Ethan Allen Interiors Inc (ETD) 2004 Q1 法說會逐字稿

Welcome to your conversation this morning. I would like to remind all parties you're in listen-only marked for identification at this time. I will give instructions later at that time, and will turn the conference over to Mr. Kathwari at this time.

I'm sorry for this delay, I was cut off, so I had to get back on. I am joined today by Jeff Hoyt, our vice president of finance. Today we are reporting the results for the three months ended September 30, 2003.

We are pleased with the quarterly results. During the period, we successfully maintained healthy revenues, margins, earnings and cash flow despite the continued uncertain economic environment. Since last August we have seen positive signs which are indicative of a strengthening economy and improving consumer confidence. I will elaborate on these trends and impacts on our business, but first let me give you the key financial highlights for the Q1.

As you must have noted, we are providing additional financial information in our press release so that I do not have to state them in our conference call. However, I will touch on some of the key financial information. For the quarter, earnings per share amounted to 50 cents on net income of $18.9m, as compared to 52 cents and $20.1m respectively in the prior year quarter. Sales increased 2.9% to $222.8m in the prior year quarter. Wholesale sales increased 0.7% during that period while retail sales increased 10.1%. [ inaudible ] delivered sales increased 0.6% over that same period.

For the current period, total written orders increased 11.3% as compared to the prior year quarter. At the wholesale level, net orders booked increased 12.4%, while at the retail level, written sales increased 8.3% and comparable store written sales decreased 1.3%.

For the quarter, consolidated gross margin was 48.7%, as compared to 49.3% in the prior year period. Consolidated operating margin was 12.8%, versus 14.7% a year ago. The wholesale operating margin was 17%, versus 18.4% last year. While we continue to maintain strong operating margins, the decrease from last year was caused primary by the cost associated with excessive manufacturing down time experienced in recent months, particularly in the third quarter and fourth quarter of fiscal 2003.

As you will recall, the wholesale division incurred approximately 200 days of shutdown or 18% of available shop days during that six-month period. During the Q1 the number of shutdown days was limited to 26, 6% of available shop days. We estimate the impact of down time on our EPS this quarter was about seven cents. We expect manufacturing down time to continue to subside in the coming months, enabling the wholesale division to operate more efficiently.

Two initiatives undertaken prior to the end of fiscal 2003 have better positioned us for this to happen. First as mentioned in March, we initiated a plan to close three smaller manufacturing facilities allocating existing production to more suitable plants. In the last two years, we have consolidated six manufacturing plants. And since 1993, we have gone from 27 plants in the U.S. to 14 more official plants. Second, we accelerated the introduction of new country by Ethan Allen, a new product line available to consumers this month, which is being manufactured primary at our plants here in the United States.

The retail operating margin was 0.2%, as compared to 2.5% a year ago, reflecting the sell-off of floor samples necessary to make room for new product offerings, including New Country and EA Kids. And [inaudible] shipment due to general business softness experienced through much of the period and to a lesser extent, the effects of Hurricane Isabel in the mid-Atlantic states.

Regarding the balance sheet, cash increased $47.6m during the quarter and inventories increased $7.9m. And we remain in a strong inventory position with approximately 93% of our [inaudible] items available for shipment within four weeks. We generated strong operating cash flow of $15m during the period. We utilized $4m for capital expenditures.

Now, I'd 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. Our primary focus continues to be providing customers with a full complement of effective home decorating solutions. We continue to believe it is extremely important to offer innovative, stylish and high quality products at great values. This summer we introduced the EA Kids program in an effort to expand our consumer reach and take advantage of the great opportunities presented within the children's home furnishings market. During the quarter, we opened our first dedicated Ethan Allen Kids store location in the Best Farms Malls outside of Hartford, Connecticut. Both the collection and store have been well-received. As we mentioned previously, further dedicated EA Kids test stores are planned to be opened later this year.

Our exciting new collection, New Country by EA, will be introduced this week in connection with the mailing of our fall magazine. New Country offers great style and value to consumers, while further strengthening our casual lifestyle offerings. It's an innovative collection of a variety of styles and finishes, all of which serve to complement other existing [inaudible] product lines.

As was mentioned earlier, the majority of the New Country collection will be manufactured at our plants here in the United States. In order to remain competitive, we had continue to believe it is extremely important to maintain an appropriate balance of domestic product with products sold offshore. The New Country program should help the utilization rate in our U.S. manufacturing.

We continue to expand and strengthen our region network in the U.S. and abroad. During the quarter, in addition to the first of our EA Kids stores mentioned previously, we opened our third store in China, this one located in Shanghai. Our first two stores opened in Tanjen [sp] and Roomchi [sp] continue to show progress. We expect one additional store in Beijing will be opened during this fiscal year. In addition to the two new stores opened this quarter, we also closed one store.

Our stores remain the most important vehicle for showcasing our product. Therefore, maintaining the quality of our store base by moving stores to better locations, and continuing to renovate interiors and exteriors in order to ensure an inspirational setting for our collection, is fundamental. As such, we are constantly evaluating new real estate opportunities. When appropriate, we take advantage of such opportunities in order to open new stores and close existing stores [ inaudible ] enhancing our presence in most strategic locations. We must continue to aggressively position our stores in the right markets with a strong image.

At the end of the quarter, our retail store network consists of 310 stores,.110 of which are company owned. While total store count has remained relatively set, we open an average of 15 new stores per year over the past 5 years. Further, in that five years, nearly 25% of our store base is new. We anticipate we will continue to open new and relocated stores at a rate of between 10 and 15 stores per year.

We continue to develop resources aimed at making the design process easier for consumers. But the most important and effective resource remains our 3,000 trained design consultants. At the end of the month, we will be conducting an international retail convention for our design consultants and retailers, during which we will discuss current and future product offerings, solicit their input in ideas on a variety of customer related topics, and provide in order to -- [ inaudible ] – excellent customer service. Besides our consumers, our design consultants play an extremely important role in our strategy for growth.

I believe the best time to make improvements is during slower economic times. We have taken advantage of the last two years in strengthening our products, our stores, our manufacturing, offshore manufacturing, and our ability to service consumers with trained and knowledgeable people. I believe we are in a good position to benefit from the next phase of economic growth.

Finally, as you are likely aware by now, we will be holding the annual investor conference at our Danbury headquarters on November 19. [inaudible] can provide more details should you need them.

At this point, I'd like to open the line for questions and comments.

At this time, we ask, if you have a question, please press star-1 on your Touch-Tone phone. Please press star-1 if you have a question at this time, please.

Our first question comes from Margaret Whelan, from UBS. Please go ahead.

Good morning, Farooq. Thanks for putting that extra date in. The press release is very useful. The first question I have is just housekeeping. The $2.2 million of other income, can you tell us what was in there?

Margaret, a substantial portion of it is due to sale of three plants that we closed. And also about close to $800,000 from a legal case that we won that has been going on for quite some time in Florida.

Was that regarding real estate?

No, this was a 20-year case that related to a dealer who had actually initially sued us, and it's a long, long story. The courts had ruled in their favor, but we kept on fighting, and finally we got the money.

Okay. That's good news. Will you talk a little bit about the promotions you were running over the last quarter? And your orders looked to be very strong, double-digit growth going into the Christmas quarter. Can you talk a bit about how much of that was promotions versus maybe the EA Kids and some of the successful new lines you've introduced?

We have not done any special promotions other than, as I said in our press release and my statement that we did sell off some floor samples and most of our company-operated showroom items and our dealers did it, too, to make room for new products. We also sold off products in some of the quiet stores we had last year. We are now ready to start renovating them, so we sold some of the product. But we did not do any special promotions, other than the fact that we introduced the Ethan Allen Kids program, which was very well-received. We also had the Tuscany program introduced during this period which was also well-received. But all basically at our regular pricing.

Okay. That's good news. The other thing I had is we're looking at the quota being lifted on fabric coming in from Asia. Can you tell us a little bit about what [inaudible] was doing with their upholstery and if you're going to directly import finished upholstery?

Margaret, at this stage we are not importing in upholstery from a [ inaudible ], but are importing upholstery from other countries. And at this stage I really have no information about any quarters on products that we are importing.

But just in general for the fabric industry?

We are -- I have not heard anything. I'm going to look into this now that you mention it, but I have not heard anything that sort of concerns me at this stage.

I'll send you some stuff we have. The last question I have is this store base you have. I think you said in your prepared comments you replaced about 25% of the stores in the last five years. Can you give us an idea of why you do that, and as you go into new markets, what you are looking for?

Our stores that were established in basically 1960s, 1970s, and today many of those locations are not prime locations. And also the size of the stores are not appropriate in many cases. So our basic focus has been to take the stores and put them in the right locations. And it has helped us increased in traffic, in projection, and also business. And to us, that's a very, very important part of our strategy. And we'll continue to do that as we go forward, because it's important for us to realize more from what we have, rather than try to open up new stores and leave existing stores in trading areas which are not appropriate.

How much has the sales per square foot in those kind of relocated stores improved on a percentage basis? Do you have that?

Well, it depends on the period of time, but if you take a look at since the last ten years, the number of stores have remained the same, and our business has more than doubled. And it's basically due to increase in not only square footage, but for us it's more what we call the performance index, that is the conversion of traffic into sales. We look at that very, very carefully. And that, to us, is very important. And in fact, we have more than doubled that. That is, conversion of people into business.

As you go forward, do you expect the company will own more newer stores or you'll have independents?

We'll do both. We have a very strong base of independents. Now that we have gone through the process of acquiring those stores from those people that wanted to retire or were not interested, in our opinion, of wanting to make changes in relocating their stores. We have done most of that. We have a great base of independent dealers who are interested in growing. And as the economy is improving, I think they will grow more stores and relocate their stores, and we will also continue the program we have of opening stores by the company.

But right now, in the company-operated stores, we are spending a great deal of time in managing what we have, improving what we have. And that has taken us a great deal of time to create the structure, both in terms of people and in terms of logistics. And I believe in the next six months, one year, we'll be in very good shape with the 120 stores we have.

Okay. Good job. Thanks very much.

Thank you..

The next question comes from Budd Bugatch from Raymond James.

Good morning. I was interested in that seven-cents impact on results from the higher cost inventories that I guess flowed into inventories as a result of the shutdowns, and the unit cost being absorbed into inventories. If my math is right, that equates to about 264 basis points of manufacturing margin impact? Is that the way that I should read that? That would impact the manufacturing profits, right?

Yeah, the wholesale profit. That's right, is approximately -- you're in the right range, Budd.

Okay. You say that will subside in the coming months. Can we get your feel -- I know you can't be exact on this -- but how much of that inventory is left to flow through? Do we get half that impact in the second quarter and maybe a quarter of it in the third and be done with it?

It takes approximately between six to nine months for everything to flow through. Also, it is a result of the amount -- the inventory turn is also a factor. If we have larger inventory to turn, we absorb more of it. So inventory turn is also -- is a very important factor in addition to approximately six months' time.

Okay. So, again, I would expect it's not quite as much impact in the second quarter and less impact in the third. But be done by the end of the third quarter, because certainly you'll have turned all the inventory as then?

That's correct. And assuming that we don’t accrue more down time. At this stage, as I said, we're going in the right direction of taking less down time.

Can you give us a component of inventories? I know that's not in the release but has there been much change? Is finished goods becoming a larger portion composition of inventories? There should be, with both retail and imports.

Imports is having some impact but the import is really -- as far as we are concerned, we look upon manufacturing as manufacturing, whether it is domestic manufacturing or overseas. As you know, we are structured in our wholesale division buys all the product from our manufacturing. So our wholesale division buys whether we manufacture it or it is manufactured elsewhere.

I understand that, but within those manufacturing inventories, we would see a difference between whip and raw materials and finished goods?

There has been certainly obviously an increase in the inventories that are from our offshore business because that business is increasing. Other than that, there has not been too much of a change at the wholesale side.

Okay. Have you got any feel that you would want to share with us -- I know you have the feel, but what the capacity level of the domestic production footprint is today? And what maybe at what percentage of capacity you may be operating domestically?

You know, this capacity is all of a state of mind. When people tell me they're 70, 80%, and then we double it --

I understand.

I would say if you look at -- our accountants will tell me we're operating at 75%. I don't believe it, but that's what they'll tell me.

Okay. My last question is, you opened up a new alpha reta [sp] prototype and had the dealer conference there a couple of months ago. Now had maybe now three months of operating history. Can you tell us how that store is comparing to the one that was across the street?

It's doing approximately 50% to 60% more business, but it's a larger store. We expected it to do that, Budd, and we have given it more attention. It has more people, and we've put in a strong management in that, and we have seen -- in this case, as you know, we just built that store right across the street, so we did not change the location. What we did change was the size of the store. It has increased some traffic, but not to the degree that we should do it, and as we get the people going and we train them, we will do more advertising to get more people into that store. We have been a bit hesitant to get too many people in there without having the right structure in place.

How much larger? That was an old homelife store. And so it should be about 30,000 square feet?

That’s right.

And the old store was about 15,000 or 18,000?

It was 11,000.

So significantly larger.

Yes.

Thank you Farooq.

Thank you, Budd.

Our next question comes from Jason Putnam from CS First Boston. Please go ahead sir.

Good morning Jason.

One quick follow-up on Budd’s question on the manufacturing square footage. I guess one thing that surprised me was the New Country line is being built in the U.S. facilities. Can you go into more of the strategic thinking behind that? Do you want to keep the current footprint you have with your manufacturing, or should we expect more closures? And what the rationale was for not importing the New Country line.

The rationale is we need to balance our domestic manufacturing with our offshore. And we don't want to go too fast offshore, even though we are already now -- our offshore is slightly in excess of 25% in a relatively short period of time. Our manufacturing now that is consolidated has resulted in us having now the more efficient plants and the products that we were making in the six consolidated plants, some of it has gone offshore. But some of it -- or at least more than half has gone into our existing plants. And we have kept these plants going, we have made improvements and we have taken even down time to be ready for an improvement in business.

Now, improvement in business can take place with existing products, but also it's a self-fulfilling situation that if you don't put strong products in our U.S. plants, [inaudible] then we have to close them. So we are balancing product lines that we believe we can make in the United States with reasonable efficiency. A lot of products that we make in the U.S. today can be made overseas, too. But we want to maintain the balance between U.S. manufacturing and overseas, and maintain some control over our manufacturing as well. And that’s why we are doing it.

Can you give us a bit more color in terms of your experience with -- I guess you've made a pretty significant shift going now to 25% with the imports. Have you experienced any significant problems that would cause you maybe to maybe slow it down? Or do you think things have gone as smoothly as you would have hoped?

I think they had gone better than what I had hoped. I was somewhat hesitant. I went slowly, because you can have lots and lots of issues. And there have been issues. But as we have limited ourselves to a very, very few -- very good manufacturers, and have had even strategic alliances with them, and have spent a great deal of time making sure they manufacture to our specifications, and our specifications are fairly tough. We have been surprised overall how well they have done. Now, there have been problems, but they responded to them quite well.

How many different manufacturers or different plants, I guess, is the Ethan Allen different products coming from Asia? How many different plants are they made in?

Most of our major manufacturing is with four or five plants, and then we have smaller plants making some secondary product lines.

Okay. Next kind of line of questions just relates to your cash use. I saw the cash balance spiked up a little bit. It didn't look like there were any share repurchases during the quarter.

What do you mean little bit? $50m, Jason.

Yeah, quite a bit. What were you thinking? Should we expect more share repurchases or more store openings? It looks like you might be gearing up for something. Just want to kind of get a feel for what that may be.

My first objective was to gear up to get the cash, because then you can do things with it. So last quarter I was only interested in getting a lot of cash, which we did. As we go forward, we'll think about what to do with if.

Nothing in the plans, no major, you know, new store or --

Nothing other than our already -- what we have in plans.

Okay. There were no share repurchases during the quarter?

That's right, there were no purchases.

Okay. That's all for me. Thanks a lot, Farooq.

All right.

Our next question comes from Chuck Grom from J.P. Morgan.

I was wondering if you could comment on any coming ordering trends or any traffic patterns thus far in two weeks in October versus September and August?

It's too early to give you any indication. You know, many people in our industry have reported that early September was strong, then later in September it was somewhat soft. We also sort of saw some of that softness, most probably not as soft as what I've been reading. So October also continues for us, not as strong as if you were to say the first two weeks in September, but still at a satisfactory rate. It still is trending positive.

Okay. Good. And kind of a big-picture question, just in terms of looking back to the 90-91 recession, I know you’ve been in the industry for more than 20 years. I was wondering if you could recall what seemed to jumpstart the sales growth back then? And what signals are you looking for today that would tell you that we are really going to see a sustainable pickup in demand over the next six to twelve months?

I see parallels. It was during that period also we made major changes. In the 91-92 period we changed 40% of our product lines. At that time we started changing the image of Ethan Allen. So we did a lot of things to improve our business internally. And as the consumer confidence improved, it gave us an opportunity to take advantage of the next cycle of growth.

I see us ourselves and the economy in somewhat of a similar situation. So because of that, in the last two years, we have taking the steps we have taken in terms of taking on many of our retailers who were on the verge of retiring, not investing in their businesses, we've taken them on. And the last two years we’ve invested a lot of money in these stores and in our business. We have also taken steps to consolidate our manufacturing to make it more efficient. We have also developed a very strong marketing program.

But I see, as consumer confidence is increasing, there is a great interest in home decorating. Now, in the last couple years, people say there has been a great amount of construction. There has been, but it really has given an opportunity to people with relatively low incomes to buy a house, because when interest rates are as low as they were, folks with relatively modest incomes could buy a house. And that's what they have done. Those people, as well as people who want to redecorate generally have not spent a lot of money on home furnishings, especially the ones that we are -- the demographics that we are dealing with. As we see the consumer confidence increasing, and the economic cycle turning, I think in our view we'll start seeing the next phase of growth.

I agree with you. Then final questions with regard to inventory. It looks like inventory was down about 4% sequentially. Where do you expect that to kind of trend over the next couple quarters and by the end of the calendar year, in terms of generating a significant amount of working capital?

Chuck, it will -- again, it all depends on business, you know. If the business continues to improve, you're going to see our inventory levels stay where they are or go lower, not higher.

So trend below the 190. Thanks a lot. Nice job in the quarter.

Thanks.

Our next question comes from Laura Champine.

Good morning.

Good morning, Laura.

Does the 25% of product being sourced offshore include accessories?

No, when I mentioned 25 percent, I was referring to furniture.

Okay. And where do you think that percentage should be? You mentioned a slow and steady growth. Where do you think that percentage could be at the end of this fiscal year run-rate basis?

I think it will be approximately close to that.

Okay. And if the Chinese currency were revalued, what impact do you think that would have on your sourcing strategy?

Of course, it all depends how much it's revaluated. And if revalued 10% to 15%, I think we would still have a viable and an important sourcing from China. If it was revalued in a large number and manufacturers in China started raising their prices, then obviously the differential between what we do in the U.S. and outsourcing would change. It's all really relative to if and how much it will be. That's why it's very important for us to have a limited number of plants and maintain or strengths and make them better.

Great. One last question. Are there any restructuring reserves that might be reversed in future quarters?

No, not likely.

Great. Thank you.

All right.

The next question, sir, comes from Todd Schwartzman at Sidoti.

Good morning, Farooq.

Good morning, Todd.

A couple things. One, to follow up on Jason's question first with regard to the somewhat more cautious approach to imports. You had mentioned how the factories in China have done quite well in meeting your specifications that are pretty tough. What are your thoughts that cause you now to pause and take it a bit slower?

Well, I always believe that change has to be managed. If you go too fast, you know, being a mountain climber, if you go too fast, you get water in your lungs and you die. So you have to pace yourself. You have to make sure at every given stage you make sure you're doing right. Even if the furniture we're getting. Good furniture, sometimes you see the problem six months from later or a year later, because it moves. So we've got to make sure that we watch it, we are careful with what we are doing and slowly increase it. But certainly outsourcing has been a great help to us in making our manufacturing also more efficient, because when you go back to the previous cycles, we had to keep even some of our, you might say inefficient plants, because in an up cycle, we needed all the production we could have. Today that's not the case. Today, we can go offshore and balance it. So I think if you have a good balance between domestic and offshore, that works very well. We will watch it very carefully to see what makes good sense.

So there are no issues, events, legal or otherwise, that are causing you to change strategy? In other words, this has been your strategy all along?

That's right, yeah.

Okay. The other thing I was curious about is on New Country. Can you talk a bit about how the price points compare with your other domestic-made products? And also if you are trying to reach out, let's say, to a new type of consumer who maybe previously didn't shop at Ethan Allen?

You know, Todd, as we have increased our volumes, and we have consolidated our plants, not only have we been able to become more efficient, we have also been able to transfer that value to the consumer. That is the reason people have been asking me and when we are at 16%, 17% operating margins and people say, how do you increase them? I think it's possible, but I think it's important to make sure we offer the best possible value to the consumer. We have been fortunate in the way we operate or business, eight or ten years back in our wholesale division, we developed a structure where our overhead costs are pretty much maintained. And as we increase the volume, we have the ability not only in improving our margins, but in improving the value to the consumer. And that's what we are doing. We are taking advantage of our positioning where we want to have decent margins, but we don't want to be greedy. We want to make sure we are competitive. So people are surprised at the values we are able to have in our New Country program, and especially it's made in the United States.

Now, it's possible -- and you might ask this question -- it's possible if we had made it elsewhere, it's possible we would technically show a higher margin. But with the overall better utilization of our manufacturing, we would have a better margin overall by manufacturing it in the United States, as long as we are manufacturing.

Okay. Thanks.

Our next question, sir, comes from John Baugh from Wachovia Securities. Please go ahead.

Good morning, John.

Good morning. Congratulations. Strong backlog, care to quantify that, Farooq?

No, John.

Okay -

But I will tell you this, it really is -- as you know, we give information on an annual basis, but I mean -- no, I was too flippant in my answer, which I'm sorry.

I can tell you just be careful. It is over 30% in terms of increase in backlog, compared to the beginning of the quarter. And so that's a sizable increase. But in our case, you know, we can use it fairly fast, so it also depends on what else we do during the quarter.

Sure. Would you comment on the Chicago store acquisitions? How has that gone? Have you increased the sales in those stores? Have you made progress in opening or transferring locations? Just give us an update on how that's going.

We are making progress. We have had to put in new management. We have had to -- as happens in many of these cases, we have had to change the culture in the way we operate today, that is on somewhat of a fast-paced basis. We have redone all the stores in terms of visually presenting them better. Some in a major way, some in sort of a small way. We have signed up two new stores, so two new stores will be relocated in the next year or so. It does take a couple or three years to reposition the market, so we are on the way of doing it.

Any sales per square foot change?

No, not yet.

Okay. And in SG&A, I know mixed influences with retail versus wholesale, and retail is moving up. But is there anything else in the SG&A component, that's almost 36% of revenues that was --

It's entirely by the mix shift. Our wholesale operating expenses are actually lower than last year.

Okay. And that will do it. Thank you.

Thanks, John.

The next question, sir, comes from Keith Hughes with SunTrust Robinson. Please go ahead.

Thank you.

Good morning, Keith.

Just calling to get an update on the EA Kids program [ inaudible ] do you have any short-term plans to open more? What kind of numbers are we looking at?

We are planning to open our second store in late November, early December, in the Washington area. And we are looking to open up -- we are in the final process of negotiating on a third store. Our objective would be between three and five stores is the test stores. We want to see how they work, what impact they have before we make a decision of opening more stores, Keith.

How long of a test period do you anticipate?

I would say we need at least one full year.

Okay. Thank you very much.

Okay.

We have a question from Steve [Tab] from [Topefield].

The selling, general and administrative expenses are up about 10%. Could you give us a breakdown to the increases?

The G&A is basically increased because of the more -- the more retail stores that we have. That is [inaudible]. All of it increase is due to having more retail stores in the retail division.

Well, do you have 10% more retail stores this year than last year?

In the retail division, approximately, yes, I would say so. We have added the benefit -- what it is is we have added in the last two and a half year about close to 35 stores. And as those stores come into our system on a 12-month basis, you will be seeing the full impact of the G & A expense on the numbers.

Is that partly attributable to selling, too, to your consultants in the stores?

Yes, in our retail stores, obviously a large store operates at a breakeven and we operate at a 44% gross margin, you're talking about a 44% increase in operating expenses. So the retail stores have higher operating expenses relative to our total system.

I guess, then, it's been hurt because the sales haven't gone up normally as they would when you're putting on more retail sales?

That's right. I think the opportunity we of course have is to increase the top line in our retail division, and that's it is leverage we have.

Right. I have a few questions about the Chinese stores. You say you have three now, you expect to open one more. Do you own the stores? When will they become profitable? What percentage of the merchandise they sell comes from the U.S.? And what is the volume of these stores?

The stores are not owned by us. They are owned by a licensee. And so the profitability -- any profits and loss of the stores are borne by our licensee. The stores approximately do 70% of the products at this stage is being shipped from the United States.

And do you have any -- can you reveal --

No, I think that is a proprietary information of a licensee.

In the past, there's been some -- other topics, some complete purchases of stock. Although you have increased the dividends in terms of percentage, quite substantially, it's been from a very low base. Is there a chance the company will favor more substantial increases in dividends and less buybacks due to the change in the tax laws?

We have already done that. The fact that we have had increased our dividends in the past 12 months by over 60% reflects or ability to have cash, but also the fact of reflecting the new tax laws. And we will look at it carefully as we go on.

Thank you very much.

All right.

Our final question comes from Matt McCall with BB&C Capital Markets. Go ahead sire.

Thank you. A quick couple questions. You mentioned in the release and I think in your remarks that the floor samples you sold to make room for the new products were mainly behind the retail margin declining. Was this mainly just for the New Country product line?

No, it reflected a number of factors. New Country, plus the Kids, plus some of these stores acquired in Chicago, Milwaukee and others, where we have started to redo the stores, what we have done is sold off all the floor samples to bring in new products. And it reflects all of that.

You said you were going to introduce the New Country this week. Does that mean that most of the floor sample selling is complete that you would expect?

That's right. However, we are in the process of further introducing new products at our convention at the end of this month, and that will have some impact. We saw the impact of this floor samples and all that because our volumes were not as high as they should be in the retail division, so that we were not able to absorb it into our margins.

Finally, the tax rate, I think moved up a little bit. For modeling purposes, should we go to a 37.8 in future quarters, or is it a 38.5, or what’s behind that?

Jeff?

I'd say you can expect between somewhere between 38.2 and 38.5 on a go-forward basis. It's purely just a function of operating in more jurisdictions now with more company-owned retail stores.

Gotcha. Thank you very much.

We do have a call from Jim Bazzone from Delphi Management.

I missed earlier on, what was the amount of store openings and closings in the quarter? And then for future store openings, are there any areas you'll target geographically?

We opened two stores and closed one store in the quarter. And on an ongoing basis our objective continues to open anywhere between 10 and 15 new stores. And they are really right across the country. We are taking a look at opportunities we have. We will have some more openings in the Midwest area, especially Chicago, because those are the stores we've taken over and need to relocate some of those.

Okay. Thank you.

Well, thank you very much. If there are any more questions, please let us know, and we look forward to seeing you at our annual investor convention in November.