Ethan Allen Interiors Inc (ETD) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Ethan Allen earnings release conference call. I would now like to introduce your host for today's conference, Mr. Dave Callen. Mr. Callen, you may begin.

Thank you. Good morning and welcome to the investor and analyst call for the fourth quarter, ended June 30, 2010, for Ethan Allen Interiors Inc. I am David Callen, Vice President of Finance and Treasurer, and join Mr. Farooq Kathwari, our Chairman, President and CEO in this quarterly discussion. After I read a few administrative notes, Farooq will provide his opening remarks. I will then review some of the important financial highlights from the quarter and fiscal year. Then Farooq will close our prepared remarks with a detailed review of the business initiatives of the company and then open the phone lines for questions.

Please note that in the earnings release, and in the course of our prepared remarks, reference have been made to certain non-GAAP information which excludes the effects of restructuring, impairment, transition charges and unusual income and tax impacts in the reported periods. 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 a reminder, comments from this call should be considered in conjunction with the Company's reports filed with the SEC. Any forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking comments reflect management's current best judgements and are subject to various assumptions, risks and uncertainties. Actual, future events or results could differ materially from those contemplated in the forward-looking statements. The Company assumes no obligation to update or provide revision to any forward-looking statement at any time for any reason. Now to Farooq Kathwari for his opening remarks.

Thank you, Dave. And also thank you for participating in the earnings call. As you note, we had a good quarter. We continue to focus on our eight strategic priorities. The first seven focus on continuing to strengthen important aspects of our vertically integrated structure, the 8th and the last priority is to have strong financial results. I believe as we continue to improve the first seven priorities, we will end with decent financial performance as well.

During the quarter, our delivered sales increased by 17.8%. Our retail division retail sales increased by 18.5%. Our written or booked orders for the retail division were 23.5%, with comparable written up 31.3%. Our liquidity improved with cash and investments of $102.2 million as of June 30, 2010, compared to $53 million as of June 30, 2009. Dave will provide more detailed financial information, and after that I will discuss our strategic initiatives and also comment on the business prospects as we see them today. Also by keeping in view that it is very hard to make future predictions in these uncertain economic environment. And with that, back to Dave.

Thank you, Farooq. Net sales for the quarter were $163.3 million, up 17.8% from the prior year quarter. Our retail segment reported net delivered sales of $121.2 million, up 18.5% versus the prior year quarter, and comparable design center net sales increased 25.2%. Written orders booked in retail increased 23.5%, with comparable design center written sales up 31.3% versus the prior year quarter. The difference there largely attributable to having 14 fewer retail division design centers this year end versus last.

Wholesale net delivered sales were $100.1 million, up 17.5%, compared with the prior year quarter. Consolidated gross margin for the quarter was 49.5%, compared to 48.7% in the prior year quarter.

As we previously discussed, we continue to incur some transition charges related to both our closed plants and for the ramping up of production and the conversion to custom case goods during the quarter. These costs totaled $1.2 million, or about $0.03 per diluted share. Excluding these costs, our consolidated gross margin would have been 50.3% in the quarter. We expect transition costs in our first quarter of fiscal 2011 to be about half of what we had in this quarter, as we begin to offset those costs with improved yield over the coming quarters.

Pre-tax income reported for the quarter was $11.6 million, compared to a pre-tax loss of $23 million in the prior year quarter. The current year quarter included a net benefit of $4.3 million, primarily from a change to our design commission plan that benefited the results by $5.2 million. The US GAAP reconciliation tables attached to the press release show the break out of these charges between the segments. The majority of the wholesale items affected cost per sales and the retail items affected operating expenses. Excluding these benefits and restructuring impairment and related transition charges, the profit before tax would be $7.3 million, compared with a pre-tax loss on a comparable basis last year of $10.1 million.

With the conclusion of our fourth fiscal quarter, the Company had a cumulative three-year pre-tax loss, and as a result, concluded that it was prudent to record valuation allowances against our deferred tax assets. This resulted in $34 million of tax expense charges in the quarter. These non-cash reserves may reverse in future quarters, resulting in tax benefits that will cause fluctuations from a normalized tax rate of between 36.5% and 37%. When adjusted for the items noted above in both periods, the earnings per diluted share for the quarter were $0.16 compared to a diluted loss per share of $0.23 the prior year, demonstrated the positive drop through from the 17.8% increase in net sales and the lower cost structure.

Net sales this fiscal year were $590.1 million, compared with $674.3 million last year. The retail division's net sales were $438.5 million this year, compared with $508.6 million last year. Wholesale net sales were $362.5 million, versus $403.4 million last year. Consolidated gross margin this fiscal year was 47.5%, versus 51.5% in the prior year, including the facts of lower manufacturing volumes, consolidation actions and transition costs the last 18 months.

Operating expenses after adjusting for the special items previously discussed in both periods was 50% of net sales this year, versus over 51% of net sales last year. Again, showing the impact from cost reduction efforts despite the 12.5% decline in net sales year-over-year. Excluding restructuring impairments, transition charges, commission plan impacts and unusual tax items in both years, the diluted loss per share for fiscal 2010 was $0.15 versus a $0.16 loss per share the prior year when revenues were 12.5% higher. Our total cash in investments, as Farooq mentioned, was $102.2 million at the end of fiscal 2010, a 93% increase from last year end, demonstrating that discipline working capital management employed by the Company. Inventories were reduced $22.4 million, or 14.4%, especially meaningful when you remember that nearly half of our inventory is display product on the floor of our retail design centers.

During the year, we realized $13.2 million from the sale of properties and reinvested $9.9 million in capital expansions. We have also paid $5.8 million in dividends to our shareholders year-to-date. At the end of June and the beginning of July, we purchased in the open market 387,000 shares of our stock for $5.4 million, leaving us with a remaining authorization for the purchase of approximately 1.2 million shares. With our increased cash position and the continued availability of the $60 million revolver, we believe the liquidity and balance sheet of the company are well positioned for us to execute against our business initiatives and strategies going forward. Now back to Farooq for detailed comments on the business initiatives.

Thank you, Dave. I will provide a very brief update and then open it up for your comments and questions. Our first priority, as I've been discussing for some time, is to continue to develop a strong network of interior design associates. This great recession has given us an opportunity to add strong professionals. During the quarter, the fourth quarter, we added 52 very qualified interior design professionals for the retail division. Our licensees also have been adding to their staffs. We also continue to make progress in attracting to our IDA. That is the Independent Designers Affiliate program. As of June 30, we 1300 associates, 350 added in the fourth quarter.

Our next priority has been to build an effective marketing program to drive more traffic into our design centers. During the fourth quarter, we continued a strong advertising program, including national television, direct mail, print. The digital media continues to be an important and growing medium. We continue to invest in developing a strong website utilizing electronic magazines.

Now, also in the beginning of July we implemented a price increase averaging 7%. At the same time, when we implemented this price increase, we offered a unique savings offering, which is currently ongoing under the umbrella of Two Ways to Save. A 10% savings on the total purchase or a 24-month no interest offering. These have been well received by our associates and customers. The great recession also gave us an opportunity to improve our product programs in diversity of products, in improving quality and also migrating the custom and domestication. During July, we had a retail conference here in Danbury where we introduced a very focused product program which are being delivered to our network by end of this month.

Our next priority has been to strengthen our design centers. As of June 30, 2010, we had 281 design centers where the company operated 145 and independent 136. As of June 30, 2009, we had 293 design centers with 159 company operated and 134 operated by independents. And as you will note, we closed and consolidated several retail division design centers during the year. During the last decade, we have made major investments in repositioning and relocating the retail division design centers, as well as by our licensees. As we have relocated design centers to prominent locations in several markets, we had design centers that were trading dollars. One of the main reasons our comparable written sales in the retail division increased at the level they have is due to these consolidations. And it was because of that we also did not mention that in our pre-press release, because I think you have to keep in perspective, that comparable written in our retail division also reflects this consolidations of our design centers and our existing design centers got the business.

Today our retail network is much stronger. And as I said during the last ten years, we have made major capital expenditures in relocating our design centers. In fact, 60% of the Company retail division and, in fact, very close to our independents are relocated in the last 10 or 15 years. We expended a great deal of capital expenditures. Our fiscal 2008 capital expenditures were $63 million. And the good news was that we had completed most of those relocations by that time. Some will continue, but most have been done. In 2009, we spent $23 million in capital expenditures, again, mostly on retail. In 2010, the fiscal year just ended, we spent $7.6 million. And in 2011, we'll spend about $12 million or $15 million in capital expenditures.

Our next priority is sourcing. Both United States and off shore today is in much better shape. We have made major progress in repositioning our North American manufacturing. Currently, 70% of our products are produced in our North American facilities. I would say 70% of our sales are products that are produced in North American facilities. And also adding the domestic sourced products, like carpeting and other products, which amount to about 6%. So approximately 76% of our products are made in North America, and 24% is sourced off shore.

During the quarter ended June 30, we had no down time. Our associates are working forty hours. As Dave said, we have reduced our transition costs. And as he said last quarter, they were $1.2 million from $2.1 million, and we believe that will go down another 50% in this first quarter of fiscal 2011. Our domestic case goods is now 100% custom. This was a major, major undertaking. And keep in mind last year at this time we just had started the process.

Our next priority has been to continue to invest in technology, both at manufacturing, logistics and retail. And I'm very, very glad that we have done that because it is making us efficient right across the many elements of our business. And now just comments on business prospects. And as I said earlier, it's hard to make forecasts in these uncertain economic environments. However, I will share my thoughts with you. We have strong offerings. A strong and moderated network of licensees and associates. We are offering unique savings and a very strong marching program. We expect to continue to gain market share in the product and price categories of our focus. Our last savings event ended June 30, and was extremely strong. The first two weeks of July were slower due to many factors, including a strong ending to June, and across the country we are also hearing that more families are taking time off this year compared to last year. We have less urgency as our savings event ends September 6. So there is not the same kind of urgency as we had. And, of course, we got to keep in mind the uncertain economic environment.

Now, having said all of this, we have a very strong marketing campaign this quarter. We are increasing our advertising by about 35% this quarter, compared to the depressed levels of the first quarter of last year. Now, due to our savings calendar, we do intend to get most of the written business toward the end of these events which is the end of August, beginning of September. And in September, we have a very strong marketing program which is actually going to -- which we believe is going to make a strong difference in adding traffic into our design centers.

Now, we also are planning to have an investor conference around the middle of September where we will have an opportunity to reveal our new product programs, the changes we have made to our design centers and to our technology, and also this very strong marketing program that I mentioned. With that, I would like to open it up for any questions and comments that you might have.

(Operator Instructions)

Our first question comes from Robert Higginbotham from Goldman Sachs. Your line is open.

Yes. Hi, good morning.

Good morning. Thank you.

I wanted to talk a little bit about your gross margins. I'm honestly a bit surprised they were only up 160 basis points given the down over 500 basis points comparison from last year while you have had some meaningful declines in down times and you said you're currently at zero and last year you were kind of around the 50% kind of level. So you clearly had some benefit on the just absorbed overhead component of gross margins. So it sounds as if a couple things are going on. Either, one, you're more promotional than I gave you credit for, or your initial markups are lower. I'm just kind of wondering if you could suss out what the drivers --

Robert, any positive questions or are all of these negatives?

Only trying to get --

I'll get to you. Okay. Our gross margins are impacted by a lot of factors.

Yes.

They are impacted by the factors that our domestic case goods, in converting it to custom and maintaining them in the United States and then giving them up -- we actually get them up by 40% in the last six months. When you do all of those things, it does have an impact on gross margins. Our domestic case has been operating at almost a gross margin due to these consolidations. Second, as volume, while it has increased, we are still operating about 40% lower than maybe 2008. We have made progress. I'm talking about year to year.

Now, even though we have increased by 18% in this fiscal -- in the fourth quarter, we are still down about 25% if you compare it to the highs of 2007 and 2008. Our retail division is now operating also with savings, which we had on every day best price. And that also had an impact on our margins. I believe that that's one of the reasons we have taken a price increase, so that when we give a savings to consumers, which we are, that at least we have an opportunity to give a saving. All of these factors had an impact on our gross margin. The good news is that as we become more efficient in our manufacturing, which we are, and as our volume increases, we have a leverage of improving our gross margins. As Dave mentioned, it's approximately 50% or so, which is still pretty decent.

Okay. That's helpful. So how should we think about the trajectory of kind of working out some of those current inefficiencies, disruptions, if you will, that you've seen after the plant consolidation? Is that a long tail to that or is that kind of more in the near term?

You know, Robert, I think that we have the opportunities of continuing to improve it. As our -- now, that also depends upon our continued increase in sales. Continued increase or at least maintaining the manufacturing operations that we have. So there is a lot of uncertain things. But as business continues to improve, we have the opportunity of leveraging and increasing our gross margins.

Okay. And one last question on sales. You guys seem to pretty meaningfully be bucking the trend. I mean, when you look at the rest of the world, durables has clearly slowed down, while you guys -- well, you slowed for a brief moment of time. You seem to be re-accelerating. What do you feel is driving that? It doesn't feel as if you're being incrementally promotional, although I know you are being appropriately so probably in your view. What do you think is really driving your differentiated performance?

I would say that maintaining our network in this very tough economic environment. We have maintained our retail network even though we have closed a number of our design centers as I meant ,but they were done strategically so that we were not trading dollars. We have maintained the core of our associates in the retail network, our professionals.

We have also offered great savings, as you know, that we were offering every day best price and we got caught into a situation that consumers said "no every day best price is not good enough". "We want savings also." And then also finally, I think that even though we've done very, very well, we're also comparing to numbers -- depressed numbers of last year.

Great. Thank you.

All right. Thank you.

Your next question comes from John Baugh from Stifel Nicolaus. Your line is open.

Hi, John. Good morning.

Good morning, Farooq. What did you do to the sales commission? Walk us through what you did and the rationale.

Yes, John. In 2007 and 2008 we worked toward creating a team concept in some of our independents too, but of course we implement it in the retail division. What we did at that time was we gave our associates, interior designers, a base salary which represented 75% of what they were doing in the previous year and then after that it was based on their getting a bonus. Now, in 2009, the base of the 75% was working against us. And -- most of fiscal 2009, we felt that we had to go back to getting people on commissions because of the fact that it would be more entrepreneurial, it would also give us an opportunity of creating a variable cost, but we did not do it for six or eight months because right in the worst of that recession, taking it off would have given a very, very bad signal.

So it cost us a fair amount of money, but we felt that we had to maintain our network. And that goes back to Robert's question of why have be maintained -- why our business has increased? We paid the price of maintaining our people. And earlier this year when we saw that business was improving, I said this is the time to put them back into commissions, and they appreciated it, because we have somewhat of a -- we had to reduce the design staff. Maintain a very strong network of designers. And they like to be entrepreneurial. And I think that it is also reflected in the business we're getting, John.

So the drop, I think you mentioned a $5 million benefit is comparing the June quarter with this new commission structure in place in the June quarter fully and, I guess, that's reflecting compared to that 75% base a reduction? Is that the way to think about it?

John, what you have got to think of is this, when you are on a commission, we pay people on written, but book it when that product is delivered. So when you write more than you deliver, you accrue those commissions. And in the past, when we had the salaries, we paid it. So the difference there was that we were now -- we had the benefit of writing the business. In the past we would have expensed it. This time we accrued it so that when we would deliver it would be charged. Dave, is that right?

That's right .

So that means that the commission rate will come back up when we compare September to September somewhat?

No. I think it will just even out. I think that this quarter -- this first quarter, I think most right Dave, it will just even out. This is one quarter when the change took place. After this it evens out.

Okay. And then just so I'm clear, you are taking your pricing up 7% across the entire product line. Then you've got a promotion currently running through September 6 where everything in the product line is at 10% off. And then I presume that September 7 we're back to the full price and then you mentioned some kind of plan for September. I assume you're seeing that that could create a lull in business going back to the full price. Do I have all of that right, and any color on what you plan to do, post the sale event expiring?

The time difference between September 6 ending and the next one starting will be two or three days. So we won't have -- we will still have to offer -- what we are doing is this. We're offering some very interesting, unique opportunities to save. But we've got to keep on doing that. And, John, we will do that right up two or three days. Our next event will start.

And I was right this is the whole product line we're talking about with 7% increase and then the 10% discounting.

Yes. Just keep in mind that 7% was average. Some products we increased somewhat more. Some we did not increase . It averages out to 7% but the 10% is across the board

Great. Thank you.

All right, John.

Our next question comes from Brad Thomas from KeyBanc Capital. Your line is open.

Hi. Good morning, Brad.

Good morning, Farooq. Good morning, Dave. Congratulations on the strong sales results.

I just want to follow up on your network of professionals and the IDA program and the commercial business that you're working to grow. Could you help quantify it all, what benefit you are seeing at this point to sales from these programs?

Obviously the first -- the most important one is adding professionals to the in house interior designers. And that, of course, reflects an increase of business that you are seeing due to the fact of maintaining a strong network, adding the people that we're adding. We will continue to see the benefit of that as we go forward. The IDA, the benefit of those are that we do have -- we have not disclosed the sales but it is a reasonable amount of sales that they are bringing in. These 1300 affiliates, and as you know the program is that they will come in and they are partnered with an in house designer. They work together. And we compensate both for the work that they do. So they have an incentive of bringing in people. We have a marketing program. And it's building. And we're very pleased with it and we're going to continue building that because they bring in -- they bring in incremental business and they are at the grass roots level and they're also in many, many markets where we are not. So it sort of gives us an opportunity to expand our reach. As I said, it is growing and I think it is going to be a good business. And another thing is that some of the people who come and they're independents, we also have an opportunity of seeing them. And many of them, in fact, have joined us full-time too when we're looking to add people.

Okay. Great. And then a follow-up on the price increase. Could you maybe talk a little bit about what you are seeing from a sourcing and input cost standpoint? Is this price increase supposed to offset something that you're seeing from a price pressure standpoint or could it more than offset that? How should we think about those two sides of the equation?

Brad, we have actually in the last few years worked hard to reduce our prices. We have not increased our prices. In fact, we have reduced them because of making our products more affordable. Both in terms of upholstery, in terms of case goods. And then on top of it we have given this savings. In the near term -- let's say in the last quarter, domestically we did not see a price increase in raw materials. Our energy costs based on our volume was up about 5%. It was our energy costs were somewhat similar to what they were last year about but on volume-related basis they were up 5%. Overseas there is a pressure of increasing cost both in terms of you had to take some price increases overseas in the last few months. And then on top of it, the transportation costs are increasing. As you know, there is even a shortage of containers, so you really have to work hard to get containers and then pay a higher price. But that is 24% of our sourcing, we are somewhat less affected.

Okay. Great. And then as we think about the potential for profitability in the coming fiscal year, in the past you all have been very helpful at outlining different operating income and net income levels and different sales levels. Is there anything that has changed in the last quarter as you look at the sales trajectory, the mix of the business, as we think about the price increase and some of the perhaps input costs going up? Is there anything that's changed from a positive or a negative standpoint as you look at profitability potential?

I think at this stage in those models that we developed at $700 billion, $800 billion and to see what the impact would be, I think that those are good models to use. Obviously we try -- at this stage I don't see anything negative side. We'll try hard to make it better. But I think those are good operating models.

Great. Thanks so much Farooq. And best of luck going forward.

Thanks very much, Brad.

Your next question comes from Budd Bugatch from Raymond James. Your line is open.

Hi, Budd. Good morning.

Good morning, Farooq. Good morning, David.

As you have moved to custom case goods, can you talk about now the progress of cycle time where you are on delivering and what your ultimate goal is?

Yes. Budd, at this stage, we are shipping our, as you know, now domestically we are 100% on upholstery and cased goods. We are shipping approximately at this stage our lead time is between six weeks to eight weeks in upholstery and approximately six weeks to nine weeks in case goods. Because the good news has been that we have had, in the last six months as you know, our business has increased 18%, not only last three months, last 18 months. That will give us an opportunity to increase our capacities in both Vermont and North Carolina. So they brought decent backlogs and longer term, our objective is to maintain an average of about six-week lead time on custom products. And we are not that far off on it right now, Budd.

And the efficiencies that you're seeing in the plant, I would imagine they would be increasing kind of week by week or maybe month by month, however you measure it?

It is. One of the biggest challenges in cased goods was, as you know, it's an 80 year old paradigm we are changing. Our biggest number of challenges we had, one challenge was basically the setup time of equipment in case goods. And as you know, in fact, it has been taking us more time to setup than make the product. But we're learning to make it better. We're looking at how to improve our efficiencies and every week it is getting better. And it also gives us an opportunity -- as you might have read yesterday, the Governor of North Carolina and I, we made an announcement that we are expanding more people in our North Carolina and Pine Valley case goods plant. So they're participating with us on that. So I'm glad to see that after many years, Budd, that our people are working full-time both in North Carolina and Vermont.

And full-time is a 40-hour week or is it a 44-hour week? Any over time at all?

There is some overtime in bottleneck areas. But generally it's 40 hours with overtime in bottleneck areas.

I see. Okay. I think you put out a release a couple of weeks ago on a contract program. Could you talk a little bit about what you're doing there? I may have missed it because I got interrupted on part of the call.

Yes. We have been working on it the last year or so and as you know Dan Grow has joined us last year. He had been working diligently in terms of developing the right tools for us to work in the contract area. And our first initial contract is to help our retail network and the designers work on projects that they can do. They're also working on some national accounts where we hired an outside company for us to work with national accounts. The ability -- our ability now is much greater with customization. Because as you know in contracts they require different finishes. They require different specs at times.

Before it was very hard for us to do it. Now we can do it. And so at this stage we are -- we're doing a step at a time. We're not rushing into this. We are right now developed -- it has its own contract website. If you have opportunity, you may want to look at it. We have our contract catalog, and I'll ask Dave to send it to all of you so you can take a look at it. So we are now working with our design network and as we go forward we will most probably have a specialist in our design centers whose focus would be to develop on the contract as we have a specialist in soft goods. So that is how we're proceeding with it, Budd.

Anyway for us to quantify the market opportunity that might be there?

As you know, the numbers are big huge numbers when you look at contract. But I think let us get our perspective off it and I think in the next six months or so we have a better idea of where we are and certainly we'll share with you.

Okay. And I think in relation to John's question earlier talking about the promotional calendar and what you are doing in September, I think you said you were going to be much more active towards the balance of the year, maybe in the future, which is from my standpoint is a welcome change. Can you talk about maybe the philosophy of promotion going forward, how you look at that and what the cadence might be?

Yes. Budd, we have been looking at -- every crisis creates an opportunity and this last year we said we have an opportunity of getting market share. But to do that, we have to get the message across that Ethan Allen is aspirational, but it's also attainable to more people. Now, our current advertising has been well-received. But in September, you will see even a new attitude in our advertising. And we have now completed it. We retained an outside advertising, a national advertising agency to help us. As you know, we run our own advertising. But it's good to always get perspectives from the outside. And we are going to launch television, direct mail, digital, print next month. And I think it's going to be well received. Our whole network was here about two weeks back and they liked what we saw. Now, to do this we've got to spend more money. I said this quarter we've decided to increase our advertising in the company. That's national advertising and the retail division by 35% from more than what we spent this first quarter -- I mean the first quarter of last fiscal year.

Now, it's a vicious cycle. If you don't invest -- if I don't increase our production, we won't be able to deliver it. Last year in December I got together with our associates and said "let's increase our casework by 40% or 50%". If we had not done it with the kinds of increases we have had, we would have been in big, big trouble. So we are taking some risks. But on the other hand, we're also watching the economic environment. If for some reason the economy is bad, we can pull back. But right now very cautiously, we're going to increase our advertising. We're adding people. And the good news on the design center side is that a lot of those we've already done, but a few we will do too. We are also very fortunate that one of our biggest growths last year was China. There are now 40 stores in China and they actually have done very, very well and, in fact, 60% of the products they're selling in China are made in our US plants.

Okay. And the last question is one kind of -- of detail, if you'll quantify or talk a little directionally about what you're seeing in traffic and average ticket? You obviously had 31% comp store written sales in the Company comp stores. What are you seeing in terms of average ticket and what is the composition of that increase?

In the last year, our average ticket has increased. But like everything else, one has to go behind the numbers. The interesting thing is in the last year and the recession has done it, the average age of people buying from us has gone up. For instance, age 46 and up in the last six months, the last six months, is up to 68%, from 59% in 2007. Look at our age. People -- our income, people making $150,000 and up has gone to 40% of our clients, from 25% in 2007.

Now, the good news, because we're getting increasing market share for folks who got the money, who are 45 and up. And that has resulted in also higher ticket. But of course our challenge now is to make sure that as we move forward we expand our reach to more people at both end of the spectrum. Obviously we're not at a March level, but our advertising while maintaining the aspiration value you'll see Budd, is going to reach people, say 35 and up. We can't get a lot of people in the 20s, but 35 and up. And that's what we are doing. Our average ticket is up , but there's also reason behind

So the last question, so at the conference or at the dealer conference a couple weeks ago, did you introduce new products that reinforces that message?

It does. And those products are going to be delivered, most of them, end of this month.

Okay.

To our retail network.

And we'll get to see them, I guess, in September?

You will.

We'll get to see them earlier if they're going to be delivered end of this month.

If you go to our design centers. Here we have a full spectrum of what we have. Also we have products we're planning to introduce in fall and early next year, which we also showed to our network.

Okay. Thank you, Farooq.

Thanks, Budd.

And our next question comes from Joe Feldman from Telsey Advisory Group. Your line is open.

Hi, Joe.

Hi, how are you Farooq and Dave? I had a couple questions for you to follow up.

First, on SG&A ,or total operating expenses, I guess, how should we think about it for the coming year? I guess my question's really are there any costs that you were able to control or cut out in the last year or even the past two years that we should start to think of coming back into the SG&A going forward?

Yes. As you know, compared to -- if you keep in mind, in fiscal 2008 our SG&A was $420 million. Now we are running at slightly under $300 million. We did cut out $120 million in SG&A and then we also cut down a lot on the cost of goods side. And as Robert earlier, from Goldman Sachs, had a good question on the gross margin which is that we did cut all of those and when do we get the benefit -- we will get the benefit as we start getting even more efficient and even more volume in our plans. But on our SG&A side, I think that as I already said, we're going to increase advertising. We are increasing our professionals. So, we are adding people to a great degree are all related to getting more business or producing more products. We are not increasing a lot of indirect in any areas of our business.

Got it. Okay. And then sort of the second part of my question related to the advertising. How should we think about marketing? I guess if you could share what percentage of sales it was in the past year versus what you expect it to be this coming year? Is it a measurable increase, or is it percent of sales is relatively stable?

It will be relatively stable somewhat. We have to take -- as I said, we are going to take somewhat more of an aggressive position relatively. Reasonably aggressive position. So it would be slightly higher this going forward at this stage. But not too far because our business -- our sales have increased also. In terms of dollars, it will increase. As a percentage, more or less same, slightly higher.

Okay. That's helpful. And then the last question I wanted to ask, and turn it over to somebody else, was about stores. And how should we think about your stores for the coming year in terms of openings, closings and maybe what the goal ultimately is in terms of a longer term store base that you see at this point?

Joe, our business, as it has migrated more and more in terms of providing interior design solutions. And also combining technology. In fact, we have just completed development (inaudible) touch screen technology which is now going to be shipped to all of our design centers in the next few weeks. You had it in Danbury. You had it in four or five other locations, but it's going to go to all of our design centers. At the end of the day we want to make our people more efficient. And that I think you're going to see us -- you're going to see us have that element across the board in our business. And what is the second part of your question?

The kind of store growth we should expect to see. Or more closings, even.

Twenty years back we had 300, and now we have 200 and actually 40 or 50 in North America. Our perspective, because the nature of our business, our business is not an (inaudible) store, not a candy store where the more you open the more you look at square footage sales and say each one is going to give you $700 per square foot. Ours is now a service business. I want to have the right design centers in the country.

Look at Manhattan. We used to have three and now we have one. This one at the end of the day has got to do more than the three. Not right now but it is actually growing. Look at a market like Milwaukee. We have three neighborhood stores. Now we have one major flagship design center. Same thing we have used in the last 15 years market after market. In other words, having less number of buildings and square footage but having better locations and more people. Full-time and also affiliates. So as you go forward, I don't see us increasing a lot of a footprint in major markets.

Now as we said in the past as the economy improves, we have about 60 or 70 very important markets which are second tier markets where we need to be and we're going to go there. Our first priority is with independence. We just opened up in the last few months a 6,000-square foot in Paducah, Kentucky with a family. And they're doing very well because they also have all of our touch screen technology. And you're going to see that smaller footprint in smaller markets for us, and in some consolidation in markets where we are trading dollars, I would rather have -- if you don't need two stores, I have one.

I would rather spend that money on more people and advertising, and that's what you're going to see from us. Some locations like we just opened one in Pittsburgh a few weeks back for the relocation. We are in the process of building one in Estero, Florida between Naples and Fort Meyers. One of our new retailers is opening our new design center in Austin, Texas. So we're going to have a few of those coming up. But the main great news is that a lot of work we have done has been accomplished. Now we want to leverage from what we have.

All right. That's helpful. Thanks, guys. Good luck with the coming quarter.

Thanks.

(Operator Instructions)

Our next question comes from Joel Havard from Hilliard Lyons. Your line is open.

Yes, hi Joel.

Hi, Farooq. Good morning, Dave.

Most questions have been asked . I wanted to go back and get a couple of pretty specific answers to a couple of those that were addressed thematically. First of all, this may be more Dave. Was there any particular or notable charges from that roster of charges that you cited in the press release that was included in cost of goods

Yes, Joel. As I mentioned in my prepared remarks, the table that we attached to the press release showed on the wholesale side that there was an adjustment to the operating income for those special charges. The majority of that was in cost of sales.

Okay. On that same vein, and sorry I missed that data point, the dollar impact, if you can get a sense of it, of the deferred compensation or deferred commission issue in Q4.

Right. That was $5.2 million.

And what's the nature of that as far as bringing it back, catching up in future periods, something along those lines?

Well, as Farooq mentioned, it's expected to even out in terms of percentage of net sales going forward. But as also he mentioned, what that is we pay commissions based on written business and when that product is delivered, then we recognize the expense in the (inaudible).

Okay, And this is following up on the comment you made on the G&A side, Farooq I know that you're justifiably proud of having cut so much of this cost out, but are we at what you would consider sort of a safe baseline? And I believe I've asked you this question in previous quarters and you continue to bring it down a little bit more, but I'm concerned we're running out of room there, particularly if we're starting to see an inflection on the top line.

I said this Joel, that we're going to strategically spend more money. And we have to do that because our delivery costs, as you know we, deliver our products at one cost nationally to our network. And those costs are part of our selling expense. It's unusual because, as you know, most people in our industry deliver FOB. And the retailer pays the cost, or in some cases they put it in cost of goods. We have put our selling expense, -- our delivery expenses both from the wholesale to our dealers, or of our own retail network or -- and also our delivery expenses from our retail to the consumer's home. All are part of a selling expense. And that's a big number based on increase of business. So keep that prospect in mind. That is a variable expense based on our business.

The second is advertising. Those are important numbers. Third is the fact that the more business -- our first objective, of course, is to leverage more from the people that we have so that they can get more business and make more money. I want our people to make more money at the retail. But then we're adding people. So that also gives us an opportunity to get more business but, again, related to, relative to sales. So all of those factors have to be -- I think as our business increases, Joel, you're going to see an increase in operating expenses. And most of it variable.

Sure. Thank you for walking me slowly through that. A couple of other broader questions. With the change that you have undergone on the case goods side with the effort that's under way on the contract side, is there a longer term pressure to increase the working capital commitment to that, or does the custom nature of everything now sort of offset that potential impact?

Yes. Not much additional capital on that.

Very good. And lastly, Farooq, I know you all don't get -- share too much detail on the credit side. That being third party. But, can you give us a sense of what is going on at the store level? Maybe the proportion of applications that are being rejected now versus six, 12 months ago. Is there anything like that that you could?

Joel, I already mentioned that the current body that does the financing for us, and they have 100 major clients, we are at the top, they tell us continuously, in terms of our customer base having the least amount of delinquencies, because of the base of customers we're dealing with. I also mentioned earlier the fact that people with somewhat higher income have tended in the last year to be our clients. So, no, we have not seen any. We watch it very carefully. We do hear from time to time people have been rejected. But it is not something that is of alarming nature anyway.

Okay. Could I summarize that then as your customer's credit trends remain sound, and your third party provider remains comfortable in servicing that portfolio?

Yes. I think you said it better than me.

Okay. Thank you, guys. Good luck.

All right. I will take one more question if there are any questions. Anything else there?

(Operator Instructions)

There is no question, I think we have covered most probably a whole breadth of questions over here. And I would like to thank everybody for participating. And if you have anymore questions, please give a call to Dave Callen. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference.