Ethan Allen Interiors Inc (ETD) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [OPERATOR INSTRUCTIONS] Today's conference will be approximately 15 minutes in presentation and then we will have question-and-answer section. Today's conference will end promptly at 12 noon Eastern time. Sir, I would like to go ahead and turn the conference over to you today, Mr. Farooq Kathwari. Sir, please go ahead.

Yes, good morning, I am Farooq Kathwari. I'm sorry for the delay. I understand the telephone company had some technical problems in getting us through. I am today joined by Jeff Hoyt, our Vice President of Finance and today we are reporting our results for the fiscal first quarter ended September 30, 2005.

I would like to begin by providing some key financial highlights for the quarter. Please note that in the earnings release issued earlier today and in the course of my prepared remarks, references made to certain non-GAAP information which excludes the effects of the restructuring and impairment charge recorded during the current period. A reconciliation of this non-GAAP information to most directly comparable GAAP measure is available on our website.

For the quarter, net delivered sales amounted to 251.3 million, representing an increase of 9.1% over the prior year comparable quarter. Net delivered sales for the Company's Retail Division increased 11.8% to 158.4 million with comparable store delivered sales increasing 8.8%. Wholesale Sales increased 10.6% to 178.4 million during that same period. On a quarter over quarter basis, Retail Division written sales increased 18.1% while comparable store written sales increased 15.4%. At the Wholesale level, net orders booked increased more than 18% reflecting orders booked for new products introduced at our 2005 retailer conference held in mid-July.

As you will recall, our 2004 regional conference was held in late September. Excluding the effects of conference orders. Wholesale net orders booked increased more than 8% over the prior year period. The quarterly consolidated gross margin was 50.4% as compared to 47.9% in the prior year period. During the current period, consolidated operating margin, including the pretax restructure and impairment charge of 4.2 million related to the planned conversion of the Dublin manufacturing facility into a regional distribution center amounted to 11.2%. Excluding the restructuring and impairment charge, consolidated operating margin was 12.9%. Wholesale operating margin, including the aforementioned restructure and impairment charge resulted in 16.7%, excluding the restructuring and impairment charge, wholesale operating margin totaled 19.1%. The retail operating margin was 1.1%.

As mentioned in our press release, results for the quarter ended September 30, 2005 were also impacted by the adoption on July 1, 2005 of new rules with respect to the stock option accounting. As a result, additional compensation expense totaling 1.2 million, 0.7 million after tax or $0.02 per share was recognized in the period and has been reflected within operating expenses. For the balance of the fiscal year, we expect, based on the current level of outstanding stock options and other share-based awards, the effect of these new accounting rules will result in additional pretax compensation costs of approximately $300,000 per quarter. Earnings per share for the quarter, including the restructuring and impairment charge amounted to $0.49 on net income of 17.1 million. This compares to EPS of $0.51 per share and net income of 18.8 million in the prior year comparable quarter. Excluding the restructuring and impairment charge earnings per share for the current period amounted to $0.57 on net income of 19.7 million. Our financial position remains strong.

For the quarter we generated operating cash of 45.6 million, utilizing 36.8 million to repurchase shares of the Company's stock, 6.5 million to fund capital expenditures and acquisitions and 5.2 million to pay quarterly cash dividends. In addition during the quarter, we successfully completed a $200 million offering of 10 [ Inaudible ] Notes which, when combined with our consistently strong operating earnings and cash flow, provides us opportunity to more aggressively expand our retail network, further improve upon our manufacturing, sourcing and logistics activities and continue to increase shareholder value. Inventories increased 3% during the quarter resulting primarily from the higher level of incoming orders. We remain in strong inventory position with over 95% of our case with items available for shipment within four weeks. EBITDA for the quarter, excluding aforementioned restructuring and impairment charge, was 37.8 million or 15% of sales.

We are pleased with our operating results and financial standings in this challenging and economic and industry environment. Our strong delivered and written sales were a result of, first, our focus on developing our business on providing decorating solutions and one-stop shopping for customers. We continue to differentiate ourselves in this age of selling furniture as a commodity with heavy promotions. We are benefiting from the repositioning. We have more stylish, better quality and better valued products. We have expanded our reach to a larger consumer base with our offerings.

Our store network is stronger with 50 new stores opened in last three years and we plan to open 15 to 20 new stores this fiscal year; 70% of them will be relocations, utilizing our existing capital and structure. About 70% of the new stores will be - - will be by the Company and 30% by our independent retailers. We are benefiting from stronger focus by our retail management both independent and Company stores. During the quarter, we continued to implement the project management program. This effort has involved promoting about 150 of our senior interior designers in our stores to assist our design consultants to provide professional service to our clients and also help increase sales. While this program has added costs, we believe this initiative further differentiates us in providing professional service and creates a structure that will help us grow. I believe the new luxury for customers is consistent, good, professional service.

Our gross margin increased to 50.4% from 47.9% due to increase in sales volume, improved efficiencies within our manufacturing, despite having our case good manufacturing operating at [32Rs] during this period and to a lesser extent, the effects of a modest price increase implemented in July. Our operating margins, ex restructuring were 12. 9% of sales. During the quarter, our selling expenses increased $9 million due to increase in sales, both at wholesale and retail, increase of $5 million in advertising expenses, which is an 85% increase in advertising, compared to previous year first quarter. In addition, selling expenses increased due to higher freight and fuel costs. Ethan Allen delivers products to its retail network at one delivered cost throughout North America; thereby protecting our retailers from frequent paid surcharges and also protecting their gross margin. We have absorbed these costs.

Our G&A expenses increased by 5.6 million mainly due to the implementation of the project manager program in our Retail Division and expensing of 1.2 million for the stock option expense. As I stated previously, we expect about $300,000 pretax expense a quarter going forward. Our retail operating margin of 1.1% were lower than the year margin of 2%. This was the result of implementation of the project manager program; while adding costs has resulted in greater sales, professional service to our clients, and the right structure for future growth. Retail advertising expense increased by about 30%. Higher expenses related to continued relocating of stores to better retail markets and larger stores in markets such as Chicago, Phoenix, Houston, Western Michigan and others. The wholesale operating margin benefited from increased sales especially from the Company's Retail Division.

The operating margin, ex restructuring expenses increased to 19.1% compared to 17.5% last year. Our EPS of $0.57s - - $0.57 per share ex restructuring reflect a $0.02 expense this year due to expensing stock - - stock options which expense we did not have last year. We have been impacted by increasing cost of petroleum-related raw materials and energy costs. Offsetting this has been some reduction in lumber costs. We are watching the situation carefully, and if the trend continues may initiate a price increase.

We continue to balance the domestic and offshore sourcing. Currently we are about 65% domestic and 35% offshore. During the September quarter, we had our annual retail convention and launched the [Mason] program which replaced our Country French program, the [Mason] program was to developed with our focus on reducing all lead times and this product program is already in our stores and is receiving very positive reaction at retail.

During the quarter we acquired three stores from an independent Ethan Allen retailer who has joined the Company Retail Division responsible in managing several retail districts. We plan to open 15 to 20 new stores in fiscal 2006, most of which, as I said earlier, will be relocations. We have recently opened larger stores in - - in our new format in several markets including San Jose, Kansas City, Chicago, Los Angeles, Grand Rapids, Sarasota, and Virginia beach.

Now having implemented initiatives to develop the right products, position our stores in the right location, and strengthen the management structure at retail, we continue to focus on our marketing initiatives and the way in which the Ethan Allen brand is presented to consumers. The elimination of sale periods and implementation of everyday pricing has helped us to develop a focused and effective marketing strategy,the aim of which is to further differentiate Ethan Allen, positioning us as a leader in style and service. In the most recent quarter we utilized a combination of television, direct mail, newspaper, print ads and radio to carry this message and believe that our results are indicated of the fact that our marketing program has been effective with reaching consumers and is having a positive impact.

We have again committed to utilizing some level of national television advertising in the second fiscal quarter in order to support our newest collections that serve to update our classic programs. All of [inaudible] have one common objective: each was intended to enable us to improve all aspects of our business and to work with great amount of credibility within our own organization and with our plans. We believe we have made a great amount of progress in our objectives and, of course, recognize there is still more work to be done. At this point, I'd like to open the line for any questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is from Margaret Whelan. Go ahead, please.

Good morning, it is actually Susan for Margaret.

Good morning, Susan.

Can you comment a little bit on the manufacturing operating margin. It was quite impressive this quarter, and I know that there's a few factor such as EDLP and the plant closings that are working for it, but then you seem to have some higher costs that are coming through that are working against it. Can you kind of quantify those for the quarter and then, how do we think about them going forward?

Our margins are very, very good at wholesale. And our result of the benefit of consolidations of the manufacturing that has taken place in the last three years, we have now consolidated - - consolidated 13 plants. So we are starting to see the benefits of that. And higher volumes is very important in achieving these kinds of results. These margins were also achieved despite the fact we spent about - - about - - we spent in excess of $5 million on National advertising, and they were also achieved after spending money in terms of delivering our products to our retail network. As I said earlier we deliver the products to all our stores and we absorb the costs. All of those costs are part of our - - of our wholesale margins. So, we have been able to benefit from the initiatives we have taken and so far have also been able to absorb costs which have gone up, especially in petroleum-related products and fields.

Okay. And then on the retail side of the business, it seems like the product's appearing at a growing number of discount retailer and websites. Can you just comment on that? Is it any harder to balance your inventories as you are importing more? Or what that - - how that works with your strategy.

I am sorry, Ethan Allen products you said?

Yes.

Well, it is not. Actually the only products so far we - - that has - - that has appeared lately has been some product which our Ethan Allen dealer in New Orleans sold an insurance company and then they sold it in Boston. Before that we, ourselves, sold some very old products through - - through a company in which we got some advertising credits. Other than that, nothing else is sold other than our own stores.

Okay. And then just one last question. Are you relocated stores included in your comp store data?

No, they are not.

They are not? Okay, thank you.

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

Hi Budd, good morning. Budd Bugatch.

That was a new one. [Laughter]

Go ahead, Budd.

A couple of questions. The retail operating margin down - - down 100 basis points year-over-year, yet you had very good comps in retail. Can you kind of characterize what the differential was there - - I understood you said $5 million of extra advertising. Was it all advertising-related? Can you kind of give us, maybe some of the puts and takes on what caused the changes in retail Op margin?

Budd, as I mentioned, the main factors were an increase in advertising - - the retail advertising increased about 30% from the previous year. And other factors - - well, two other factors - - or three. One is the implementation of the project managers which we implemented in the last four or five months. We have added, over 115 project managers in our Retail Division and that has gone as - - initially it is an expense. We believe it does make a lot of sense, which does get results in the increase in sales, but it also has this added cost. But, we felt that the added sales were important because not - - not only do the sales increase but the professionalism of our people increased and the benefit of those sales you saw in the wholesale side. And the third factor was that we also changed the incentive program of the Retail Division. Both of our design consultants and the project managers and we are now giving them a substantially more incentive for business, so that added our costs. And, again, we felt all of these costs at this time made sense to grow our business.

Yes. So trying to put them in some sort of relative order. Would the advertising be the most? Or would the project managers be the most? That's going to continue, and when will we anniversary that?

You'll anniversary it - - it will - - in about a year's time. And advertise something somewhat variable. The project manager is probably one of the most important initiatives we have taken. We believe that you will start seeing it leveling off. We believe that you will start seeing it leveling off. This was - - we added a lot of it in the - - immediately in the last four months. We are not going to have that kind of an increase going forward. It is going to be much, much slower increase in adding more people.

Okay. And was - - was retail gross margin about the same year-over-year?

Yes, it was.

A couple of other questions, Farooq, can you on the retail side give us - - I know we know that overall sales I think were up 18 - - orders were up 18.1% and shipments were up 11.8%. But on a dollar basis, did orders significantly outpace shipments? Can you give us maybe the delta-to-orders-to-shipments?

Jeff, what - -

The written outpaced delivered during the quarter but somewhere between 20 million and 30 million.

[Inaudible] the $30 million higher? Okay. Thank you. My last area is - - you did put $200 million of capital on the books. You - - I think one of the uses said to expand the retail network. Although it looks like that was within - - certainly within the capital generating potential of what you already do without the additional debt, and some perhaps to expand logistics or I guess manufacturing offshore. Can you kind of give us an idea when we might see that and what priorities you might have?

We will give you more information next quarter, but - -

Okay. Do you think you will have a project under way by then?

I don't know. I think we will give you more information on all the subjects you just mentioned.

Alrighty. Thank you, sir.

Thanks, Budd

Thank you. Our next question from Joel Havard. Go ahead, please.

Thank you. Good morning, everybody.

Good morning, Joe.

I want to echo the debt question just a little bit, and this is more the mechanical treatment of it. Is it interest only? Is that correct?

It is interest only for ten years.

Okay. Is it - - should we accrue for interest expense every quarter? Or should we just have the twice-a-year payment?

It is - -

[inaudible] accruing it monthly.

We will be accruing it monthly, but always - - but our payments are twice a year.

Does that mean that we will see it on the income statement then every quarter?

That's right, you will.

Okay. Alright, thank you. And I - - Budd - - Mr. Botch that is anticipated our question on how that would be deployed. In the meantime we are just going to leave a fairly substantial cash balance: is that a correct treatment?

That's right.

Alright, thanks. That's all we got, guys. Thanks for the good quarter.

Okay, John, thanks.

Thank you. Our next question is from Justin Maurer. Go ahead, please.

Good morning, Farooq.

Yes, good morning.

A couple of questions. First on the retail margins. Just a reconciliation question. Is there - - it looks if I just take the 1.1 margin and the 19.1 in wholesale, there's about a 3.4 millionish delta. Is that just corporate expense? If that make sense.

That's the profit elimination in the ending retail inventories.

What we do is we - - we shift the more to the Retail Division than they could deliver. At the end of the period, that is eliminated from profits.

Got it. Okay. So the Transportation cost you were talking about earlier, does that go against retail allocation? Does that - - does that impact their margin?

It - - not the wholesale deliveries but at the retail level also, the cost of delivering from the retail warehouse to the consumer is a cost to the Retail Division, and those also went up.

Got you. Okay. Alright. Secondly in marketing expense. I think you talked last quarter it runs about plus or minus 3% of sales and you just felt like, as you were going back were going back on National TV some dollars will just be shifted from Catalog or what have you to support that. Did you find there were more opportunity to - - to get some sales in the quarter, so, therefore, the number ended up being higher than you thought? Or - -

You know, you never - - as I said previously, it is hard to say how much of the advertising really works; however, we had by - - by the summer, we had completed an introduction of many of our product programs, especially the Tango, which was an important element of our casual contemporary and we felt it was important to get that message across in a very, very loud way. So, I think we most probably spent more in the summer than we normally would or what we would spend going forward.

Okay. All right. And then, on the options expense. The 300,000 you said going forward; is that just by design that you decided to take a little bit off the table there, just in regards to the difference between future quarters and this quarter?

No, it is just the way it fell that most of our options expense was in the first quarter not by design. This is the way it - - it fell. And - - and the rest of the quarter - - the rest of the year, we expect at this date about $300,000 or so, pretax.

Got you. Okay. And then. Lastly on the capital allocation question as well. I think you - - your previous mention on CapEx was about 40 to 50 million. I am sorry if I missed the comment for this year if you made it. Is that still the case?

It is. This quarter we spent relatively small amount, maybe close to $6 million. But a fair amount of it is going to be spent. We have got a lot, a lot of real estate projects coming up.

Okay. All right, thanks, good luck.

All right.

Thank you. Our next question is from Ivy Zelman. Go ahead, please.

Good morning Farooq. Great quarter.

Good morning.

Your performance is very impressive and as you talked about the industry being down 10% in dollars, I guess the question is what do you think you could do through share gains knowing that this quarter - - was this - - do you believe the beginnings of a trend where you will continue to buck overall performance versus the peers?

Ivy, it's hard to say. We have always focused on what we can do internally. You know a lot, a lot of factors beyond - - beyond our control. We've another hurricane coming in this morning. Those things are all there. External factors of commoditization, of our product, of our industry. So, we have decided that being in the middle is not an option. That we have to focus on providing the best possible solutions and that is differentiating us. And I believe it will continue to differentiate us because those folks who are in the middle are in trouble.

Do you think that - - if you were to quantify the fact that market's down ten in dollars can you - - keep, the normal - - for Ethan Allen would you be up 5% in dollars, so do you have any kind of level of growth that you could be comfortable telling us we should be thinking about on a go-forward basis?

Ivy, it is so hard. All I can say is that we've got lots and lots of great programs in place and we are going to continue to sort of focus on those things and then the numbers will be what they will be what they will be.

Moving on to just a few other housecleaning items. You mentioned that you obviously were negatively impacted by the higher costs, freight and all these commodity costs. Would you say that you actually absorbed those costs through the quarter and that next quarter it will be about the same or do you expect incremental costs given that the polyurethane issue at the end of the - - I think it was more like an October issue. In other words, should we see incremental increases that will negatively impact next quarter or will it be about the same?

It is hard to say but I would say it is about the same. We are seeing some trends towards a decline in the fuel costs and that might help us.

Okay. Terrific. Thanks very much.

Thanks, ivy.

Thank you. Our next question is from Larry Fittcowski. Go ahead, please.

Hi, Farooq, how are you?

Good, Larry, and good morning.

Can you tell me what the share count was at quarter end and what the buyback activity has been, if any, post quarter end?

Jeff will get our share count. We purchased - - in the beginning of October we purchased an additional 367,000 shares, Larry.

The remaining authorization as of today is 493,000.

Okay. And, Jeff, do you have the exact share count on end of quarter?

End of quarter the amount outstanding or available for repurchase is 860,000.

Are you talking about shares outstanding? Or - -

Yes, not related to what was left on the authorization, just shares actually outstanding at quarter end.

I don't have that handy, no.

I will follow up with Peg on that. Thanks very much. Congratulations.

Thanks, Larry.

Thank you, our next question is from Barry Vogel. Go ahead, please.

Good morning, Farooq.

Good morning, Barry.

My first question has to do with your share buybacks. It's quite obvious over the last year and a half, you have been much more - - you have had a much more aggressive stance toward share buybacks despite the fact that industry conditions really have not improved. My question is, what has changed in your perception relative to where you were before in your share buybacks that have made you so much more aggressive?

Well, you know share price has gone down by 20% in the last 12 months. So we feel that gives us the opportunity as a Company to buy back shares. At a good value for our stockholders.

But it was down below - - you know some time in the last couple of years it did the same thing, but you were less aggressive.

That is true. I think that as our business model has improved, I - - I feel more comfortable with the repositioning of the Company, the differentiation of the Company and feel comfortable with our ability to generate cash so I - - because of that I became more aggressive in buying our shares.

Okay. The other couple of questions I have is, do you know or have some idea what your D&A will be this year?

About $20 million.

About $20.2 million.

20, 22? Can you tell us did you lose any production days in the quarter?

We did not lose production days, but what we did as I mentioned we put our case goods manufacturing to 32 week, and due to that of course, [always] can be lost on production.

Do you expect to go back to a more normal week of 40 hours?

We already are doing that right now.

Okay. So, that would help margins if you continue the 40-hour week in the next quarter?

We will but on the other hand we are going to also - - I don't like inventories to increase because it means a lot of cost and space. So to manage inventories if possible we might take a few days off here or there to manage inventories. Thank you very much. Continue to - - you're doing a great job. Thanks very much.

Thank you. Our next question is from Bob Fedge. Go ahead, please.

Good morning.

Good morning, Bob.

In regards to the everyday low price. To the degree that you had some legacy items, to what degree were prices reduced?

When we instituted this program last year, we reduced our prices to what we would, at that time, have our sales prices. Which was about 10% lower. However, we sold about 75%, 80% of our products at that - - those lower prices anyway, so it impacted about 20% of our programs in which we effectively reduced the prices by about 10%>

Okay, and now on the new product, then you were just identifying what was felt to be the most optimal price points coming in right?

That's right. Yes.

On the product flow, obviously, we've been talking about all the initiatives to really refresh [Robin] and contemporize the line over the last three years here. Can you give us some sense in terms of what to expect from a new product flow going forward now? So much effort having gotten us to this point. Are you going to be looking to replace the existing, including some of the newer stuff, in say a two, three year period, or, what are your thoughts?

Well, the last three years as I mentioned we changed over 70% of our product line. So, as we go forward, the change is going to be much, much smaller. Maybe 10% or so a year.

Okay. So, and to the degree that it was so significant suggested that you probably had a fair bit of H-product or product that was not the right product for the marketplace that you're looking to serve?

That's right. We felt that our products was fairly good; I mean they were still doing well, but in this age of commodotization and sameness we had to further differentiate our products both in terms of style, in terms of details, in terms of quality. And, also balance between what we were making domestically and overseas. And, all of those elements were important in this repositioning of the product line.

Also, you talk very often about gaining share of market and sales per, essentially, population in - - in markets where you do have stores. How has that number begun to change, if at all, over the last year?

We take a look at households of $50,000 and up. And take a look at our average - - they have gone up a little bit, but still a tremendous lot of opportunities. We have lots and lots of opportunities in many, many markets around the country and, as you know, we are focused on [inaudible] of markets at a given time. To reposition it; to have new stores; to relocate stores; to put up the right kind of a management structure. And, we are just taking a few at a time and that's what we have done in the last eight, nine years. Right now, we are [inaudible] that process because we now have a stronger retail structure to do that.

And you talked about opening 15, 20 new stores next year. Are, in fact, any of those in new locations, new markets?

Yes, 20% of them are new stores.

Okay, and when you look at the geographic map, how many areas do you feel that you're not serving yet that you ought to be?

You know, it's hard to say because we have lots and lots of smaller markets where we are not in; we have over 300 stores. So, we are in most of the major markets in the United States. However, our stores have to be in the right location and the right size in those markets. And there we need to have at least 100 of them - - we need 100 new stores to reposition our network.

So, would you say you're in each of the top 50 [NFAs]?

Yes. We are not in exactly the right number of stores, but we are in those markets.

Thank you.

Thank you. Our next question is from Laura Skantee. Go ahead, please.

Yes, good morning.

Question about uses of capital. You'd mentioned in conjunction with the debt raise that a top priority was expanding retail, but haven't announced new stores. Would buying back independently owned Ethan Allen stores fit in that definition of expanding retail?

Yes, it would.

And, what's your strategic thought process on - - on that as a possibility?

Well, our first priority and objective is to have our - - a successful independent Ethan Allen retailers. What we don't like is folks who are not performing well. So, our objective is to help those who are doing well, and those that are not doing well; they should move on.

Thank you.

Thank you. Our next question is from John Baugh. Go ahead, please.

Morning. Congratulations.

Morning, John.

Your comment about written sales slowing, is that relative to the 8% number which is adjusted for the timing of conferences or not?

Yes. It is relative to what we did in the last quarter, John.

Yes, but you did something to the mid or high teens, but adjusted it was eight. So, my question is are you comparing to the eight of the fifteen to eighteen?

You're now talking of October; our October [inaudible] running a little ahead of last year, but we're not running 8 or 10 or 12% as we did last year; last quarter.

Great. And would you hazard a guess five years out where you think sourced product might be as a percentage of your megs? And how that would impact further plant consolidation over that time frame.

John, we have now, I believe consolidated our manufacturing to the best and the most optimal plants that we have right now; both in upholstery and case goods. And our objective is to - - and that's what we are doing to make them work - - to make sure that they are efficient, they have the right technology and that - - in our future growth, I believe, will come more from outsourced products than more manufacturing in the United States. While we want to make what we have operate more efficiently. So, I would say in the next few years the chances are most probably it will go to about 50/50.

And, are there any small plants left to close or does the next one have to be a big one and, therefore, - - it's a tough decision when to do it obviously. Your utilization rates would drop in between now and then if you go to a 50% source mix, all sales being equal. Obviously if you grew dramatically, you might be able to continue to run those factories, is there an obvious plant next in line or is the next one going to be a lot bigger or a lot more difficult?

John, all the solid plants have been consolidated in our case goods now.

How about on upholstery.

On upholstery, we've also consolidated and we are right now we are operating in a optimum manner. We have right now five plants, and they are strategically located across the country.

Great. Thank you much.

Okay, John.

Thank you. Our next question is from Scott Heleniak. Go ahead, please.

Hi. Good morning, Farooq.

Good morning, Scott.

Can you talk about the TDI situation? Are you seeing a shortage or significant price increases because of that? Is that a major issue at this time?

I am sorry what - - what area you said?

The TDI that goes into the phone.

Oh, the phone.

Yes.

Yes. Well, the price increase - - prices are increasing, and they are threatened to increase more but I do not know how how much of that is due to the fact that many of these operations in the Gulf coasts are out of business which, I understand, they are getting back into business, and while we were not on any - - on any allocation we were able to get our products. We are now hearing that those folks who were on allocation are also now starting to get their products. So it looks like the sourcing is okay. People are - - have raised prices. They are threatening to raise prices. How much of it is due to the fact of short term, hard to say. So we are watching it carefully.

Okay. You talked about a price increase in July. Can you talk about how much that was? Did you do that?

It was approximately between [12.5 to 3%] and came effective in September.

Okay. And you talked about 90% of your product being delivered within four weeks. Where do you think you can get to in the next few years?

Well, we are shipping 90% of our case goods within four weeks. We are shipping about majority of our upholstery within six weeks. Our objective is to deliver - - to deliver all our products within four weeks, in the next couple of years.

Alright. Just one more question, you talked about the store openings, any of those going to be international locations for '06?

We just opened up a store in Bangkok this month, Bangkok, Thailand and we are opening another one in China, but other than that, our focus really is more domestic.

Okay, thank you.

Thank you, we have a follow-up question from Justin Maurer. Go ahead, please.

Farooq, just relative to the operating margin consolidated going forward and not necessarily this year but as you look out to the next few years. How should we think about that? It seems like we are turning the corner from a productivity standpoint and consolidation standpoint at wholesale, I think net-net if the math is right if you exclude the options expense the margins consolidated were flat maybe up slightly in the quarter but retail obviously with the investments you have done there with the - - with the counselors and what not has been a drag. But when we look at those two numbers together, what do you think about that going forward, once we start to see the benefits of that?

I believe that if our sales continue to increase not even at the level that we had this quarter, I believe if we continue to have overall sales increase between 5% and 10%, you are going to start seeing a positive impact on our operating margins.

Okay. And then just - - as it relates to - - some of the store relocations. Did those benefit - - what kind of lift have you seen? I know you have shown slides in the past of specific locations, but do you guys have an overall number as to the benefit that you have perceived?

It's hard to - - to give a specific benefit, but the biggest benefit of those has been an increase in sales. On the other hand, the costs of those have been higher. So while at a retail level, the new stores have been impacted as additional costs, you see the benefit on the wholesale side and that's why we had higher operating margins in the wholesale side.

Got you. Okay. Thanks.

Thank you. I am showing no further questions at this time, sir.

Well, thank you very much. If you have any further questions, please give a call to Peg Lupton. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's program. This concludes the conference. You may disconnect, and have a wonderful day.