Ethan Allen Interiors Inc (ETD) 2003 Q4 法說會逐字稿

Thank you for holding and welcome to your conference call today. I'd like to remind everybody that you'll be in the listen-only mode until the question and answer period. We'll be approximately 12 minutes until the question and answer period, and to ask a question, just press star, 1, and at this time, I'll go ahead and turn it over to your main presenter, Mr. Farooq Kathwari.

Thanks very much, and good morning. I am Farooq Kathwari, Chairman and CEO of Ethan Allen. Jeff Hoyt, our VP of Finance, joins me today. Today we are reporting the company's results for the quarter and the fiscal year ended June 30, 2003. Last quarter capped a challenging 12-month period for Ethan Allen and our industry as a whole. Yet despite the negative effects that the economic and political environments have had on consumer confidence, we are overall pleased with the company's results.

Now let me share the financial highlights of the fourth quarter and the fiscal year ended June 30, 2003. After these brief highlights, I will go into greater details of the financial information. For the quarter, our sales increased 0.7% while our EPS was 54 cents as compared to 62 cents last year, excluding restructuring costs. Our gross margin was 48.6% versus 49.2%. Importantly, we held up our operating margins at 13.8% versus 14.5% in the previous year.

Factors that impacted our gross margins and operating margins during the quarter were downtime at our manufacturing plants to keep control over our inventories. We took about 115 days of downtime in our case goods manufacturing, representing about 22% of total production base. The second factor was in our retail division, where the sell-off of floor samples of four stores that were closed and relocated during the quarter and generally sale of floor samples throughout our retail division which resulted in lower gross margin and lower operating margins in order to make rooms for new products.

Our results in the retail division were also impacted due to overall lower shipments during this quarter. During the quarter, our total booked orders decreased 5.5%.

Now for the whole year, I'm pleased that our performance for the whole year was good. We had a sales increase of 1.7%, resulting in our reporting record annual sales. Our earnings per share was $2.17 versus $2.14 both periods exclude restructuring charges. Our gross margins went to 49.5% versus 47.2%. Our operating margins at 14.7% versus 15.1%.

Our EBITDA was 17.2% that is $156.2 million versus 17.6% last year. Net orders booked for the whole year, that's a combination of our wholesale and the retail, had a decline of 1% as compared to the previous year. Inventories increased $24.1 million during the period during this year, reflecting acquisition of 16 retail stores and the slower than expected orders due to the impact of war in Iraq.

We strengthened our financial position during the year, we repurchased 1.5 million shares or $43.5 million, and increased our dividend by 60%, while maintaining a net cash of about $73 million at the end of the year. Now to give you greater details, for the quarter, our earnings per share amounted to 54 cents on net income of $20.5 million compared to 54 cents and $21.4 million respectively in the prior year quarter, which included pre-tax restructuring and impairment charges totaling $5.1 million.

Excluding the impact of these restructuring and impairment charges, earnings per share for the prior year quarter amounted to 62 cents and net income $24.5 million, sales increased 0.7% during the current quarter to $236.4 million versus $234.8 million in the prior year quarter.

Wholesale sales decreased 2.5% during that period to $170.9 million as compared to $175.3 million last year. Retail sales increased 8.8% to $139.3 million from $128.1 million in the prior year quarter, and written sales increased 10.3% over that same period. Comparable store delivered sales and written sales for the quarter decreased 2.8% and 2.6% respectively as compared to the prior year.

For the 12-month period, earnings per share including pre-tax restructuring and impairment charges totaled $13.2 million, amounting to $1.95 on net income of $75.4 million. This compares to $2.06 and $82.3 million respectively in the prior year period, which included pre-tax restructuring and impairment charges totaling $5.1 million. Excluding the impact of restructuring and impairment charges in both periods, earnings per share and net income amounted to $2.17 and $83.6 million respectively for the current year as compared to $2.14 and $85.4 million respectively for the prior year.

For the year, we achieved record annual sales of $907.3 million, representing an increase of 1.7% from $892.3 million in the prior year. Wholesale sales of $661 million in the current 12-month period remained relatively unchanged as compared to prior year. Retail sales increased 14.5% to $526.4 million from $459.6 million in the prior year, and written sales increased 15.4% over that same period. Meanwhile on a year-over-year basis, comparable store delivered sales and written sales decreased 3.5% and 3.1% respectively.

For the quarter, total net orders booked decreased 5.5% as compared to the prior year quarter. At the wholesale level, net orders booked declined 10.5% while at the retail level, written sales increased 10.3% and comparable store written sales decreased 2.6%. For the year, total net orders booked increased 1% as compared to the prior year. Wholesale net orders booked decreased 3.3% while retail division written sales increased 15.4% and comparable store written sales declined 3.1%.

For the quarter, gross margin was 48.6% as compared to 49.2% in the prior-year period. The consolidated operating margin was 13.8% versus 14.5% in the prior year, which included the effect of pre-tax restructuring and impairment charges totaling $5.1 million.

Excluding the impact of these restructuring and impairment charges, the prior year consolidated operating margin was 16.7%. The wholesale operating margin was 18.4% versus 17.1% in the prior-year quarter, which again included effect of pre-tax restructuring and impairment charges totaling $5.1 million. Excluding these charges, the wholesale operating margin was 20.1% in the prior year quarter. The retail-operating margin was 0.9% as compared to 5.5% a year ago, reflecting lower volume and additional costs associated with operating a greater number of company-owned stores and the sell-off of floor samples. For the year, greater manufacturing efficiencies and continued expansion of the retail division have resulted in an increase in our gross margin to 49.5% from 47.2% in the prior year.

Operating margin including the effect of pre-tax restructuring and impairment charges totaled $13.2 million in fiscal year 2003 and $5.1 million in fiscal year 2002 amounted to 13.3% in the current period versus 14.6% in the prior-year period. Excluding the impact of restructuring and impairment charges in both periods, the consolidated operating margin was 14.7% in the current year as compared to 15.1% in the prior year. Wholesale operating margin including the effects of the respective pre-tax restructuring and impairment charges mentioned previously amounted to 16.5% in the current year and 16.7% in the prior year. Excluding the impact of restructuring and impairment charges in both periods, the current year wholesale operating margin was 18.5% versus 17.4% in the prior year. The retail-operating margin was 2.8% versus 5.5% a year ago.

Regarding our balance sheet, cash, and short-term investments increased $6.2 million during the year and inventories increased $24.1 million. We generated strong operating cash flow of approximately $100.5 million during the year, which enabled us to continue our focus on increasing shareholder value. In April, we announced a 17% increase in our quarterly dividend. This was followed by a further 43% increase in our quarterly dividend announced just a few days ago.

For the 12 months ended June 30, 2003, we repurchased $1.5 million shares or $43.5 million, and at the present time, have $1.3 million shares remaining as authorized for repurchase. EBITDA including the aforementioned pre-tax restructuring and impairment charges applicable to each period amounted to $143 million or 15.8% of sales for the current year as compared to $152.1 million and 17% respectively in the prior year. Excluding the impact of these restructuring and impairment charges, EBITDA was $156.2 million or 17.2% of net sales in the current year, and $157.2 million and 17.6% respectively in the prior year.

Depreciation and amortization expense for the year amounted to $21.3 million, as compared to $19.3 million last year. In addition, we utilized cash of $27.2 million for capital expenditures and $11.3 million for acquisitions during the year.

At this stage, I'd like to provide you a brief business update and a discussion of some of the important elements of our business that continued to differentiate Ethan Allen. Our goal can be simply stated. We want to provide our customers with a variety of solutions, all of which assist in making the home decorating process fun and easy.

These take many forms and include our products, our stores, our people, and our financing options. We continue to believe that one of the primary elements of enabling us to provide the complete home decorating solution is our one-stop shopping products.

As such, it is extremely important that we continue to develop and offer innovative stylish and high quality products at great value. In July 2002, we introduced Townhouse, our first import collection, which quickly became our most successful product introduction to date. We followed the success of Townhouse with introduction of Tuscany and leather collection expressions in spring 2003, and Ethan Allen kids program in summer of 2003. Each of these collections (inaudible) to some degree source offshore served to further strengthen our existing lifestyle offerings and expand our consumer reach.

In June, we introduced yet another new collection, new country by Ethan Allen to our retail network, which will be available to consumers in fall of 2003. Unlike the new collections mentioned previously, most of this collection is manufactured at our plants here in the United States. We continue to believe that developing the appropriate mix of offshore sourced products with products manufactured domestically is critical to enabling us to remain competitive and profitable.

One of our objectives to ensure the shopping experience for Ethan Allen customers is an enjoyable one. To address this, we recently undertook the first step in our most recent phase of reinvention, which was to update the look of our stores with an exciting new store design. The first of our stores displaying the new design was just recently unveiled, a 35,000 square foot flagship store in Alpharetta, Georgia.

At the same time, we continue to re-evaluate the size and location of all our stores. With objective of ensuring that our stores are located in the best, most convenient shopping locations. As part of this initiative, we will begin shortly an effort to pilot separate standalone Ethan Allen kids stores, which will be located in shopping malls and our other high traffic shopping areas. In addition, selected larger Ethan Allen locations will display the Ethan Allen kids collection using a store within a store setting. We continue to expand to strengthen our regional network in the U.S. and abroad.

During the year, we opened 14 new stores in the U.S., seven of which were relocations. We also closed domestically in abroad 14 smaller low volume locations, all of which, as I said, generated relatively small volumes.

As of the end of the year, our retail store network consists of 319 stores, 119 of which are company-owned. We acquired a total of 16 stores during the year from retiring retailers, providing us the opportunity to reposition stores and increase penetration in these markets.

As mentioned previously, we are constantly evaluating new real estate opportunities. When appropriate, we take advantage of such opportunities in order to open new stores and close or relocate existing stores with objective of enhancing our presence in the most strategic locations. Internationally, we opened our second store in the UK and both locations continue to make progress and show considerable promise.

In China, we opened two stores, one in (inaudible) and one in (inaudible) a store third store opened in Shanghai opened earlier this month. We continue to expect that one additional store located in Beijing is planned to be opened during this calendar year.

As I've said 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 product to a broader consumer base, enabling us to realize more from within.

To assist consumers in the design process, we introduced an important new hot color publication entitled "Ethan Allen style, create the look you love." This book, which is over 200 pages is provided to customers in our stores on a complimentary basis and helps them in identifying their own personal style using Ethan Allen's product offerings. We also recently introduced an interactive online room planning resource, which can be easily accessed by our Web site. This tool allows customers to determine which Ethan Allen products best fit their needs based on their own personal home floor plans.

Our national advertising campaign, which includes print, direct mail, radio, and television continues to emphasize the importance of our more than 3,000 design consultants and the services it provides at no charge for the customer in developing the desired look for ones homes.

We continue to make our products more accessible by strengthening our consumer finance options. In January 2003, we launched our new and improved VA finance plus card, allowing cardholders to choose from multiple financing options with the opening of a single account.

Cardholders can choose to finance their purchases through the use of a fixed installment payment term loan or a revolving credit facility. Consumers' response to this simplified combined card offering had been favorable. We believe that challenging times present the best opportunity for initiating change. It is critical, however, that such change be managed appropriately.

Within our industry, this cycle of change or reinvention is becoming shorter. We are constantly faced with the threat of sameness and much work diligently to differentiate ourselves from the competition. The last 12 months have afforded us opportunity to turn our attention within and focus on improving efficiencies and enhancing our customer solutions.

I believe that as a result of these initiatives, as well as the professionalism of our people, we will continue to effectively differentiate Ethan Allen from the competition and at this point, I'd like to open the line for questions and comments.

OK. If anyone would like to ask a question, press star, 1 on your phone now, and if someone has already asked your question, you can remove yourself by pressing the pound sign. Our first question is from Margaret Whelan. You now have the floor.

Good morning, Farooq. Congratulations on a good year in a tough market. I have three questions. The first one is just about revenues in July. It looks like your orders are down a little bit year-over-year, but are you seeing any pickup over the last couple of weeks?

There's a little bit of a pickup, but not -- nothing substantial. It's a little bit better than what we've seen in the last -- if you combine all the last three months. It's better than that, but still I think on the slower scale.

OK. So in terms of the next couple of quarters, should we maybe be clouding the earnings estimates, do you think?

Well, as you know, I am sort of hesitant to give any forecasts, but on the other hand, I thought it would be best to give what my thinking is, which we gave in the press release, and I think that -- I think that the first two quarters, especially this first quarter, we think that the economic recovery was most probably is going to start or will more or less stay where we were as compared to the last quarter, but I think going into our second fiscal quarter and -- third and fourth where we think by that time, the economy should improve, and so I would think that the first two quarters could most probably be somewhat slower or comparable to last year, and then I think third and fourth quarter is where we think we should have the advances.

OK. That's about what we're modeling. And the second question is, your whole wholesale margin is really remarkable given the environment. I know how efficiently you run your plants, but can you share with us in terms of the expansion you're seeing how much of that is from bringing in lower cost products from Asia versus what you're doing locally and whether this kind of 20.1% level is sustainable or can be raised from here or what you're thinking there in.

Well, it is a combination of our continuous focus on cost efficiencies, consolidation of some of our weaker and small plants, which we have done, and also the fact of getting products from overseas where we don't have to take the manufacturing variances we have to do when we close our own plants. Now obviously you can understand that what our margins -- our margins would have been obviously more -- even higher if we didn't have to take that many days of downtime we did, and so -- and obviously some of this, as you know, will reflect in our first quarter as the down time we took in our third quarter reflected in the fourth quarter results.

So I think that the imports certainly helped, but as importantly was our focus in the last few years of reducing costs in our manufacturing and streamlining and also taking out our weaker plants out.

OK. So net-net, I guess you would have some more product that you'd be importing, less downtime, there's room for improvement?

We have that opportunity, yes.

OK. And the last set of questions is that I think you said you own 119 of the stores now are company- owned, right?

That's right, yeah.

So it's about 37%?

Yes.

What are you learning as a company by owning so many more of the retail stores that's giving you the advantage over your peers?

Well, running a retail store as I've always said is very, very difficult because one has to make sure that the excellence in customer service is given at the local level, and our challenge has been that we have now created 25 business units running from 10 to $15 business units, we call them districts, and in the last year and a half, we have brought in to strengthen this, to build this business, we've brought in, I believe, 17 new district managers.

So our challenge was to train them not only on retailing but, most importantly, on the culture of Ethan Allen, what it takes to take a customer and turn them into a client. To me, that was one of the most and is the most challenging thing to do, and we are spending a great deal of time on what you might say orientation and training. Now of course on the other side, we've also learned that maintaining distribution in tough times has helped us on the wholesale side.

We will not be having these wholesale margins if we did not maintain our distribution at retail. So from that perspective, our wholesale margins are a reflection of our investments we made at retail. But retail also offers us an opportunity because especially the last quarter was a tough quarter for us at retail because we didn't ship as much as we thought we would ship, now the amount of overhead that we had. Secondly we decided to clean up our floors and that has an impact on our margins. But as we go forward, the retail has an opportunity of improving its margins too.

Aside from the margins, it seems your sales are holding up so well versus your pierce at peers at the high end, your margins are too, and I'm wondering if owning more stores are giving you a competitive advantage because it's giving you an advantage of what the customers are buying, what are looking for. What price points (inaudible). Are you seeing any benefit from that

There's no question. There is no question about it. Last week I had 20 of our interior designers that we recognize each year, and we spent a day and a half, which I do every year, with our key management. So we are very, very close to the customer, and we are very, very close to understanding the needs of good customer service, merchandising, marketing. Yes, certainly being very deeply involved with the retail gives a different perspective than just running a manufacturing operation.

OK. Thanks very much.

All right.

Our next question is from Ivy Zelman. You now have the floor.

Good morning, Farooq.

Good morning, Ivy.

I wanted to sort of ask a big picture question for you with respect to the industry over the last few years as it's been challenged, you see a continued increase in incentives to sell product, and realizing that it seems to be a Ferris wheel that it's tough to get off of, realizing rooms to go is now offering as much as 36 months no interest and incentives were discounting going on, what do you think this is doing to the industry's credibility? And do you see any way to get out of it?

Well, Ivy, our focus has been, and that's what is really one of our major, major differentiations, and of course our industry knows that too.

Our focus has been in helping consumers with solutions, and the solutions also, as part of that solution, as to create the credibility.

Because you know we're taking prices down and giving big discounts, there's no end to it.

So our focus always has been give great values, because our prices are very, very competitive, people are amazed at the values that we give, and the reason we are giving it is because we have a structure that enables us to do that. I think the solution that we are offering through our stores, our stores are the solution, as I said in my comments. Our people are a solution.

And I think our industry is moving towards that. They're trying very, very hard to do that. I think there's a lot of discussion and debate going on that this question of just focusing on price is deadly. While you've got to be competitive, but it is a solution that a consumer is looking for, and I think our industry has to move towards that. And if we do that, we'll get more of the disposable income.

If not, deflation is going to be an effect for many, many people. Now, you know, we have benefited. For us this whole year in a tough, tough year to more or less maintain our business, maintain our earnings, to have close to 15% operating earnings would not be possible if we had not structured our business in the last 10, 15 years to do that. And that's what our industry has to do, I think.--

Another big picture and then the specific. On the big picture, you know year-to-date outsourcing, what percent of your business from China?

Between 20 to 25 -- it's not just China.

Right, of the Asian market.

Off shore, between 20% and 25%.

You know, what are your thoughts now with the political pressure that's beginning with respect to, you know, changing the amount of production moving not just in your industry but other industries? I mean, what would happen if all of a sudden, you know, the Chinese or the currency wasn't pegged to the U.S. dollar and we started to see the competitive advantages from outsourcing product after you've closed facilities as well as your peers in the industry, what would happen in the backlash if you thought about what's happening today in that respect?

Yes, Ivy, this is a very important issue, and certainly with this anti-dumping and all that stuff that is taking place. I was in China two weeks back, we opened a great, great store in Shanghai, flagship store, and I was talking to many of the people in China about this. I think what's going to happen, what's happened in other industries.

Certainly for us, off shore has given us an opportunity to become better in manufacturing in the U.S. We would not have been able to close six plants that we consolidated in the last two years if I did not feel comfortable that we would have production alternatives elsewhere. Previously, we had to keep these plants going because when the cycle changed as it did in the late 2,000s, we had no production. We had to outsource in the U.S., it affected our margins and everything else.

So I think what's going to happen is that good manufacturers in the United States have to stay in business. They got to invest in their plants. They got to make sure they are the best. (inaudible) introduce this new country in our plans, and we are very very competitive and we could not be competitive if we hadn't taken the steps of improving our facilities and consolidating.

And I think what's going to happen is that most probably weaker companies in China and weaker companies in the United States are not going to make it.

Good companies in the U.S. and good companies in China are going to make it and even if there is a re-evaluation and even if there are some duties imposed, it is going to, I think, create more of a balance between what we can do here, but only in good manufacturing and what China can do. I think both have an opportunity of being successful and our objective is to maintain a good balance between what we outsource and what we're going to manufacture in the U.S.

Do you think you're at the optimal level now, 20 to 25%?

There is no such thing as optimum. I have no ceilings. It's going to be what it's going to be. But most probably going to be a little higher than this. As you know, two years back, we were zero. So we have less than two years gone to a substantial way because I felt more comfortable that it made sense to do it.

And so we will balance it. I think in the next year or so, we will balance it more between domestic and overseas, and our domestic -- I don't think production is going to go down in volume. I think as the economy recovers, we're going to produce more domestically, and I think we're also going to produce more off shore.

Then lastly, Farooq, if I may, the specific question relates to your guidance that you provided for fiscal 2004, realizing, I think, 10% earnings growth is somewhat contingent on an economic rebound in the second half of this year and into the first half of next year. Assuming we don't get an economic rebound, what do you think realistically that earnings growth might look like?

You know, Ivy, we can do all kinds of assumptions. In the last year, in one of the toughest periods we have had with the war, especially, as you can see last year, for the first six months, we were doing very, very well.

Our sales were up, our earnings were up by 20 or 30%. But the last six months with this war and its impact is what impacted our whole business. So I think that -- and despite all of that, we've been able to still maintain a reasonably good sales and, I think, good earnings. So I think that we are -- we have to always be prepared for things not turning out as we think they would. That is, things improving. So I would think that if things go bad, we will more or less do what we are doing now.

Do you still think even if things don't recover, that you're not being aggressive in your guidance, you think 10% is achievable even without an economic rebound?

No, what I meant was that, you know, Ivy, it's all assumptions one has, but let's assume that you are a very conservative assumption and again conservative assumption meaning that we will more or less continue the way we are doing now. If that is the case, then our results are going to be more or less what we are doing now.

Thanks, Farooq.

OK, Ivy.

The next question is from Budd Bugatch with Raymond James and Associates.

That's a new one. Maybe I just do have some baggage.

I know. First of all, you went through a lot of numbers that we don't have in the release, which I would encourage to you put in the releases in the future, but can you give us the wholesale revenues again for the quarter?

All right. You're talking about shipments?

: Yeah, I'm talking about the shipments to dealers before eliminations, and then maybe the eliminations.

Wholesale - Manufacturing shipment numbers are. All right. For the quarter, our wholesale was $170.9 million.

OK.

Versus $175.3 million. Our retail was $139.3 million versus $128.1 million.

Right. I have the retail, I just did not have what the whole same, what the elimination numbers were. When you look at the guidance going forward and you look at the last couple of years, the character of the company at least on a reported revenue basis has changed now with our significant -- with the majority of the revenues being reported out of the retail division, and you're saying with your guidance now to be up 5 to, I guess, 7% on a revenue basis. Can we (inaudible) that a bit and say what do you think the retail division will be up, and how do you get to that 5 to 7?

With a lot of years of experience, Budd.

I have one year of experience a lot of times, Farooq.

I think that we are taking an assumption, against I'm giving an approximate and Jeff here can be more, but approximately we are assuming that 3 or 4% increase -- here, Jeff will give you the information. Let's see. I think that approximately 4% or so, 3 to 4% in wholesale and most probably 10, 12% in retail brings it down to those numbers.

And are you assuming any additional stores?

We are. Budd, again, you can do all kinds of assumptions we can. This is the best judgment that we had. You know, can you do all them. We can do for 50 different configurations.

But is that 10 to 12 comps or is it 10 to 12 total revenues that includes what percentage of comps?

I mean, are you asking too many details. I think that if we do -- our objective overall to have 3 or 4%, there's no way -- this is the way we're looking at it right now, 3 or 4% increase in wholesale, a greater increase in retail. It ends adds to about 5 to 7% overall.

When you look at the retail margins in this quarter, they were just under 1% versus 5.5% in the same quarter last year, and you talked about selling off floor samples and the additional cost. Can you give us an idea of that 460 basis point decline, how much of it was gross margin and how much of it was operating expense?

Let me talk to Peg Lupton to see how much information I can provide you which is going to be consistent with what we give to others. But overall, I would say that -- I think 50% of this impact was not having enough shipments, and the 50% was due to the addition of the new stores, additional cost, and the sell-off of floor samples.

All right. So you're lumping the floor sample -- the discontinuation of products or the market-downs that are associated with that with the cost of additional overhead of running the business now I was trying to get the difference between that versus the problem with the volume -

You know what you can do, you can take a look at it basically at our gross margins were lower by about 100 basis points, and that had an impact down the line. If you normalize our gross margins and then when you are breaking even more or less at the volume we do, any incremental volume has a very major impact on the bottom line.

No question about that. My last question goes into advertising. Can you give us kind of what the number was for the quarter or for the year as well? And what you expect it to be for next year?

All right. Again, Budd, let me just think about what numbers we can give out, but I must tell you this, for the year and the quarter, we did lower our advertising. That was one of the reasons of lowering of our expenses. So we did take that advantage because that is a discretionary amount, and we felt that we could lower it, and we did lower it in the year and the quarter.

Want to give us any number or how much, by how much?

Let me think about it to see what information we can give, Budd. Again, I just want to make sure that we give this information publicly.

I do too.

OK.

All right, Farooq. Thank you very much.

Thanks, Budd.

The next question is from Chuck Graham. You now have the floor.

Can you speak to current capacity today and if you foresee any additional plant closings coming over the months?

When we take 115 days off, we have reasonably good capacities domestically and I think overseas also, there's a lot of capacities. Chuck, we've got to digest the closings of what we have just done, because we have had to transfer all of these products to our plants, and for all our plants that received this product, this for them is a new product. So in the next few months, we'll be in a better position to see if we've reached where we want to be, and then we'll make a determination. At this stage, we have not made any other determination.

I understand. Second question is inventories look like they're up about 1% sequentially, and I think around 14% year-over-year. Where do you expect inventory levels to come in by the end of the calendar year, you know, the benefit working capital flows?

You know, I had said last quarter that I expect them to be a little bit lower this quarter, but business was not as strong as I thought it should be, and even though we have been very, very good in controlling our inventories by taking shutdowns and everything else. I think that our inventories should decline, and even if the business stays constant, our inventories are going to come down. And if the business increases, our inventories are going to come down even more substantially.

OK. And last question is on average dollar per household. I think you've spoken in the past about this. I believe in 2002, it was around $38. You know, where were you in 2003 and what are you doing to improve your average store yield?

Our average, of course, remained more or less about the same because our business overall remained about the same. All our initiatives are to increase that. This whole question of introducing products which reaches a larger consumer base, our introduction of the Ethan Allen Kids that we did last month, that is in July, has been very well received by the consumer.

It's early, but it's been well received. We have actually a very strong marketing campaign including television. In fact, this quarter, we are spending most of our -- practically all of our television dollars on marketing of the Kids program to the consumer because we want to get kids and their parents to our stores. Well received, it's good quality, people understand it, appreciate it, and it's going to take us the next year to build that business.

And similarly, the New Country, I think, is going to help bring to us additional business, more excitement, and the focus on our people in terms of solutions, helping them become better. We are doing a lot of training, tremendous amount of focus. We are on the average in the last five years opened up 15 new stores, many of them relocations, but that's very, very important in increasing that penetration. So all of our efforts really are to increase the penetration, and I think as the economy picks up, we are in a good position to do that, Chuck.

All right. Great. Thanks a lot. Nice job.

The next question is from Laura Champagne. You have the floor.

Good morning. I think missed the number that you gave for operating margins for your retail segment in the quarter. Was it 0.9%?

That's right. Yeah.

OK. And can you comment on traffic patterns and average ticket price of late?

The traffic has for the year been down sort of -- it averages down about 10 to 12%. That's what we have seen across the country. Some areas more, some less. And average ticket has more or less stayed the same. I would say that because of the fact of even better values we are offering, perhaps in the last quarter, we have seen going down by about 5% from where we were before.

OK. And is there any way that you could break out same-store sales numbers or your independent stores?

No, that's hard to do.

OK. Thanks.

Thanks, Laura.

The next question is from Todd Schwartzmann. You now have the floor.

Good morning, Farooq. I just wanted to see if you could talk a little bit about capacity utilization, where it was for the quarter, Q4, where it was a year ago, Q4 of 02, and also just curious to know what sequentially from third quarter, what the change was, and more importantly, where you see it in the first half of 2004 vis-a-vis the second assuming you do get that pickup in the second half of the year.

I would say that in our own domestic plants, we operated in the last -- in our case goods, operated at anywhere between 60 to 65% of capacity. Our upholstery most probably closer to 80, 85%, and that's why we had to take -- and of course the reason we're able to manage is by taking all this downtime. And as we go forward, you know, it all depends upon the business opportunities that we have, and as business improves, secondly, we have consolidated plants where we have taken that product into fewer plants, we have an opportunity of improving the capacity utilization.

However, it really also depends upon the better economic conditions than we have seen in the past. We have a fair amount of opportunity domestically and also overseas.

OK. Thanks.

The next question is from Joel Havard. You now have the floor.

Good morning.

Good morning, Joel.

You mentioned 16 stores acquired during the year. I had tallied up five through the first three quarters. Did I miss one earlier or was this a fourth quarter pickup?

We acquired seven stores in Canada, six stores in Chicago and two stores in Houston and one in Memphis.

And was any of those in the fourth quarter?

The Memphis was in the fourth quarter.

What was your total acquisition expenditure for the year if you've got that figure yet?

I think we get about $11 million.

11? OK.

11.3, yeah.

I know that's a really easy tuck-in and obviously a real boost to operations. Do y'all have just kind of an opportunistic plan there or are you teed up again for another year in 2004 like you saw in 2003? Was that kind of an aberration?

You mean 2002 -- you're talking store acquisition?

Is the year in front of us -- does it have the same kind of unit acquisition opportunity that you experienced in the year?

I don't think so, not at this stage. I think that, you know, the last two years of tough times created an opportunity for a lot of folks who wanted to retire. Tough times help them do that.

Sure.

And also at this stage, we have a pretty stable dealer network, so I don't have any candidates right now in sight.

OK. Well, that's a fair answer. On the credit side, EA Plus, am I reading right that that is really a consolidation of what was -- what was it, two different programs previously?

Yeah, this is the financing program to the consumer.

Yes.

And this is on a non-recourse basis to Ethan Allen or our dealers in our stores. And we had it with two different financial institutions. We consolidated into one. And because of that, we were able to put it into one card for the consumer. So they have one application and through that, they can select the different options.

And who is -- I guess now there's a single provider there?

Yeah. It is G. E. Capital.

And what's the balance, I guess either of lines or drawn of consumer credit at the end of the year versus fiscal 2002?

The portfolios have approximately stayed constant, anywhere between 200 and $225 million combined on the installment loan at any given time, about $600 million of open to buy. It has more or less stayed constant.

So it stayed pretty flat. I wondered if -- kind of went back to one of your earlier questions that y'all being not aggressive a pricing standpoint but being more -- maybe more convenient for customers in that middle -- upper middle household income level to work with Ethan Allen now than was the case a few years ago. I thought that might be a more pronounced driver of growth.

No, not for us as yet, but I think that providing financing, a longer term financing, I think is a very good marketing option. I mean, automobile companies have done it, and sometimes they overdo it, but they have maintained their business by doing that. I think in our industry, by default, people are now starting to give 36 months as we heard interest rate, which is really giving an installment loan with zero interest. And I think that's not a bad idea for getting consumer in as long as you also make money at the end of the day.

Well, that's -- that will be one of the things you have to balance carefully going forward. Last question, I guess, is on the EA Kid store standalone, is that in test phase or is it still on the boards yet or how many units do you plan to use as a test? Could you give us some detail there?

Yes. The first store is going to -- is planned to be opened in third week in August, I think August 22nd or August 23rd in Connecticut in West (ph) malls, and the second one is scheduled to open a month or so later in Virginia, and third one, we are still finalizing is planned to be in Chicago. So we'll do three for the time being and learn from it before we go any further.

OK. So would that get you through fiscal 2004, you think, to let those things sort of mature and see how they perform?

We'll see. If we find that it is working very, very good and we've learned a lot, we'll open one or two more. It also depends on, you know, getting the right locations. We want great locations but don't want to have long-term leases . If it doesn't work, we can get out.

So these are will be sort of off-mall kinds of real estate is what you're looking for?

We are looking at three different locations with these test sites. One is inside a mall, one is in a suburban shopping area with a lot of pedestrian traffic, and third is a sort of store right in front of a mall. So we can learn from three different situations.

So we might call that a test then.

It is a test, yeah.

Alright. Thanks, Farooq.

The next question is from Keith Hughes. You now have the floor.

My questions have been answered. Thank you.

We have a question from John Ball.

Good morning, Farooq. I've got one left. How many stores did you say you closed in 2003, and can you give us what the total retail square footage was, and I don't care if it's corporate-owned or dealer, I just would like the gross number of the combined two, what that change was in 2003 and what you would guess that change would be in 2004?

John, what I would do is this: I have some numbers here, but what I would do is I will have Peg Lupton call you just to get an overall perspective, we've closed stores, international stores, like we had two stores, a little one they consolidated in the larger stores. In Taiwan, we had a little store that consolidated into a larger store. Cairo, we had two stores, a little one consolidated into the larger one. Same thing in Japan, same thing in Korea.

All in all that, gave as you million dollars of business for the entire year. Stores that we opened, for instance, and the total square footage of this as I read it here is about 22,000 square feet. One store in UK we opened is about 21,000 square feet. And three stores in China that we opened, each one is about 15,000 square feet each. So it's a tremendous - larger stores are opened and small ones are relatively small and small volume.

So I can get maybe these details from Peg later, but would you guess that new square footage at retail total company both independent as well as corporate would be up 2, 3, 4% this coming year and it was up last year is what you're saying?

I think the total square footage would be up again this year, the year we're going forward, yeah.

OK. Thank you. Good luck.

Thanks.

The next question is from Suniel Swami. You now have the floor.

Hi how are you. I actually have the same question on square footage and maybe I can talk to Peg later in terms of what was the growth in 2003 and what's going to be the growth in 2004.

Just keep in mind that the square footage is important, but I've always said we also have got to make sure that -- I would rather have a 10,000 square foot store in the right location than a 15,000 square foot in the boondocks.

Sure.

So, you know, just keep that in mind, even though total square footage has improved, but that is not for us a complete indication of what is a total change that is taking place. The change that is taking place is not only increasing square footage, but more importantly, the stores are being put in the right locations.

Sure. So the store productivity should be higher.

That's right. That has been our objective. I'd rather have a smaller store in a better area than a larger store.

Maybe you addressed this, your SG&A margins seem to have crept up from 32.5 to 34.8. Maybe you could tell me what happened, and what do you expect them to be in 2004?

All of that, in fact, our wholesale - you know, we have two segments, the wholesale and the retail. But the wholesale segment, our operating -- our costs actually went down. All of our costs are reflective of the new stores and the increase in the business in the retail division. The retail operates at a much higher operating expense level than the wholesale does. So all of this is due to the increase of business in the retail -- in the retail division.

OK. And so going forward, should I take that 34.8% number for the -

Well, it all depends. It's a mixture of, you know -- one of the reasons it's gone up is that the proportion of retail business to the wholesale business has continued to grow, and if it continues to stay more or less where it is now, you're going to see it approximately be where it is. If on the other hand our retail becomes even a larger percentage of the total business, then you want to see it creep up.

OK. And then just another -- when you look at your -- realize that your earnings guidance is approximate, but how do you get from 5-7% to 10-12%? Do you get some operating leverage as your sales go up, and are there some share buybacks included or how do you -- if you can just give me some -

There's a very small share, maybe $30 million worth of share repurchase in our calculations.

OK.

A lot of it is due to the fact of especially both of the wholesale and the retail level is operating at more higher levels than we have been doing will give us that leverage.

OK.

Because in the last year, we have had to take a lot of downtime and our retail is operating at a level that only incremental business increased more operating earnings.

OK. And then lastly, I had sort of a big picture question. You know, we read that housing stocks are up, housing market is doing strong, yet furniture seems to be lagging. Is that because most of the growth is at the lower end, or what's your perspective on that?

There are a number of perspectives. The first is most of the housing that has been built has been built at more the moderate or the lower price points. The middle-to-middle high housing has been relatively slow. In fact, very stagnant. Secondly, I think those folks that bought those houses have -- don't have much money left to buy anything else. And thirdly, I think that they have available to them at retail people that will meet their needs of very -- you know, very, very moderate lower-priced products which they most probably are buying and not what we are doing at Ethan Allen or others like us, where we need to have better consumer confidence, better recovery, economic recovery, and I think then we're going to see the real improvement in our business.

OK. One final question. We've heard also reports of Chinese imports. I'm assuming that if that's true, that's not going to impact at the high end your sales. First of all, is that true or -

Are you talking about the possible interdumping?

Is there increased Chinese imports into the country, and is that affecting furniture sales or, you know, what's your view on that?

I'm sorry, are you talking overall imports or what?

Are those companies from Asia bringing in furniture?

Yes, well, you know, it has like any other -- many, many other areas, there is certainly an effect of deflation that is taking place. In our case, what we have been able to do is we have been able to so far benefit from it because we have brought in products which are toward the higher end of our selling prices, but offer consumers much better value.

And perhaps sort of, you know, we have, I think, attracted that customer to Ethan Allen. The second customer that we are attracting to Ethan Allen are the kids, because that product is also being off shore, and that offers great quality and at very, very good values. So we have gone -- and in the middle is where we are making in the United States. And I think what it's done for us is helped us at both ends and in larger market share.

Thanks, and congratulations.

Thank you.

The next question is from David Ricci. You now have the floor.

Good morning, Farooq. Can you talk a little bit about the response to the Tuscany and leather expressions and how you're feeling about those two?

Very good, David. The Leather Expressions is very, very well received. It's only three items and, you know, limited number of options, and we hear from our own design consultant that they needed all kinds of options. They found out it's a great quality, good value. They can sell it. It has already become a major proportion of our leather upholstery sales. It has brought us business which we wouldn't have gotten at Ethan Allen. Tuscany, the same thing. The Tuscany is about, you know, similar to the Townhouse kind of prices and looks, and between Tuscany and Townhouse, we are now just meeting what you might call the high style big scale furniture, and that has also done very well between the two of them. But also our own British Classics, since last quarter, British Classics made right here in the United States was our number one selling program for two reasons. One was early last year, we decided to reduce some of the prices on key items, and secondly, we decided that we would give somewhat more importance to it in our advertising because in the last year, all we have been giving attention is to our new products. Human nature is, you know, you go to new things. And when we gave refocus on British (inaudible) last quarter that was our number one selling and Townhouse was second.

Can you talk a little bit to the broader mix of the business? It sounds like your newer products and then British Classics doing very well. Obviously some other parts of the business are mixing out differently. Can you just talk to that a little bit?

Well, the last year has been -- the last 12, 14 months has been a year of balancing our domestic products and off shore products, and our focus, of course, was to bring in off shore because we started with base zero, so we really built that from zero to 20, 25% of our business, a pretty large increase. And of course it had an impact, negative impact on our domestic products, and now we are balancing the two, and I think as we go forward, we'll see a much greater balance, I think in sales also.

Right. That's to be expected obviously. But is there any -- as you kind of look at what furniture is working and what furniture is not working as well, do you kind of take anything away from that? Obviously the new product is working. Consumer -- are consumers drifting one way or the other?

No, it's very interesting that, you know, people are -- people do pay attention to details. They do pay attention to the level of quality. One of our best selling products in British classics -- in the Townhouse is a $1,200 coffee table. But it's a $400 coffee table since it's coming off shore. They're even willing to pay $1,200 for a coffee table, and that's our best-selling item.

It sort of goes against the thinking that it's got to be with 2, 3, $400 an item that would be the best seller. So I think it's a question of presentation, it's a question of having people who are able to make this information available to the consumer, but overall, I think that we are not - we certainly Townhouse, Tuscany are certainly very major, Leather Expressions, but now we are seeing more of balancing with our other major products.

Should we expect more new products for next spring?

Yes, we have to because I believe that the time to make lots of changes is when times are slow. So between what we did with starting with Townhouse and by the time we are through with next spring or summer, we will have changed 35 to 40% of our product line. Which is major, major. considering, you know, 15 years back, 70% of our product line was there for, I think, 40 years.

Right. Right. Absolutely. I took a look at your Kids line versus Pottery Barn kids, and it seemed like the prices are comparable simply from a crib versus a table or a table versus a table, bed versus a bed. Do you want to comment at all on the quality of the furniture or any differences we should think about in looking at Pottery Barn versus yours?

Have you looked at the catalog or have you gone to the store?

Specifically on the catalog so far.

I think what you should do is you should go and look at the store and see the difference in quality. Then you'll know the difference.

That's what I'm asking. So you definitely think that there's a quality difference?

No question about it. You know, they do a good job too, but our objective is really to do better. And secondly, our costs are also a delivered cost to the consumer's home. We do not charge delivery charges.

Right.

And that's a big number there.

Absolutely. Absolutely. OK. Should I infer from your comments that we'll see more downtime in Q1?

There's going to be some downtime. I hope it's not what we did in our Q4 of last year. I think it should be less than that because we really compressed our manufacturing so that we controlled inventories. And even, you know, even that was difficult, but I think we have done that, we have consolidated plants, so we are expecting to do less downtime than we did last quarter. Last quarter was tremendous.

Right. Any sense yet about the response in China?

In the stores?

Yeah.

I think the response is positive. You know, I mean, 80% of the products that are being sold in those stores are made in the United States in our plants here. So, you know, the prices are not - they're reasonably expensive there, but they've done a fantastic job. I mean, there's the execution of the stores, the way they have projected it, the way they are marketing is they've really done a great, great job. Much beyond what I thought they could do.

Right. Right. OK. You believe it's the type of thing that takes time to build the brand, the awareness, education of the product, et cetera?

Right. I mean, it's a long way to go for them to do real business and make some money, but they're doing it the right way. They have a great structure and a lot of commitment, a lot of professionalism, and I was really very impressed.

One last thing. You added a lot of new people at that district manager level, that report level. Obviously there's a learning curve to any position. Where are we with that group, and then do you feel like -- where they need to be in terms of learning the culture and the business, et cetera, et cetera?

Well, David, this last year really was the year of their just really understanding what to do, and as we go forward, in fact, next Monday, Tuesday, they're all coming to Danbury and we're going to spend two days with them. A lot of it is going to be understanding the culture, that change is good but change has to be managed. I think that this year -- and part of our performance in the retail division reflected some of this inexperience in Ethan Allen. I think this year, they are more knowledgeable, they are paying a lot of attention, helping them a lot, and I think they're getting better and better.

So that should be a positive influence?

Very positive. That is one of the most important assignments I have in our management, to be sure that these folks understand the culture and get the kind of people who will give great customer service.

Great. Terrific. Thanks so much, Farooq.

All right.

The next question is from Tom Kaplan. You now have the floor.

Hi, Tom. Good morning. Good afternoon now.

This is going on quite a long time now. Just a couple of quick ones to fill in on the model.

OK, Tom.

Can you break down the current assets to prepaid expenses and deferred taxes?

Yes, I think Jeff will.

The number you're looking at in the press release is about $16 million, it's up about $16 million?

$53.76 million.

Right, up about 16. I can tell you the 53.7, about 23 of that is deferred taxes. And the prepaid and other current is about 30.8.

OK. And the reason for the rise there in the prepaids?

It's all in our current tax receivable. We had some overpayment during the year that's thrown us into a tax receivable position.

Super. And the allowance for doubtful accounts, please?

Do we give that out? I mean, I think that -- let's check it out whether we make that public, but it hasn't changed from the previous year,

Thank you very much.

I'm showing no further questions at this time. If anybody else has a question, just press star, 1.

All right. Well, thanks very much, and if there are any further questions, please give a call to Peg Lupton in Danbury. Thanks very much.