million. Sales amounted to 224.6 million versus is 227.9 million in the prior year third quarter. All sales increased marginally during that period to 173.9 million while retail sales increased 9.9 percent to 127.3 million from 115.8 million last year. Comparable store delivered sales for the quarter decreased 4.3 percent as compared to the prior year.

For the nine month period earnings per share including the restructuring and impairment charge amounted to $1.42 on net income of 54.8 million as compared to $1.52 and 60.9 million respectively in the prior year comparable period. Excluding the restructuring and impairment charge, earnings per share for the nine month period increased 7.2 percent to $1.63 and net income increased 3.5 percent to $63 million. Sales during that same period increased two percent to 670.8 million from 657.5 million. Wholesale sales for the current nine month period increased one percent to 490.1 million as compared to 485.5 million in the prior year. Retail sales increased 16.7 percent to 387.1 million from 331.6 million in the prior year comparable period while on a year over year basis, comparable store delivered sales for the nine month period decreased 3.7 percent.

For the quarter, total net orders booked decreased 5.5 percent as compared to the prior year quarter. At the wholesale level, net orders book declined 8.9 percent, at the retail level written sales increased 4.4 percent and comparable store written sales decreased 9.2 percent. For the nine month period, total net orders booked increased 3.3 percent, as compared to the prior year comparable period. Wholesale net orders booked decreased 0.9 percent while retail division written sales increased 17.2 percent and comparable store written sales declined 3.2 percent.

For the quarter, gross margin was 49.8 percent as compared to 47.6 percent in the prior year period. Our consolidated operating margins including the restructuring and impairment charge was 8.4 percent versus 15.8 percent in the prior year. Excluding the restructuring and impairment charge, our consolidated operating margin was 14.3 percent. The wholesale operating margin including the restructuring and impairment charge was 12 percent versus 18.7 percent in the prior year quarter. Excluding the restructuring and impairment charge, the wholesale operating margin was 19.7 percent. The retail operating margin was 1.7 percent as compared to 4.6 percent a year ago reflecting low shipments due to business softness and effects of adverse weather conditions experienced during the quarter.

For the nine month period, our gross margin was 49.9 percent, up from 46.5 percent a year ago. Operating margin including the restructuring and impairment charge was 13.1 percent versus 14.6 percent in the prior year period. Excluding the restructuring and impairment charge, the consolidated operating margin was 15.1 percent. Wholesale operating margin including the restructuring and impairment charge amounted 15.9 percent as compared to 16.5 percent during the prior year period. Excluding the restructuring and impairment charge, the wholesale operating margin was 18.6 percent. The retail operating margin was 3.4 percent compared to 4.8 percent a year ago. We are pleased that in this challenging environment we have been able to maintain strong gross and operating margins especially taking into account that our manufacturing had 75 days of down time during the quarter.

Regarding balance sheet, cash and short-term investments decreased 9.4 million during the quarter, primarily as a result of treasury stock purchases of 19.4 million, capital expenditures of 6.5 million and inventory increase of 16.3 million. Inventories increased due to several factors. Build-up or launch of the Tuscany and leather expressions in March and April, better stock position in townhouse, increase in our retail stores, delay in shipments to consumers for our retail division due to bad weather, increase in raw materials especially logs due to timing, and into enter space (ph) of closing of three plants and obviously, overall softer business condition as well. We expect to have lower inventories at the end of the fourth quarter.

Customer deposits increased 7.7 million during the quarter and is consistent with a quarter and year-to-date increases in retail written sales noted previously. Accrued expenses and other liability increased 7.4 million from December 2003 as a result of the restructuring accrual recorded during the quarter and the timing of our normal accruals and cash payments encountered in the ordinary course of operation. We generated strong operating cash flow of approximately 18 million during the quarter which has enabled us to continue to focus on increasing shareholder value. As was mentioned previously during the quarter, we repurchased 678,900 shares of the company's common stock in the open market for 19.4 million. For the nine months ended March 31, 2003, we have repurchased 1.4 million shares for 41.8 million. At the present time, 1.3 million shares remain authorized for repurchase.

EBITDA for the quarter including the restructuring and impairment charge was 24.4 million or 10.8 percent of sales as compared 41.8 million and 18.4 percent respectively in the prior year period. Excluding the restructuring and impairment charge, EBITDA was 37.6 million or 16.7 percent of net sales. Depreciation and amortization expense for the quarter amounted to 5.5 million as compared to 4.8 million last year. In addition, we utilized cash of 6.5 million as stated previously for capital expenditures and there were no acquisition during the quarter.

Now I would like to provide you with a brief business update and a discussion of some of the important elements of our business that continue to differentiate Ethan Allen. We continue to believe it's extremely important to offer innovative, stylish and high quality products at great values. As stated previously, the success of our Townhouse collection continues to exceed our expectations. Earlier this month, we introduced our Tuscany collection and Leather upholstery program. The initial response to both has been strong. Ethan Allen kids which was in market in July, is our next important product offering and a intended to further expand our reach to consumers. We recently announced that several stand alone Ethan Allen kids stores will be open in strategic locations. These test stores will be specifically designed to showcase a full complement of this product line in an exciting setting that appeals to both children and their parents.

Lastly, we'll be holding a special retail conference in Atlanta in June during which time we'll introduce our new storefront design at Alpharetta location. We'll also be launching a product program to strengthen our country casual collection. Most of the products will be manufactured at our plants here in the U.S. and are expected to be marketed nationally in the fall of this year. We are taking this opportunity to strengthen our offerings and also have strong programs to produce to the consumers during the next 12 months.

We continue to expand and strengthen our retail network in the U.S. and abroad. During the quarter, we opened three new stores in the U.S. and are consistently evaluating new real estate opportunities. Of these three stores one was a relocation. When appropriate, we take advantage of such opportunities in order to open new stores and close or relocate existing stores with the objective enhancing our presence in the most strategic locations. We closed four relatively small stores during the quarter in overseas markets. These stores generated annually less than $300,000 of wholesale volume.

Our two stores operating in the UK continue to show progress as does our first store opened in Tang in China. A second store in China is scheduled to open in May and we continue to expect additional stores in Shanghai and Beijing will be opened during this calendar year. As I've stated previously, our focus as we go forward will be to aggressively position our stores in the right markets with a strong image. We believe that by establishing larger stores in better locations, we can more effectively market our products to a broader customer base enabling us to realize more profit. At the end of the quarter our retail store network consists of 312 stores, 120 of which are company owned. For the remainder of the fiscal year, we expect to open four new relocations - four new stores, three of which will be relocations.

We have maintained a strong marketing program in this difficult economic environment. Our ongoing advertising efforts continue to position Ethan Allen as an authority on home decorating. All facets of our current advertising campaign including direct mail, print and television, emphasize the message that Ethan Allen's 3,000 design consultants can provide solutions to customers while making home decorating fun and easy. The response to our first design book entitled Ethan Allen Style has been very positive.

This hard cover publication, which is over 200 pages, assists consumers in defining their style and illustrates how to get the look they want with our products and services. In challenging times such as these the notion of sameness in a business and a willingness to accept mediocrity can lead to failure. I believe that as a result of the company-wide initiatives referred to previously, as well as the professionalism for people, we are positioned very well as the economy and consumer confidence improves. At this point, I would like to open the line for questions and comments

If anyone has a question at this time please press star followed by one. That's star followed by one on the touch tone phone. If someone ahead of you has asked your question, you may remove yourself from queue by pressing the pound sign. The first question is from Margaret Whelan, please go ahead.

Hi Margaret. Good Morning. Hello.

Miss Whelan, are you online?

Yes, Hello?

Hello Margaret.

This is actually Susan Maklari for Margaret.

Okay, Susan.

Can you just talk a little bit about your - I know that the prepaid expenses on the balance sheet were up quite a bit sequentially.

Prepaid?

Prepaid expenses on the balance sheet.

Yes, yes. Okay. How about, there's nothing unusual, but I will see that if there's anything special. Jeff?

No, it's largely prepaid commission for the retail segment. There's actually some other current assets inventory, samples, things of that nature.

Susan, there's nothing abnormal about.

Farooq, it's Margaret, I actually jumped on, could you talk about little bit about normalized levels for both the retail and the wholesale business. I think you said in your prepared comments that the retail margin is 1.7 percent and that wholesale is 19.7, and realizing the retail is weak right now, but could you give us estimates for a normalized level as business recovers and as you're increasingly opening and controlling the retail stores what the EBITDA margin we should be expecting for corporate as a whole would be?

Our objective in the retail should be to operate at least between four and six percent.

Okay.

And at a wholesale level to be operating between 18 and 19 - 18 and 20 percent. We're already at 19.7 percent. And I think an EBITDA margins will be between 17 and 19 percent also.

Even with an increasing retail as a percent of the total it's not going to dilute it so much?

As you can see, as you can see in the last two years, our wholesale margins and even overall operating margins for the nine months is over 15 percent. Considering the fact our retail margins are relatively low.

Yeah.

So I think that as our retail margins improve, it will not dilute, in fact, either maintain it or slightly improve it.

Okay. About the second thing is just as you're increasing the imports would you give us your thoughts on shipping rates we're hearing are rising in early May. Also is there going to be any delay of your new product because of the shipping delays because of the SARS epidemic?

Margaret, we have not heard. I mean the shipping costs so far are not that major for us. We're going to take a look at it as we go forward. And as far as SARS is concerned, so far, not an impact. But as we go forward and we're not able to send our people over there, there is a possibility. So we're watching it very carefully. We've got a couple of people working there. We don't work with too many people overseas so that limits our exposure. We don't have to send a lot of people visiting a lot of people. So we are working with a very, very few number of people and they're pretty good and we've got a couple of people over there. But we have not been able to send our either to the store openings or to look at manufacturing.

Are you actually having any delays with the product that's coming into the U.S.?

We're having no delays.

No delays, okay. Would you just tell us the location of the four stores you closed? You said they were overseas.

They are small store - in Cairo in Brazil, in South Korea and Japan.

Okay. And if you're closing stores in these markets does it make sense to be opening outside of the U.S.? Do you think they've got the leverage?

What we're doing is opening like in the U.S. also. We're opening larger stores in better markets than these little stores we had previously, mostly by our independent dealers, as you know all of these are. So we are encouraging them to consolidate into larger operations and not have these little stores.

Okay. Thanks very much.

All right, Margaret.

Our next question is from Budd Bugatch. Go ahead, please.

Hi, Farooq, how are you? A couple of questions, one on inventories. Could you give as you breakdown between finished goods with and raw materials.

Ed, is this information we give out?

We have not in the past?

With finished goods and ...

I just want to make sure. We do give out.

You do report it on the Qs.

So in terms of an increase between the two, approximately for $5 million of the $16 million was in our raw materials and manufacturing related. The rest was basically finished goods.

So $5 million was in raw materials and of the $16 million between.

Rest was in the finished goods.

... and the $16 million increase. We had $167 million last year in the third quarter besides the $29 million increase. So you're talking about until the end of the year.

No I'm talking between the quarters, December 31 quarter and March 31 quarter.

Okay. So of that $5 million of that increase was work in process and raw materials and the balance was the finished goods. Okay. That's helpful. I was curious about your decision to talk a little bit more about the decision to accelerate the dealer meeting to Alpharetta that I guess in the middle part of the year. I guess normally your dealer meetings are in the fall in October and November. Does that also signal some additional promotional activity? Are you going to perhaps run another promotion as well?

No. Bud, we are going to also have our annual convention in the fall. This is a special conference we are having. We normally have regional meetings in March or April every year, but this time we decide have a conference to reflect, as I said in my comments, the opening of the new Alpharetta store. This reflects the new store designs we want all our retail network to look at it and also, we're introducing, and we decided to accelerate a product introduction, which normally would have been introduced to the consumer in the spring of 2004.

We felt we had the opportunity, we had the time and we felt it was important to make sure that we take this time to really improve our product lines. And so we accelerated our product designs and we are going to introduce those products in June to our retail networks and to the consumer in the fall. And that is a very, very important develop as far as we are concerned.

What kind of product and where does it fit?

This product is going to be more casual, more country. And this product is going to be made mostly in our southern plants.

And it's a full collection?

Well, it is but as you know, we are getting away from suites (ph) and stuff. This is a collection of items, 30, 40 items representing different moods. It is not just one finish, you know. It has a lot of colors and finishes that we're using and we're using the flexibility of our domestic manufacturing to be able to give the flexibility of color. But it would be - it is going to be a very significant introduction. And we believe very, very well received by the consumer.

And my last area of inquiry is I noticed your customer deposits are $55 million which was higher than it was at the beginning of the quarter and I know retail has been a challenge. So we've got customer deposits up, that's usually a precursor of deliveries of retail sales in the current quarter and I was just curious if you're feeling, I know with nine percent comp store orders down in terms of orders, where do you think the comps will run for your company on retail business as you move through the fourth quarter.

I think what's important is to look at, Budd, is the three percent decline in comps for the year and not just the nine percent. Because and also to look at the fact that we did have lower shipments as I mentioned that the weather did have an impact in lowering shipments and business conditions are also relatively difficult. But it does give us an opportunity to somewhat increase shipments in the fourth quarter reflecting as you already pointed out the increase in the deposits.

I'm also interested in where you see the order patterns going. The orders don't really depend on - well the orders may depend on the weather to the extent that stores were closed. Did you say you had 75 down days.

That's right. In manufacturing.

Total. So plants times number of days down was 75 in the quarter.

That's right.

And you still had a 19.7 percent wholesale margins.

That's exactly the point. If we had all the plants working at full blast, we would had v had a slightly higher margin.

All right, Farooq. Thank you very much.

Our next question is from Jason Putman, go ahead, sir.

Good morning, Farooq.

Good morning, Jason.

Let me follow up a little bit on Budd's last question. I think I'm a little bit confused as well. When you say 75 down, you don't mean 75 days the plants are sitting idle, they're just not running to capacity.

No, it means 75 days like a plant would be closed for a full week. 75 full days of plant closings.

Okay. So no production coming out ...

That's right.

Any plants in 75 days or just some plants.

No, almost all plants. What we did was, what it means, just to clarify. If we closed one plant for five or seven days, and we closed other plant for four days, so that's how, we are counting days throughout our whole system.

Okay. Then my next question is the three plants that you've taken out in your restructuring that you just announced, is that the right number of plants after you take those out or is there more plants that still need to come out?

At this stage, I think that it is the right number. Now we're going through a down, we're going through a recession. And we've got to make sure that we have production capabilities not only to domestically but also overseas and that's what we are balancing. One of the important factors, I think, to keep in mind, is that our outsourcing has given us a tremendous flexibility to do what we are doing, that is consolidating our smaller plants and plants where we are not going to be making investments for the long-term.

Previously, we couldn't do that because when the cycle changed and we needed more production, as you know three years back, we had to outsource in the United States even with having, I think six or seven more plants than we have today, but today we have the opportunity of now consolidating our plants to the best plants in the United States and our capacities have increased despite the 74 days - 75 days that we took, we still produced products. And you know, we could have consolidated more, but it would be unwise to do that because I think we're going to come out of this softness and we are going to need production.

My next question relates to demand. Obviously the order numbers for the quarter weren't that encouraging, but you did have the poor weather conditions in February. Can you talk about how things trended in March. Did they improve after the weather broke a little bit? And then going into early April has there been any change that gives you hope for the rest of the year?

Jason, I think that we got - we were impacted like most businesses and most industries by the war. Consumer confidence was impacted, and I think that it is only towards the end of March, early or almost in the last couple of weeks, we have now seen some change in the situation in Iraq where all these cable channels have gone to something else, other than Iraq. Which is good news. So that the people can, you know start focusing on coming into stores.

What with have seen is we have seen an increase in traffic and that's good news. Having said this, this is hard to compare the last two weeks because this year, Easter came in April and last year it was in March. So with Easter in the last two weeks, it is not a good time to make any comparisons. I think the next few weeks we'll have a better understanding. My feeling is talking to our retail network that we should be able to have more positive attitudes of the consumers and that's what we were looking for.

Okay. Just the last question relates to SG&A. Obviously it's up rather substantially from a year ago. Is this just in large due to increased promotions or is it also due to the fact that you have a much bigger retail portion of your business now?

It's actually it's all the retail. In fact, our operating (ph) SG&A is somewhat lower our overall SG&A on the corporate side - wholesale side went down because of the substantial increase in our retail stores.

So would you expect that the SG&A on an on forward going basis. I mean, is there increased, I guess promotional activity in this quarter that we would expect to drop off as business conditions improve?

It's it is not related to promotional things. It lass to do with we have many more stores this year than last year. If you increase the number of stores substantially, which is not the plan right now, in terms of we don't have many plans to buy more stores as we did in the last year or so, I think that increase in SG&A will be directly related to increase in business.

So as a percentage of sales like rate now SG&A is 35.6 percent, is that kind of 35 to 36 percent range a more likely type of run rate going forward? Or do you expect to come back a little bit?

I think it will be in that range. It might change if our retail network increases substantially. If it remains where it is today, that's range we will be at.

Okay. Thank you.

Our next question is from Todd Schwartzman. Go ahead, sir.

Hi Farooq. I'm curious if the change anyone come and other income is solely a function of lower interest rates or there is something else going on there?

We had a real estate, we sold some property last year and this year we didn't have any sales.

Okay. Thanks.

Next question is from Laura Champagne (ph). Go ahead, please.

Good morning. Would the success of the Townhouse collection, which is a lower priced collection, are you seeing a downward trend in average ticket size?

Actually, Laura, the townhouse for us is not lower, actually the Townhouse for us is towards the top of our price lines. It just reflects a great value for the consumer. Because of that, our average selling price at wholesale or retail has not come down.

Okay. So it's just lower number of transactions fueling lower same store sales?

That's right.

Where are you as a percentage of your furniture sales in terms of product imported from the Far East now?

It is going to now, it is ranging now between 20 and 25 percent.

Great. Thank you.

Our next question is from Larry Vidkowski (ph), go ahead, sir.

Farooq, congratulations, very solid quarter. Just to follow up on the last question, the average unit price overall is about unchanged?

Yes. It is about unchanged. In fact, I will take a look at it. I'm not seeing this last quarter but previous to that, has slightly gone up.

And one or two quick follow ups. Tuscany, that falls where in the price scheme and also where is the leather line being made?

Tuscany falls about the same as townhouse in terms of price points.

Okay.

And the leather expressions is made in China and Malaysia.

Okay. Thank you very much, congratulations again.

Just a reminder it is star one if you have a question, and pound to remove yourself from queue. The first of three remaining questions is from Keith Hughes. You have the floor, sir.

Thank you. You mentioned earlier in your comments about a stand alone youth store. Could you give me some sort of timing of when we're going to see those launched?

Keith, we are launching our Ethan Allen kids program - we'll be marketing it in July of this year in all of our stores. And I believe that this summer in all-or August, we should open the first of the two - the first of these stores. Our objective is to open up five or six test stores.

How big are they?

They will range between 2,000 to 3,000 square feet.

And they're going to be stand alone, correct? Or just a store within a store?

Well, first of all, we are going to have the Ethan Allen products in all of our stores and in the largest stores that we have, it will be a store within a store, but the stores that we are talking about which are away from our store, these experimental stores will be - most of them are going to be in malls and two or three we would lake to have them outside malls but in high traffic areas.

Will there be a mix of product? Besides furniture there will be textiles and toys, things of that nature?

It is going to be primarily kids furniture store, but supported with accents, that is like bed spreads, pillows and some upholstery, but we're not going to have bears and toys and all that kind of stuff.

Okay. Thank you.

Next question is from John bow go ahead sir.

Good morning, John.

Good morning. Congratulations. I guess I wanted to follow up on Budd's question about how did you achieve a 19.7 whole sale margin with 75 down days? Do you go into some of the components, the influence of sourcing margins like with Townhouse, was it raw materials helping? Clearly your absorption of U.S. plants has to be hurting and I assuming the margin - I don't have a the figure in front of me from a year ago, but I'm assuming it was actually. So help me understand the dynamics on that number.

John, you're absolutely right. We have been operating under very, very tough conditions. The factors that have contributed to it are both the benefit of the plants we consolidated two years back. We're seeing their benefits. We're seeing the benefit of having our plants operate more efficiently today than they were doing two years back in terms of we've cut down on expenses, we've cut down on labor. We have brought in technology. We have also - and also the impact of doing things right the first time.

We launched this program a few years back, very, very strong program and it's very, very important for us. Because most businesses don't realize they can improve their margins considerably if they do things right in their factories. Rework is what has a tremendous impact on margins. And then we had higher production as we did a few years back, we hired lots of folks. Rework became an important prospect. We got that out. Then Townhouse was also an important factor. The margins of Townhouse had a very, I think, had an important impact on our overall margins at the wholesale level.

Anything on raw materials or on that front?

Raw materials, yes, we did some benefit of raw materials. Right now in the last few months we are losing that to some degree in the short-term because in sawmills logs in the United States, those folks are not buying a lot of logs, because business has been bad. Interestingly, it's more driven by supply rather than demand. That's why we had to take some stronger position during this quarter to get logs into our factories because as you know, when the season starts which is now, you can't go in and get any logs, we wanted to protect ourselves. That's why the $5 million increase I talked about, a lot of that was due to the fact we went in and got some good logs.

The same question, have you seen any issues on quality with Townhouse at this point that you know have cost you significant money to fix? And what delivery quotes are you quoting consumers on the delivery of Townhouse? You mentioned you had more inventory there.

John, the townhouse quality issues, of course, have been larger, because of volume we are doing. And secondly, also, in some items, it's not across the board. In some items, they did not completely follow the requirements even though we were very, very strict, so we have some issues. But nothing, I don't think there's anything substantially different than the issues we have some our domestic manufacturing. As far as deliveries are concerned, we have in pretty good shape, we are delivering. In fact one of the retail division the reason our sales got held up is because we are delivering, a the lot of consumers don't want to take furniture right now.

So what are you quoting on townhouse versus domestically made?

I would say for most of them, our retail stores again, depending on what part of the country they're in, four to six weeks is what they're quoting.

And townhouse would be within that?

That's right. Again, you know, 95 percent, if there's some items that are out of stock, it maybe larger, but 95 percent of the product is delivered within four to six weeks. In fact, we're shipping it pretty fast, as I said. It depends on what part of the country you are from with our distribution centers.

Okay. Thank you very much.

Our next question is from Rick Sing (ph). Go ahead, please. Mr. Sing (ph), do you have your phone on mute, by chance?

Yes, thank you.

You're welcome.

I wanted to ask you about typically what percent of your sales in the following quarter are based on the orders that you receive in the previous quarter? So for example, your orders are down nine percent in Q3, what percent of a your Q4 sales would be reflective that down nine percent order flow?

It's hard to say because it would to a great degree reflect on what kind of business we're going to get during the quarter. It may not necessarily have a major impact. If we are - if our business during the quarter improved. So it all depends on how well we do during the quarter because especially now that our in stock positions of inventories are pretty good, if the business comes in, that comparable store decline we had would not be a material factor, it would be a factor. Also I would have to take a look at the backlogs at the end of the period. Because as I said, for us, retail sales during the quarter were lower because of weather factors and other factor, that will have an either positive or negative impact on the next quarter. So I think it has an impact, but I don't think it is a major factor.

Is there a way to quantify with a total dollar value of what written sales is?

Dollar value of - why don't you please call up Peg Lupton and ask her this question, she'll give you the information.

Okay. Great. Thank you very much.

Our next question is from David Ricci

David, go ahead.

Hello, Farooq. Two questions, one is given the consolidation of the plants in the U.S., would you envision that your days downtime in Q4 would not be quite as material as they were in the first quarter there? And secondly, is could you provide any kind of color on how the consumer is reacting across your product line? It sounds like your new products continue to be well received, you know, where is the consumer not right now buying as much general terms?

As far as your first question we are going to continue to have downtime in the fourth quarter. Because our production capacities even with these lower plants and everything else is and has to such a degree, you know, we got really a race horse there and we got to control otherwise we'll build a lot of inventories. So we would have some down time. It might be perhaps a little bit less than what had the third quarter, but we'll watch it as were you we go forward. It's hard to tell right now.

Second as far as the consumers reacting to the new products, the townhouse has been received well for a number of factors, it's a great value and also, we have 3,000 design consultants. They like new things and when they like it, that's what they focus on. That's why it was important for us to balance from Tuscany Townhouse to the new country going to be made at our plants in the U.S. because we felt if we did not give attention to products made in our plants, it would be a self-fulfilling prophecy that we would get attention to all these products coming from offshore. But that's why we are also introducing these new products to the consumer in the fall. The products that declined are product would have traded dollars with townhouse, like very formal 18th century products made in the United States. Those are most probably the ones that have suffered the most.

That's more of a cannibalization (ph) issue, you're saying?

That's right. It is. Every time you get something new - dollars only shows how much.

Right. In broad terms, the consumer obviously is a little reluctant to buy right now. Would you say that's across the board or is it more concentrated in any particular spot, lower end, higher end, middle end, credit oriented noncredit oriented, any patterns that your seeing.

We're not seeing patterns. If you take a look at townhouse, the top end of our program, it represents great value, but it is the not the lower end of our product lines. Our best selling product line in the townhouse is a $1200 coffee table. That the most expensive coffee table we have and that's the best selling product line. It's not just the price, it's the value, but it offers a tremendous value at that price and the consumers see it.

Okay. Perfect, thank you.

The next of three remaining questions is from Justin Mauer you have the floor sir.

Good morning, Farooq. Just a quick question on the inventory again. Just to try and get a sense of I know you hoped you said it would be down first quarter to third quarter. Do you have any sense, or are you at least willing to talk about a target just because, as you mentioned, the inventory second quarter, third quarter is up, call it $11 million in finished goods, yet you had 75 down days, so just trying to get a sense of if you're at 196 do you hope to be under 190? Certainly nothing close to last year presumably is in the cards.

Adjusted (ph) is going to be lower. Hard to say right now. Business improves it's going to be much lower. If it doesn't improve much, it's going to be less lower.

All righty, sir. Thank you.

Our next question is from Margaret Whelan.

Farooq, I have a follow-up question. It's a little offbeat, but I'm trying to figure out what are the numbers that Ethan Allen gives to the AFMA to quantify your business? Do you give them your total revenue number or just your wholesale number?

We give total numbers.

Isn't that double counting on the retail side though?

No. It is - it reflects elimination. What we give the number - Ed, what number do we give?

We give total sales.

What is what, wholesale and retail.

You give whole sale and retail with the elimination, so it's just a consolidated revenue number. I can follow up with you afterwards, it is easier.

Actually, we are, after maybe talking about how we can provide some simple numbers, I think we're making progress.

Okay. Great. Thank you.

Just a reminder, it is star one if you have a question. Our last question at this time is from Todd Schwartzman. You have the floor, sir.

Just a follow-up on the EA kids stores. Have you said anything about the location of the initial five to six free standing stores? And also just to clarify, is that two to three thousand square foot figure the store within a store or the free standing size expected? Thanks.

2,000 to 3,000 is going to be the stores in the malls. Within our existing stores, the size will be from approximately 600 square feet to 1800 square feet depending on the size of the stores. One of the important reasons we are going to experiment putting these stores in malls and in high traffic areas is in those markets where we don't have larger stores. As you know, longer term our objective is to have larger stores in markets where there is the right kind of demographics. What was your other question? Locations. We are not set, but the first one we're able to finalize is one in Connecticut and one near Philadelphia.

Okay. Thank you.

Sir, I have no one else in queue at this time.

All right. Thank you very much. Any more questions please let us know.