Ethan Allen Interiors Inc (ETD) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ethan Allen Earnings Release Conference Call. At this time all participants are in a listen-only mode. In about 15 minutes we will conduct a question and answer and instructions on how to participate will be given at that time. Approximately 30 minutes has been set aside for questions and answers. [OPERATOR INSTRUCTIONS] I would like to introduce you to your host, Mr. Farooq Kathwari. Sir, you may begin.

Thank you, Matthew and good morning, I am Farooq Kathwari, Chief Executive Officer of Ethan Allen. And I am joined by Jeff Hoyt, our Vice President of Finance. Today we are reporting results for the three and six months ended December 31, 2006.

Please note that in the earnings release issued today and in the course of my prepared remarks, references made to certain non-GAAP information which excludes the effects of restructuring charges recorded during the current and prior year six month period. A reconciliation of this non-GAAP information to the most directly comparable non-GAAP measure is available on our website.

I am pleased to comment on our operations and financial performance during the quarter ended December 31, 2006. Our sale of 257.4 million was 6.7% lower than the previous year quarter. Our sales were impacted by first, overall weaker economic environment. Second, favorable impact in the last year quarter of our initiative to reduce lead time associated with delivery of products to consumers. As a result, during the prior year quarter, we substantially reduced our backlog which was reflected in the 12.5% increase in sales in the prior year quarter including a 15.5% increase in retail sales with 12.5% on a comparable basis. And a 16.2% increase in wholesale sales. The combined efforts contributed to $10 to 15 million or 4 to 5% increase in sales. Please keep in mind, we had positive impact of such increases in sales in the first, second and third quarter of fiscal 2006.

The other factor that impacted sales during this quarter was our decision to not offer special financing offers in the months of November and December which were offered in the previous year. In our judgement, we would not have gotten any material incremental sales while seriously impacting negatively on operating margins.

In the current quarter, retail delivered sales decreased 1.4% to 1.77 million and comparable sales decreased 8.5%. Wholesale sales decreased 11.7% to 165.7 million during the period. And as mentioned earlier wholesale delivered sales were lower due to slower business, reduction in backlog and some timing differences of shipping from the wholesale side. And in the current quarter, retail written sales increased 2.8% and comparable written decreased 5%.

Our consolidated gross margin was 52% as compared to 50.7%. The major increase in gross margin was due to positive impact due to increase in proportionate share of retail sales to total sales. Increase in gross margins in upholstering manufacturing with a lower cost.

And while we had strong gross margins, we were negatively impacted in shutting down of the Atoka, Oklahoma upholstery plant, the Spruce Pine manufacturing plant, and starting the process of conversion of Dublin, Virginia to a distribution center. While most of negative impact of the Atoka, Oklahoma was absorbed during the quarter, the Spruce Pine cost will largely flow through inventory in the third and fourth quarter. The gross margin during the quarter were impacted by about 1.2 million due to the closing of the Atoka, Oklahoma and Spruce Pine facilities.

In addition, to maintain control of our inventories, most of our domestic case goods plants operated at 32 hours during the quarter, thereby negatively impacting gross margins.

The consolidated operating margin was 14.2%. The wholesale and retail operating margins were 18.2% and 3.3%. Considering the lower sales, we are pleased to have maintained strong operating margins.

The main factors of this strong performance were positive impact due to very strong control of our operating expenses. Negative impact of conversion of Dublin, Virginia to our major, to a major national distribution center. This has resulted during the last six months of moving inventory from Vermont and North Carolina distribution centers to consolidate in Dublin, Virginia. We incurred about $600,000 of additional expenses in transitioning into Dublin this last quarter and 1.8 million during the last six months. Having absorbed these one time costs, we are now functioning well in our Dublin, Virginia facility.

For the six months ended December 31, sales amount the to 500.2 million, a decrease of 5.1%. Sales for the Company retail division increased 1.5% to 343.4 million with comparable delivered sales decreasing 5.3%. Wholesale sales decreased 12.2% to 321.3 million during this period. For the year-to-date period the retail written sales increased 1.6% and comparable written sales decreased 5.5%.

We ended the quarter with a strong financial position. For six months ended December 31, we generated operating costs -- operating cash of 56.2 million, utilizing 17.7 million to repurchase shares of the Company stock, 44.5 million to fund capital expenditures and acquisitions and 12.2 million to pay quarterly dividend. Inventory management remains strong. At December 31, we reduced inventory by $10 million or 5.3% from June, 30, 2006 and 14.9 million or 7.7% from December 31st, 2005. This decrease took place despite adding 20 stores to the retail division during the year.

Now, this morning, I want to update on our progress in positioning Ethan Allen as a provider of solutions and service and differentiate from the sea of sameness at retail. Several years back we launched our program to transform our store to a design center. We continue to implement many programs. During the quarter, we have improved our offerings. And at our annual convention in September, we introduced two strong programs: Modern Glamour and Horizon Studio. Both of these reflect modern styles with a classic perspective. Modern Glamour is more towards the higher part of our offerings and Horizon Studio is more on the lower and middle part. These programs should further enlarge our customer base.

In September 2006, we introduced the new design center concept in our Danbury design center or our Danbury store. As you know, we are now calling our stores design centers. The reception by clients and design consultants has been very positive. And after fine tuning the design, developing less costly options for construction, we plan to incorporate this to several design centers and to all the newer ones that are being opened.

We are developing a strong home and garden program, that's indoor/outdoor furnishings. These reflect unique styles, quality, and value.

Our focus is also be to strengthen our marketing and marketing programs including a major initiative on training. The monthly boot camp training for all new design associates is continuing at our Danbury headquarters. During the last one year we have had over 500 new design associates go through this program. In addition, I continue to be involved in personally reviewing and approving every candidate at the Company retail division.

Regarding advertising, we are implementing many programs to enhance our brand and increase traffic to our design centers. We have a strong national television program being on the air every other week for 11 months of the year. December being the exception.

We are just started shipping our 2007 style book of about 300 pages. This style book represents the various lifestyles we offer. Our plan is to hand out over 1.2 million copies this year to our clients.

This book celebrates our 75th year anniversary. In that connection, we plan to participate in ringing the opening bell in the New York Stock Exchange tomorrow morning. I have invited a number of our associates from our U.S. manufacturing plants and an also our retail design centers to celebrate with me. Especially an associate from Beecher Falls, Vermont, which was the birth place of Ethan Allen Furniture in 1932.

We continue to distribute over 6 million copies of our newly designed quarterly direct mail magazine. This magazine gets our message across, of the versatility, of our styles, and the services we provide.

We are in the process of developing a world class website. We are also looking into design options which will enable our clients to order online our products. Our objective is to take our orders online and to have all orders be referred for design and customer service to our design centers. We believe combining the benefits of internet technology and the personal service of our designers and our vertical logistical structure will give us a strong competitive advantage. We plan to implement this end of this year all of this, although this spring we will start selling our home and garden furnishings online utilizing the concept.

During the quarter we opened five new design centers in Atlanta, Denver, Chicago and Palm Beach. We closed four design centers with smaller volumes. We acquired five design centers, one in St. Louis and one in Cincinnati, and three in Seattle, Washington. Our objective is to open seven to eight new design centers in the next six months.

With that brief summary, I would like to open for your comments and questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Susan Maklari from UBS.

Good morning, Farooq. Can you talk a bit about the demand trends that you've seen? I know in your release you commented that you saw positive comp written trends in your stores in December. Can you elaborate on that a bit for us?

Yes, Susan. The positive trends in comparable stores was compared to the year earlier December. It was not on a sequential basis. So we had an increase based on what we did the previous year, December. That's important. I did not clearly state that in our press release.

We have seen for the last six months tougher comparisons, as I said, due to first, because of our own internal comparisons of having to compare with 12% and 15% increases in the previous year. So we had a very, very major hurdle. And the second one was that there was a slow down in the economy, consumer confidence was down. The elections were very, very divisive and as we, as myself had predicted in November, that when the elections are over and things settle down, consumers will be more settled and December we will have better consumer confidence and that's what happened. There was better consumer confidence and we are seeing that confidence in January. And we will of course, end of the month is the last 8 to 10 days is where we closed a lot of business, but in terms of our increase in traffic, we we have now, had more positive increase in traffic. Some in December which continued in January.

Okay. And then you noted that you kind of pulled back on some of your promotional sales that you ran in the last quarter. What are you planning for this upcoming quarter?

We have a very strong program. We have just in the process of distributing 6 million copies of our direct mail. And we have national television on. Which as I said, we are running every other week and wove a very special. We have a very special, also strong in next month, under the direct mail to our clients which is going to be again give a strong representation of products that are very timely for this period. So we have a very, very strong program. And then we come into in towards March and we will start introducing in the middle of the March our Modern Glamour to the consumer. Both in direct mail and television.

That is relatively consistent in term was the sales with what you did last year?

That's right.

Okay. Thank you.

Thank you. Our next question comes from Adrianne Shapiro of Goldman Sachs. [AUDIO STATIC] I am afraid we will have to move on. Our next question comes from Bud Bugatch of Raymond James.

Good morning, Farooq. Congratulations on the quarter. Quite an impressive margin performance in a tough environment. Couple of questions. You used to give us orders. I think you gave us, if I heard you right, on comps on a written basis in the quarter for the retail segment were down 5%, is that correct, versus the delivered comps of down 8.5?

Let me just see. Yes, that's right.

Okay. Could you tell us, one, did we get positive or close to positive in December? How did the quarter unfold? I know you said it was significantly better but I don't know if you gave us quantification of that.

December was positive both in the retail and wholesale side.

For comps.

Yes.

That's good. You used to give us percentage order increases total for retail and wholesale and I would hope maybe you would start to practice again. I found it useful to get a flavor of what was going on in the order book.

The only thing is this, we stopped it because now, the retail being such an important part of our total business, that gives a better indication because on the wholesale side, we can ship the products, but our real business comes when we deliver to the customers.

I agree. So if you give it just on the retail I still would find that useful. Okay. Total orders I didn't hear that. If I missed that, I apologize.

Jeff, how about repeating it.

In the quarter, we mentioned that written business was up 2.8% and the comp written down 5%.

Got you. I missed the total. I apologize. On the inventory, which was an awful impressive performance with additional stores and obviously inventory at the store level, can you talk about the flavor of the inventory between the stores and wholesale and how did you keep the inventory essentially flat for a year-over-year.

First, you have to watch it like a hawk. You have been in retail. So that's, that basic and fundmental.

Second is this. Our whole -- I hate leftovers. As you know in merchandising, It is the leftovers that get you, both in terms of inventory and impact on your margin.

Our structure of every day best price also enables us better control of inventory in many, many ways. It enables us better forecasting. We don't have to forecast six months in advance and when you forecast for sales, you know you are going to be left 30% and you are going to be out of stock 30% or so. So our structure enabled us better management.

And then, this mission possible initiative has resulted in us moving products all across the board. That is products, that is work in process, in our distribution centers, at our retail level. And that has further reduced our inventories. Then also, we have consolidated some plants, so the inventories of those plants are also down.

All those factors are really contributing to this reduction on inventory while we have had increase and you know, more retail design centers and lower business.

Yes, and I misspoke. You are actually down about 15million year-over-year. Flat with the first quarter. So if I looked at it just retail inventories versus year-over-year, or wholesale versus wholesale, would the change really be on the wholesale side because of the consolidation of the plant and distribution centers?

It would be.

So the retail inventories are actually up, year over year, I would expect with the additional stores.

But not too much. We also have helped in the retail, we are turning the products faster and not holding sold goods in our service centers.

Couple of other quick questions. If I heard you right there is about 1.8 million of expenses that you absorbed in the first six months that you won't have continuing for the distribution center move and the consolidation of Atoka?

No, in fact the distribution alone is 1.8 million. Atoka was additional $1 million or so in the second quarter.

So there is 2.8 million in the first half that will not get, that we'll cease to see.

We will cease to see this one. As you know, year to year we take a look at how to consolidate and this will not appear again.

Got you. Just a couple of other questions. You said you talked about five acquisitions. Five store acquisitions. If I did my numbers right, I think there were eight more Company owned stores this quarter than the other quarter. Were three of those the openings you talked about?

Yes, three openings and five acquisitions.

Then the closings were some of the independent stores, I would take it?

Are they all independents? All small independents. Yes.

But you know are almost at 50% Company owned, where will you be by the year-end? Do you think you'll be 50% or more Company-owned stores?

Our policy is to encourage our independent retailers to run strong businesses and good news is that we got very, very strong retailers and many of those folks who wanted to retire for lots of reasons and didn't want to make investments to move their stores to the right places. Many of them have gone, but a few more as we go along that will probably have to acquire. I think that long term in terms of number of stores, you could not seek too much of the difference in the next year or so.

You have been saying that for several years now. And I know that is going to engender a smile on your face, because it continues to go upwards, so I'm just curious if you see some more retirements in the near term.

Well, you know, one thing is certain in life. Retirement and death.

Now, I know you are smiling. Thank you very much. And congratulations on the quarter.

Thank you. We will try again to reach Adrianne Shapira of Goldman Sachs.

Hi, can you hear me Farooq. Sorry about that before. Wanted to -- clearly one of the impressive thing is how controlled selling expenses were. I don't know if you addressed this and we lost you a little bit here in the Q&A. If you can just elaborate how that came out flattish, what were the areas of restraint, especially given the increased focus on the selling and design concept stores?

Yes, Adrianne, we are using our advertising moneys more productively. We now have, especially in our regional division, we now have a fairly major strength and presence where we can use the resources now to have stronger, national advertising programs rather than spend it in the little ways all over the place. So we have our direct mail, to our national television, much stronger national programs and overall we are going to be spending some what less. That is one element.

And the other element has been continued reduction in operating expenses on the consolidation side and when we consolidate, that also reduces. Our distribution costs while still high because of Dublin and everything else, were somewhat lower due to the fact of, we have some what lower gas prices, utility costs were lower and -- but overall, it was just looking at our expenses across the board and every element of our business.

Okay. That's helpful. On the advertising front.

And on the selling side, you know, as our retail sales were not -- We had a decrease in retail sales. That also effects all the incentive payments we have to make so we didn't have to make the incentive payments because they are based on increasing retail sales.

That was my following question. So compensation, that also came down. We understand there was a change in the the advertising, bringing it in house.

We have brought the national television production in house but the placement of the advertising is still down by national advertising agency.

But in terms of, there might have been some savings, bringing it in house as well.

Yes, there are, and producing, we have a talented staff of people now. And I don't know if you have seen our newest commercial we we are running now called Loft and if Peg Lupton hasn't sent it to you, I'll make sure that Peg is is on the line, she will send you our latest commercial produced in house, at obviously the cost is more probably close to you know, 1/15 or 1/20 of what we had to spend outside.

Great, I look forward to seeing that. My other question related to just guidance. Sounded as if this morning, the press release you suggested third quarter is within reach. Which how should we read that? It suggests to us that perhaps it is near the high end of your expectations and yet it sounds like sales have begun to rebound. We are wondering if in fact chronic expectations perhaps are at the high end and what is vulnerable in the P&L if sales are starting to improve?

First of all, we are still going to be impacted the third quarter by approximately four or 5% benefit we got last year by the reduction of the backlogs. And that is, we start with that, that factor.

You mean sales have to be up four or five just to be flat.

That's right. That is one factor and that's what happened this quarter and we maintained pretty good margins. We have, I think it is hard to say right now overall what our sales are going to be relative to what we had last year. Flat, a little bit down, a little bit high, but I feel some what more comfortable on the earnings side because of the fact of the control over expenses and also these one time costs that we have been incurring that are not there. And the foam continues to come down, fortunately the gas prices are lower. From a cost point of view and we are going to get benefits and sales are going to be still a challenge.

Okay. Great. That's helpful and lastly, just stepping back and give us a sense, the state of the competitive environment. Clearly there are several people that are working down some inventory overages, and I'm just wondering how -- what does that mean in terms of competitive markdowns and how that's impacting you.

Adrianne, as you know, it is some what of a crisis situation where there is a tremendous amount of supply of product, both at the source level, domestic as well as overseas. There have been a great amount of reduction of sales especially at the mass merchant level where because of the slow down in housing, and increase in costs and gas prices and everything else from what I understand has had a major negative impact on some of those folks who are more on the mass level. Than we have had store closings. And people going out of business which has been negatively impacted us, in the short term.

And the good news is crisis does create an opportunity and opportunity is that we are strong. We are getting stronger and as these folks are going out of business, have these closeouts and you know, when they do close out, they really have big sales and promotions and all kind of offerings. That is taking place and I think it is possible in the next six months we may see that continuing. However, we also get a benefit of that. We get traffic into our design centers if these people who are going out of business are close to us and may many of them. And it give us an opportunity to get more clients. And at the end of the day we have to have great value, great quality, and great solutions and ourdesign consultants are doing a great job in converting people in a tough environment.

Thanks. Best of luck, Farooq. Thanks.

Our next question or comment comes from Ivy Zelman of Credit Suisse.

Congratulations on a great quarter with respect to margins for sure. Everyone has asked a lot of my questions, but If I could focus in a little bit on the strategy that you position yourself as much more of, obviously, a retailer today than you have been in previous decades and obviously fully vertically integrated. As acquiring the stores, the Company owned stores and looking at the performance of how you are doing within some of the more mature ones that you've acquired going back a few years as opposed to the ones that are newly acquired, what is the opportunity from the margin perspective on the stores, where you actually ramp them up as you are now Company owned, fully mature as opposed to the ones you are acquiring, is it a huge gap and a real opportunity.

Yes, Ivy, there is. For us to do 3.3% gross, I mean, operating margin at a retail division in somewhat tough conditions, gearing up new stores, closing stores, and moving stores, the fact is that that 3.3% really has a tremendous opportunity toe be improved as we continue to stabilize. You know, as you have said in the last five years, we have had to transform our business from a manufacturer to selling to independent retailers primarily to converting to a much more balanced distribution to also then relocating the storage to newer locations in the last five years alone. And we have done about close to 40 or 50 great locations and which increases the traffic. So, all of these of course we absorb the costs and then we also have been building management and training. And training them and we -- our training in Danbury, which we run now and didn't run before. We could end up spending at least $1 million and plus having people out of the design centers for two weeks at a time. So we're absorbing all of these still maintaining decent margins. In short, we have a lot of opportunity of improving that.

Can you give us some examples of the more mature recently acquired stores and how they are performing.

See the range goes anywhere from losing money to 10% of operating margins.

Great. If I can flip to the margin for a moment on a Company wide gross margin basis. 52% is very impressive and you've always the kite doesn't fly high enough and you now have the benefit, with the exception of the headwind of the 4 to 5% that you benefited from last year with all the costs you incurred now that you're not going to be incurring going forward. Should we expect that is a fairly stable margin even if the sales environment doesn't change much, is that where you would like us to model? Is there opportunity to improve upon that, given what you see in the pipeline?

It's like, as you rightly said. You keep on flying the kite, it is going to go where it goes. I didn't think we could do 52% a few years back, Ivy. And at this stage, if you are modeling, is that what you said, I think about that number is appropriate right now.

Great. Well congratulations again. Thank you.

Our next question comes from Joel Havard from BB&T Capital Markets.

Good morning, Farooq. I guess I'll start with a comment echoing Ivy. I remember a few years ago, you were asked if a 49% gross margin was sustainable and you said you felt pretty good with that accomplishment. So we will keep watching you. Great questions asked so far, so couple of follow ups. Jeff, you may have the numbers handy. I think you touched on the CapEx dollars versus the acquisition dollars. Can you say that again, please?

Yes, Jeff is --

CapEx for the six months, is 35 million.

35 and the acquisition expense?

6.

And keep in perspective that out of the 9.6, a lot of it was we acquired real estate also, Joel. Well that begs one follow up, which I think you also referenced it in your prepared remarks, how many new stores you foresaw opening up the second half of the year. I think I said about seven to eight.

For the second half or is that for the full year?

Second half.

Great. Are those typically, as has been the case recently, more relocations than new market expansions or not?

Well, in this case, it just happens to be in this quarter. And in this period happens to be about 60, 65% relocation and 35% new.

Right. Okay. What is left on the repurchase authorization.

About 2 million shares.

All right. Wonderful. I am sad to say that's all I have got. Thanks, guys. Good luck.

Our next question or comment comes from Laura Champine from Morgan Keegan.

Good morning, Laura.

Good morning. If I count your guidance for, Q3 then for the first nine months of this fiscal year it looks like earnings is expected to be down 5%, but you haven't updated the full year guidance for earnings. I think that is still a 10 to 12% increase. Would you care to update us on your thoughts for the full year at this time?

I think Laura, as things have developed, that the economy and the factors have been more challenging and negative and so, we have been watching like everybody else from a quarter to quarter what the situation is going to be. It's been hard to make predictions, but certainly it would appear that as we have said, given the third quarter and fourth quarter would be left. It would be that you could use your own judgement what our numbers are going to be. They are not going to be what I said about you know, six or nine months back.

Okay. There is nothing that you can give us in terms of thinking about the full year, the fourth quarter for the top or bottom line?

Only thing that is now left is the fourth quarter and I think that it will be wise for us to see how the overall environment with the consumer is, the economy is in the next few weeks so that we can get a better understanding of the fourth quarter.

Okay. Should we expect just a comment on quarterly guidance for the rest of the fiscal year.

That would make sense right now. We have a couple, of -- I think I am speaking at a couple of conferences in the next couple of months. That would give me an opportunity to make comments.

Okay. Farooq, can you explain to us why the wholesale sales trends are so different than the retail sales trends in the quarter?

The retail sales reflect the Company retail division. The wholesale represents selling our products to the Company's, Company division as well as our independents. And it also reflects issue of timing. As of right now, 68, 69% of the total business is done through the Company stores. The wholesale shipments are being shipped to our Company stores, have to be eliminated unless they are shipped to the ultimate consumer. So all of those factors have to be taken into consideration. And secondly, it was also the impact of, as I said, close to 5 million-dollars reduction of our backlogs on a quarterly basis. And an overall tough economic environment.

Farooq, with the past couple of seeing double-digit declines in your wholesale division and much smaller declines or growth in the retail division, does that imply the franchise stores are not performing as well as Company-owned in terms of sales trends?

I think that as a whole, you cannot take that number as I said, because the wholesale today is not what it used to be for us when we were a true wholesale company. Our business has changed. Because 70% of it goes to our own retail and depending on our own policies and procedures, where we keep the inventory, it has that impact. But having said this, yes, our independent retailers on the whole have performed less than the Company stores while our strong independent retailers have done better than our Company stores.

One final question. Maybe for Jeff. How many stores are in the same-store sales calculation this quarter.

I think Jeff will have to get back to you on that so he can tell you out of the 149 how many are in the same-store. You will give her a call.

Sure.

Thank you.

Thank you.

Thank you, our next question or comment comes from James Leventhal of Levy, Parkins and Company.

Good morning, Farooq. I feel like the greedy guy in the back of the room rubbing his hands together, but I am curious as to why you chose not to purchase any am curious as to why you chose not to purchase any shares in the quarter?

At this stage, with the amount of money my we are spending in terms of building our business, our first objective really is to use the resources to build the business. And we are getting more opportunities to do that. And so I am watching that carefully and then we will see whether it makes sense to continue an agressive repurchase program. As I said earlier, we have a 2 million share repurchase authorization.

Okay. Thanks, Farooq.

Thank you. Our next question or comment comes from John Baugh from Stifel Nicolaus.

Thank you, good morning. Can you hear me?

I can hear you, John.

Can you comment on your case goods production. You said you were down to 32 hours a week. With orders ticking up, is that a number you see getting better or with the continued shift to imports is that going to continue to be a challenge and we have to look at yet another plant closing in the near to intermediate future?

John, we have taken the down time more in the northern plants, not in the south, in North Carolina. And I see that the 32 week, and it also reflects the fact that we are really working hard to do just in time which means we don't want to build inventories. And we are watching it carefully. We are introducing products in the next few months which will be solid woods, which is where our competitive advantage is domestically. So I see we will be operating at 32 hours, but I would think that by, towards the middle or the end of this quarter, our hope is that it will be back to 40 hours.

Okay. Can you comment at all in, is it two stores only you have done the conversion to the design center approach or is it more now? What the results have been from that and what the scheduled rollout is on that, and then you made a comment that you found a way to reduce the cost of converting. I am not sure you ever told us what the cost to independent or Company owned store would be to convert. Can you comment on all of that?

We have, the first one we converted to the studio, Design studio, and being part of our major total design center that you saw in Danbury, was Danbury. And then we have we are implementing that in the three or four newest ones that were under construction where we could make that change. And all the new ones that we we have constructed and that will be opened up in the next six months and all have this new design. Now, what we have done since we did the Danbury as I mentioned in our comments. We have been reviewing that and see what the fine tuning it requires and more importantly, what we can do to reduce costs as we launch it nationwide. And we have made lots of progress in using materials, alternative material, resources and we are just in the process of now doing it in one more design center with these new costs, which are substantially lower than what we spent in Danbury. And because you know, if you do 100 of those, at a difference of $100,000 in cost and that has been my objective, is $10 million. So we are almost ready to start launching it and our objective would be in this quarter to start it in about three or four, and then accelerate it as we go forward in the next quarter.

I am sorry, what is the cost roughly, if you could--

I think John, you know, for competitive reasons, it would be wise for us not to mention the amount of money we are going to be spending but on the aggregate the rate ranges anywhere from 150 to $300,000.

And then is there any feedback from the Danbury store, quantitatively, that you can give us.

It has had a very, very positive reaction by our clients, by our design consultants. the objective is to excite our clients. The objective is to have them also make the process faster and that's what is happening. The process of closing and the process of deciding is faster in Danbury due to the tools being there and due to the fact that it is also focused on design and solutions. All, and as we launch it across the nation, our objective is great solutions, but we simplify the process.

Have any of the independents committed yet or are they remodeling as we speak?

Two are doing it right now. Two independents are even doing it faster than we are doing in the Company.

Thank you very much.

Okay.

Thank you. Our next question or comment comes from Todd Schwartzman from Sidoti and Company.

Hi, Farooq. Sounds like you got some price relief in the second quarter with respect to foam. Can you talk maybe a little bit about that and what you are seeing, some other raw material trends?

Yes, we did get relief on foam. It was not a major one, but I think that that relief is continuing in the quarter. It has stabilized and as you know it was, every quarter, it was going up. The other areas have really been more related to fuel and energy. Our health costs are still going up. And we have not seen any major increases in the costs of our other raw materials, lumber, et cetera. And also overseas, costs have stabilized because of excess capacity and everything else. They are not in a hurry to increase costs and raise their prices.

Okay. On the share buy backs. You say you have 2 million remaining on the authorization. Seems a little bit lower than the last number you threw out there. Did you buy back any in the quarter?

I am sorry. Jeff just told me it is 2.5 million.

Thank you very much.

Thank you, our next question or comment comes from DeForest Hinman of Paradigm Capital Management.

Good morning.

My questions have been answered, thanks.

Our next question comes from Justin Maurer of Lord Abbot.

Just on the stores again, did you say you opened three new or five new, year to date? You were rattling off the cities. I thought you said five.

Hold on. I will give you the total number.

Year-to-date, there've been three new Company-owned stores, added, Atlanta, Denver and Chicago.

And four closed and five acquired.

Total at the end of the quarter is 149 Company owned, 158 independent.

And the total is?

307.

Ad CapEx, I know originally, kind of traditionally, 40 to 50 million. You said maybe as high as 80 this year, is that still conceivable you think?

Approximately that. We already spent $35 million in the first six months.

Okay. Just relative to the delta between the retail sales and wholesale. I know everyone is trying to figure out the relative health of the independents. But is there noise in there created by the ongoing shift to import product? Just in terms of price points that moved through there? I know you've referred to timing on occasions of that, but does that have anything to do with that or not?

I am sorry in terms of-- The fact that over time, you are continuing to shift more to offshore sourcing. It presumably still flows through the wholesale business, correct? If average selling prices are lower, that effects the number or something. It does. Everything flows through our wholesale. And our objective is to offer great values. Competitive values to the consumer for what we design, what we make. Whether it is domestic or overseas and also have the opportunity of giving our, all our retail a very healthy opportunity of gross margins. So from that point of view, there are no issues.

Okay of fair enough. Thanks a lot.

Thank you. We now have a follow up from Bud Bugatch of Raymond James.

Two quick follow ups. Farooq, you had said, I thought CapEx was projected between 60 and 80 and I did not know it included the acquisition expenditures?

Right now, we have spent $35 million out of which acquisitions are --

Acquisitions is a separate 9.6, CapEx, is 35.

I understand that, but I was wondering guidance for the year. The 60 to 80 includes what you will spend on acquisitions, or is that just on CapEx alone?

I think at this point, most probably our 80 million or so would include both.

Includes both. Thank you. And last one.

Unless we acquire more.

I am sorry.

Unless we acquire more.

Okay. And did you, if I missed it again, I do apologize. Did you comment on with how much pricing impacted the quarter, your price increases?

Our price increases reflected an average of close to, if you think of the impact, it is about an 1% impact on the gross margin. On the wholesale level, I would say, the net impact of the quarter was about 1% to the wholesale gross margin and less, about 0.7%, to the consolidated gross margin.

Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS]

I think, Matthew, That should do it. We have -- the time is up. And I want to thank everybody and if you have any questions, please give a call and I know Peg Lupton would be happy to talk to you. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everybody, have a great day.