Ethan Allen Interiors Inc (ETD) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the earning release conference call. [OPERATOR INSTRUCTIONS]. I would now like to introduce the host for today's conference, Mr. Kathwari. Sir, you may begin.

Good morning. I am Farooq Kathwari, Chairman and CEO of Ethan Allen. I am joined today by Jeffrey Hoyt, our vice president of finance. Today we are reporting the results of the three and 12 months ending June 30, 2005. I would now like to begin by providing some financial highlights for the quarter and the year. For the quarter net delivered sales amounted to $242.3 million, net delivered sales for company's retail division increased 1.1% to $151.4 million, with comparable store-delivered sales decreasing 1.3%. Wholesale sales decreased 0.3% to $171.8 million during that same period. On a quarter over quarter basis total written orders increased 5.4%. At the wholesale level metal orders booked increased 4.1%, while at retail level written sales increased 8.6%, and comparable store written sales increased 5.8%.

The quarterly consolidated gross margin was 49.9% as compared to 47.5% in the prior year period, reflecting improved efficiencies in our manufacturing and retail operations. During the current period, the consolidated operating margin was 13.3% with a wholesale operating margin amounting to 17.1%, and a retail operating margin amounting to 3.1%. Both divisions have benefited from our continued focus on improving efficiencies. Earnings per share for the quarter amounted to $0.56 a net income of $19.5 million. This compares to EPS of $0.56 per share and net income of $21.3 million, excluding restructuring and impairment charges of $12.8 million in the prior year comparable quarter.

For the 12 months ended June 30, 2005, net delivered sales amounted to $949 million, net delivered sales for the company's retail division increased 1.7% to $586.2 million, with comparable store-delivered sales decreasing 0.2%.Wholesale sales decreased to 1.6% to $663.2 million during that same period. For the 12 month period, total written orders decreased 1.4% as compared to the prior year period. At the wholesale level, net orders booked decreased 3% while at the retail level, written sales increased 2.9%, and comparable store written sales increased 1%.

The 12-month consolidated gross margin increased to 48.6% from 48.3% in the prior year period, despite approximately $4.2 million of manufacturing variants consumed during the year related to two case good manufacturing facilities closed at the end of fiscal 2004. These variances adversely affected the consolidated gross margin by approximately 0.4%. The year-to-date consolidated operating margin totaled 13.6% with the wholesale and retail operating margins amounting to 17.5% and 2.2% respectively.

Earnings per share for the 12 months amounted to $2.19 on net income of $79.3 million. This compares the EPS of $2.28, excluding the previously mentioned restructuring and impairment charges reported in the prior year comparable period to a net income total $87.2 million. Our financial position remains strong. For the quarter we generated operating cash of $24.2 million and on a year-to-date basis our operating cash flow totaled $103.3 million. During the 12 months ended June 30, 2005, we utilized $81.4 million to repurchase shares of the company's common stock on the open market, $30.3 million to fund capital expenditures and $19.6 million to pay quarterly cash dividends.

Inventory has remained relatively unchanged for the prior year and we remain in strong service position that 93% of our case good items available for shipment within four weeks . EBITDA for the quarter was $37.3 million or 15.4% of sales as compared to $40.5 million and 16.4% respectively in the prior year period, excluding the aforementioned restructuring and impairment charges. Overall, we're pleased that with our operating results for the last 12 months in light of the challenging economic environment.

As far as a business update is concerned, in recent years our industry has endured many challenges. Consumer confidence has been hampered by rising fuel costs and the price of increased interest rates, causing the economy to be inconsistent and unpredictable. Globalization has enabled imported products, especially wooden furniture, to make significant inroads in the United States. Globalization of manufacturing has resulted in more furniture being sold as a commodity with focus on price promotions. As a result, we believe our industry has become overcome with sameness, commodization, price inflation and marketing efforts which focus on no money down and no interest have become all too commonplace.

However, we believe with challenge comes opportunity. That is why three years ago we began the first of several important, and in some cases radical, initiatives intended to redefine our business and position the company for the next phase of growth. To accomplish our objective, we focused on the pillars of our business, our products, our stores, our marketing initiatives and our people. Our focus on products meant first ensuring that our new introductions were of high-quality and value. Today's consumer tastes and preferences are much more eclectic than ever before, and as a result products that are complementary and interchangeable are extremely important.

To this end, we have changed 70% of our product line in the past three years in order to meet changing demand. Second, we strengthen our product sourcing activities to effectively balance the mix of products made domestically in our own plants and that which is imported from overseas vendors. This enabled us to remain competitive and offer products at prices that appeal to a larger consumer base. Lastly, we introduced an everyday pricing program which provided benefits to our customers and our design consultants by offering our own (inaudible) products at the best everyday prices, which is also resulting in benefits to our manufacturing and logistic operations.

During this time we also made progress in our initiatives of repositioning the stores to larger formats and more prominent locations. Through our demographic and sales analysis we determined that several markets were not reaching their potential, and as a result, should be addressed. This effort has led in the last three years to the opening of more than 45 new stores in prime locations, all projecting an inspirational and exciting shopping environment. In addition, our international presence has grown to over 30 stores, 11 of which are now located in China.

We plan to open between 15 and 20 new stores in fiscal year 2006, with five new stores scheduled to open in the next few months. Having developed the right products and positioned our stores and right locations, we next turn to our marketing initiatives. The elimination of sale periods with implementation of everyday prices forced us to develop a focused and effective marketing strategies serving to differentiate Ethan Allen. By positioning Ethan Allen as a leader in style, we feel we've accomplish this objective. To carry this message, we increased distribution of our direct mail magazine which allows us to draw more qualified customers into our stores, which in turn resulted in improved performance metrics in most of our stores.

In addition, we maintained a presence in other media outlets such as newspapers, radio, print and, most recently, national television. We expect to continue with a balanced marketing campaign the year ahead, having committed to some national television advertising in the first fiscal quarter to support the introduction of our newest collection that serve to update our classic programs. With all the change the company has experienced in the past few years, one facet of our business has remained constant. The commitment and quality of our people. We open an ongoing dialogue that is maintained with our over 3,000 design consultants, our independent retailers, and our company-owned store management provides input and feedback that is invaluable.

Training has been enhanced and sales tools developed, all of which are intensive to enable our front-line people to be more effective when dealing with customers. As I have traveled around the country during the last three months holding regional meetings with the people in our stores and in our plants, I have received very positive feedback from our design consultants and from the majority of our retailers about the benefits of some of the structural changes we have implemented. At the same time, we know that we cannot become complacent.

That is why we have recently undertaken an initiative to hire and to promote from within 100 product managers in the first stage that will bring an added measure of professionalism to what our design consultants and sales associates do when working directly with clients. All of the initiatives undertaken in the past three years, have one common objective. Each was intended to enable us to style (ph) up all aspects of our business, and to work with great amount of credibility within our own organization and with our clients. We truly believe we have made a great amount of progress in our objectives, and of course recognize that there is still more work to be done.

Peg Lupton, our Investor Relations Manager, has brought to my attention several questions which I think, I'll answer them up front to save time for everybody. The first question was do we receive a marketing fund from the finance company that manages the Ethan Allen Proprietary Finance Corp.? The answer is yes. The last 15 years we received a small percentage of the finance rate toward the marketing fund that is used to offset our advertising expenditures on promoting the finance program. I'm not at liberty to give you the amounts due to competitive and confidentiality agreements.

The next question was an issue of our company store comparable written increasing greater than our wholesale. Our company retail reports, the last day of the quarter, while wholesale is orders received. For independent retailers there is a lag time between their written and our received orders toward the end of the month. Having said this, the majority of our independent retailers do well, both in acceptance of our initiatives and the business. We have a smaller number of independent retailers who have to gear up to create the solutions-based philosophy and organization as they do lag behind. Fortunately, it's a small number and most of them are working to catch up.

Last week we had a very productive convention where over 700 people participated. We have received positive feedback on new products, and most importantly, on our marketing initiatives. The next question was on the -- relating to our wood plants. As you know, they were put to 32 hours a week last month. Our upholstery plants continue to operate at 40 hour weeks. In July, we closed our plants for vacation, and in August we will evaluate the production time for our wood plants. On the question of average selling price, we are not in a position to give that information due to competitive reasons.

Last quarter - the next question was on television. Last quarter as planned, we started our national television program focused on getting the message across that Ethan Allen is fresh, modern and redefined. This was after completing the introduction of our casual and modern products in the fourth quarter. Most of the increases in our selling expenses are due to national television advertising, and we're not in a position, for competitive reasons, to give any detailed information on breakdown of our advertising spending. We plan to continue a strong advertising program this fiscal year, including national television.

For next month we plan to focus on introducing to the consumers in all of our mediums, the redefined classic products, which was the focus of our introductions in the last week's convention. Finally, yesterday, we had a 8-K filing which gave information on our initiatives to strengthen our capital structure by entering into a five- year $200 million unsecured revolving credit facility. And the authorization by our board to negotiate issuance up to $200 million in senior unsecured notes.

Our objective is to utilize the funds, for general services including, but not limited to retail store expansion, investment and manufacturing logistics, acquisitions, payment of dividends, and to continue to repurchase the company's stock in the open market. At this point, I would like to open the line for any questions and comments. Operator are you there?

Yes sir, thank you. [Operator Instructions]. Our first question comes from Todd Scherr (ph). Your question sir.

Could you tell us about the top line issues that gone on all year long? In the beginning of the year you thought that there were economic issues and you thought things would definitely bounce back after the election. And if you go back and read the first quarter transcript and second quarter, that was your belief. And things still haven't picked up. And you continue to be in one of the strongest housing cycles of all time, with the lowest interest rates of all time.

So, not being an expert in the industry, it seems like there's something going on here. Can you talk about what is it that you think is going on and why you would have any more optimism today than three quarters ago?

Well, I think there is more optimism and I mentioned that our written business last quarter increased in our own retail division by 8.6%, and comparable stores increased by 5.8%. I mean, those are good news. I think, as far as housing is concerned, we have had a great housing boom, and as I said repeatedly, two factors. First is, a lot of it has been at the beginning price points, and I believe the furniture has been sold. But the beneficiaries of that there have been folks who have been selling furniture at the - what you might say - are the beginning price points. Lower-priced - lower prices.

And folks who have purchase all these homes have been sort of house rich, cash poor, and I don't think they have completely furnished their homes. But certainly if they have in the initial stages, most of the benefit has gone to people at more of the mass selling of furniture. We are going to start getting benefits, and I think as we have started getting benefits in the last quarter, in an environment where we are, of course, we're hearing that most people in our industry, certainly the public companies, are not showing positive results. I believe we're showing the positive results mostly due to our own initiatives that we have taken. And I believe we should continue to see those positive trends as we go forward.

Thank you.

Our next question comes from Ivy Zelman. Your question please?

Hi, good morning Ivy.

Good morning, Farooq. I agree, the written business is exciting and you're seeing that improvement. Just looking into July, assuming those trends continued, or is there any change, is our optimism continuing on what you're seeing through the recent weeks? That's the first question. I have a follow-up.

Ivy, as we have said in our press release, yes, we have seen so far in July that the trends -- somewhat similar to what we saw last quarter continuing.

That's good news. And when you talk about outsourcing, can you just, for modeling purposes, remind us how much of it is coming from outside domestic? What percent?

It was last quarter, it was -- as I said was 70% domestic, 30% offshore, and now it's gone 65% domestic and 35% offshore.

And where do you think that that will be by the end of fiscal '06?

It's hard to say. One of the reasons, of course, it went to 70 -- 55 -35 was the introduction of the Tango product line which was brought into our stores in the last fiscal quarter and has done extremely well, but it also resulted in the fact of our outsourcing increasing. I would say that it is going to continue to increase and we are still, of course, very strong in our domestic manufacturing. We have consolidated them. It is hard to say at this stage, Ivy, but what I can say is that the trend will continue in terms of going towards somewhat more offshore than domestic.

As a result of the offshore, how has it changed your willingness to build inventory? Because, bviously, the time on the water will be a determent to consumers. So are you stocking inventory on certain SKUs, and what's your willingness to hold inventory in terms of how much far in advance?

Our inventory overseas at this stage is not too much different than the way we do projections domestic. In fact, our inventories last year have increased a greater degree more domestic than overseas in the last six months or so. Yes, we are going to have to account for more inventory in terms of being on the water, but I don't see, Ivy, that it will be materially different than the way we have been operating. Overall, we are going to operate well because our forecasting today is much better than the past when we had to forecast for sales six months in advance. That has helped, and as we go forward it is going to greatly help in improving our delivery times. It's also going to improve our turn of inventory, and we're going to have a much more balanced inventory. We're already seeing it Ivy.

Great. Thanks, Farooq.

Okay.

Our next question comes from John Baugh. Your question.

Good morning John.

Good morning, congratulations. I guess, two questions. One, filing for possibly issuing debt. I don't think you've ever made an acquisition. Is that correct? And other than buying back a lot more stock that you can buy with your free cash flow, what would be the purpose?

Well, our acquisitions have been mostly stores that we have purchased from retiring retailers. That has been - what so far has been our acquisitions. And on a plan basis, as it does make sense --last year we didn't, as you know, we didn't make -- a net impact on our company's stores was net addition of 2. So we really did not have a major acquisition of stores last year. In fact, we acquired some and even sold some. So our acquisitions are going to be mostly stores and it's even possible that we may look upon the possibility of having some limited -- to start with some limited manufacturing offshore.

Okay. So would it - other than that -- I'm trying to read between the lines here. Your expectation is that you might have a substantial number of dealers who want out in the next few years and you want to be in a position to buy them ?

No, I would not say substantial. I think that it is relative. We have moved -- a lot of those, as you know, we have purchased in the last 10 years. So it is going to continue. We've got a number of - a few retailers -- I would not say substantial, who on a plan basis, fortunately for us, as they retire we have been able to work out with them to take the over the store, and we will continue with them unless of course some other retailer comes in and take those stores. Which is always our first preference. We want very, very strong retailers to take on. But I don't want weak retailers to take our stores.

Okay. And then a second question. I know you don't want to break it out - print and television, et cetera. But ad spending as a percentage of revenue. Where did it come in for the year just ended? And then compare that to prior year. And then guidance for '06?

You're talking about the total company?

Total company. Not counting what your retailers are spending, but -- .

I would take a look at total sales, that concludes our wholesale, retail, it is approximately 3% of total sales of $1 billion we spent as a company-- the total company, approximately. I think Jeff is doing the numbers here. The retail? Approximately 3% is what Jeff tells me.

Did that change appreciably in '05 versus '04? And the plans for '06?

No It's pretty stable. About the same percentage John.

In '06?

You're talking now on '06. It would most probably - it will be a little bit higher because -- I would not say too much higher, but it is going to be somewhat higher because of our national television. We're going to go back into full year of national television it in '06 while in '05 we were not in full year.

Great. Thank you much.

Okay.

The next question comes from Joel Havard. Sir, your question, please?.

Yes, thank you ma'am. Good morning, everybody. Farooq, this is more philosophical in nature and probably hard to really quantify, but the evolution to the degree that there has been some on the credit side, something we haven't focused on in a while, but given the kind of unusual demand patterns the last few quarters, the trends we're starting to see in your same store sales. Has your third-party credit business benefited or declined in this environment? And whichever way that is answered, do have you have some thoughts on why?

Joel -- you're talking about the amount of financing we give to the consumers for the third party?

Correct.

It has increased and it's increase because of the fact that we have, not having sales, but we decided that we would view the financing as a means of creating urgency. So in the last year we used three or four periods where we gained, let us say, a 12 month interest promotion and in some cases nine months. So it did it increase overall business that we do through our financing program.

You all have been kind enough to send us your advertising materials. I know my wife gets them at home. I don't - I haven't paid that close attention. Is that a highlight that a consumer is going to be very aware of as she goes into the store -- is reading the advertising material?

Well, so far it has not been. And n fact, you'll see a little bit more of it. For instance 48% of all our financing is done on - what is -- six months same as cash. And for us and for our dealers, the discount rate on six months same as cash is lower than using Master Charge and Visa. So that's what we have been promoting. It's a very affect the way as consumers and a lower charge to our retailers.

So they're inclined to push this?

Absolutely. Because, as I said, it is lower than using a Master Charge and Visa.

Good. But should we presume then that the preponderance of sales are still cash, check, bankcards?

Absolutely.

Okay. All right. Well, we're not worried about your demographic. As the product has shifted, and you've begun to mix in more sourcing and some of these new collections are aimed at a little bit lower price points, any sense or feedback from the field yet that you all are reaching that younger, perhaps slightly less affluent, household. I know that's been a strategic issue you've addressed in the past.

Absolutely. Especially in the last one year we have completely re-introduced the casual and the modern side of our stores. And today we are offering in the casual and the modern style products both in style and value that appeals to and reaches a larger consumer base, especially younger people making less money. And we're seeing those in our stores now.

Great. All right. That's all I had. Thank you. Good luck.

Thank you.

Next question comes from Laura Champine. Your question please?

Good morning.

Good morning.

You mentioned a impact - a negative impact on gross margins of about 40 basis points for the full year from the inefficiencies in your manufacturing. Can you quantify the benefit to gross margins that you've seen from selling what I presume are higher margin imported products?

Laura, the impact on margins was due to the closed plants. When I talked about $4 million, or 40 basis points, it was due to closed plants, specifically plants were closed last year but we still have to carry on the expenses in our operations. I'm not in a position to give you the margins between the domestic and overseas, but I can tell you that our overseas margins are higher than our domestic margins on our case goods.

So we saw very strong gross margins in this quarter, and I just wonder how much of that is from increasing sales of product lines like Tango, which have better margins. And I just wonder if you can quantify the --

I would say - it's a good question - I would say that 50% is due to the fact of selling products like Tango, and 50% is due to the fact of having better margins both at our retail end and at our manufacturing.

Okay. And the just one more. If you have changed your mind about giving the unit growth numbers, I still would love to have those. And whether or not that's the case, can you talk about what your expectations are going forward for the industry in terms of the direction of price points?

I would think that the industry has, to a great degree, continued to reduce their price points. But now I believe the industry is under pressure, both in terms of the fact that there is going to be an impact of costs that have increased overseas, and what we've seen from overseas that while they've not changed prices on existing products, we do see a change and increase in prices of new products. So that's how the overseas folks are changing their prices -- on new products. And also - and all of us have been impacted with increased freight costs, both overseas and domestic. So I would think that it would appear to me that we have seen most probably - the last of these great pressures on continued reduction of prices. If anything, we're going to start seeing it go the other way now.

All right. Thank you.

The next question comes from Justin Maurer Your question sir?

Good morning Farooq.

Good monring Justin.

A couple questions. First, on the new revolver and bond issue or shelf. As you mentioned, with regards to acquisitions you've been able to do that mostly with cash flow over the years, and I think you've e been able to pick up those guys at relatively modest prices. Are you think --

No. Very fair prices.

Are you thinking of doing something more substantial potentially?, Meaning are there some dealers there that have larger groups of stores that may be retiring or something that you're thinking about?

We have - Justin, as I recall, I've been president for 20 years. I don't recall that we have terminated one dealer. That's an amazing record. And people just don't understand the relationship we have with our dealers is the fact that we have not -- even the folks that perform poorly, at the end of the day, they themselves decide to leave. And while there is a concern sometimes among our dealers, because as you know we don't have a term or a exclusivity of markets, we don't.

We just almost operate at will, yet our average dealer associate is now over 30 years. We have a great relationship - we have a great partnership, and today the vast majority of our dealers are expanding, they're putting in new stores, they want to operate the business. But there are some who don't have anybody else to pass on the stores to. And there are some who are in very important markets, as we have taken over these markets, where we had to completely and totally put in new stores. They were not in a position for lots of reasons of investing. So we would fill those. But I would not say there are many.

There are a number of people in the smaller markets that somewhat are struggling because they've got stores generally in the wrong places. But there are also not many, maybe five or six of them. So overall, we've got a healthy network out there. Last year has been tough for many of our retailers, too, because the business conditions have not been that tremendously favorable. But our people have done well. They have taken on all these new programs, so I believe that we're going to have some people, but I don't see it - I don't have folks -- lots of them in line -- maybe four or five at the most, probably, who we're talking to right now.

Okay. So no real change from the last few years then. But just thinking of the factors that you cite in putting that potential money out there. Acquisitions you mentioned as well -- not acquisitions, I'm sorry, but the expansion of manufacturing, you would not consider something offshre , would you?

We could, yes. It's possible. I think also, Justin, right now with rates a little over 5%, these are historic low rates. We also when we open up stores which we have been doing, most of these stores we have acquired land and we buy them. So I think getting some money into our balance sheet of 5% or so is a good investment and we can open up lots of stores and own them and also have money for buying our shares and things like that. We will continue that too.

Okay. And then just on the one point that you talked about earlier, the lower-end customer or entry-level customer if you will, and you guys are obviously trying to address some of that through some of the new collections. But any sense of ASP and/or margin implications by doing that? Or presumably some of that stuff you're either making or buying at better margins anyway? It's not dilutive to either?

No I don't think so. It is not dilutive.

Okay, thank you sir, good luck.

Thanks Justin.

The next question comes from Margaret Whelan. Your question ma'am.

Good morning. It's actually Susan for Margaret. Can you tell us a little bit about, as you start to import more, what will be, or how do we think about your free cash flow going forward.

Our free cash is going to be used as we have done in the past, for continuing to expand our business, build new stores, to pay dividends to our stockholders, to keep on buying our shares as it make sense. So we will continue to do what we've done in the past.

Okay. But will you be tying up more of it up in the imports and in the process of getting the product over?

There will be. We're in the process of substantially, and this is a new initiative that we have right now, of overall reducing the delivery time to our customers. Now we can do this. Now that -- one of the benefits of everyday pricing is that we now can forecast things better, so we are in the process of working to reduce the delivery time of all our products to our consumers. Some of that might involve more (inaudible) but it's not going to be a substantial amount.

Okay. And then can you just give us any new guidance for CapEx for the upcoming year?

It would be somewhere in the range between $40 and $50 million.

Okay Thank you.

The next question comes from Charles Grom. Your question please?

Hey, good morning Chuck.

Good morning Farooq. You often speak to your new collections on how they occupy roughly 70% of your product line. I was just wondering if you could give us a sense of - is that commensurate with what you're generating for your topline with those collections?

If I understand, you're talking about - Chuck, let me understand your question again, if you would?

Yes. Just the - you've introduced over the past 36 months your product line-

Absolutely. In fact, the new products are generating more, proportionally more, of our business than the 70% change.

Okay. So it's fair to imply then that the comps you're getting from these new collection are better than your older collections, and looking forward as you continue to introduce new collections, such as the one that's upcoming this fall, and then that trend should continue?

Absolutely.

Okay. And then could you just specifically on Tango -- you seem to be really pushing that this spring and early summer. Just on -- any color there or any sort of metrics that you could just help us out with?

Well the Tango is going to be -- become - it's already at a rate of being the best-selling product line that we have.

Okay. Okay great. And then with regards to the EDLP. Early on there was some chatter on the sell side that some of your independent dealers were not satisfied and there was a letter that a lot of us received. Is this still the case? Are people still concerned, or have more of your associates come on board?

Well, there are some people who are concerned. In any important initiative, you're not going to get everyone agreeing to it. But vast, vast majority of our people like the program. Some of them initially were concerned because for 40 or 50 years they've selling a certain way and we sort of we changed the whole ball game.

There are some retailers, and it's possibly one of those - I mean, it was an unsigned letter that I also received - and anything that's anonymous, I don't want to make a lot of comments on. But anyway, there are some people in our system who are concerned about it, and they would like us to go back to the days when we raised our prices 30%,r 40% so we can give big discounts. But those days are gone. The economy - the whole environment is changed. That's deadly, so we're not going to do that. So we had a great convention last week, and I told everybody -- those few people - that they've got get on the train or they're going to be left behind. Because the train is moving and we're not going to stop it.

Okay. And just to shift gears - I hopped on a little late so I apologize if this has already been answered - but the industry continues to be a under lot of pressure. We see it with furniture brands this morning. Yet your sales look like they're beginning to turn the corner. Could you walk us through a couple of the factors that are starting - that you would point to as reasons for the pick up? Is it the anniversary of EDLP? Clearly, consumers are still a little bit hesitant as there may be a shift in apparel with retail still going on. But yet you guys look like you're starting to turn a little bit. I was just hoping you could provide a little color on why.

I did mention those things Chuck. It is the initiatives that we have taken. This is not something that we've done in the last one year or few quarters. This is the overall structure of our business, which is based on creating -- providing solutions to customers. One-stop shopping. Having 3,000 design consultants. Changing 70% of our product line to have better quality, better value. All of these initiatives are now helping us differentiate ourselves from most people who have today -- gotten into the trap of selling products as a commodity. And I believe that our solutions-based philosophy is now starting to get the impact.

We have, also I mentioned, that we have now taken the steps to improve the productivity of our design consultants by putting in what we call product managers. In the last eight weeks we have put 85 product managers, all from within, who are now reviewing the work with our design consultants with the clients. And they're helping close the business. They're helping make sure that we give a professional job. In other words we're taking our business to the next level of professionalism, rather than becoming a seller of commodity. And I think all of that has been recognized by our clients, and that is resulting in these better sales.

Great. And then last question, just on the - obviously in the past 90 days you got a little aggressive with TV and catalog spent. What sort of metrics do you guys have internally to gauge the effectiveness of the dollars spent in that area and, I guess, to give you a sense of confidence going forward that it makes sense to continue those practices or even discontinue them if they're not working?

Yes. We have a fairly comprehensive program from direct mail, very strong one of the largest direct mails in our industry. We have television, we have radio, we have print. And we have upgraded all of those in terms of its message, in terms of its content, and even the mediums that we're using. Having said all of those, in advertising you never know how effective it is. The old saying, 50% of it doesn't work. And nobody knows what that 50% is.

It is always an issue. We always use our judgment and we always keep on monitoring and seeing what is the best way and what the best timing is. As you know, last -- not this quarter but before that, for six, seven months we held back television. In our judgment, it was the right thing to do. We spent more money on direct mail. Direct mail has an impact of getting more qualified people, yet the traffic does go down. The television increases traffic but not necessarily as qualified people as the direct mail does.

Maintaining a balance is important, and I believe that we'll continue to have a balance. Now the other important thing is that we're using television, as we're using other mediums in getting the message across that Ethan Allen, when it was, for instance, in the modern side of our business, we got the message across that Ethan Allen is fresh, is modern, is redefined.

Our next message starting next month is going to be on the classic side, because that's where the focus is on our products. And that is, Ethan Allen is fresh, and has redefined the classics as well. So that message is important for the customers because it is creating traffic. In fact, if you are in New York and you take a look at the New York Times today's -- Thursday section in the home, and you are going to see our new print campaign. And I'm sure you're going to see it is quite different and quite attractive.

Great. Thanks Farooq.

The next question comes from Chris Sorensburg(ph)? Your question, sir?

Good morning Farooq.

Hi. Good morning.

I just have a couple of quick questions here. One is I'm trying to understand the drivers of the gross margin expansion a little better. You mentioned manufacturing efficiency's improved. Is that due to the fact that last year you had the plant closure costs flowing through the inventory -- the variances going through last year -- but you don't have that this quarter?

Well, a lot of it was due to the fact that last year we took downtime. We had no downtime this year. Also our gross margins and our retail division increased by over, what, 100 basis points? -- about 100 basis points in the retail division. Last year in the retail division with all this new product coming in we had to sell off a lot of product. We had some excess products in our retail division which we sold off. This year, we had little of that so our retail margins improved, so that had an impact on our total consolidated gross margin.

Okay. And any relief on the raw material side? What you're seeing there?

For the last six, seven months there was pressure. I think the pressure is somewhat easing right now. That's what we see.

Okay. And looking at the selling expenses, that went to a 19.6 last year to 25.5 of sales this quarter. A lot of that is driven by the increased TV advertising. Is that a level we should look at going forward as you're spending more on advertising? That it's going to turn around those levels?

It will. Yes.

Okay. And the final question Farooq - and then I'll yield to others - is you mentioned that manufacturing capacity expansion could be one potential use of cash flow, and one of the reasons you got the additional debt capacity, I guess. So my question is in terms of offshore, what would be your preference in terms of expansion? Would it be in acquiring a manufacturer or would it be acquiring a distribution or warehousing space? What are you looking at in terms of that? And do you actually have any type of capacity overseas now?

We do not own anything directly ourselves but we're looking at different options. We're not in a hurry to do it, but we're putting the resources so that if it's something that makes sense we'll be ready to do it.

Okay. All right. Thank you.

Okay.

Next question comes from Eric Goldbell(ph). Your question sir?

Yes. Good morning.

Good morning.

I just wanted to follow up and make sure I did hear correctly the prior question about the CapEx for the forthcoming year? I think -- if I understood correctly, you said 40 to 50?

That's right. Yes.

Okay. And then I just wanted to get a little more detail on that, given that that is a ramp up in the pace you've been running in the past couple years of mid-20s to low 30's, somewhere in that neighborhood?

Most of it is going to be new stores.

Okay. Very good. Thank you.

The next question comes from Justin Maurer. Your question, sir?

Farooq just on the manufacturing question. You said that June encased goods was 32 hour weeks and then July was it the whole month that they're on vacation? Or just part of the month?

Just part of the month.

Okay. And then you're going to reassessed that in August.

Right. Yes.

Okay. And then secondly you mentioned the price increase. You feel like we're at the bottom and maybe moving in the other direction from price increases coming offshore. Are you starting to see that in your discussions with them on new collections in the next six to 12 months?

Well, what I said was that what we have seen is that while the people overseas have not given price increases on existing product, but they have put in a higher cost -- higher prices on new products. So that's how they're taking - that's how they're putting in a price increase.

Got you. But have you seen it on any of the stuff that you released in the spring? For example, did you see it on any of that? Or is it stuff that will be coming?

Well if the prices on higher, we price it accordingly. It is not something that is impacting our margins right now.

Right. Okay, thanks.

The next question comes from Ivy Zelman. Your question please?

Hey Farooq, just a follow-up. Looking at your capital structure you now have, between the $200 million on the revolver and $200 million that you could actually issue, a pretty big appetite with capital. Can you kind of outline for us what we would anticipate how you would be spending that, assuming you were to access it?

Well, first of all, Ivy, we have immediately 2 million share optimization. So we'll continue to -- as we've done in the past -- continue to buy our shares back as it makes sense. We'll become more aggressive in acquiring real estate for our stores. I'd like to own all of them because our occupancy costs are much, much lower when we own them. And then as I said, where it makes sense we are also going to spend some money in our information systems, in logistics, warehousing, some domestic, some overseas, and also - we will also take a look at whether it would makes sense to put some money in manufacturing.

Great. Thank you, Farooq.

Take care.

There are no further questions sir.

All right. Well, thank you very much. If you have any questions, please let us know. And I know that Pat Lupton is available. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Have a wonderful day.