Ethan Allen Interiors Inc (ETD) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ethan Allen Q3 2005 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). Today's conference will -- (technical difficulty) -- 11:45 AM. I would now like to introduce your host for today's conference, Mr. Farooq Kathwari, President, Chairman and CEO of Ethan Allen. Sir, you may begin.

Thank you very much, Heather, and good morning. I'm Farooq Kathwari, and I am joined today by several members of our team, including Jeff Hoyt (indiscernible) and Peg Lupton, our Director of Investor Relations.

Today, we are reporting the results for the three and nine months ended March 31, 2005. Please note that the results referred to for the three and nine months ended March 2004 reflect the impact of the lead accounting adjustments discussed in this morning's earnings release.

For the quarter, net delivered sales amounted to 231.2 million. Net delivered sales for the Company's Retail division decreased 4.7% to 137.3 million with comparable-store delivered sales decreasing 6%. Wholesale sales decreased 5.6% to 168.8 million during the same period.

On a quarter-over-quarter basis, total written orders decreased 8.1%. At the wholesale level, net orders booked decreased 10% while at the Company operated retail stores, written sales decreased 3.3% and comparable store written sales decreased 4.5%.

Importantly, consolidated gross margins were 47.8% as compared to 48.8% in the prior-year period. The 1 percentage point decline was due primarily to the overall decline in wholesale shipments, absorption of 700,000 of variances related to plants closed in the fourth quarter of fiscal 2004, price increases with respective (ph) raw material categories, including lumber, foam and springs, and some impact as result of the Company's switch to the everyday pricing strategy.

During the current period, the wholesale operating margin was 18.7% and the retail operating margin was negative by 0.7%.

Earnings per share for the quarter amounted to $0.50 on net income of 17.9 million. This compares to EPS of $0.60 per share and net income of 23.1 million in the prior-year comparable quarter.

For the nine months ended March 31, 2005, net delivered sales amounted to 706.8 million. Net delivered sales for the Company's Retail division increased 2% to 434.8 million with comparable-store delivered sales increasing 0.2%. Wholesale sales decreased 2% to 491.4 million during that same period.

For the nine-month period, total written orders decreased 4.2% as compared to the prior-year period. At the wholesale level, net orders decreased 6.1% while, at the retail level, written sales increased 1.2% and comparable-store written sales in our Company operated divisions decreased 0.5%.

The nine-month consolidated gross margin was 48.1%, as compared to 48.5% in the prior-year period. On a year-to-date basis, the Company has absorbed approximately 3.6 million of variances related to the aforementioned closed manufacturing facilities, adversely affecting our gross margin by approximately 0.5%. Our year-to-date consolidated operating margin totaled 13.7% with the wholesale and retail operating margins amounting to 17.6% and 1.8%.

Earnings per share for the nine months amounted to $1.63 on net income of 59.8 million. This compares with EPS of $1.72 reported at comparable period and net income totaled 66 million.

Our financial position remains strong. For the quarter, we generated operating cash of 11.9 million and on a year-to-date basis, our operating cash flow has increased 79.2 million. For the nine months ended March 31, 2005, we have utilized 58.9 million to repurchase shares of Company stock, 34.2 million to fund capital expenditures, and 14.4 million to pay (indiscernible) cash dividends.

Inventories increased 9.4 million during the quarter as a result primarily of the planned introduction of Tango in April and to a lesser extent, the lower-than-anticipated sales volume referred to previously. Of this 9.4 million, about half of that is products on the water and most of it the Tango product.

EBITDA for the quarter was 34.8 million, or 15% of sales, as compared to 43.2 million and 17.6% respectively in the prior-year period.

Now for a business update. As was stated in this morning's earnings release, the recently completed quarter was a challenging one. Numerous retailers have expressed similar deals (ph) in recent months as economic uncertainty and intermittent consumer confidence remains an issue. In addition, we faced tough comparables with our prior-year third-quarter sales having increased 9% and written business being up 14%.

The base of business for our industry has slowed somewhat since the ended last fiscal year -- (technical difficulty) -- signs of recovery, especially for the beginning of this calendar year -- with signs of recovery spotty since consumer confidence has been impacted by factors such as the decline in the stock markets and the continuing rise in fuel prices.

I'm going to address a number of issues that have been discussed by analysts relating to our solutions-based strategy and everyday pricing, and even one comment whether our products are competitive in this age of globalization and commoditization. I've always believed that, while most companies spend a great deal of time in developing short-term strategies based on financial modeling, the main way of differentiating in this age of sameness is to create a -- (technical difficulty) -- competition behind -- (technical difficulty) -- Ethan Allen, in creating one of the spurious (ph) solutions-based enterprise in the home furnishings area. Our everyday pricing initiative is part of this continuing development, which has taken us over 15 years of work. Our strategy recently has included that, in the past three years, changing 70% of our products to make the more stylish, add quality and details to differentiate in this age of the commoditization and sameness, as I said earlier.

In addition, our objective has been to provide a one-stop shopping experience for consumers where there is a consistency in style, quality and value. Three years back, we started with focus on plastic (indiscernible) programs and in the last six months, a very big effort in reinventing the casual side of our store with fresh, modern, great quality and value products. We are pleased that, with introduction of Tango to our stores this April, we have substantially completed this major transition, which did result in some impact to our sales and earnings, especially in the last six months.

Our focus has been to create a professional organization that provides service to our customers. To date, we have about 3,000 design consultants and over 500 retail-management associates. Our objective, over the years, has been to create an umbrella where these professionals are able to provide the best service and convert customers to long-term clients. This part of our business is a major differentiation factor and hard to replicate.

We are, on a planned basis, relocating our older stores to more prominent locations and increasing the size by 14 to 20%. During the past quarter, we opened three new stores, three major stores, in Chicago, Washington D.C. area, and Reno, Nevada, as well as two new stores in China. This brings our new store count to 17 this fiscal year. During the next twelve months, we plan to open about 15 new stores.

Our everyday pricing initiative is very good for customer service. It offers our entire menu to help create beautiful home environments and our design consultants and (indiscernible) customers love it. It benefits the productivity, credibility of our designs -- (technical difficulty) -- improves the efficiency of our manufacturing, forecasting and logistics.

The issue has been whether we have lost the urgency created by sales. We used to have about six sale events lasting about six weeks each, offering about 30% of our product at about 10 to 12% discounts from our regular prices. During the year, we did over 40% of sales with this discount.

While we have eliminated product sales as an incentive to create urgency, we are using financing incentives to create a sense of urgency, when needed. For instance, we had a soft January and a stronger February, which included a financing incentive towards the end of the month for our customers. March was soft, despite a financing incentive at the end of the month due, we believe, to overall consumer caution and Easter falling in March this year. We will continue to use financing as an incentive. We believe this is better than offering 10 to 12% of sales discount in this era of bigger and bigger discounts and commodity selling.

During this quarter, there has been concern among analysts and some of our retailers whether our new pricing initiative was solely responsible for weaker sales. There is a bit of perspective now, as most manufacturers and retailers with strong price promotions have had soft sales during this period.

There is no question that the globalization of sourcing and furniture being sold as a commodity -- (technical difficulty) -- formats that very good values are available to the consumers and it is becoming extremely hard to compete. We realize this, and we're focused on differentiating ourselves with quality and details.

Our 3,000 design consultants are our research engines. They do constantly do competitive shopping and they repeatedly advise us that we have great value, relative to our quality, style and products and value. This has been enforced by customers when they come into our stores and see the differences that we offer. Our objective, obviously, is to get more customers into our stores. We have a strong communications program -- (technical difficulty) -- radio, our solutions books and now, starting April 25, a strong national television campaign to get the message across that we are ready with fresh, modern casuals and they are in our stores now. We believe that we are well positioned to grow our business.

At this stage, I would like to open for questions and comments from you.

(OPERATOR INSTRUCTIONS). Charles Grom with JP Morgan Chase.

Good morning, Farooq. Probably most of us on this call got a copy of the frustrated independent dealer letter. I'm just wondering how you handled this internally and what is the sentiment amongst your dealer committee towards EDLP, given its struggles to date?

First of all, it was one letter, unsigned, sent by somebody, assuming it's an Ethan Allen dealer, but this is (indiscernible). It has impacted our retailers in this chain, those who have not, in the past, spent more of their efforts in creating a solutions-based organization. Their focus was to depend upon good old times, good old ways of doing business. Ethan Allen is spending advertising in national television. Our direct-mail, which we increased in the first quarter by 40%, benefited people -- our retailers, I'm talking about -- who have had more of a solutions-based organization with strong teams. Because the direct-mail, what it does, it did reduce our traffic but it got more qualified people into our store.

Now, we obviously need to make sure that we are in constant communication with our people in fact, not because of this one unsigned letter but because of our normal procedure. For instance, in the last few months, we have been traveling around the country talking to hundreds. By the time we're through in the next month, maybe thousands of our associates, about all these policies -- getting their feedback. Because you know, Chuck, we're not foolish. We're not going to do something to hurt our business if we think that -- if 10% sales is going to bring us a lot more business, that may be a better way of doing it, but that, to me, is really not the long-term answer. The long-term answer for us is to create the best possible teams, to differentiate ourselves, not be in the middle, because today, 10, 12% here in the middle of nowhere. It worked in the past; I don't think it's going to work in the future. Today, offering our best offerings to the consumer and yes, using -- financing is an important tool to use as an incentive.

Now, you know, I was concerned in January/February, I thought that maybe it was us but as time went by, I've been hearing that, you know, retail has been poor across the board, so it was not just Ethan Allen; it was not just our everyday pricing. But we are in constant (indiscernible) communications with our whole retail network.

So it's the thought process once you begin to anniversary the EDLP in June, you are expecting some type of pick-up in sales going forward?

Absolutely. If it doesn't pick-up -- assuming there are not external factors beyond our control. Things that we can control is to have a great product, reinvent it, improve our store network, have a great team of people. You know, we do realize it's a very competitive environment out there. For us, building products that are just the same as everybody else is not going to do it. So that's why we've changed 70% of our products, is realizing this whole issue of commoditization and sameness is going to take place, so our products today have differentiated us in terms of quality and details. Yes, they are somewhat higher priced than the commodity products out there, but they reflect the value and they deserve those prices. They are great value for what we are offering and our people tell us that, who do the competitive shopping.

Okay. Just let me give you a quick scenario -- let's say the macroenvironment begins to improve over the next six months, yet your sales continue to deteriorate. Is it not out of the realm of possibility you decide to get more promotional and kind of put EDLP back on the shelf?

We're going to do what makes good sense. There's nothing set in concrete.

Fair enough. Then lastly and I will pass it onto others -- you know, just the commentary in your press release on the April remains slow. Could you just provide a little more clarity on current trends? Are they resembling what we saw in March? Are they picking up and I guess what your expectations are for the quarter?

April has been slow. You know, you can blame the weather; you can blame the tax season; you can blame the economy. I don't know who to blame, but it has been slow. In the Northeast, in the Midwest and most of the country, we've had fantastic and on weekends. Now, this weekend, we're looking for some good weather; that's rain. We need a couple of two or three weekends of good rain so that people can come into the stores. the last two or three weekends, that has not happened, so we're looking for nature to help us.

Second, we have started a national television campaign the next week. It's a strong program. I believe that people have been, to some degree -- that they always do -- distracted by the tax season. If good weather comes early, they are distracted. I view also there are concerns, and we are -- I have been around, in the last few weeks, I have been -- I've at least talked to 500, 600 of our design consultants from stores from California to Boston. Last week, I was in all of our stores in the New York region, talking to design consultants. They said people are interested. They come in; they were working on projects (ph) but they are hesitant, much more hesitant to close. So that factor is there.

I believe that our programs, Chuck, are there. We're well-positioned; we have the ability to be much more -- to be able to make a change, a few people and incentives if we have to, and I believe that -- (technical difficulty) -- April, May and June should be good. That's what our projection is.

Thanks, Farooq.

Ivy Zelman from Credit Suisse First Boston.

Good morning, Farooq. With respect to the TV advertising, can you refresh our memories -- the timing you said starting now, and in aggregate how much will you be spending on the TV promotion or TV programs?

For competitive reasons, I can't give you too much information, but I will tell you this -- that to give you a perspective, this last six months, we depended to a great degree on direct mail. We supplemented the direct-mail of our retail (indiscernible) almost, not exactly (indiscernible) somewhat less but we spent it on direct mail. Now, we will go back on television, and our first is going to be a six-week intensive program starting April 25, then we wait for some period and we go back on television.

For what channels, or is this HBO or any cable or is it all the local networks?

No, it is a national -- it is both broadcast, it's cable, it's primetime -- you know (indiscernible).

(indiscernible) one of the things is your costs are up significantly, looking at SG&A expense, selling expense; everything is going up. You're saying that the TV expense will be pretty much the same as it was for the direct-mail, so we shouldn't really see too much further impact, negatively impact on the margin on the selling expense. Is that an accurate assessment?

No, Ivy, our expenses have increased because we've got more retail stores. (technical difficulty) -- sales were lower relative to the amount of stores we have and what we should be doing. That's what they've increased. At the wholesale level, our selling expenses are somewhat lower, but we're going to have somewhat higher selling expenses on the wholesale side on national television, because we are going -- I can't tell you gain, as I said, for competitive reasons, but we're going to spend more on national television.

Our expenses on the wholesale side actually are lower because the retail side and because of the fact that we have opened up larger stores in many markets, we have relocated stores, our sales, delivered sales in the retail division were not sufficient to cover those expenses. Those expenses are going to remain there, because our focus is to grow the business and our long-term, of course, longer-term, shorter-term objective is to have more delivered business from our Retail division.

If you look at headwinds that you face -- correct me if I'm wrong -- that strategy has been in place to continue to relocate and add new stores. But looking at your operating margin performance in aggregate, you are now facing income headwinds, new increases from your outsourcing from China. We understand April 30, freight costs are going up across the board. Also, we're hearing that there is some wage inflation in China for those people that are actually making product being shipped back to the U.S. If you were looking at today's margins for the quarter ended March 30 or 31, would you expect that that margin is now sustainable or will we see some further pressure if retail sales do not improve? Assuming the same sluggish environment, would we incrementally see further pressure on margins, given the strategy to continue to invest in the growth?

Ivy, if you take a look at our margins, it is still remarkable that our wholesale margins are close to 18%. That's remarkable, considering the fact that we are absorbing costs. As you rightly said, these costs are not just going to come in the (indiscernible) but we're getting costs. Our number has increased; our foam (ph) has increased. We deliver our products at one cost nationally and we are I think -- we use approximately 7 million gallons of fuel and our fuel costs have gone up $1. We've got surcharges coming in. Yet, we have been able, through lots of factors, maintain pretty healthy margins on the wholesale side.

On the retail -- and if the pressures aren't there, there's going to be pressures. So on one hand, you have pressures due to costs increasing. On the other hand, we have somewhat benefited -- not as much as I would like to see -- but we're benefited the consolidation of the plants. As I reported about $3.5 million of variances were still absorbed this fiscal year from plants closed in the previous year. About $700,000 this past quarter because of these plants, we're trying to sell them. Some of those are in the North climates and the winter is -- you know, we've got to keep them heated. So we spent $700,000 last quarter and every quarter, it's coming down. Despite all of those things, we were able to maintain pretty healthy margins on the wholesale side, considering our sales went down in the wholesale side.

So on the retail side, our margins -- I'm going back to the wholesale side. There's going to be pressures, and there are pressures, even though we took a 3.5% price increase in January and we were fortunate that I did it, it takes us six months to implement a price increase. When I did it, people thought I was foolish, but it was good because, at that time, because without that, we would have been even deeper in the mud with all these cost increases that we are facing.

I believe that the benefits of consolidation, the benefits of our own domestic manufacturing consistently becoming better. Also remember that all of these products we're talking about that we've introduced, most of them are new for our factories, New Impressions, new Horizons, Newport; all of those are products made in the U.S. plants, and we are somewhat in perhaps a little bit different also in the fact that we also continue to focus on developing products for our U.S. plants, so we're still 70% domestic and 30% overseas.

Yes, we're going to be under a lot of pressure, and if business does not increase, there is a possibility our margins are going to be impacted. But on the other hand, that if business even improves a little bit, we have the leverage on the other side.

One more question -- in respect to your groupings, with Tango, you said it's been shipped this month or is it in the stores in April?

It's already in the stores now and --.

(multiple speakers).

You know, I think that's very important, because this Tango is coming from overseas, mostly from China. The tango did create for us some issues in the last few months, in the sense with the sole issue last year of these duties and everything else that was taking place, you know, that -- what was that thing called? Anti-dumping stuff. All that did take away a focus by many people in China on producing products on time. Our objective was to get this Tango in our stores early this year and be ready with a strong national television along with other casual products being reduced (ph). But they, instead of coming early, they are now coming in April but they're all in the stores. That's why we delayed our national television, because we wanted to make sure our casual side of the store is modern, it's fresh and all the products, it has it now (sic).

In terms of today's number of groupings, including Tango, what number are you now at? Of that total number of groupings, what's new in 2005?

Compared -- well, as I said, in the last three years, 70% is new.

No, no, no, I know, but looking at today's stores, when you look at your number of groupings, how many do you have roughly? Is it ten groupings? Is it six groupings? (multiple speakers) -- British classic, you know, naming the Horizon -- (multiple speakers)?

I would really not -- today our product line is somewhat more mixable. We are not developing, like the furniture manufactures of the past, developing big lines. Today, our products are much more eclectic (indiscernible) items and even though we've given these names.

Right, I know, but there's some of your retailers that will say that they do 70% of their business is from British Classics and everything else just sits there. I'd like to know if I could, understanding your groupings, where you are making your money and what's not maybe working, and what's doing well.

(indiscernible) this -- I mean, I don't think, for competitive reasons ,I should get into all of those kinds of details, Ivy.

Okay, I thought I would give it a shot. Thanks.

Laura Champine from Morgan Keegan.

Good morning. Could you give the unit growth or unit decline in the quarter?

Laura, I've decided, for competitive reasons, not to give that information out any more. We're just giving too much information out.

Okay. If I'm reading the press release right, you ended the quarter with 11 million in cash. Then since then, in April, have repurchased 22.6 million in stock. What was the source of funds for that repurchase?

After that stage, it's all internally generated cash.

Okay, so it's all-cash?

Thirdly, and this is the last one, the 15 new stores that you said you would open over the next several months, is that a net number? If not, what is the net number?

This is not a net number, and I said within the next 12 months. At this stage, I would think that -- but you've got to understand that most of these 15 stores are going to be relocations, because that has been our focus and that will continue to be our focus. It's possible that we might open up four or five new stores; it's possible we might close four or five stores, but the rest are going to be relocations.

Can you give, since the store size is changing, can you give us what your total square footage was at the end of the quarter?

I don't have it with me. If you would please give a call to Peg Lupton and then we will decide whether we want to give that information out.

Margaret Whelan from UBS.

Good morning. Could we focus a little bit on your wholesale margins? They really are outstanding, given the spottiness of the business over the last three months. Can you just give us a sense of how your price increases have helped out, maybe the incremental margin from that versus the higher labor and commodity costs? It's about the utilization . Can you give us any kind of idea on that?

I will give you a general perspective, Margaret, of areas that have positively impacted our margin and areas that have negatively impacted our margin. The areas that obviously have negatively impacted our margin is that we have had lower sells at the wholesale level. We have also absorbed, I would say, for us, about 10 to 15% increases in lumber -- (technical difficulty).

What percent of your cost is lumber?

I think that, again, I won't go into all those details, but we have had an increase also in all petroleum-related products.

(indiscernible) distribution -- (multiple speakers).

I would say that, in our case (indiscernible) about the cost increases have most probably impacted about 1% of our gross margin, I would say, both on the (indiscernible) side and most probably a little bit more on the (indiscernible) side has been the impact of cost increases to our cost of goods sold.

Now, on the (indiscernible) goods side, where we have had some benefit, has been the consolidation of the plans that we took place earlier in the last two years, even though we did have $3.5 million of negative variance, the positive was still greater than that 3.5 million negative variances, and that contributed positively to our margins.

Our (indiscernible) in the United States, (indiscernible) it's still under pressure of making lots of new products. However, we didn't have any downtime in the last quarter, compared to the downtime we had the previous year, so that was a benefit. I mean, all of those factors taken into consideration, our wholesale margin remains very healthy but overall gross margins (indiscernible) impacted by about 1 percentage point negative with all these things I talked about.

So the fact that you had no downtime was probably the biggest -- (multiple speakers). Okay.

The second question I have is around your retail strategy. In terms of this anonymous letter from this disgruntled retailer, I mean, I'm not worried about that because we get a lot more of that mail from your competitors, retailers, but I'm worried about the fact that retail stores are losing money right now. So can you give us an idea of exactly what's going on there? Do you have retailers that you're going to have to consolidate as VIEs (ph)? Do you have them -- a sense for the best margin some of your retailers are making versus the worst and how those can be changed?

You know, the last three months have been tough and they have been tougher especially for retailers in the middle of the country. You know, we have stores in the middle of the country that we operate and we can see the toughness. We have markets where our business has gone up, but they generally have been larger metropolitan markets where our business has gone up on both the coasts.

Now, and I -- and these smaller retailers and smaller markets are the ones who have been most impacted. I believe that, to help them and to help everybody, we did provide financing incentives, which we subsidized. However, it has not been sufficient, in this last quarter, for them to do the kind of business that they should, so they have -- they are under pressure. We are -- we have, starting this next week, with our national television program, our direct-mail has just started shipping out. We held up our direct-mail in April after this tax season is over because that people (indiscernible) -- (technical difficulty) -- so we've got lots of programs for them to help them and to get more traffic into the stores. You know, they are under pressure at this stage. I think, if it continues, it's possible that some of them may not make it if this kind of a business continues for the next three months.

Consolidating that?

Yes, it's possible that, you know, (indiscernible) business (indiscernible) we are trying to help them as much as we can but you know, our policy is not to take credit risks that don't make sense. I've never done that.

Yes. In terms of the -- (technical difficulty) -- there's a seasonality to the business and the products are selling better now versus other times of the year. It's interesting because you are investing in new commercials right now, given the fact that seasonally it's a slow period. So do you really think their (ph) product is going to be attractive nationally?

Yes, I think (indiscernible), Margaret, that we have strong, strong products and we have spent the last six months focusing on this modern, casual great product line, great values, but we wanted all of it (indiscernible) to make an impact. So because of that, we believe this is very, very strong and we already received good reaction from all the stores that have received it, because you know, get a lot of feedback right away. So we believe that we're going to generate traffic, and we're going to have -- we should have good business.

I cannot really comment on what overall condition, economic conditions that the consumers are faced with. Considering some reasonable situation, we've got an excellent opportunity to reverse the trends that took place this quarter.

The last question I have -- I might have missed this in your prepared comments but can you give us the total number of stores you've opened right now and the percent that are owned by the Company?

I'm sorry, the number of --?

The total number of stores?

313.

How many are owned by Company?

133 are owned by the Company (indiscernible).

Harold Kingsberg with General American Investors. (OPERATOR INSTRUCTIONS). (technical difficulty) Joel Havard from BB&T Capital Markets.

You can see there is as much trouble with my name as with yours!

Say that again? Mine is easier!

(LAUGHTER). In your opening comments, you talked about the financing incentives and then you were just giving a little bit more color on that with Margaret. My understanding was that both the sort of revolver and term programs are third party. Are you all backing that to some degree now? If you could clarify that. Then beyond that, if you could give an example maybe of how you all are putting more incentive into it for the retailers.

Again, you ask me a lot of areas that are, from a competitive position, Joel, I will be careful but I must tell you this -- having, you know -- there's not many open -- there's not many secrets in this industry. In February, for instance, we decided to go I think approximately a 10-day period of financing to the consumer at 12 months sort of an interest rate promotion, because we believe that make sense for us. It did bring in a lot of people, and we subsidized the rate paid by our stores on that, so that if they did more (indiscernible) and with the same thing in March, and we have planned to continue to do that so that we are able to give an opportunity to all of our retailers to benefit from something like that. But if you do not subsidize it and that every retailer decide what to do (sic), it sort of generally tends to benefit the bigger retailers at the expense of the smaller ones. So our focus has always been, like everyday pricing, one delivered price nationally. We also give the same benefits across the board, not only to the consumers but to our dealers. We will continue to do that.

All right, I want to make sure I understand that. The credit programs themselves are still run by third-party providers, but y'all are -- the corporation -- (technical difficulty) -- bridging some special promotions?

That's right. You see, they are on a non-recourse basis to us and to our stores, and the retail store generally has to pay a discount rate based on the promotion subsidizing that, and those are also in our numbers.

Where is that accounted for?

That's accounted in our selling expense.

Okay, well, that helps. Yes, that's very enlightening.

Secondly, and this is more philosophical. Farooq, I know you are really wired in with the kind of political tone of Washington. What do you make of this initial -- (technical difficulty) -- successful first vote in the House for a manufacturing tariff -- (technical difficulty) -- coming out of product from China?

I think that is generally a leverage to see whether to put a pressure on China to open up their currency.

How do you read that?

I think that, you know, as has been reported by many analysts (indiscernible) highpoint also on Saturday and Sunday, read some of the reports. The Chinese are also now facing pressure in the cost, material costs, labor costs and all those things. They are somewhat under pressure. There is, on one hand, overcapacity; there is, on one hand, they are building plants like crazy. I don't know how many of those are going to make it. Some of them are themselves coming into the marketplace and starting up distribution and selling products. And you know all of these things.

Then on the other hand -- so they are under pressure, and there's lots of pressure is coming in, and especially, as you know, with the textiles. In fact, this morning, the news was that China is thinking of putting up a duty on their side on textiles. I believe that there's a lot of pressure, not only from the United States but the rest of the world, because the first time that China has now a balance of payments surplus with the rest of the world, which was not the case until this year. This year, we had a balance -- you know, a deficit. The rest of the world had a surplus in China, but that has also been reversed. So they are getting a lot of pressure from Europe and other countries. So, I have a feeling that, within this year or so -- again if I had to guess -- that the Chinese currency would be revalued.

Well, that's interesting. We won't hold you to making currency best but it has been worth noting that the Chinese communication mouthpieces are starting to at least broach the subject.

So can I interpret this that Ethan's business is, at least on the importing from China's side, already thinking about how the world will work with a floated currency? Or, and perhaps you are suggesting it's just a stalking horse, a higher tariff?

You know, Joel, every company has their own strategies. We have decided that, while we obviously must also continue to (indiscernible) come from China. While doing that, we have also invested a great deal in our remaining plants. We've got six casement (ph) plants, the major plants, and in fact, the top three or four (indiscernible) in the last six months have been products made in our plants in the U.S., which on one hand has been good because those products are differentiated, because we use solid cherry, we used solid maple; we use (indiscernible) better advantages we have. On the other hand, this has impacted our margins, because obviously imported products, I won't tell you what margins but there's higher margins than the domestic product.

Well, thanks for your insights today. Good luck to you all.

John Baugh from Legg Mason.

Thank you. Good morning. Most of them have been asked but one last one -- are you bringing in currently any upholstered fabric, finished furniture from Asia? If not, do you plan to do so in the future, or just use cut-and-sewn kits as a strategy on fabric upholstery?

John, at this stage, I would think imports has been leather and leather cut and sew. We're looking at the whole issue of fabrics, and while we are looking, we're not limiting as yet. But we're watching it very, very carefully to see what advantages we would have. (indiscernible) the great advantages we have now done because of the fact that, as we now have the ability to do better forecasting, we have started to reduce our leadtime in our upholstery manufacturing. We're going to make a substantial reduction in the next six to twelve months, as we take advantage of this not having big spikes that we used to have.

Are you five to six weeks, currently?

Currently, we are on the average of -- our leadtime average is about five to six weeks, yes, but in some plants, it's a little bit less, in some it's a little bit more. But you know, it takes us only -- and I should not say that because that's competitive information -- let me say we are going to reduce it.

Okay, thanks. Good luck!

Budd Bugatch from Raymond James.

Good morning, Farooq. I've got just a few more questions, too. Let me go back to the advertising issue. If I do my math right, it looks like, over the last three years, at least the data that we've got, the advertising the sales ratio has dropped by about 175 or 180 basis points, at least on the statement margins, and the actual dollars of advertising expense that's disclosed on the statements have gone from 44 million to 30.5 million. Can you give us where you think it will be this year? Where do you think in the year ending --(technical difficulty) -- where should that advertising the sales ratio for the Corporation be and how should we think about it?

I mean, all those numbers that you have, I don't know where you got those numbers from. I will have to take a look at them.

Your 10-Ks!

(LAUGHTER). Okay, but you've got to remember that our advertising numbers reflect two elements. The first is the advertising that is done by our own retail stores, which is somewhat similar to the advertising done by (indiscernible). The second is the corporate advertising that we spend dollars on.

Yes, but the number of stores have gone up, corporate-owned stores have gone up and the advertising expense has gone down.

I will take a look at it, but I will see -- at the retail level, our advertising more or less has stayed the same level. Again, I don't want to really give a lot of information of where we're spending money but let me say that, as we go forward, Budd, we're going to be spending more money this year on national television than we spent last year. If I would make a guess right now, the chances are, in the next six months, we will spend anywhere from 5 to $7 million more.

Okay, good expenditures! I would make a suggestion, too, that you put the new television advertising on the Web site so maybe we could take a look at it rather than just having to catch it on --.

(indiscernible) is here a sitting with me. She says she will do it on Monday -- (multiple speakers) -- on our Web site.

Can you give us an idea of what the eliminations were in the quarter? I know we get to see that in the -Q, but maybe we can get a little early peek at that?

Jeff, how about giving that information?

Yes, Budd, the impact on gross profit was unfavorable, 1.3 million.

Farooq, you mentioned a $3.5 million variance, negative variance. I don't know that you named it, and I don't know that we know what period it is. Can you tell us of that?

It's just the nine months of the fiscal year, and that basically represents the plants that we had closed in the previous fiscal year.

So that was last year's variance or this year's variance?

This year's variance.

So it's a negative variance?

A negative between (ph) $.5 million.

Okay. One more question and these are all just kind of housekeeping, now. Options expense -- you are going to have to start doing that or reflecting that beginning June, if I now know the new accounting, or the new-new-new-new accounting from the SEC, you've got to start impacting that. Can you give us a read on -- I think you normally or at least part of the options are normally granted in late March and early April, if I go back a couple of years, and some are in August, I think, to you. What was the option grant this year? What does it look like?

I cannot tell you that because our people don't know.

So, secondly, as far as our impact, you are right; there's going to be some impact in the first quarter of the next fiscal year, and right now, the impacts are going to be relatively small, because -- and we're not changing any of the rates, like I read. Some folks are not having everybody get vested in this fiscal before June 30. We're not doing any of that stuff. So based on the fact that most of our options are already vested, we're going to have a very small impact -- a little bit more impact in the first quarter of the next fiscal year than the -- (technical difficulty) -- of that because whatever make-up is left (ph) is going to be expensed, and our impact in the first -- (technical difficulty) -- impact in the future years, unless we grant some options in August. At this stage, I don't think the Board has any -- has not indicated anything about giving me more options. So, the chances are we're not going to have much of an expense.

You didn't have any last August either? Is your -- (technical difficulty) -- granted to you the same vesting period as the options granted to your other executives?

My options were granted in my -- employment agreement about four years back?

Well, a couple last year, too.

Yes, my options were granted about three or four years back, so no new options have been granted.

The normal vesting period has been five years. Is that still accurate?

Four years? (multiple speakers) -- just say, what is it --.

Budd, the last employment agreement, the re-up, provided for three option grants. One was a three-year vesting tranche; one was a two-year vesting tranche; and one was a 1-year vesting tranche. They all vest on August 1, '05.

And they are the Kathwari options?

Yes.

What about the rest of the team?

Employees are four years and boarder (ph) are two.

We don't have much -- I mean, what impact could possibly be (inaudible).

We've looked at the model right now, although we've got to go back and refresh some of the assumptions for the new accounting, but using the old assumptions, it's looking to be probably no more than $0.03 for the full year, next year.

Really? It has usually been about $0.03 or $0.04 a quarter, right?

What you've seen lately has been the layering effect of the Kathwari options.

(indiscernible) I get more.

Okay, Farooq, Well, you know, okay, I'm not going there! (LAUGHTER). Okay, so it's going to the $0.03 all of next year, Jeff? Is that what you are saying?

That's the initial -- that's -- I have to look at the model for the new accounting. A couple of the assumptions, the volatility factor and some of the other assumptions in the model need to be tweaked, but I'm not expecting it to be much off from that.

Okay, maybe we can get some of that data off-line as to what is going to happen quarter by quarter. I don't think that's material. Okay, thank you.

All right. Are you there?

Yes I am, sir.

I've got to catch a plane, so thank you very much. If anybody has any more questions, please feel free to call Peg Lupton. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You many now disconnect. Everyone, have a great day.