Ethan Allen Interiors Inc (ETD) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Ethan Allen quarterly earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session (Operator instructions). I would now like to turn the call over to your host, Mr. Kathwari.

Good morning. I am Farooq Kathwari, Chairman and CEO of Ethan Allen Interiors and joining me is Dave Callen, our Vice President, Finance, and Treasurer.

Our sales and net loss during the quarter reflects a challenging economy, very low backlogs at the beginning of the quarter and the impact of special savings event's which are resulting in increasing written business at the end of these special savings events. As we reported in early August, we had a stronger end to our savings event in July. August was slower, and we had a stronger end to our written sales at the end of this savings event in September, resulting in increasing our backlogs.

Our focus during the quarter was to increase our cash position. We increased it by $19.5 million to $72.5 million. Continued to reduce inventories. During the quarter we reduced them by $9.9 million and, from 9-30-08, by $40.8 million. To continue the consolidation of manufacturing and logistics, to implement stronger marketing programs to increase sales, to implement the IDA -- that's the Interior Design Affiliate membership program -- to strengthen our regional divisional operations, to implement programs to convert our US case goods manufacturing to custom -- I will give some greater details of all of these initiatives after David Callen has given his report.

We have reduced the decline in sales in a substantial manner, but still a decline. We have reduced our operating cost structure by over 30% and implemented many marketing and operational initiatives. While we feel very good in the positioning of the Company, we still remain cautious for the near-term due to unpredictability of consumer sentiment, and the consumer who is still very cautious.

I will discuss, as I said, in greater detail after Dave Callen's comments.

Please note that in the earnings release issued last evening and in the course of our prepared remarks, reference has been made to certain non-GAAP information which excludes the effect of restructuring, impairment, plant transition costs and related charges recorded during the quarter ended September 30, 2009, and the comparable prior-year period. A reconciliation of this non-GAAP information to the most directly comparable GAAP measure was provided with the tables attached to the press release. As an added reminder, comments from this call should be considered in conjunction with the Company's reports filed with the SEC. Discussions containing forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward looking statements reflect management's current expectations concerning future events and results of the Company and are subject to various assumptions, risks and uncertainties. Accordingly, actual future events or results could differ materially from those contemplated by the forward-looking statements. The Company assumes no obligation to update or provide revision to any forward-looking statements at any time, for any reason.

Net sales for the quarter were $136.2 million compared to $205.8 million in the first quarter last year and $138.7 million in the previous quarter sequentially. Retail posted net sales of $103.2 million versus $155.9 million last year, with comparable Design Center delivered sales 35.3% lower than in the prior-year quarter but improved from being down 43.5% in the fourth quarter comparison. Written sales in retail decreased 19.5%, and comparable written sales decreased 20% versus the prior-year quarter. These metrics also improved from the fourth quarter.

Wholesale net delivered sales were $81.3 million in the quarter compared to $121.3 million last year. Consolidated gross margin for the quarter was 42.8% compared to 54.4% the prior-year quarter. The previously announced consolidation of our US manufacturing operation negatively affected the quarter and our gross margin with $8.5 million or $0.18 per diluted share of plant transition costs, including $6.6 million of accelerated depreciation, abnormal overhead charges of $1 million and other transition costs of $900,000.

Excluding these costs, our gross margin would have been 49.1% in the quarter. Operating expenses excluding restructuring and impairment costs totaled $73.6 million, which equates to an annualized spend of $294 million. This is 27.4% lower than the operating expenses incurred in the first quarter last fiscal year. During the current quarter we also recorded $800,000 of restructuring and impairment charges on actions previously announced. This charge impacted the quarter by $0.02 per diluted share.

Consolidated operating loss was $16.1 million versus an operating profit of $12.2 million in the first quarter last year. Included in the current-period loss were $8.5 million of plant transition costs and $800,000 of restructuring and impairment charges noted above. The prior-year quarter included a net $1.6 million recovery of restructuring and impairment charges.

Interest and other income decreased $300,000 from the prior year due to lower interest rates and lower average invested balances. The effective tax rate for the quarter was 25.7% compared with 28.7% in the prior-year quarter. While the prior-year rate included one-time benefits of $800,000 or $0.03 per diluted share, the current-year rate was adversely affected by valuation allowances booked in the quarter on the retail business, which impacted by results by $0.07 per diluted share relative to our normal tax rate of about 36.5%.

Diluted loss per share for the quarter was $0.47 compared to diluted earnings per share of [26%] (sic -- see press release) the prior year. Including the plant transition costs, restructuring and impairment charges and the tax reserves booked in the quarter, the net loss per diluted share was $0.20 compared with earnings per diluted share of $0.22 in the prior-year first quarter, excluding the prior-year net recovery of restructuring and impairment charges.

Our liquidity has continued to improve as we ended the quarter with $72.5 million in cash and equivalents, up $19.5 million since June 30. As a result of our working capital management actions including further reductions in inventories of $9.9 million, we generated $17 million in cash from operations during the quarter. We collected $5.9 million from the sale of property and reinvested $2.5 million of that in capital expansion. We also paid $1.4 million in dividends to our shareholders during the quarter.

As previously announced, we also completed the planned expansion of our asset-based revolving loan facility by $20 million to $60 million. We still do not have plans to draw against this line, and currently use it to support our $12.5 million in standby letters of credit, primarily with workers compensation insurance companies. As said before, this line also provides us real insurance we believe is prudent in these challenging times. We are pleased to have good business support from three very stable and well-positioned lenders. We are also pleased with the liquidity and capitalization of the Company and continue to deliver against the many initiatives which are making us a stronger enterprise going forward.

Now back to Farooq.

Thanks, Dave. During the quarter we continued to implement many initiatives. They include aggressively marketing various products with strong savings. Upholstery has been a special focus, as this category performs relatively better in recessions. We have been able to offer exceptional values while improving levels of quality. This has resulted in sales not too far from previous year.

During the quarter we substantially completed the consolidation of our Chino, California upholstery manufacturing to our Maiden, North Carolina facilities. We have now the equipment in place in Maiden that was transferred from Chino, California, and have started adding experienced upholsterers. During the quarter we added about 60 associates to Maiden and about two weeks back we started adding an additional 100 associates. We had a one-day job fair, and over 1500 qualified persons showed up.

We are also expanding our capacities at our cut-and-sew facility in Mexico. We have doubled the space getting into operation this quarter and have started under expansion plan to double the facility within the next 12 months. A few years back we had seven US upholstery manufacturing facilities. We are now operating with the Maiden, North Carolina facility supported with Mexico cut and sew. We have the opportunity to expand the volume at both as sales increase. This setup now gives us a very efficient manufacturing capacity.

Case goods at our price points has been most negatively impacted for us and the industry. We took the recession as an opportunity to start transferring our domestic case goods manufacturing to custom, somewhat closer to our upholstery programs, where each item is assembled with options. The case goods plants are developing parts inventory rather than finished products, giving an opportunity to provide more options and also produce each item with final inspection at the plant.

This initiative is changing the paradigm of the last 77 years of manufacturing and in the short term will create inefficiencies and bottlenecks, however, for longer-term, provides us a competitive advantage of maintaining manufacturing in the United States.

During the quarter we substantially completed the consolidation of our sawmill and case goods manufacturing. We have now a more effective base to operate with. While this quarter we continue to absorb the inefficiencies of this transformation, we have the opportunity to operate our plants full time from next quarter unless, of course, business conditions worsen.

We have also taken this time to make our logistics more efficient, both at wholesale and at retail. During the quarter we substantially completed the consolidation of three national distribution centers to our one remaining national distribution facility in Dublin, Virginia. Keep in mind, a few years back we had seven national distribution centers and over 100 retail warehouse service centers for our retail division. Now we are going to operate with one national distribution center supported with warehousing of parts in our plants, and at retail division we had about 25 retail service centers, down from 100.

Retail division profitability and operations continue to be our focus. In the last one year, we have substantially reduced our cost structure. At this time, the major focus is to increase sales. At this time we have started to add very qualified interior designer associates and also started to strengthen management at our district level in several parts of the country.

To leverage our in-house interior designers, we are implementing the independent designer affiliate membership program. We believe the independent designers, working in partnership with our in-house designers, will help us to do more business. We have so far added about 300 independent designer associates in the last 45 days since we started this program.

And at this stage, I'd like to open it up for any comments and questions.

(Operator instructions) Robert Higginbotham.

A question, a couple questions, on factory down times. First of all, could you give us some insight in terms of what the factory down times were for the September quarter? And also, you made some comments around the changes you've been making to your capacity, that driving full-time production starting next quarter. And I just wanted to make sure that I should interpret that as your factory down times, given current volumes, would be essentially zero.

Yes. This last quarter our factory down time was about 30% of the percentage of our shop days, approximately the same what we had last year this quarter. This quarter, the second quarter we are going, our upholstery operation is actually working full-time and, in fact, over time. Our case goods are operating most probably at this 30% we had this last quarter. I would say this quarter most probably, we'll operate -- and I don't know the numbers, but I'm giving an approximation to give you a perspective -- approximately 12% or so down time because we are still balancing between our sawmills and our manufacturing. And by next quarter the opportunity is with no down time or very little down time.

And then, also, could you give us a little bit of color on how sales progressed through the quarter, and also if you have any comments on current sales trends, that would be helpful.

Robert, last time when I gave some information in August about July, it also created some issues because we just took one month into consideration. That's one thing we've got to keep in mind. The second is, we have gone away from our everyday best price because of the tsunami hitting the economy. Our everyday best price is the way for us in the future, but right now in this emergency we have had to, in the last nine months, come with special savings because today you have to give a good excuse for people to buy, especially discretionary items. And we have done that.

Now, what (inaudible) has done, as has been pointed out by one of the analysts, that it has changed the way our written business is done. We are now having these initiatives approximately six weeks to eight weeks intervals.

Now, we are also using this time to really -- to reinvent our business -- for instance, I'll talk more -- perhaps a question will come on the custom side of it. We are now converting our manufacturing case goods to custom. But we are using this opportunity of offering special savings, and they end approximately six to eight weeks. And what we now see is that towards the end of this period is when we get a lot of sales, which is good, but it also creates service issues because it creates forecasting issues, and that's why we had converted it to an everyday best price. But circumstances -- it's an emergency situation, and we have to keep that in mind. So accordingly, our -- this initiative that we have in October will end in November. And what's happening is we're building business. We are building -- our designers are working with clients, and what we will see is most probably a strong end to this event in November, and the next event starts from the middle of November to end of December. Then we'll start one in early January to end of February. So we've got to keep that in mind, and that's why I don't want to give too much information until these events end.

Budd Bugatch.

It is those special savings events that I was wanting to explore more. So you say the duration of each event is about six to eight weeks?

That's right, yes.

And then, what's the length of time between events -- two to three or two to five?

About one week.

And the current event right now, is that just a no payments event? Or, what is the current event that's in progress today?

We have to events in progress right now. We started our special savings event in the beginning of October, which will end right about Thanksgiving or end of November, actually. Then what we did was we also, last week, provided our network with a special no payment, no interest for one week, which is in progress right now, so that we could help get some more business end of October. And that's what is taking place.

You mean, nine months; I mean, it's a nine-month no payment? Right?

Now, keep in mind all of this is going to end as of February 22. There's no -- no payment, no interest by law is not going to be able to be given by anybody. And in fact, even whatever we are offering now, we have to either deliver it before February 22 or, on February 22, book it, and then start the nine months from that date, even if we have not delivered the product. You are going to see a lot of flurry of no payment, no interest from now to February because after that, it ends.

The inventory that you've reduced -- can you give us an idea or a flavor of where that inventory was reduced? Is it primarily at the wholesale side at the manufacturing or the service center, or is it at retail?

It is across the board. We have reduced it in our raw materials when we have consolidated our plants, it reduces work in progress, it reduces raw materials. We have reduced it in our finished goods. We have also reduced it in our retail service centers because they are very focused on delivering the products fast. And also, by plan, we are also reducing our inventories, having less inventories on the floor because in good times you end up stuffing your floors, as you know.

But this time we are also getting the -- selling the inventories from the floors. Our dealers are doing it. It's a good cash flow, so it's across the board.

You say you've signed up 300 interior designers. Have you seen any business yet come from that?

We have. It's building up, and I believe that this really leverages our own interior designers. And of course, we have to create a situation where it will be a partnership. Otherwise, as you know, in the past it was considered as a competition and did not work. But the way we have created this, it's a win-win situation. It adds to us interior designers who, today, need more and more stable sources to work with. And the good thing is, they can bring in their clients. We are getting very, very qualified interior designers joining, Budd. And we have about 300, and we just got them getting started. And they are also starting to get business, yes.

Do you see any future charges or, right now, any other issues that we are going to see booked in the second and maybe third quarters?

We've previously announced actions but have had some additional impacts going forward. But those will show up on the restructuring line. The unusual charges that we are talking about in this quarter are pretty much behind us. We'll have some fine-tuning of accounting, but we'll be able to represent them. The issue on the tax line, we will continue to draw your attention to that each quarter going forward, until things start to --

And the accelerated depreciation? I take it that was for some areas that were closed?

Yes; that was for two of our plants that were closed.

And the other one goes to that issue that Farooq talked about, about converting case goods to operation to a customer. Any way to estimate what the inefficiency of that conversion might be in the near-term and what impingement on gross margin that could be?

Budd, that's a good question because this is a major, major undertaking, and two things are taking place at the same time. And with the consolidation of our existing case goods plants, we transferred all the products that they were making to our existing plants. So our plants are very busy right now making new product. For the system it's not new product, but for our remaining plants its new product.

So we are running some inefficiencies because, as you know, every time you introduce new products it creates an inefficiency. So we are going through that this quarter.

The second is this whole issue of conversion of custom. We are doing two things. Not only are we converting it into custom, we are also offering special savings. And also what is doing is -- which I think in the industry you are going to start hearing -- is, that is we're going to start having service issues. People overseas have cut down their folks. At the end of September we converted, started converting our dining rooms to custom, and in the last week, we had chairs 900% over our forecast. Now, forecasts are conservative. But the thing was that chairs are made in China, and the tables are made in the United States. And the folks who make the chairs -- they have cut down their people by 70% because they were not getting any business in the seven or eight months.

So we decided that we had to deliver, so we went back into chair production in the United States right away. And we are now producing and shipping chairs from the US as well as in China, and it's going to impact on our margins. But we've got to make it happen. So this quarter it's a little bit, somewhat hard to determine where we'll end up. But there will be an impact because they're learning to make this custom. We are making new products into our plans. We're making all these chairs. We have some -- it's going to be a positive margin. But in the domestic US manufacturing this quarter, I think we are going to have an impact on the margin from all of these initiatives. The good news is we are getting it behind us this quarter, most of it.

That should be end of this quarter?

That's right.

Todd Schwartzman.

Is it too soon at this juncture to talk about any early benefits you are seeing from the shift to custom case goods?

Well, it is a little early, and because it's a process of education, it's a process of having the right tools in our design centers, it's a process of getting that known to our clients. We are starting to get it. Now, the benefits -- and I hope you are able to attend our investor conference, in which we are now redesigning our design centers to make it into what I'd call a design workshop to reflect this whole conversion into custom, so that we are able to show it better to our clients.

Now, the benefits of this is, it is going to take our best selling products and make it available in different finishes -- that's how we are starting it. And the amazing thing is with the finish, it changes its complete perspective. So we are adding a lot of designs in with existing products on the floor. The impact of this also is going to be, as we go forward, is a reduction of products on our floor and less SKUs -- more options, less SKUs, because the best product is the one that sells the most.

So you are going to start -- we are already starting to see it. But it is going to take us a few quarters to really get it into the system, and the advantages are going to be more options, more efficiency and, as you have also -- as I mentioned, has an impact to the logistics network throughout our system of how we make our products. We used to make products and store them in seven different places. Now we are going to make parts. It's a challenge; it has not been done before. But we are doing it. We've got a lot of talented people, and this is the only way, I believe, that not only can we maintain manufacturing in the United States but convert it into competitive advantage.

So we are seeing benefits. But I think in the next two or three quarters is when we really are going to get it into place.

Could you maybe walk through any revisions to the debt covenants, how they differ from the old?

All the fees and everything else is there, was exactly the same. We did not agree to pay anything more than what we had agreed to. The only one change that did take place, that in the older -- in our existing covenants was that our -- what is that thing called?

Intangibles.

Our intangibles were going to be part of the secured once we had drawn an X amount on the line. We now agreed that we would give them that security up front. It's not an issue because of the fact that, if we had drawn, we would have had to give it anyway. And our intention is not to draw on it, anyway.

David, is that right?

That's correct. The only -- there are some covenants and restrictions, but the only one that you are thinking about, probably, is the fixed coverage charge. And that doesn't come into effect until the last 15% has been drawn on the line.

What about the effective tax rate for second quarter? What are you looking for there?

Again, in the loss position that we are in, we are going to have to continue to -- if we continue to have losses in the retail side of the business, we will have to continue to book valuation allowances against the deferred tax assets on the retail side from [safer] (inaudible) from Canada. And if that continues, then the rate that you saw this quarter will probably continue. But I'll continue, each quarter going forward, to highlight the difference relative to what our normal rate is, in the 36.5 kind of range.

How likely would you say a net profit is, in the December quarter, ex-any items?

You know that we don't provide that kind of guidance, so I'll just leave that up to you guys to let us know.

Todd, at this time, what we have done is we have reduced our cost structure. We have many, many major initiatives in place. On the other hand, we have used this recession to reposition our business. All the initiatives that we are taking of consolidation to make it more efficient -- that is going to -- it also, even though we write off this stuff, in restructuring and all that stuff, but a fair amount still goes into a regular cost structure.

So I think this quarter it ultimately depends on how much business we get. Sales cures a lot of things. I think that we've got to be conservative this quarter, and then I think the opportunity is will be in a much, much better positioned next quarter and assuming that the business holds up.

And what are you now budgeting for a full-year CapEx?

CapEx -- we did $2.5 million as against $11.5 million first quarter last year. So we had said, Dave, what?

Between $12 million to $15 million.

Yes, between $12 million and $15 million. That's on the -- it will be, most probably, on the lower side of that.

And that's essentially unchanged from your previous forecast?

That's right.

Last question is the share repurchase. Where are you now with the existing authorization?

What is it?

It's still at $1.6 million.

It is $1.6 million.

Bradley Thomas.

I wanted to follow up on the everyday low pricing and the promotions. I know that philosophically and strategically it would be better if you could be on an everyday low price. But if this new normal consumer environment that we are in right now continues, how do you balance the strategic distribution desires versus what the consumer is asking for right now?

That's a reason, Bradley, we -- while we -- we had -- really, our everyday best price had lots of positives, but also created issues because we were already offering very good values. We didn't have room to have some artificially high retail prices so we could give big discounts. So we were in a situation whereby, to give discounts the way we had, it really would have had a major impact on margins.

Now, we also came -- even though we reduced inventories, we did not come with a lot of excess inventories. We reduced it because we consolidated our plants, we did all kinds of things to make it more efficient. So we didn't have a lot of inventory to sell. So we really had to create great values and still have some margin.

Upholstery was one where we could do it, so we were able to work with our partners and they gave us great deals in fabrics. We were able to offer them like, for instance, something that one of our designers other day told me that we are giving away upholstery, $2000 sofa at $1299, almost close to 35% to 40%. But it was down because we were able to renegotiate, rethink, obviously operate on lower margins, mostly at wholesale while the retail -- we gave them the opportunity to have the decent margins because especially our independent retailers, we have always been -- we are interested in making sure they survive this, and their cash flow.

So I think that, as we go forward, we are going to continue to utilize these special promotions events, but we'll continue to use this as a strategic objective. Like, for instance, we have now, through this process, lowered the overall pricing of Ethan Allen products. And that's important because consumers today also are not going to accept the prices anybody had a year back. They want great quality but lower prices. It doesn't matter what the product category is. So we are meeting that.

In case goods, for instance, while we are making custom, we have lowered the prices. It should have been the other way around. And we will continue that from a strategic point of view, and obviously our objective is to make some margins as we go forward but not necessarily focus on big margins at this time, when we want to make sure that we get traffic and we build sales.

And then a follow-up on the partnership with the independent designers. You mentioned that you've signed up over 300 associates in the last 45 days. Could you share some more color on perhaps what you're saying on, in particular, markets where you've had greater success or particular stores that have had greater success at this and perhaps what sort of benefit you think there could be, based on what you've seen in the last 45 days?

If you take a look at it, there are approximately at least 50,000 qualified interior design businesses, and almost half of them are ASID. So these folks are really very qualified, talented. And about 15%-20% of the people that we are getting were previous Ethan Allen designers went into their own businesses. So they're coming back.

Now, what this does is, the opportunity is for the interior designers is that with all this confusion in the marketplace, their sources are becoming difficult. They are having a harder time to get sources. They have to also worry about all the logistics of delivery of the product.

And what we do for them is they come in, they work with our -- in partnership with our clients, we have the whole product line, and we deliver and take the whole service element to the consumer. Now, on top -- previously, as you know, we did not compensate. And they used to come, some of them, and bring in their clients. But now we are compensating them, and we believe that their clients know how we are compensating them. And it's between them and their clients to determine that what we are giving them should be passed on to their client or they keep it. We want to keep it completely open.

Our other designers know what the compensation structure is. Other designers also will benefit because, as you know, at the Company retail division we have converted our designers into teams. The teams have a base salary, and then they share in a bonus. So any business IDA's will bring in will be added to their volumes for getting their business. So it's to their interests to help them get business. So we want to make it a win-win situation.

Our other objective, as I said, is that we -- I see an opportunity for us to at least get 2000 good, qualified interior designers to join our ranks. And what it does at this stage is help us get more qualified designers to work with clients at a time in the last one year when we have reduced loss of people in our network.

Our other option was to go back and add 1000 people. This is a better way for us to leverage the independence at a variable cost structure.

And if you were able to get up to 2000, what do you think that could mean for sales maybe in terms of percentage of sales at retail coming from --

Our objective is that, on average, we like to do -- and that's our objective is that, at the minimum they should do at least $10,000 per designer. That's a minimum. And that's one sale, most of the time.

One quick follow-up from a modeling standpoint. It looks like you guys continue to do a good job of bringing down your selling expense. This quarter, with the lesser rate of decline in revenues you brought down selling expenses at a greater rate than revenues. Could we see that trend continue through this year? Or might that be offset by some of the focus on investment and sales that you alluded to earlier?

I think that it would be very, very difficult for us to reduce it in dollar terms. Where our opportunity now is to reduce, as a percentage of sales, of our expenses to sales, because our objective is to build sales. That's where the real focus is now. We really have cut back. In some cases, we have cut back, as happens, a little bit more than we should have in our retail. We are adding some people.

The good news is the people we are having are very, very qualified. So I don't think that, at the dollar terms -- we are looking at every element all the time. But for us to have reduced 30% in one year -- but it has been monumental because of the fact that we still run a lean company. But we have done that and in the process, in some cases, maybe a little bit more than we should have. So in those cases we'll add, for the time being, as we go forward, I don't think, in dollar terms, you're going to see too much reduction unless, of course, business -- we go from a recession to a depression. Then we'll have to take steps.

What you're going to see is basically, I think, at the opportunity now is to leverage this operating cost structure so that we can reduce our expenses as a percentage of sales and also get some profitability because it's the first time in 30 years and an operating level we have not been profitable this year.

So if I understand correctly, it sounds like these (inaudible) should grow or should grow at a slower rate than what sales improve?

Yes, absolutely.

Joel Havard.

First question gets to an earlier line in the conversation. If I recall right, you were talking a year-plus ago, as we entered the challenging period and the Company's response to it, about lowering the breakeven point, reducing that cost structure. I know that's all been built into this, but I think you threw out a number, something on the order of 20%. Is that still reasonable to think about?

It's 20% of what?

Of the cost structure from, say, mid-2007 calendar.

Well, if you take a look at our fiscal year ending 2008 to now, we are operating at our operating expenses about 30% lower.

And that's to presume, then, with the language that hopefully we are through the restructuring, that that 30% target has been achieved. And maybe getting to your comment a moment ago, that, short of another leg down, you are about where you want to be?

Not only are we 30% from fiscal year 6-30-08, we are down 27% from the first quarter of last fiscal year, which by itself is also quite material.

And we are talking about the cost structure?

I'm talking about the expense. If you take out the cost, we are -- in addition to reducing the expenses by 30%, we have also reduced the cost structure, which basically is in the cost of goods sold section. That's in addition to the 30%.

Company and dealers' door count at quarter end?

Is more or less unchanged. The good news has been that at year end we have 289, and a year back we had 293. So we have three less, and we have gone through this pretty major downturn in this past one year.

And what was the quarter end breakout between Company and dealer stores?

155 Company and 134 dealer.

And do you think there is still -- to do sense much of an appetite still for dealers to join the family, as it were, on the acquisition front?

Not much, actually. As you know, we have not acquired anybody for a long time. And we are glad that our dealers are surviving. It's not easy, but we are very, very gratified that they are. We have tried our very best to help them also by taking on the bulk of national advertising. We have maintained that. We've helped them maintain their margins while, at the wholesale level, the margins have been impacted. We are trying very, very hard to make sure we ship products. And as I said earlier, that as business increases we also will end up in some service issues because we've got to start catching up at a time when the mentality is to go down. We have now also to make sure we service.

But our dealers are holding up well. Our receivables are all current, 95%-97%, as in the past. So they are doing relatively well in a tough environment.

I'm glad to hear that. Has there been any more move on the shift from the older format stores to these smaller-format -- I forget the term -- gallery or --

(inaudible) studio.

Studio, studio. Has there been much more progress there on the dealer side?

We are having a conference this next month to discuss it. In fact, we are converting the Danbury design center to a design workshop. We have opened up four, we have one in Raleigh and Las Vegas and a couple of other places with the smaller format. People are looking at it. Now, conversion is going to be -- it's going to take time because first we've got to convert our current to our new format. Then the next issue is looking at new locations with smaller footprints. That's going to take time.

Last one, and it's for you, Dave. What was the actual dollar amount of the accelerated depreciation, as opposed to standard D&A?

$6.6 million.

$6.6 million -- all right, great, that's all I've got, guys. Thank you, good luck.

John Baugh.

I agree, we were all kind of head-faked by the July comment. Can you go back to that time and tell us when your promotion started, when it ended? You made the comment that August went back down, it sounded like, fairly dramatically. Did the promotion end then? Just give us the color on the window of the event -- when it began, when it ended and how that influenced [written] sales.

Our event, relative to that call and that discussion, was -- started in early June, ended in late July. The next one started in about, I think, the first week of August and ended late September. And that's why what we are now seeing is the fact of the impact of the closing of the event is when there is -- people are working hard. You try to make people work every week to get business, but human nature is you end up -- when you do these kinds of events -- we did this for 20 years before, you know that -- that it was towards the end we would get a lot of business.

And when you do what we are doing that's what happens. That is, whatever you may do, consumers wait, our folks work at it, they want more time. And the last week, 10 days, they start closing. And that's what happened the last period.

So we shipped -- or, excuse me, the July event that ended July, you got some good orders in July. Most of that would have shipped, would it have not, in the September quarter?

It did. But always keep in mind, you know, we have been operating with very, very low backlogs. And even with all this increase in [goods], what happened in July was about -- and I don't remember; I am just -- approximately, we were down maybe 20% relative to 38%. And that's what we said, that we have halved the decline in sales.

No, in the quarter, by the end of the time the quarter ended, that is, our first quarter, we were also down about 20% as against about 38%. So we did maintain, by the end of the quarter, we did reduce the decline in sales. End of the day, of course, we've got to start even doing better than declining 20%.

So it sounds like there were very little written orders in the month of August, and then the event -- even though the event began in August, to your comment about orders being written towards the end of the event, which was September. So you got a lot of orders written in September, but they obviously didn't ship and you didn't write many orders in August. So your shipments in the July event shipped in August, but you didn't have much shipment in September. Is that the way it went down?

That's right. You say very low, and although the relative terms are. But anyway, generally you are right.

And did I hear this correctly, that you've essentially lowered prices on all of your goods? And if so and that's correct, what did you do, roughly, in pricing terms?

No; we reduced our prices on those products that we had put into this special events. We did not reduce -- for instance, in case goods, in the month of September and the month of October and November -- but before that, let's go to August and September is when we started converting our case goods into custom. So we took our dining room, domestic dining room, not all of them but a number of them, and made those available at approximately -- most of them were approximately 12% to 15% lower in price.

In one or two instances, we did it even a little bit higher than that. But it's not all the products. It's only those products that we made available in the special events.

You're running at about a $560 million annualized rate of sales over the last several quarters. I'm wondering if you could, if not precisely, at least generally speak to what you would deem to be the contribution margin from an incremental dollar of revenue in both the retail and wholesale segment from this starting base of $560 million. And I realize we've got a lot of noise in the current quarter, the December quarter. So if you wanted to comment after some of these unusual things are behind us, any kind of color there would be great.

Well, we have reduced -- we have brought our operating cost structure down so that we are able to break even at anywhere close to $650 million or so, from $1 billion that we had before. So that's what we are watching. Our objective is to get into at least $650 million and above so that we can start -- then we start leveraging this lower cost structure.

And how do I think about above $650 million in terms of comparing it with history, recent history, where you really weren't having to discount at all? I assume there is less -- and I'm not criticizing the strategy. I think you've just got to discount in this kind of environment. But does it not take away from some of the earnings leverage in the future, relative to the past, albeit on the much lower cost structure? But we might be giving up some margin. How do those play off on each other?

If we had not taken steps to rationalize our manufacturing, to rationalize our logistics, to rationalize our retail and our total cost structure, then we would need a higher margin to have an impact on the bottom line. That's what we are referring to. Today we can have, as sales increases, about the same impact because we have reduced our overall cost structure.

Joe Feldman.

I wanted to ask about, with the shift in the case goods, have you seen any -- gain traction with the customers in the stores? And how is it being effectively communicated to customers? I guess essentially, have you seen any kind of pickup in sales as a result of that option?

Just keep in mind that all of our upholstery, which now represents 50% of the business, more than that, is all custom, one item at a time. A client comes in, works with our designers. They say we have this frame; it can be available to you in maybe three different sizes and 3000 different fabrics and maybe [150] different options. They already do it. They are trained to do it. So, for them to get into case goods to do it is not a big issue. Now, they've got to learn because we are also about to make -- we are also in the process of providing better tools. Our website that we introduced earlier this year was one of the major initiatives in technology.

One of the things we're also doing which I failed to mention is investing more in technology at this time. We have introduced this year a new retail system. We have added manufacturing systems, the most current one, and we are in fact doing it right now, we have added -- we have a new website, and we are in the process of now developing more tools which will be used by our design consultants to show these options. It is gaining traction, but it's going to take us about a year or so to really start seeing benefits in a major way. We do see some benefits already right now.

That's good to hear. Can you talk a little about maybe the quality of the customers that you are getting, that are applying for credit? Are approval rates about the same? Are they getting the same amount of money approved? And just their general quality relative to where they were maybe six months ago or even a year ago?

Well, there is no question that all the banking companies -- you know, we have a third party that gives us financing. They have become more strict. They have to be, and in our case they have done that, too. Relatively, we do not see a big issue, but we do see that they are people who used to get credit before -- today they are not getting credit or what they are getting less credit.

Now, consumers themselves are becoming very wary of taking in debt. And as you know, by February 22, this no payment/no interest is going to go away, with the credit, with the finance reform acts. There are also a lot of restrictions on what the finance companies can do on these cards.

The good news for us is that we wanted always to focus on promoting what we call our simple finance plan, which is a five-year term with the low interest rate and consumers paying on a monthly basis. I think that is where we are going to end up, and it makes a lot of sense. And you are going to start seeing us promoting that.

And then the final issue I wanted to ask about was, I think I got a sense from the call already, but I just want to hear from you again. The complexion of what you are selling today -- have you seen that shift down? Like are people mostly focusing on the entry price, or is it really still just, people are buying what they want, it's just there's fewer people buying?

I think it's a combination of both. I think that fewer people are buying and also people have reduced the kind of amounts of money and the price point they were willing to (technical difficulty) [back]. So I think the American consumer today, in this environment, wants -- has an appetite to buy good quality products, but they are looking for price points that are lower than they did a year back or two years back. We see that, and that's why we have taken major positions to, in a very creative way, to bring products, without reducing our quality/style, but to reduce our prices so that we become more attractive to the public. And I believe that's very important, even though, short-term, it's impacting on our margins. But as -- the key is, we've got to build the top line. And then we'll make that up.

All right, I think we have gone over time, but because it's an important quarter, and if there's -- any other questions?

You have two more questions, sir.

So we'll just take two more, then.

Barry Vogel.

David, I want to clarify something, please. It has to do with these comparable stores written sales, delivered sales, wholesale written sales. I'm very confused. And also the mention of backlogs. So if you can bear with me, I've been doing these numbers for a while. And I missed one of the numbers, but I wrote down that your comparable store written sales were down 20% from last year's first quarter. I wrote down that your comparable store delivered sales were down 35.3%. I missed the wholesale written sales number because you went a little bit too fast for me. So that's the first part of this question.

While Dave is looking at the wholesale, net orders booked were down 21%.

All right, that's wholesale written sales down 21%?

We call it net orders booked. Yes; that's it, wholesale.

I got confused with the terms. Now also, there was a comment about backlogs, which I've never seen before. And you made a comment that the written backlog during the first quarter was up 19%. A, I don't have backlog figures from the past; and, B, I don't know what period you're comparing it with.

Okay, Dave, would you please answer that?

All right, Barry. If you look in the 10-K, we do disclose backlog for retail. And what we are saying is that, during the quarter, we increased it by 19%.

From the beginning of the quarter to the end of the quarter, Barry.

That was a sequential increase?

That was increased -- the backlog from the beginning of the quarter to the end of the quarter increased 19%.

And that's the retail backlog?

That's right, yes.

Okay, that answers that question. How about the wholesale written sales? Is Farooq correct? It's minus 21%?

Obviously, I am correct, Barry. What's the matter?

What do you mean, obviously? Now I have a few more questions. You talked about selective rehiring of employees in the press release, and then you mentioned very quickly some of the hirings in the North Carolina plant for upholstery. Can you tell us, as far as your selective rehiring of employees, since the beginning of the fiscal year how many employees have been rehired in the wholesale division, how many in the retail division?

Dave, how about getting the numbers? I'm just giving a very approximate -- we don't give these numbers. I think in the retail it's minimum, maybe 10 or 12. And in the wholesale, most probably close to 75 or 80 people.

Dave, what's the numbers?

That's about right.

That's about -- Barry, that's the numbers.

Now, what about the comment you gave about the hiring in North Carolina? I wrote down that you said you initially hired --

60 people.

-- 60 people and then another 100 people.

100 people we are hiring this quarter. They are not all on, but we are going to add 100 people this quarter to expand our upholstery in Maiden, North Carolina.

So therefore, if you were -- in the first quarter, in the wholesale division, if you added 75 to 80 people and you are adding another 100 people in the second quarter, that would be about 180 people rehired in the upholstery division?

And we have also added approximately 100 people in Mexico. So that's in addition to this.

As far as Mexico, I'm glad you mentioned that. One of your competitors -- well, it's not really your competitor; it was -- well, it's La-Z-Boy had been talking about --

They are a big competitor; I keep on telling Kurt Darrow that; I'm sure he's listening. But anyway, go ahead.

Anyway, they have been very good at giving potential cost savings from building up a very big cut and sew operation in Mexico. And you've got to have some idea of what the potential cost savings are for doubling the size of this thing. And I don't even know if you're doing cut and sew right now in Mexico? Are you?

We are doing, actually -- that's what it does -- that's the whole operation is cut-and-sew. And I think, Barry, it's a little bit early for us where we'd look at -- it certainly is a cost saving. You know, the labor cost, the availability of sewers over there is very different than -- one of the big bottlenecks we have in Maiden, North Carolina is finding qualified sewers. We are able to find upholstery assemblers, not sewers. It's a tough -- while in Mexico, fortunately, where we are, we can find them and they are very qualified, they're experienced because sewing has been a big operation in that part of Mexico.

You know the labor rates. You know what we have in the United States, what's in Mexico. So there's obviously a benefit. And the great thing is, because, being custom, we can and we want to maintain a delivery time. So in Mexico, in three or four days, we can get our cut-and-sew into the United States. If we did it offshore, you're talking about at least 30 to 45 days.

So you were doing it -- this stuff that you're doing in Mexico, were you doing it offshore before?

Some of it, very small portion we were doing offshore. But 95% we were doing in Mexico and, of course, still in the United States.

So if you do this transition to increasing your output in Mexico, you've got to be saving?

We will have savings. And then, as I said, we are also offering great savings to clients. On one hand, we have reduced our prices so we can offer great value. On the other hand, we are also reducing our cost structure so, end of the day, we want to make sure we have got great values for the customers and also we have a cost structure that will enable us to have profitability.

Now, as far as these changes in distribution, which you elaborated on, you are obviously looking for savings there. Can you give us some rough idea, when you complete the change and the consolidation for distribution, what kind of savings you're going to have?

In the savings of this 30% that we already have talked about. A good portion of our distribution savings are already reflected in there, in terms of the consolidation from -- we consolidated three major distribution centers in the last nine months. Now, short-term, it also creates inefficiencies because you have moving products, you have -- even though in a rough time, you have overtime and extra costs. The cost of consolidations have already been taken. The cost of the benefit of the operations we are going to see in the future. So we are going to continue to see benefit of this consolidation as we move forward, while the raw cost of consolidations and reduction of workforce is already reflecting in this 30% reduction of our operating expenses.

Gee, I'd like to see even more top-line growth, Farooq. So when are we going to see this?

Well, we're working very hard at it and we've got great initiatives and we have reduced our declined by half, and so we are going in the right direction.

Congratulations on going in the right direction. I'm looking forward to some good solid results.

I do too, Barry, we are not used to this.

[David Berman]. He removed himself from the queue, sir. You have no further questions.

Well, thanks very much. If there are any other questions, comments, please let us know. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference, and you may now disconnect.