Ethan Allen Interiors Inc (ETD) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter earnings release 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).

I would now like to introduce your host for today, Chairman, President, and CEO, Mr. Farooq Kathwari. Sir, you may begin.

Yes. Thank you Melissa. Good morning. With me today are Dave Callen, the Vice President of Finance and Treasurer, and Peg Lupton, Director of our Investor Relations. I will provide you with very brief opening comments, followed by Dave Callen giving details about our financial results. I will then discuss in greater detail our business initiatives, and open for questions, and plan to end by about 11:45 a.m.

Despite a very difficult period, we saw our sales decline by 27%. We were able to generate a 5.3% operating income. We were able to maintain our consolidated gross margins at 53.7%, the same level as last year despite lower sales. Our inventories remain stable, and operating expenses during the quarter were reduced by $14 million.

Our Board also decided to continue our cash dividend, although at a reduced rate of $0.10 per share. We have also reached an agreement to amend our bank facility, providing us a $100 million unsecured revolver. Our objective continues to manage our cash, so that we do not draw on the revolver.

I will discuss in greater details our business strategy, which focuses on two elements. First, positioning Ethan Allen as a provider of interior design services with stylish, good quality, and value offerings, and second, continuing our process of reinvention, by improving and simplifying our structure, adding technology to our personal services, and continuing to reduce operating costs, to counter the expectations of lower sales volume for the foreseeable future.

With that, Dave.

Thank you Farooq. Good morning everyone.

Please note that in the earnings release issued this morning, and in the course of our prepared remarks, reference has been made to certain non-GAAP information, which excludes the effects of restructuring, impairment, and related charges recorded during the quarter and year-to-date ended December 31, 2008 and December 31, 2007. A reconciliation of this non-GAAP information to the most directly comparable GAAP measure is available on our website.

Net sales for the quarter were $189.6 million, compared to $259.5 million in the second quarter of last year. The retail divisions net sales were $147.2 million, versus $192.6 million last year, with comparable design center delivered sales 27% lower than in the prior year quarter. Written sales in retail decreased 29.9%, and comparable written sales decreased 32.8% versus the prior year quarter. Wholesale net delivered sales were $108.8 million in the quarter, compared to $155.9 million in last year's second quarter.

Consolidated gross margin for the quarter was equal to the prior year at 53.7%, reflecting underabsorption of overhead in our wholesale plants, and some impact from warehouse and floor sample sales in retail, that were offset by the increase in proportion of retail sales to our total net sales.

Gross profit in the quarter was $101.8 million. Consolidated operating margin was 5.3% for the quarter, very healthy given the lower sales volumes. Wholesale operating margin was 7.9%, and retail operating margin minus 2.1%, excluding the minimal restructuring charges. Consolidated selling expense decreased $8.9 million. General and administrative costs decreased $5.4 million, compared to last year's second quarter.

Interest and other income decreased $1.1 million from the prior year, due primarily to lower interest income, with lower average invested balances and lower interest yield. Other factors which positively impacted results for the period, include a lower effective tax rate of 33.6%, and the effects of share repurchases on retirements occurring during the last 12 months, which served to reduce the weighted average share count by 2.7%, or 800,000 shares.

Diluted earnings per share for the quarter were $0.19, on net income of $5.5 million. This compares to diluted EPS of $0.70 per share, and net income of $26 million in the prior year quarter. Net sales for the first half were $395.4 million, compared to $508.2 million in the first half last year. The retail division's net sales year-to-date were $303.1 million, versus $375.3 million last year, and wholesale net sales were $230.1 million, compared to $312.3 million dollars last year to date.

Consolidated gross margin for the first half improved to 54.1%, as compared to 53.7% in the prior year first half, reflecting the improved margin in our retail segment, and the increase in proportion of retail sales to our total net sales. Gross profit year-to-date was $213.7 million. Consolidated operating margin was 5.6% for the half, or 5.2% excluding the $1.6 million of net restructuring income booked in the first quarter. Excluding restructuring impacts, wholesale operating margin was 9.1%, and retail operating margin was a minus 2.7%.

In the first half of this fiscal year, consolidated selling expenses decreased $11.2 million from the prior year-to-date spending. General and administrative costs decreased $7.4 million over the prior year-to-date. Interest and other income decreased $2.9 million from the prior year, due primarily to lower interest income, with lower average invested balances and lower interest rates, plus the prior year included non-restructuring gains on sale of real estate.

Diluted earnings per share year-to-date were $0.45, on net income of $12.9 million, excluding the impact of restructuring, diluted earnings per share were $0.41, on income of $11.8 million. This compares to diluted EPS of $1.27 per share, and net income of $38.1 million in the prior year first half.

During the 6 months ended December 31, 2008, we generated operating cash of $15.7 million, and ended the half with $64.5 million of cash and investments. We spent $16.1 million on fixed assets, primarily in the retail segment, but also realized $5.7 million in cash, on the sale of a property in the first quarter. We did not repurchase any of our common stock this fiscal year-to-date, and have paid $13.5 million in dividends to our shareholders. Accounts Receivable are in good shape, with 97% of our dealer receivables current.

Inventories edged up just 0.8%, or $1.6 million this half, as we prepare for the launch of the Artisan Collection, and somewhat from the lower sales volumes. We remain in strong service position with respect to incoming orders, with over 90% of our cased goods items, available for shipment within 30 days, and over 90% of our custom upholstery in 45 days. EBITDA for the quarter excluding restructuring and impairment charges totaled $35 million, or 8.8% of sales, as compared to $75.7 million, and 14.9% of sales in the first half last year.

As a result of the decline in sales, and the deterioration of the economy as a whole in this most recent fiscal quarter, we performed with support from a large accounting firm, other than our external auditors, an interim evaluation of the indefinite lived assets of the Company. We determined that the fair value of our indefinitely lived assets exceeding their carrying values, and therefore were not impaired. If macroeconomic factors, our stock price, and our operating results decline beyond anticipated levels, the Company may again need to evaluate the fair values of our indefinite lived assets, and that test might result in impairment at that time.

We have also reached an agreement with our lending group to amend our line of credit. We expect to execute the final agreement shortly. We have happy to have the backing stable and well-positioned lenders in our banking group, and we continue to about confident in the liquidity and capitalization of the Company, and pleased with our operating results and financial standing in this challenging economic environment.

Now back to Farooq for his comments.

Thank you, Dave. I mentioned earlier two important areas of focus. First positioning Ethan Allen as a leader of providing interior design services, with style, quality, value and personal service, and second, the continuous reinvention to strengthen our enterprise, while at the same time, reducing our operating costs, to counter the expectation of lower sales volume for the foreseeable future.

We have made good progress, including the following key initiatives. Our teams at all levels are stronger, leaner, and more cohesive. The migration to the team concept early this fiscal year, has resulted in strengthening our ability to service, and also lowered costs, by reducing the number of associates needed to provide these services. We have strong credibility within our organization and externally with the public. We are perceived as a desired brand.

Our offerings are stronger, relevant, and stylish. We have enhanced our offering with the introduction of the new Modern Attitude earlier this month. We have expanded our reach to a larger consumer base. Our offerings including the new American Artisan, with our new innovative ecofriendly water-based finishes, are being well received by our professionals and our clients.

We have continued to maintain a strong advertising presence. To project the strength of our brand, we increased our national television and our national print advertising during the second quarter by 25% over the last year quarter, while overall reducing our advertising costs. We are a more efficient organization, and we have in place a continuous process of reinvention at all levels.

We are more efficient in our design centers, by closing underperforming design centers, and consolidating several to design studios, which lowered our operating costs. Last year 18 retail warehouse service centers were consolidated. Earlier this month we announced the consolidation of several additional retail service centers, to our larger retail service centers, and also the closing and consolidation of an upholstery manufacturing plant.

These steps and other measures taken this fiscal year have helped in lowering our operating expenses this past quarter by $14 million. The initiatives we announced this month of consolidations, will further reduce our annual operating costs by 8 to $10 million, which we would benefit in our next fiscal year.

In this severe recessionary environment, we think it makes sense to bring our operating cost structure down on a proactive basis, to a level that will sustain lower sales volume. We are fortunate, we have been taking steps during the last several years to reduce our operating cost structure. We are in the process of further bringing our costs down, while maintaining our strong presence in the marketplace.

As you also know, we had decided several years back to maintain a strong manufacturing base in the United States. While at this time we are operating at a rate of about 62% of furniture products made domestically, our objective is to take it to about the 70% range. Please keep in mind, when we include our accent product programs, we are already operating at about 70% with domestic made products.

We are better positioned with our investment in technology. We have invested several million dollars during the last two years in our new website, which has been very well received. We have invested in many other areas of technology, including a new digital asset management system, and next month we have ready to launch an information system for our retail division.

We have also developed and implemented a new information system for our upholstery manufacturing and logistics division in the last two years. As our website is operating according to expectations, we plan to launch a major national marketing campaign, from early February to have more consumers visit the new EthanAllen.com, and also our design centers.

We have substantially completed our initiative of relocating design centers around the country. This initiative involved annual capital expenditures in the range of 50 million to $60 million over the last few years. This year our capital expenditures are expected to be between 25 million to $30 million, and next year we have the flexibility to spend less than $20 million.

During the quarter, one independent design center was transferred to the retail division. Our dealers closed two smaller design centers, and opened one new one during this quarter. We are also grateful that our organization is better prepared to face the recession, and the difficult decisions that need to be made. Our brand is strong. Our leadership position is strong, and our entire organization fully understands the concept that cash is king.

I will also briefly update you on several other areas. On capacity utilization, we continue to operate our manufacturing by taking down time. In our first quarter, we took about 18% down time, and in second quarter 21%. Last year we had no down time in the first quarter, and we did take about 8% down time in the second quarter. We expect to continue to take down time this third quarter to manage our costs and inventories.

At this stage our plans are operating at about a 60% capacity. Our inventory levels remain at $187 million. The same as last year, despite a major decline in sales. Our everyday best price structure has enabled us to maintain our gross margins at retail, while our margins at the wholesale level did go down, due to taking down time, and also the result of lower sales.

On a consolidated basis, we maintained our gross margin the same as last year quarter. In the third quarter, our plan is to reduce inventories from the current levels. Our design centers as of 12/31/08 were at 293, with 131 operated by independent dealers. Despite a very difficult operating environment, our dealers are holding on, and as Dave just mentioned, over 95% of our Receivables are current.

We are also pleased that Dan Grow, formerly President of Drexel Heritage Furniture, has joined us to lead our international business, and the new initiative of developing a contract sales department. We believe we have an opportunity to leverage our brand, operations and offerings, to expand our sales in that area. Finally, we are ready for the next cycle of economic activity.

With this, I would like to open it for questions.

Thank you Sir. (Operator Instructions). Our first question comes from Robert Higginbotham. Your line is open.

Hi there.

Hi. A couple of questions. The first has to do with inventory and production rates. You called out the fact that inventory is pretty much flatish against last year despite the sales declines, and you also talked about the 60% kind of utilization rates in your factories, but you are talking about reducing those inventories, and also increasing those utilization rates in your factories. Can you help me understand how those two things are going to come together?

Yes. I also mentioned that our structure of everyday price has had many, many positive implications for our business. It has given us an opportunity to level our sales during the year. It also has given us an opportunity to forecast, every 12 to 13 weeks is our timeframe now of forecasting, rather than 5 to 6 months, as it used to be before.

Now our forecasting ever since last September, started to reflect the decline in sales, but by December and January, it now reflects even more the rate of sale that we have had in the last few months. So as our rate of sale has gone down, our production and ordering from our manufacturing overseas has also started to go down, and that will start reflecting in this next quarter.

Got you. Thanks. The second question is on the dividend cut, and also the credit line renegotiation, but first on the dividend cut, can you help us out, in terms of how you thought about what level to take that to? Was there a certain payout ratio in mind? As part of that, as you renegotiated your credit line was that dividend cut, part of that renegotiation process, and sorry lastly, if you can help us with the revised covenant restrictions are?

Let me first focus on our agreements with the banks. No, the dividends were not part of any understandings, because we have cash. The reason we reduced the dividend was because it reflected the cash that we generated this last quarter, and overall we are going to look at it very closely, but this dividend rate that we gave, is approximately between 40 and 50% of our free cash that we generated last quarter.

As far as the covenants are concerned, we have not signed the final agreement. We plan to do in the next day or two, and then we will make it all public.

Great. Thank you.

All right. Thanks.

Our next question comes from Todd Schwartzman, your line is open.

Good morning.

Good morning.

Can you refresh what the preexisting covenant is, and how closely you came to tripping that?

First I must tell you this, that we have about $17 million of cash. We have not in the last few years drawn on this revolver. I was almost tempted to give it up. And as I also said in my comments, our objective is not to use it. Yet we are paying fees in using it. Yes. But based on the revolver we had previously, we had very, very high covenants, which we would have tripped. So by doing this, we have avoided that.

And any sense in terms of how close it became?

We would have tripped them.

Can you just go back to the inventory for a moment. I am just trying to understand over the past six months or so, I would have expected that inventory would be lower than it is. Just wanting to get my arms around why that is not the case?

A number of factors. One of the ways that you get lower inventories is by markdowns and selling it, and we could have done that too. That has an impact on our margins. It has an impact on our credibility, is has an impact on our structure, and we felt a better way is to continue our business, maintain our structure the way it is, and reduce it as we go along. As I said, this quarter our plans are to reduce them, to reflect these lower sales. This kind of sales that have declined in the last quarter, is like a tsunami hitting the economy.

And the only way people have been able to reduce their inventory is by just giving it away, and we have not done that. Because our inventory is in good shape. They are all current, and over the next few months, as our incoming ordering is lower, and we are going to take some more down time in our plants domestically, we are going to bring it down.

The flat levels have been largely, overwhelmingly a function of the everyday value price strategy?

It really is a function of the major decline in the last quarter in sales. The amount of decline we had was so sudden, and so fast that it will take us another three to four months to get that in line.

What color can you give us pertaining to the contract furniture objective here? Talk about maybe products, end users, what about distribution, manufacturing, where are they going to be made, start-up costs, and any other costs involved on an ongoing basis, and the timing, especially of those initial costs to be incurred? Thanks.

Yes. Now that we have changed about 85% of our product lines, and expanded our range to a larger range of styles, we are in a much better position to also service the hospitality, and the contract business, which initially we were not able to do. Now we also have, we operate our own upholstery manufacturing, which already in the past and even currently, does make product which is somewhat more needed for contract, like for instance, flammability, and things of that nature.

We have an upholstery manufacturing plant in California, which rarely has to meet all kinds of flammability for domestic, which is pretty similar to the contract. So to answer your question, we are not going to be investing a great deal in additional, either manufacturing or developing new product lines, but utilizing our manufacturing domestically, both cased goods and upholstery, and also leveraging from our resources overseas, of being able to do some contract business.

For instance, we recently did a fairly major project, in one of the most leading hotels in New York. They came to us, and we were able to take one of our product lines. We had to slighty change the design, and they are very happy with it. But we didn't have any means of going ourselves to that business. People would come to us, but with Dan Grow coming in, and his knowledge of that industry, I think he will leverage what we have, our objective is not to spend additional costs, or build inventories, or build factories, and all of that stuff.

Also another thing that Dan will do is, which we need, is to help the growth of the international business, because we didn't really have anybody full time working on that. We have right now a number of people interested, even despite this difficult environment. We are still doing well in China, and as you know, we had hired someone to work for us in Europe who is working hard, tough conditions right now, but we will be positioned well to do some business there, plus in other parts of the country. So I think that this is a very important, and a very cost effective way for us getting into that business.

Aside from the hospitality industry, you are not looking at entering the corporate office market, it sounds like? Is that correct?

That is right, we are not entering that. Other than what we already do, which is we do a fair amount of offices, but this is from our current programs. We are not involved with large scale commercial office businesses, and our intention is not to go there.

What about sourcing, and just production in general? How much of these will be brand new products, versus just repositioning, or positioning some of the existing pieces and collections to a different consumer?

We will watch it as we go along, and if we have to, like we mentioned this hotel in New York, they give us a special order, and we made it. We are not going to build inventories for this program. Our objective is to utilize about 80% or so of what we have, and 20% make it custom, from our domestic resources and our overseas resources.

Any projection on a 3 to 5-year basis, as to what this could mean for the top line?

3 to 5 is a good timeframe. I would say that internationally and in contract, we should do close to $100 million of business. That is our objective.

Last question is just how should we look at SG&A as a percentage of sales for the full year? Just looking at the first half, it has been in the 48.5 to 49 range. Do you see that on a full year basis as well for 2009?

We reduced our operating expenses by $14 million this quarter. We are now running at a rate in excess of $16 million on an annual basis, and lower operating expenses, and we are going to continue to reduce them. Now the top line is somewhat difficult to project.

The good news is this. Tough times also gives you an opportunity to keep on operating more efficiently, and this gives us an opportunity to continue to reduce our operating expenses to meet these lower sales, but on the other hand, we have a great leverage as business increases, because our operating expenses will continue to remain relatively low.

Thank you.

All right. Thanks.

Our next question comes from Budd Bugatch. Your line is open.

Hi Budd. Good morning.

Good morning Farooq, good morning David, good morning Peg. Can you give us a goal for inventory at the end of Q3? You have been flat now for a couple of quarters, maybe characterize how much inventory is retail and how much is wholesale? What is the dollar level that you think you can reduce it by the third quarter?

Well, we are going to reduce it by at least 8 million to $10 million, that is our objective, and we could even do more, but it also depends on the top line.

And that is pretty much all in the wholesale segment?

No. It is both, in wholesale and retail.

And retail too?

That is right, yes.

I noticed that customer deposits at the end of the second quarter were down at about 33%, almost 34% year-over-year, and with the written come down 33% at retail, is that a reasonable expectation for sales degradation in the third quarter?

It is a little bit early. Generally it has still been relatively tough, better than December. The last week or so we are having some positive news. But people are still overall concerns there. We are doing relatively better. We are still maintaining our margins, and I would say that our deposits do reflect the backlog, and other factors too, that Budd, over the years we have continued to deliver our products faster.

The faster we deliver, the lower the deposits. We are now, we could not five years back, imagine that we would be able to deliver as fast as we are delivering, and reduce our overall backlog. So there is good news and bad news. But good news. So yes, it is good to have deposits, but on the other hand we are in the position of delivering our products faster, from manufacturing to our retail service centers, and to our consumers. And that is also a factor of lowering deposits.

But we are about six quarters away from when Mission Possible really had the biggest impact. I would think the year-over-year deposit comparisons represents a pretty good indication of what the backlog looks like, and what the future is? Am I mistaken on that?

No. Absolutely our backlogs are lower, our business is lower. Our backlogs are lower, and we are shipping faster. So that is why our deposits are even lower than our backlogs, lower than our incoming business.

But not much different this year than last year, in terms of the relative size, in terms of the speed?

No. We are delivering faster this year.

Okay. Of the $14 million in expense reduction, how much varies with sales, how much happened because sales came down, and how much are structural reductions, either home office or field organization, that will not vary with sales?

I would say, again I am just giving you some broad ranges. Dave can perhaps do more analysis. I would say 85% of these came due because of our structural changes, and 15% due to lower sales.

Okay. That is a significant number, even if the sales do vary significantly.

That is right. That is the reason I was talking about the leverage we have going the other way.

Yes. I understand. And what do you look like for new openings? The dealer base is obviously challenged, like everybody is in this environment, in our industry and your industry as well. What do you look like for new openings in the second half of this year, and maybe next and how many, what is the outlook for taking some of the dealer owned business, and bringing it back in-house?

Budd, we are very blessed, fortunate, whatever you call it, of maintaining the base that we have. Our dealers, you are absolutely right. Everybody else in this world is going through a rough time, and it is amazing that they are holding on. One of the ways we help them is that we have increased our national advertising, so that gives us an advertising umbrella, and helps them reduce somewhat of their operating expenses, and also as I said, it gives us an ability to drive more traffic in these difficult times.

I think we have a couple of design centers going to be opened up, new ones that we are under construction. A couple of them are also building, or almost completed. For the next year, we will slow down considerably. Right now the objective is to make sure we do well with what we have, and in some cases, we are going to be consolidating where it makes sense.

For instance, just right currently, we have opened up a very major in a very good place a design center in Milwaukee, and this one new one is replacing three older ones we had, which were sort of neighborhood stores, so that kind of a process, we are right now, for instance, building one in between Naples and Fort Myers, we earlier closed Fort Myers, and we will move Naples to this new location, it is under construction right now.

We are right now in the process of building a new one in Cincinnati. So we have a few of those going on. But good news from the Company's point of view is, that fortunately most of this new construction was done, before the tsunami hit us.

Are you going to close any more stores? Do you see any more consolidation?

It is possible. We are looking at it very carefully. We are looking at some, where we have the opportunity of consolidating it, in some areas we opened up maybe two or three locations. Whereas today if we had to open them up, we would not open them up. So as we get an opportunity we might consider consolidating them.

How is that experiment progressing?

Which one?

The design studios?

We have a couple of them going. Two more are opening up. It is a good concept, and one of the worst times to open them. So I cannot tell you that right now that they are doing well, because it is too early, but as things normalize, I believe all indications are that they are going to do very well.

And lastly let me just follow-up on what Todd was asking about hospitality. One of the things if I remember right, you lost a major contract a couple of years ago, maybe longer than a couple of years ago in hospitality, because the product line didn't have the breadth that it needed. Do you need to broaden the product line for hospitality to make that a really viable business?

I think you are referring to a government contract.

I am indeed.

We used to have that actually, and we then gave it up ourselves, because we needed all of the production for our domestic needs, and you are right, at that time we didn't have the breadth, and in fact, we had to subcontract part of the program. We today are very well-positioned to get, if we want to, contracts like that, Budd.

Okay. Thank you Farooq, and good luck.

Thanks Budd.

Our next question comes from Rishi Sadarangani.

By the way, we can keep it open for another ten minutes because it is running a little bit late. Please go ahead.

Hello. Just a couple of quick questions, Farooq, I wanted your perspective. In case there were any unanticipated liquidity needs, or needs for cash, even though you have been pretty clear that the cash position and current borrowings you don't think that is the case, but if that were to be the case, what might be any other sources of liquidity that you might consider, or have available, or be able to monetize?

And I guess my next question is, what would you be looking for in the external environment to tell you that things maybe are starting to pick up? What might be some of the early signs of that? Thank you.

On the issue of liquidity, we have a number of opportunities, in addition to the line of credit we have from the bank. We have at least in excess of $400 million of real estate. We have unsecured, we own about 50% of all of our retail design centers. We own most of our manufacturing, most of our other distribution centers. So we have invested in the last maybe number of years over $0.5 billion in our structure. So we have the opportunity if we wanted to raise some cash liquidity from those, we can.

We have the opportunity of continuing to reduce and fine-tune inventories, because we have approximately $187 million of inventories. If we wanted to, we can reduce it by 30 million or $40 million, and still be able to operate. It all depends on what the conditions are. We have lots of options, but the best one is really is that we have cash. We operate our business well. We want to reduce our operating expenses to meet the current lower sales, and be somewhat conservative and as business picks up we will be in good position.

As far as business picking up, we have a very strong network. In fact, next Tuesday which I periodically do, and I and my associates, we are going to be talking over 3,000 of our associates on a webcast call, discussing our business, discussing where we are, and getting feedback. We do that constantly. So we have a lot of feedback coming in. And as I said, last week or so, we already saw some positive signs of people willing to make some commitments. One week is not enough, and there are a lot of other external factors. So we have a very strong network, and feedback, which will get us feedback instantaneously, so that we are able to react to it.

And are there any indicators, in terms of foot traffic or consumer confidence, or job losses, anything that you can look at, in terms of statistics and say okay, this is starting to turn?

For us consumer confidence has always been an important factor. We watch that very carefully, because we know that we have people coming in to our design centers. In fact our new, not new, our current advertising program and marketing program says plan now. We know people are interested, but may not necessarily be willing to commit. So our associates, we have encouraged them to work with the clients, work on their projects, plan right now, because people are interested, yet they are somewhat, some people are concerned about the external environment.

As soon as consumer confidence improves, our objective is to have a head start so that we are working on projects. As we see it, and as you know, things are so much down. It is a matter of time they will start going up, because they are so much down. It happens all of the time. This time the decline has been so strong, and so large, which is good and bad. Bad, it has affected negatively many, many people. The good is, we have the opportunity to go the other way also faster.

Thank you.

Thank you.

Our next question comes from Anthony Chukumba. Your line is open.

Anthony, good morning.

Good morning, how are you doing? Two questions. I just wanted to see if you saw any regional differences, in terms of sales performance in the US? Were some markets relatively better than others? And two, you said that part of bringing the dividend down was because your free cash flow was down. Would that imply that if the environment worsened, and your free cash declines further, that you would potentially cut your dividend again?

On the first question, Anthony, in the first quarter, when oil prices were still higher. You could see some areas of the country doing better, for instance, Texas was okay. But by the second quarter towards the end of the year, they also got impacted with lower prices of oil. I do not think there are some small little areas, the Dakotas are doing okay, because of the economy.

I think the interesting thing is that, other than our own individual factors of having very strong relationships in some areas, where people have been able to maintain relatively better business, but I think this decline in my view, for the first time I have seen has been consistently across the country.

Okay.

And the second question was?

The second question was you sort of alluded to the fact --

On the dividend. Yes. I got it. We run our business with common sense. It would be unwise for us to give dividends, if we are not producing cash. So we are going to make sure that we balance our needs for dividend, with that of security, and maintaining, going through this difficult time.

I think the objective of most businesses is that we have got to survive this, and on top of it come out stronger, and that is what our objective is. If it means, I think that we should be able to maintain the dividend, but we are going to watch it. If it makes sense, we will increase it. If it makes sense to decrease it, we will do that, or at least I will recommend to the Board.

Thank you.

Thanks Anthony.

Our next question comes from Maggie Gilman, your line is open.

Hi Maggie. Good morning.

Good morning. Most of my questions have been answered, but I just wanted one thing, one elaboration, and that is on the selling expense. Does that include your retail store payroll, or is that part of D&A?

That does include the retail store payroll, and it also includes the delivery of our products to our whole retail network from wholesale, because as you know we deliver our products at one cost nationally. So our selling expenses also includes our delivery costs and our distribution costs.

So that is why, that is the part that is variable right? Your people aren't on commission, or are they?

No. They are not. They are on salary. And their bonus, as you know, we changed it. So last year it benefited us in the sense that people are, many of our people would not have been able to maintain, to pay their bills.

Fortunately we changed it earlier this fiscal year, by converting our designers to salary plus a bonus, a team bonus, and the salary represented approximately 75% of what they had earned the previous year, and on top of it, when we created the teams, we were able to operate our business with less associates, almost 500 less associates, that also resulted in our selling expenses.

Thank you.

Thanks Maggie.

Our next question comes from Joel Havard.

Hi Joel. Good morning.

Good morning, everybody. A follow-up on selling costs. I believe advertising is included in that. Could you talk about how you are all considering, or planning your traditional broadcast and print media advertising component, versus the experience you had with the revamped website?

Joel, the new website has created new opportunities for us. As I mentioned in the last quarter, we increased our national advertising, bought national television and national print, which is basically shelter magazines by 25%, over what we had spent in the second quarter of the last fiscal year. Yet overall our advertising expenditures were down, because we decided that local print, local advertising was out in this environment. We had to maintain a national presence, and that is what we did. We are going to continue to do that.

I also mentioned and I think you got that, starting next month, our national advertising is also going to a great degree promote our new website, because we want people to come to our website, and from our website they are able to see all of our offerings in high definition, and I am sure you have seen our new website, and also we believe it will increase our traffic in our design centers.

So while we are spending approximately what we spent last year, that is still focusing on national mediums, reducing our local print, that overall our advertising will be lower, but it will be focused also on getting the message across about our website.

One follow-up please. The local spent component, was that a coop to the dealers?

No, it was not. There is no coop at Ethan Allen.

Okay, thanks. That is all I have. Good luck.

All right.

Thank you. Our next question comes from Budd Bugatch.

A couple of follow-ups. You had confirmed a couple of months ago on the simple finance plan, and I think either regenerated it, or started to readvertise it. Are you seeing much action on that and are you seeing, we are hearing that credit is still a problem for, extended credit from some of the providers?

We actually just offered in the month of January, Budd, two offerings, one was 4.99% for a full year term unsecured, actually it ends this Saturday. I would hope you would go and buy some, but it is a great, great offering. A full year at 4.99%, and the other one is we are also offering a 10 month No Interest No Payment. These are great offerings, but you are right. People are hesitant.

The credit agencies that monitor it, also to some degree, have become more conservative in approving credit. In our case we are fortunate we are still getting 80 to 82%-plus approvals, which is I think much higher than most of the country. But the consumers are somewhat, I mean wary about credit, which is understandable, but what we are offering them, and I believe that still it makes sense for us to offer the various menu of options that we have, and we will continue to do that.

You talk about advertising, and increased advertising, can you quantify a little bit for us on it? You typically quantify once a year, but maybe you can come a little bit more often to that data point?

You are talking about quantifying in what way?

What was the advertising expense this year versus last, in terms of dollar or --?

All of this information is in the 10-Qs and 8-Qs, and all of that stuff. Dave.

Not to that level of detail.

Let me just see what you are saying. You are talking about, Budd, our advertising, I will give you in percentages, we have a lot of factors to consider. As I said, our national advertising went up 25%, but our retail advertising, and this is the company operated design centers went down, which is the same similar situation with our dealers, that they reduced their advertising by almost close to 15 to 20%.

So overall did advertising go up, or it went down?

It went down. And that is our objective.

Thank you very much.

At this time, sir, I am showing no further questions.

All right. Thank you very much. Any questions please let us know, and Peg Lupton is also available. Thanks very much.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect, and have a wonderful day.