Ethan Allen Interiors Inc (ETD) 2008 Q4 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 lines are in listen-only mode. Later we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to your host, Mr. Farooq Kathwari. Sir, you may begin.

Good morning. I'm Farooq Kathwari, Chairman and CEO of Ethan Allen. I'm joined today by David Cullen, our Vice President of Finance and Treasurer, and Peg Lupton, our Director of Investor Relations.

Today we are reporting the results for the 3 and 12 months ended June 30, 2008. I will make a few brief comments and David will provide more detail on the financial information, and I will follow with an update on our business initiatives and then open it for questions. We expect to end the call by about 11:45am.

We have performed well in a difficult economic environment. We did see a greater impact of the economic downturn in our fourth quarter, with sales down 9.3%. We maintained a strong gross margin during this quarter of 54.2% reflecting our every day best policy initiative, and the combination of efficiencies in the retail mix. Our operating earnings were also at a healthy 9.3%. Our inventories remain unchanged from the March quarter. The change in EPS of $0.45 from $0.65 from the previous year reflects about $0.20 difference due to lower volume, a benefit of about $0.06 from lower shares and we did have an -- a lower income due to lower other income by $0.08. We ended the fiscal year with a 2.5% decline in sales and did maintain a healthy 10.5% operating income.

During the fourth quarter, we did not repurchase any of our shares. During the year, we repurchased 2.2 million shares for about $70 million with an average cost of about $30. We have remaining a 1.6 million share authorization and a cash balance as of June 30, 2008, of 74.4 million. I'm also pleased that yesterday our Board decided to increase our cash dividend by 13.6%, resulting in an annualized dividend amount of $1.00 per share.

Now for David Cullen to give a brief financial update.

Thanks. Please note in the earnings release issued this morning and in the course of our remarks, references made to certain non-GAAP information which excludes the effects of restructuring and impairment charges incurred during the quarter and year to date ended June 30, 2008, and year to date June 30, 2007. A reconciliation of this non-GAAP information to the most directly GAAP measure is available on our website.

Net sales in our fourth quarter were $235.9 million compared to $258.5 million in the fourth quarter last year. The company's retail division's net sales were $176.5 million versus $187.5 million last year. Comparable design center delivered sales were 11.1% lower than in the prior year period. Written sales in retail decreased 4.7%, and comparable written sales decreased 8.9% versus the fourth quarter of the prior year. Wholesale net delivered sales were $147.7 million in the quarter compared to $162.8 million in last year's fourth quarter. Consolidated gross margin for the quarter was 54.2% as compared to 53.4% in the prior year period, reflecting improved efficiencies in our manufacturing and the increase in the proportion of retail sales to our total net sales. Gross profit for the quarter was $128 million.

Consolidated operating margin was 8.1% for the quarter, or 9.3% excluding the $2.8 million restructuring charges related to the plan announced in January. Wholesale operating margin was 13.9% and retail operating margin was .8%, excluding the restructuring charges. Selling expenses decreased $.8 million on lower volume-related costs. General and administrative costs increased $1 million over the prior year quarter, as a result of our initiative to relocate a number of our design centers to more prominent locations which generally have higher occupancy costs. Diluted earnings per share for the quarter were $0.39 on net income of $11.1 million. Excluding the restructuring charges, diluted earnings per share were $0.45 on net income of $12.9 million. This compares to diluted EPS of $0.65 per share and net income of $20.5 million in the prior year quarter. For the full year, net delivered sales were $980 million compared to slightly over $1 billion last year. Net delivered sales for the company's retail division increased 3.7% to $724.6 million, while comparable design center delivered sales decreased 3.2%.

Written sales in retail increased .6% during the year, while comparable written sales decreased 5.6%. Wholesale sales were $616.2 million compared with $656 million in the prior year. The full year consolidated gross margin was 53.7% as compared to 52.4% in the prior year, reflecting the improved efficiencies in our manufacturing operations as well as the proportional increase in retail sales relative to our total net sales for the year. Consolidated operating margin was 9.8%, or 10.5% excluding the restructuring and impairment charges. Wholesale operating margin was 16.3% and the retail division posted to date .6% operating profits, excluding the restructuring and impairment charges. Diluted EPS for the year were $1.97 on net income of $58.1 million. Excluding the restructuring and impairment charges, earnings per diluted share were $2.12. This compares to diluted EPS of $2.15 on net income of $69.2 million in the prior year, or excluding the restructuring and impairment charges in the prior year, diluted EPS was $2.41.

Now for comments on the financial position of the company. During the 12 months ended June 30, 2008, we generated operating cash of $86.1 million. We used $69.7 million of our available cash to repurchase 2.3 million shares of our common stock. Also during the year, we used $60 million to fund capital expenditures, spent $7.8 million to acquire a cut-and-sew upholstery factory in Mexico and several design centers in the U.S., plus returned $25.5 million in cash to our shareholders through quarterly dividends.

As Farooq mentioned, inventories were about even with the third quarter and have increased $4.4 million during the year, due mainly through inventory maintained through the design centers and the cut-and-sew operation in Mexico. We remain in a strong service position with respect to incoming orders, with over 90% of our case goods items available for shipment within four weeks. EBITDA for the year, excluding restructuring and impairment charges, totaled $131.3 million or 13.4% of sales, as compared to $150.3 million and 15% respectively in the prior year, also excluding restructuring and impairment charges.

Overall, we are pleased with our operating results and financial standing in this challenging economic environment.

Now to Farooq for his comments.

Thank you, David.

Now, during fiscal 2008 our two main objectives were, first, to manage the business in the downturn, and second, to prepare ourselves for the next phase of the economic cycle. I am pleased with the progress we have made on these two objectives. Financially, we have maintained strong performance, and while investing about $63 million in capital expenditures and acquisitions and $69 million in repurchase of stock, we have ended the year with a strong balance sheet.

On the marketing and operational side, the main areas of focus were implementation of the lifestyle branding. Over 87% of the company-operated retailers and over 60% of the independent retailers have implemented this program, which projects our products in seven lifestyle presentations. These presentations project style, eclectic decorating, and help from - and help both clients and our interior designers.

We have strengthened the retail division with many initiatives, including rationalization of our structure, with 23 newer locations added during the year including relocations. 8% of the network converted to design studios. 12 locations in underperforming markets closed. Consolidation of 16 retail service centers to our larger service centers, and most importantly, implementing the team concept, with the development of over 280 teams of interior design teams.

We ended the year with 295 design centers, 136 operated by our independent retailers and 159 operated by the company. During the quarter, we acquired three design centers from a retiring retailer. During the fiscal year ended June 2008, we acquired a total of five design centers from our independent retailers.

During the year, 19 new locations, including relocations, were opened in the United States and four internationally. We have ended the year with a much stronger retail network in place. Last month we also opened our flagship design center at 1010 3rd Avenue at 60th Street in Manhattan, with a very good reception by our clients.

We have spent the last two years developing a new website. We expect to launch this in the September, October period. We believe this new website will enable us to add the newest technology of the web to the personal service of our interior designers, giving us a unique competitive advantage. The website will also enable our clients to place orders on the new website, and orders will be serviced through our retail network.

We have strengthened our vertically-integrated structure with many initiatives, including fine tuning our logistics operations, which enabled us to absolve most of the cost resulting from about a 9% increase in energy costs during the year. As you know, we deliver our products at one cost nationally. We acquired a cut and saw plant for our upholstery division and is being absolved efficiently into our structure. We initiated a major information technology project both for our manufacturing and retail network during the year, which should help us further improve efficiencies. By making important structural changes, we were also able to reduce our head count in the United States operations, both retail and wholesale, by over 500 persons.

During the past year, we increased our advertising spending additionally by about 11% compared to the previous year, with two objectives, to get across our message about our interior design services, the tag line "We will help you with as little or as much" and the need to make an appointment. In addition, our increase was to help our independent retail network spend lesson advertising during this slower economic period. In June 2008, we initiated a 6% price increase, which will help offset costs both at wholesale and retail.

As we indicated in the press release, it is not prudent to make forecasts on the economy. In these challenging times, it makes sense to be prepared for softening of the economy and also be ready for the next upturn. The initiatives we have taken position us well, and our objective also remains to continue to perform well financially.

And with this, I would like to open up for any questions or comments.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is from Laura Champine with Morgan Keegan. Go ahead, please.

Good morning, Laura.

Good morning, Farooq. My question is on your inventory levels. They were up 2% on a sales decline down 9%. How much of that increase is just attributable to increasing inputs costs, and how much is attributable to the slower - potentially slower than expected sales levels that you saw during the quarter?

Most, practically all, of the increase is due to number one, the purchase by us of this facility in Mexico in which we also acquire a leather inventory, and secondly, it also was due to the fact that we relocated 18 design centers from approximately 12 to 13,00 square feet of display to anywhere from 17 to 18,000 feet of display. So we increased our display inventory in our retail divisions. Those are the two main areas.

Got it. And then once again to try to parse out the sales decline. Although you have raised prices over the past year, what type of price mix change are you seeing? Are you seeing a mix shift down that offsets the price increase or the price increase is actually flowing through to the top line?

The price increase is mostly flowing through the top line. Last year, a lot of you - we also had almost all the company retail division implement this lifestyle projection, which resulted in about over 150 design centers having to sell off their floor inventories, at least 30% off of it, to replace it with new. So we had a little bit -- some of an impact on margin because of the changeover of the floor samples. But other than that, it did flow through into our sales.

Got it. So that would mean units are down more than - on a comparable basis, more than the 1 11% same-store sales number?

The units are somewhat down, yes.

Thank you.

Thank you, our next question is from Anthony Chukumba from FTN Midwest. Go ahead, please.

Good morning. Anthony, are you there?

Please check the mute on your line, sir. I'm still getting no response. Our next question is from Barry Vogel from Barry Vogel & Associates. Go ahead, please.

Good morning.

Good morning, ladies and gentlemen. I have a couple of easy questions for you. Could you give us the D&A for fiscal ' 08 and what your expectations are for fiscal ' 09, and also your capital expenditure estimate for fiscal '09 and what it was exactly in fiscal ' 08? That's my first question.

All right. Now your first question is on your D&A, and right, David, it is approximately $25 million. Why don't you give him the exact number? $24.7million on the D&A, and that's - it will be approximately slightly higher, a little bit higher than $25 million with all the investments we made in 2008, Barry. And as far as capital expenditures are concerned, we spent close to $70 million on capital expenditures, and acquisitions, we would spend anywhere between $40 million and $50 million. So we will reduce it substantially.

Okay. As far as efficiencies, I just want to get this right. You talked about 500 people leaving the company in the fourth quarter. I believe you had talked about savings on that. What would you say would be the minimum savings for fiscal '09 on those 500 people? That's the second question.

Barry, the 500 was not all in the fourth quarter. It was during the year. So although there was a larger number in the fourth quarter, assuming everything else stays the same, the net impact of that approximately is going to be anywhere between -- add some other costs in other areas but at least $12 million to $14 million.

Okay, and as far as additional efficiencies and savings going forward, I'm sure you are not going to stop doing what you are doing because you have been very aggressive, could you give us some idea if there are going to be additional moves in fiscal '09 to get more efficiencies?

Barry, I always believe that efficiencies come by making sensible structural changes. We don't just cut down just for the sake of cutting, have never done it. Every change we make to save also helps us become stronger. Like for instance, the retail teams did have - ended up with having less people but it came from the ground up. They wanted to have teams that made sense and some people were not able to fit into the teams, and it was our design centers from the ground up that made thing - that possible.

Our changes are going to continue. In the last few years, as you know, we have consolidated our manufacturing from 21 plants to 9, and today we want to maintain those because having manufacturing in the United States as much as we have I believe is a competitive advantage today going forward. We are adding a lot of technology both - in our plants. We have just installed an upgraded technology for our manufacturing plants which will help us become more efficient, and we are in the process of launching in the next couple of months a new retail information system which also help us become more efficient and reduce costs and also help us not get costs. So we are continuously looking at how to make it better.

We have made - our advertising dollars, as you know, I said we have increased it. But we are becoming more efficient. Now with the retail network that we have that we operate ourselves, we are able to take that money and have strong national programs, which helps our retailers also in these tough times. So we did spend more money in the wholesale side but we did use that money from our own retail network, and it helped our independents, too. So we have ongoing programs across the board. Yet the bottom line, Barry, is we want to increase the top line. Then we can see the leverage in our earnings.

As far as Mexico, when will that be completed?

It is completed.

Oh, it is completed? So it started up already?

Actually, we acquired an existing plant and they used to do - 80% of their business with us anyway, so it was not - it cam into our operation and fitted right away.

Okay, and as far as your operating rates domestically on your manufacturing, can you give us an idea of your average operating rate in the fourth quarter?

Barry, I don't know about that, you know, all those numbers as you know are all relative. But our case goods is operating, I'm just giving you some estimate, anywhere from 65 to 70%. Our upholstery most probably closer to 85% or so. So we have a lot of opportunity to increase our efficiencies through more volume. That is the biggest opportunity we have.

One last question on your stock buyback. I have to commend you on your consistency over the years, and I understand with economic conditions deteriorating, you are a little more cautious in the fourth quarter. But do you expect the buyback program, which continued last year very significantly, to continue?

You are talking of the share repurchase?

Yes.

Barry, you know, last year we spent a fair amount of money, and as you rightly said this quarter I said let's wait and see and strengthen our balance sheet, so we are also ready to buy more if we need to as things -- it becomes a little bit more clearer where we are headed. We have a 1.6 million authorization right now and we will watch, and as we see somewhat more confidence in the economy, our objective would be to start our repurchase program.

Thank you very much. Keep up the terrific work.

Thanks, Barry.

Our next question is from Budd Bugatch with Raymond James. Go ahead, please.

Good morning, Budd.

Good morning, Farooq, good morning, David, good morning, Peg. I want to focus for a second on the independent network and its strength. You made qualitative comment in your remarks that you have strengthened in the independent network. Talk a little bit about that. It looks like the cash conversion cycle has kind of expanded a little bit, and if I do my numbers right on the days outstanding of receivables, even though it is not material, they have gone up a little bit, and I am concerned about the independent dealer network even for a system as strong as Ethan Allen. Can you talk a little bit about that?

Budd, you know, these are tough, tough times, and it is tougher times if you are an independent retailer with only having one or two or three locations, and that area gets affected. Today to be in Arizona as an independent retailer, or Las Vegas, is pretty tough. It just so happens that we operate those design centers there, so we can absolve some of the additional costs and losses in those areas due to the economic environment. So our retail network has been impacted. That's why our objective has been to see how do we help them through this difficult period.

Now, one good news is that the ones that we have left for the most part are our stronger retailers, and even today 95%-plus pay within our term of 15 days. So fortunately our retail network is stronger, yet they are also under pressure. That's why we also decided last year that one way to help ease their pressure is to -- for us to take on more of the advertising responsibility, which we did. It helps both ways. Of course it helps our build our brand. It helps the whole network, it helps our dealers and we had a dealer meeting just about three weeks back in Danbury, and we had a good meeting and they are very -- they are very, you know, enthusiastic with all the changes we are making. Yet, on the other hand, the fact is that the situation on the ground is pretty tough. So we are also concerned and we are watching this carefully, and we are doing everything we can do to help our independent retailers remain strong and to grow with us.

Do you foresee the company taking many more retirements this year? Not many more. Do you foresee some additional retirements this, year potentially acquiring some of the independent network additionally this year?

Budd, as you know, last year it was in a very tough, tough environment, we only took over five. But we also let a few - we did acquire a few that retired, because we also were selective. We said in some markets, it is better for us to wait, because locations are not in the right places for us to take those over, a few markets. So I think the same thing will happen this year. A few will retire. A few markets where we may decide that instead of taking it over, we may wait, because then we will go back and we will go into the right markets - into the right trading areas. So we are being somewhat more selective ourselves, Budd.

Okay. I was also interested in part of what David said about some of the gross margin improvement in terms of the percentage being driven in the quarter by increased wholesale efficiencies, and I actually get about 20 basis points of wholesale gross margin improvement. Tell me how you did that with the volume degradation that you unfortunately had to experience? Did you have much downtime in this quarter versus last year? Refresh me about last year.

We had - in our case goods we did have downtime. We closed our plants for about two weeks this last quarter to keep our inventories down, more or approximately the same as the previous year, too. Our efficiencies continue to come from the benefits. Our efficiencies that we have seen in the past year were also a result of the steps we took in the year - two or three before that. Because as you know, we just don't get it in year 1. We continued with the initiatives we had taken in the previous years. Our efficiencies, for instance, in our logistics side, despite almost a doubling of the diesel fuel cost and we bear all their costs, we were able to benefit because we two years before that we had closed two of our major distribution centers and opened two new distribution centers, and that gave us a benefit of efficiencies. The two new distribution centers in Dublin, Virginia and Atoka, Oklahoma, replaced two we had, one in Vermont and another one in North Carolina. All of those efficiencies have helped us. And I am also very pleased to say that at the end of the day it is due to the fact of a lot, a lot of good people that we have. The average association of the management at Ethan Allen in our manufacturing, in our distribution, in our logistics, has an average association of over 20 years, so they are pros. That experience counts a lot in a downturn.

But structurally now you think you are okay for a while? I know you are not operating at the kind of operating capacity rates you would like to operate, but do you see any unfortunate manufacturing changes necessary to come?

No, not really. In fact, we have absolved the costs of operating in the United States, and it is [harder] to operate in the United States but now we are starting to see the benefits of having a balanced manufacturing base. In fact, most of the new products that we are going to be introducing later this year which we have already developed is going to be made out of solid American woods. We operate two saw mills also. So our objective is to balance our manufacturing and sourcing with some key people that we have overseas and we have very, good partners. We have narrowed it down obviously in the last few years, and our manufacturing in the United States, I'm talking about good manufacturing, and I think the combination of the two has the opportunity of helping us increase our margins. But Budd, we also do need a better economic environment so we can have higher volumes.

My last question goes to Laura's question on inventories. I know you took over the Mexican operation and that leather inventory. I wonder, do you have fewer retailer stores but probably more square footage this year? Is the retail inventory up year-over-year as well or is that flat, or can you give us a characterization of that?

It is flat. It is even -- even with increased -- we increased some finished goods. We increased -- keep in mind it is what, 2.5%? 2.5%, yes. Most of that is, Budd, our finished goods inventory, leather and fabrics.

I'm sorry, what's 2.5% Farooq?

The increase on inventory --

The change year-over-year?

Yes.

Thank you very much. Congratulations and keep up the good work.

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

Good morning, Farooq, and everybody. Has there been any change on your third party credit? Have they tightened? Have you seen a pattern of usage change? And if you could refresh us again what percentage are you using credit?

John, we are watching that very carefully. While we have not seen any change, I would think there most probably is some change even though my folks tell me there is no change. I would think that there is some change, yes. Our customer base and the demographics we are dealing with is always less impacted by the issues of credit that we see at more of the mass level. So I have not been told, and I follow it very closely with our third party financial -- they have not come back to us. They seem to be happy. They are approving credit for our customers and approximately --

If they had tightened the credit score, they would be required under your agreement to notify you of that?

No, they don't.

They don't have to.

What we do - the information we see is what we get from our own retail network, to see whether people are complaining. But as I said, the chances are as I said they have tightened it. I think most consumers also themselves know that they can't complain too much. But we have not heard it. Our credit seems to be okay but I would think that - while I do not know that, because we don't get that information.

Thank you. My second question is we seem to be at an inflexion point on imports. I'm curious as to what cost changes you see? Obviously we have got the currency exchange and we have inflation over there and it seems like more expensive to bring product over on the boat every time we turn around. How has that affected your thinking going forward? I assume we still have tremendous gaps of pricing or costs on certain products out of Asia. So we are not going to see a dramatic swing back. But just curious of any color of what you are seeing on cross-trends, import versus here, and how that changes your thinking? Thank you.

John, we have maintained approximately 60% domestic and 40% imports, which is up - 35% of that is from southeast Asia and 5 to 7% is from the U.S. and other countries. We made a strategic decision a few years back that we are going to maintain that balance even if it costs us more. Now, the gap is narrowing. The gap is still there, and as you rightly said it is reasonably significant gap, but it is narrowing, and we believe that it does make sense for many, many reasons for us to have this balanced approach to sourcing.

It also gives us an opportunity to develop products which are much more distinctive than you can even get from overseas because of the resource of lumber we have in the Appalachian Mountain range. This is one of the best and the largest managed forests in the world. We are taking advantage of that. We believe that going forward that it will give us a much greater opportunity of differentiating ourselves in many ways, in product, in quality and style, and also the efficiencies of time and less inventories in terms of managing it. Yet having said this, we have very strong partners overseas and we want to grow the business with them. But I don't think it will grow like -- we went 40% pretty fast overseas. I think now we will grow both.

Thank you.

Our next question is from Matthew [Fagler] with Goldman Sachs. Go ahead, please.

Good morning.

It is actually in for Matt, good morning. I'm trying to reconcile the change in total sales growth relative to the change in the reported retail levels, same-store sales growth. What I mean is total sales growth deep into a negative 9% decline, deeper than the negative 4% in the prior quarter. So a deepening of roughly 5 percentage points, and your comp actually steepened to a negative 11% decline, down from a negative 1% decline previously, a 10 percentage point deceleration. Could you help me understand what the difference -- what is driving the difference there?

Good question. The difference between the comp and the delivery can also be explained -- the number -- as well as of course the business is down. The other important factor is we have had a record number of relocations this past year, 18 in our retail division. So 18 design centers were taken out and put in to as we would consider them into -- taken from the same store to be considered new. That had an impact in having the difference between the actual delivery and the comp delivery and the total delivery. I will ask Dave, we'll see whether we can provide this information publicly or not, but I'll ask him to do a little bit of an evaluation of that. But that was the major, major reason.

Okay. That's helpful. Could you also give us some color in terms of how sales tracked through the quarter? I believe you began the quarter roughly down in a 2 percentage point - a 2% kind of territory, I think that was listed some by the -- Easter shift. Could you tell us if trends deteriorated through the quarter and if so - well, apparently that is so, but was it linear and to what extent has that weakness continued into July?

July is a little bit too early because of the fact that until there are - periods of a month is over, it is hard to give any real information, so we just have to wait for that. During the last quarter, we did see a continued decline. We also had a price increase in June, which resulted in some more business coming before that price increase and after the price increase, the business did considerably slow down. The other reason our business slowed down in the middle of June and onwards was the fact that we implemented during that period our team concept. And then we made the kind of changes we have made in June, and even in the first two weeks of July. These are major, major changes, taking all of our design consultants and putting them into teams, changing their compensation, a lot of discussion. We brought 1,000 of them over here to our headquarters to discuss it with them. So that also was somewhat - did create some disruptions during the latter part of June and even in the first couple weeks of July, because we implemented the team concept on July 1. So overall, obviously the business still remains soft because of the economic conditions.

Okay. And one last question on expenses.

Yes.

In terms of your service level and how you might have adjusted that throughout the quarter, as things softened through the quarter, how did you make, if any, adjustments in your level of store - labor in the stores, and how far -- how much further could you go or how far down can you go and maintain what you feel is the minimum service levels?

In fact, our objective is to increase the level of service because the issue really is our business is based on the fact of converting the people who come. We take the customer and turn them into a client. We really want to give them more service. Where we have been able to reduce costs is by creating these teams, and these teams also have resulted in less people, and very importantly and the major benefit is going to be substantially less turnover. We have already seen an 80% decline in turnover in one month. A major, major change as we go forward. That is one of the biggest benefits to us, less turnover, more stability.

Great. Thank you.

Our next question is from Todd Schwartzman with Sidoti & Company.

Good morning.

Good morning, folks. First of all on the gross margin, based on today's demand and cost environment, how should we think about the gross margin for full year '09?

Well, Todd, as you know, we are not giving projections but we also don't - our objective is to maintain a steady business. Our whole structure is based on an everyday best value, no sale events. Always there are some external factors. Our gross margin should be fairly steady, but keep in mind the gross margin also is impacted by volume. So volume has an impact also on our gross margin dollars, even obviously percentage in terms of how much we are able to absolve. Overall, I would say that it should remain pretty constant.

Got it. Is it too soon to evaluate the productivity of the smaller design studios? And also, how many of those are actually open now?

The studio concept right now, as you know, it is a concept. It is basically that if you have a smaller market and two designers can do the job, why put six or eight people? It is obvious, but sometimes obvious is not obvious until you do it. So we have some of those that we converted, but some of them are from the old larger spaces with less people. We have a couple with smaller spaces, but it is more a concept of the way we operate rather than size, even though we are going to get a few with smaller sizes also. So far, the experience is good. But you are right, it is still early. In the next year, we will know more but I must tell you this. It is so simple and so common sense that it is working, and places like Davenport, Iowa and Altoona, Pennsylvania, they are doing almost about the same business they did last year with at least 60% less people.

Okay, and the design consultants that have left the company, can you speak to what extent those were largely underperforming individuals or just maybe fallout of underperforming stores that perhaps were closed?

We had just over 500 people I mentioned were across the board. These people were in our service center, which we consolidated. Some also in our other wholesale operations. They were at retail. And in the retail end that you are referring to, it affected many factors. Some of them were due to this consolidation from a design center to design studio, and also we closed 12 design centers completely. So everybody there had to go. And then on top of it, when we are creating the teams, some of the people were not able to be -- to fit into the teams for lots of reasons. So those are the reasons why we had to make the changes of having less people.

Farooq, would you say that roughly half maybe were victims of closures or consolidations? Is that a fair assessment?

If you say consolidation, meaning even creating the team -- you are excluding the team structure?

Yes.

You have to remember, the team structure affected everything. It affected our design studios. It affected existing, and then there were others who were impacted due to the service side. So, you know, those are all the reasons how these people were affected, Todd.

I want to talk about sourcing for a moment. Have you seen any change within case goods, within case goods manufacturing, the mix within Asia away from China? Do you foresee that happening over the next several years?

I am not completely familiar with what is taking place in that more -- in our general furniture industry at the mass levels. We have maintained a very steady business between three countries that we deal with, that is Indonesia, Philippines and China, and that balance has been maintained for us. But overall for the rest, it really is hard to say for me.

And for Ethan Allen specifically in terms of the mix of case goods produced overseas, how high can that go over time?

Overseas?

Yeah.

Right now it is approximately 50/50. Our total becomes 60 because greater -- almost out of our upholstery is made in the U.S., so that's why the total becomes over 60%. I would say that for the foreseeable future I would like to see that 50/50, and then we will see what areas make sense for us to invest in for further sourcing.

So no plans to expand beyond Indonesia, Philippines and China for the time being?

That's right. Thank you, Farooq.

Thank you. Our next question is from Anthony Chukumba with FTN Midwest Securities. Go ahead, please.

Good morning, Anthony. Your telephone works?

I'm sorry, I'm getting no response. Our next question is from Joe Feldman with TAG. Go ahead, please.

Good morning.

So quick question for you, a couple quick questions for you. We were pretty impressed with your ability to maintain the logistics costs despite the higher increases in gas prices and other energy costs. We are just kind of wondering what you found help there? Was it better leverage of distribution, more -- better shipments? If you can just delve into that a little bit?

It is a combination of a lot of factors. One was this consolidation I talked about of 18 service centers is a continuing process whereby we are becoming more efficient in delivery of our products to the final consumer. As you know, we deliver our products to a consumer's home at one price anywhere in the United States. So it is -- so we have been affected by all these costs. On the other hand, efficiencies are taking, for instance, 18 service centers, it meant all the costs associated, occupancy costs, personnel costs, logistics costs were taken out, and secondly, our wholesale division -- we have a trucking fleet which delivers to the service centers, retail service centers, which then deliver to the customer. We had to go to 18 less service centers. Our wholesale had to deliver to 18 less, which meant -- which of course as you can see has implications of mileage, gas and everything else.

Secondly, our everyday best price has enabled us to be more in stock, which has given us an ability now to have less warehouse space with our retail operations. That's why we consolidated 18. When we had 6 or 8 sales, we had ups and downs, and we needed more space in our retail service centers to take care of these high sale periods, and then low sale periods that were empty. Because of that, the efficiency both at wholesale, we have less space. We are using it more efficiently. In retail, we have less space and are using it more efficiently. A lot of it is also good common sense by good people, lots of hard work there. So a combination, that's a very important factor in this.

And then just to follow-up on that topic, it would also imply that you are probably seeing less damages and less returns, just given the better efficiencies. Is that a fair assessment?

Absolutely. Our returns -- I'm never happy with returns but they are lower than we had before, and always we have the lowest most probably in our industry.

Great. And then another sort of topic, I think when we saw you at the -- your new flagship store presentation the other day, it definitely seemed -- we seemed to pick up a little more willingness on your part to expand internationally, that that could become more of a growth vehicle going forward. I was wondering if you can discuss that at all in any kind of a timeline, and when you might become a little more aggressive with international expansion?

That is right. We have so far -- other than China, where we operate in 26, and now 27 I think, and they are doing well. They are growing at a good rate and we have great partners over there. We have now also just established an operation in central Europe, and we are looking to see the opportunities over there. I think that in the next year we would start doing some business there. We are also becoming somewhat more aggressive in the Middle East, for instance in Dubai and other places, we are now in the process of doing some negotiations. The reasons is that unless you give it a lot of effort, it really does not work. So far we have been so busy domestically, you know, we had more opportunity and still do in Chicago and Denver and Minneapolis that we do in say Belgium or France. However, having said this, our objective is to leverage the Ethan Allen program, because we have the program, 90% of our products are in stock, and we can develop the retail business. So you will see more retail business in the next year. International business, I'm sorry.

Understood. And then just one final one before -- then I will move onto other people. When we were talking before about the relocated stores and , you know, we understand the strength of those stores, I guess the question we had was sort of the timing of -- when do we start to see a good chunk of them start to come into the comp base, where they will have an impact? Will it be as early as this first quarter or is later in the

I would say you would see it more in the second half, because most of these that we opened were opened in the second half of the fiscal year.

Thank you.

Thanks very much. We will take one more question.

Thank you, sir. Our final question is from Joel Havard with Hilliard Lyons. Go ahead, please.

Good morning.

Thank you. Good morning, Farooq, and everybody. The dealer store count, Farooq, that wasn't in the press release. I didn't catch it in your opening remarks. Is that an intentional exclusion?

No, I did mention it. I will say it again. It is 136.

I thought that would help.

And 156 is the company operated.

Yes, sir. Sort of a philosophical front here, do you believe the current marketing message/campaign is pertinent in, let's call them uncertain economic times, and that's kind of a yes or no. Obviously I'm hoping you will elaborate a little bit and tell me where you think it could go, should go, et cetera.

That is -- you are right. It is a philosophical and a strategic question. It is how we position ourselves. I believe that anybody who is caught in the middle -- and I have said this for a long time -- is going to have a tough time. We have been running a furniture store with decorating advice that is being in the middle today. Today a lot of other folks are offering furniture store with decorating services. We are -- our opportunity is to really focus on providing interior design services but to a large base of people, and not just what traditionally interior designers did.

That also has impacted all the steps we have taken in the last few years. For instance, in the last three years back we promoted 300 of our - just in the company retail division, our independents did also, the total was 500, of our interior designers were promoted to project managers. So we could really start training them to really start managing teams, and really felt comfortable. At the same time we also went on an aggressive plan of hiring new interior designers. I myself approved over 1,500 because I wanted to see the caliber of people coming in. So we had new designers, all with interior design backgrounds not furniture sales people with a little decorating help. That was the nature of our industry. It still is. And you've been there a long time.

So we then ended up, by having interior designers, by having project managers, and we felt we were now ready last year to really focus on the interior design services, to create teams, to get the message across. Because this is not just an advertising campaign. It is not going to work unless you back it up with an infrastructure and a philosophy and a commitment throughout the organization. This is one of the toughest but in my view one of the most important changes we have made to take our business to the next level.

I actually very much agree with the fact that I think you guys have built the back end support or the customer interface support, but now let's go back to the advertising part. Do you believe that in this kind of environment, it really doesn't behoove the company to maybe turn up the advertising effort? Do you just think the customer isn't going to really get there to -- in the volume you need to make those ad dollars worthwhile at this point, and you are just going to kind of wait for a recovery to begin to materialize hopefully in the next year or so, or do you think there is an opportunity for the company to maybe tweak the message or just increase the volume on the message?

Well, we have increased the volume in terms of -- if you are saying should we let them know we have some kind of values and sales, that's the other side -

Exactly.

No, I don't think so. For us to do that is going to be caught in the middle. Everybody is -- there is a sea of sameness out there, they are all saying the same stuff. That is come and get it because --

I don't just mean be more promotional or go back to some sort of sale, but to expand the number of placements you are making, maybe reach into some new media.

I'm sorry. Yes, absolutely. In fact, let's face it, we have increased our national advertising messages through prime time, through television, through cable. We have also --

Going up.

We are also getting a very strong message through our direct mail. We are also getting more into [shelf] magazines, which we did not do before. Yes, so we are using more mediums and most importantly, in September/October we will introduce our new website and we will also advertise for the website.

Okay. Now just having made the point that I will hope you spend money in order to make money, what could you tell us about your philosophy on G&A control. Even in this tougher environment, that expense has been going up. Obviously, some things going on internally that may have caused that. Can that number start to come down or at least hold flat?

You know, you talk about spending money, last year - last fiscal year we spent 11% more in advertising dollars at the corporate level. National advertising. We increased our messages last year.

Good, good.

Now as far as the G&A is concerned, we are looking at every possible way to improve the structure of our business. I also mentioned because of our increased improvement in our structure, we were able to reduce by almost 10% over 500 persons this last year in the company. That is a major change. We didn't do this because of the fact we wanted to let people go. We did it because of some important structural changes, and that's a major, major impact on G&A.

Does that then suggest that we -- obviously a little pull back in Q4, is that where we are starting to see the benefit or is there really room from here?

The benefit is next fiscal year. Again deep in mind, we have extremely a fine-tuned machine here. We need more volume. We have a lot of things in place. We have great design centers, great people. Now you folks have got to help us to move this economy a little bit.

I fear my wife and two preschoolers are doing their part already, Farooq. Guys -

That's what we need. We need better consumer confidence. But as I said, we are prepared for both. We are prepared for a slow down, but we are prepared and ready for the next phase of the economic cycle.

Thanks for your time, guys, good luck.

Thanks very much. All right.

Thank you very much. If you have any further questions, please let us know. If not, good to talk to you.

Ladies and gentlemen, that concludes the conference. Thank you for your participation. You may hang up at this time, and have a wonderful day.