Ethan Allen Interiors Inc (ETD) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ethan Allen earnings release conference call. (Operator Instructions) I would now like to introduce your host for today's conference, Mr. David Callen. You may begin.

Thank you, Mimi. Good morning and welcome to the investor and analyst call for the quarter ended September 30, 2010 for Ethan Allen Interiors Inc. I am David Callen, the Vice President of Finance and Treasurer for Ethan Allen.

After I read a few administrative notes, Mr. Farooq Kathwari, our Chairman, President and CEO, will provide opening remarks. I will then review financial highlights from the quarter and Farooq will close with a detailed review of business initiatives of the Company before taking questions.

Please note that our earnings release and prepared remarks make reference to non-GAAP information, which excludes the effects of restructuring impairments, 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, which is also available on the Company's website.

Please also note that comments from this call should be considered in conjunction with the Company's reports filed with the SEC including discussions of risks. Any forward-looking statements, discussions of future expectations, trends, or objectives are subject to various assumptions, risks and uncertainties. Actual events or results could differ materially from these forward-looking statements, and the Company assumes no obligation to update or revise these statements.

Now to Farooq Kathwari for his opening remarks.

Thank you, David. I will provide a brief overview of the highlights of the quarter ended September 30, 2010 and as compared to the previous year quarter ended September 30, 2009. After my brief comments, Dave will give information on our financial performance, and then I will give a detailed business overview.

For the quarter ended September 30, 2010, our sales increased 21% to $164.8 million. Retail division sales increased 17.3% with comparable sales increasing 26.4%. Reported gross margins were at 50%, compared to 42.8%, and adjusted gross margin ex special charges this year at 50.4% versus 49.1% prior year. Operating income was $6.3 million. That is 3.8% of sales versus last year quarter reported loss of $16.1 million and adjusted loss of $6.8 million.

This quarter had strong wholesale margins of 11.1%, as reported and as adjusted is 11.7%. Retail division while substantially reducing losses from previous year quarter had a negative gross -- negative operating margin of 3.4%. Our objective is to write and deliver more in the retail division, which will have a very positive impact on overall margins and profitability.

Written at retail division down 2.4% while comparable was up 3.5% and as reported by us, impacted by timing of the end of savings event this year ended October 18, last year September 30. Also consumer sentiment was guarded especially to this very negative election campaigns taking place.

Taking into account the closing of savings event on October 18 instead of September 30, we estimate the written business for retail division would have been a positive 5% instead of a negative 2.4%.

Inventory decreased $6.2 million from last year quarter and increased $4.5 million from 6/30/2010. Mostly sold inventory at retail division and some increase in raw materials and work in process.

Backlogs remain healthy with increased production and lowered rate of incoming orders have better balance between backlog and service as 70% of products custom made in our US plants.

Liquidity remains strong with cash and equivalent of $90.7 million. We have also been cautiously purchasing of our shares and bonds in the open market.

We continue to strengthen enterprise, and I will give an overview after Dave provides financial information.

Thank you, Farooq. Net sales for the quarter were $164.8 million, up 21% from the prior year quarter, and bucked the historical trend by being up sequentially from the $163.3 million in the fourth quarter of the fiscal year ended June 30. Our retail segment reported net delivered sales of $121 million, up 17.3% versus the prior year quarter and comparable Design Center net sales increased 26.4%.

Due to a change in year-over-year timing of promotions, our retail-written orders decreased 2.4% while comparable Design Center written order grew 3.5% versus the prior year quarter.

Wholesale, net delivered sales were $107.6 million, up 32.3% compared with the prior year quarter. Part of the wholesale increase was product shipped to our retail division that at the end of the quarter was awaiting delivery to clients' homes.

Consolidated gross margin for the quarter improved to 50% compared to 42.8% in the prior year quarter. As expected, we had lower transition costs for ramping up production of our plants during the quarter, totaling $679,000 or about $1.5 per diluted share. The prior year gross margin was impacted by $8.5 million or $0.18 which included accelerated depreciation, abnormal overhead, transition costs for the actions taken to consolidate our manufacturing footprint.

Excluding these types of costs from both periods, our gross margin would have been 50.4% this year compared with 49.1% in the prior year, first quarter. It is also worth noting that our current year gross margin was affected by a lower mix of Company-operated retail sales of 73.4% than the prior year of 75.7%.

Transition costs next quarter are expected to be approximately $300,000 to $500,000.

Operating expenses during the quarter were $76.8 million, excluding $225,000 or $0.05 of restructuring charges for lease termination true-ups. As Farooq mentioned previously, our operating expenses include increased investment in advertising during the quarter.

As a percent of net sales, operating expenses, ex restructuring were 46.6% compared to 54% last year. Our net income for the quarter was $3.8 million or $0.13 per diluted share compared to a net loss of $13.6 million or $0.47 in the prior year quarter. The current quarter includes nonrecurring other income of $1.5 million or $0.03 per share.

Adjusting for special items from both periods results in diluted earnings per share of $0.11 this year compared with a loss per diluted share of $.20 last year in the first quarter.

We are cautiously and opportunistically repurchasing our outstanding stock and bonds. During the quarter, we paid out $5.4 million for stock repurchases and paid $2.3 million for bond repurchases made below par. We also added $4.5 million in inventory, largely to service orders already on the books as well as spent $1.5 million on CapEx and paid $1.4 million in dividends to our shareholders.

We ended the quarter with a healthy $90.7 million in total cash and securities. Another $3 million in below-par bond repurchases were made in early October after the quarter ended. We continue to make strides with our business initiatives to be poised for growth and are pleased with the financial health of the business.

Now to Farooq for detailed comments on the business initiatives.

Thank you, David. In these challenging times, the only option we have is to continue to take steps to positively differentiate our enterprise and take market share. We continue to focus on our strategic priorities.

Our in-house network of interior design professionals is a major competitive advantage. During the quarter we continue to add very qualified interior design professionals. During the last six months we have added 119 experienced and talented interior designers, which included 69 during the quarter ended September 30. The net increase during the last six months was 44 as we also continue the process of reducing interior designers either through resignations or not meeting our new standards.

We have continued with extensive training and orientation programs for the new associates and also associates who are working in our design centers. The interior design affiliate's or the IDA program also continues to grow, and currently we have over 1600 associates in this program.

We launched a strong marketing and advertising program this past quarter. This included new television commercials for national television, and a very forceful direct mail magazine. The messages while conveying the aspirational aspects of our offerings are also getting the message across that Ethan Allen represents good quality, stylish products, free professional interior design services, free local delivery, and also special savings for a limited time from our everyday best prices.

During the quarter, the Company retail division increased advertising primarily through direct mail by spending $2.2 million over what was spent in the previous year quarter. During the quarter our direct mail magazine and oversized postcards were mailed to over 5 million households. While this was a major increase in spending, we believe it made sense to get our new advertising program to a larger consumer base as we continue with our objective of getting market share especially as consumer confidence improves.

During the quarter we introduced and shipped new products for our design centers. The focus of the new products was to take advantage of our conversion to custom manufacturing in the United States. In case goods, we introduced new dining room furniture where custom allows us to offer a wide variety of design elements and configurations off a common platform.

We also introduced new products in home office and media. In upholstery we added to our selections both in upholstery frames and fabrics. In accents we introduced a number of new product including a customer artwork program which provides our interior designers and clients to develop custom framing options. In soft goods we added a collection of bed coverings and custom draperies.

We are pleased that despite one of the most difficult periods, we have been able to maintain a strong network of design centers. As of September 30, 2010, we had 281 design centers, 143 operated by the Company retail division, and 138 by our independent licensees. At 9/30/2009 we had 289 design centers.

During this recession, we have consolidated a number of design centers in the retail division which were trading dollars and we have also opened a few new ones. As the economy improves we are ready to open additional design centers in North America and also internationally.

We also made progress in our consolidation and repositioning of our manufacturing and logistics network. About 70% of our products are made in the US plants. From a year back of depressed production, our domestic case goods have doubled their production and made in North Carolina, where we consolidated our US manufacturing operations in upholstery, has increased production by over 40%. We are also positioned well in our wholesale and retail logistics network.

As we mentioned in our last conference call, we have invested in technology both at retail and wholesale parts of our business. The new touch-screens are being received by our design centers at this time and by end of November will be fully functional.

Finally, as we commented on our earnings press release that while faced with uncertain economic times, we are cautiously optimistic to continue to show improvements compared to prior year both in sales and earnings.

At this stage, we have a backlog which will enable us to maintain our production levels and also provide acceptable levels of service to our clients. As 70% of our sales are custom products made in our North American facilities and managing our growth is [as] important to providing good service.

The great recession has given us an opportunity to accelerate the process of reinvention, and with a strong network of design centers, stylish and quality products, special values from our everyday best prices, experienced network of interior designers, and utilizing technology as a competitive advantage, we are well positioned to grow our business, especially, as consumer confidence improves.

With that I'd like to open it up for any questions or comments. Yes. Mimi, are you there?

Yes. (Operator Instructions). Our first question comes from Barry Vogel of Barry Vogel & Associates. Your line is open.

Hi, Barry. Good morning.

Good morning to you. I have a couple of questions on operating rates and margins. If you look at the fourth quarter on similar sales as the first quarter, about $164 million, your operating margin in the fourth quarter of last fiscal year was 5.8%. And this quarter after these adjustments are taken into consideration, it was only 3.8%. So could you tell me -- that's a big difference in margin on similar revenues. Could you tell me why that happened?

David, go ahead.

Barry, it was 5.6% in the fourth quarter. But as we mentioned on the call, we invested more in advertising in this quarter. So our expenses were a little bit higher, the percent of net sales. And also our gross margin rate was just a tad bit lower. The adjusted rate in the fourth quarter was 50.5% versus 50.4% in the first quarter. That's reflective of the mix that I mentioned on the call as well that our retail business made up slightly less of our total consolidated net sales than in the previous quarter.

Yeah, Barry, in addition to the fact we are also now starting to invest and build our business. I mentioned the fact that we had -- we increased our advertising by over $2 million, not only from last year but also increased it substantially from the fourth quarter. We've also started to increase, as I said, adding new associates.

Now, we are getting ourselves ready for the future because whether it is 4% or 5% is not an acceptable level of operating margins. They are good for the time being but we have to now gear up so that we are able to realize greater potential in sales and operating margins.

All right. One other question as it relates to the operating rates and down time. Could you give us the operating rates -- this is US now -- of the upholstery operations in the first quarter and the case goods operations and if there was any down time in the quarter can you tell us what the down time might have been?

Well, in this first quarter there was no down time. In fact, we have gone the other way. We have had to work substantial overtime both in our upholstery operations and in our case goods operation because the backlogs and the rates of business that we got in our fourth quarter while it was great, but we also have to service it.

Because as I mentioned, being in the custom business we also have to make sure that we have reasonable service positions. And so both case goods and upholstery in our first quarter had high overtime and no down time.

Does that mean you operated at 100% capacity in those US facilities?

Well, I would not use the word 100% is -- of course, we did not take any down time. We can always increase production capacities by hiring more people, by getting into second shifts. But from a perspective of the fact that we are operating today based on the number of people that we have, as I said, we operated in this first quarter at a higher level of overtime than we would like to do in this second quarter. As of course the sales are somewhat lower, we are now balancing between the incoming orders and our backlog, and the business we expect to be somewhat more efficient.

So does that mean that if business improves, you're going to handle in the US your current products that you have to -- could you -- keeping the same facilities without adding a plant that you would just add more workers to increase your revenue?

That's right. Now, Barry, keep in mind at the same time that we have been converting to custom, we have also been -- we have doubled our case goods production in the United States in the last 12 months, which does not come without a lot of inefficiencies. And we have been -- we are taking all those inefficiencies in addition to new people, in addition to new products -- same thing in upholstery.

So all of those are -- the good news is that, as I said, we have doubled our case good production in our US plants. Our maiden operation is operating at 40% more capacity, which is great news, but also it also has a number of inefficiencies built in with that kind of an increase in production.

Right now, the good news is that we have a much better position in terms of efficiencies both in our case goods and in upholstery. On top of it in case goods we did a complete change in the structure of our production from making big runs to making custom.

That was one of the major, major challenges. It also had an impact on our efficiencies. But the good news is that we still have some issues as we go forward in terms of conversion to custom, but a lot of that is behind us.

Thank you very much.

Thanks, Barry.

Thank you. Our next question comes from Joel Havard of Hilliard. Your line is open.

Hi, Joel. Good morning.

Good morning, Farooq, David. A couple more prosaic questions here. Farooq, I wonder if you could or if Dave's got the numbers handy give us the wider range of comps that you guys have shared in the past. Sort of the top line comp delivered versus I believe in the press release you referenced sort of a comp written and a total written. But you've shared a couple other things like wholesale trends, et cetera, in the past.

Well, I think we have given you I think most of the information that we have given in the past that is in this fourth quarter, as we said, in the retail division -- you're talking about our delivered sales, Joel?

Comp delivered, that's right, Farooq.

Okay. On the comps and the retail division, we had delivery -- total delivery of 17.3%, and the comp store delivery was 26.4%. In the wholesale, we delivered 32.3% in the last -- in the fourth quarter. I'm sorry, in the first quarter of this fiscal year.

Okay. And Farooq, could you run through the store metrics, your comment on the total number and then the break out between? And specifically what sort of "consolidation" was going on? I'm interested in seeing where that shift is. The background to that question would be any news of further development of some of the smaller formats. I know that's something you have all have been toying with and I'm wondering how that's progressing?

Yes, Joel, as I mentioned, we went from 289 to 281, the total count. Most of the decline did take place in the Company operated Design Centers where a number of design centers which we felt were trading dollars especially in this recession and in this environment it made sense when the leaders came up that we got out of them.

So we consolidated a few of those into design centers where we already had in the markets. And like for instance, just to give you a perspective, in Milwaukee we had three sort of neighborhood design centers and we opened up one flagship design center, which is I think long-term going to do more business than the three. Similarly, in many markets like that, for instance Manhattan itself we went from three to one. Long island for instance right now, we're consolidating a design center, which is only 10, 15 minutes away from a major flagship design center. So that was the major -- the few that were -- that some of our independents closed, but the good news is that throughout this very, very major recession we've been able to maintain our design centers.

Through this period also, Joel, we opened up a few smaller design centers to see how they work, how they operate from anywhere from 4,000 square feet to 9,000 square feet. That is continuing and we have been working very hard in making sure that these new design centers, the smaller format, also take advantage of the new technology. The touch-screen technology, our new website, all of those are important. And we are also developing plans to open up the smaller format design centers in many, many markets across the country and also of course our growth internationally is taking place too. I think as the economy improves we are poised to open up more smaller-format design centers.

Farooq, the test so far with the smaller footprint, that's the 4,000 to 9,000 square feet would be half, 25% to 50% the size of a full-line store, I guess. Are you getting the square footage performance with the market dollars per household penetration that you were looking for out of this?

Absolutely. In fact, like Raleigh, we used to have I think a 16,000 -17,000 square foot design center. We opened up a 9,000 square foot, slightly less than nine. It is of course we have to take into account the recession, but it is doing about the same business that the larger design center was doing because of two factors, two additional factors.

One is our focus on getting very qualified interior designers. The interior designer that I mentioned that we hired, -- and also that by itself is also an investment at this time. Is -- they are very qualified people. This recession has given us an opportunity to get interior designers who were running their own businesses. But with this recession they're having a tough time and they're coming to us.

So we have been -- last couple of weeks back we had 75 of them go through an orientation program here. So great, good interior designers and then technology.

Our web site is good but we are going to make it better. The touch-screens are coming up and other technologies are making it possible for us to operate from a smaller design studios or centers and that is what the future is going to be.

Thanks for that color. And just -- sorry to berate this but just so I understand, what was the specific dealer versus Company store count at quarter end?

143 was Company, and 138 was dealer. Last year the Company was a little bit higher than the number of 143. So we've maintained more or less the dealer stores similar to last year.

Well, in fact, I guess you're actually starting to see some net dealer positives there on a sequential basis, I guess.

Yeah. Because if you take a look at it the prior year first quarter, we had 155 Company and 134 dealers. And this quarter -- I mean this year later we had 143 Company and 138 dealers.

Excellent. Guys, thanks. Good luck.

Thank you. Our next question comes from Chad Bolen of Raymond James. Your line is open.

Hi, Chad. Good morning.

Good morning, Farooq. Good morning, David. Thanks for taking my questions. Farooq, you shared with us that if you make the adjustment for the timing of the promotional calendar that the total written business was up 5% versus the reported down 2.4%. If I make that same adjustment does that suggest that the comp written business was up about 11% versus a plus 3.5%?

I think -- no -- Dave will do those numbers because the comp may be different because of the fact that -- well, it's possible. Yeah, I think it's pretty close. Dave will look at it but I think you're right. It would be pretty close to that.

Okay. And if I remember correctly the current promotional event that you have runs from October 22 through the end of November. How does that compare with what you were doing in the prior year second quarter? And do you anticipate any meaningful year-over-year impact to the comps because of timing next quarter?

Well, our programs this year are stronger in terms of the focus of advertising and even savings. This year we are going to end up, one in -- end of November and then we're also going to have a shorter period in December. It would be somewhat similar to what we had last year in the second quarter.

Okay. And Farooq, you mentioned that you had shipped some wholesale orders to retail that were still awaiting delivery. Could you talk a little bit about what the consolidated backlog looked like at the end of September versus say how it looked at the end of June? What was it up, flat, maybe down a little bit? And what does that imply for delivered sales next quarter?

The backlogs are lower at the end of the first quarter because of the fact of these two reasons; one is we delivered -- we had high deliveries with a 21% consolidated increase in sales and 20 -- 17% in our Company design centers.

So we did eat into that backlog, which is good for us. Because our backlogs -- we need backlogs but we need to make sure those backlogs are backlog that we can deliver in a reasonable time period. We had actually -- because of the fact we were gearing up production, our backlogs were creating somewhat of a service issue. Now they are in balance. They are lower than what they were at September -- I mean June 30.

However, the issue really is, as we go forward maintaining a backlog that would enable us to keep our manufacturing, which is now producing basically based on backlog, keep them busy. So far for the next couple of months, we see them remaining busy.

Okay. And I guess as I look ahead historically, the December quarters delivered sales have been higher seasonally than September. But is it reasonable to think that because you had such a strong September for deliveries that we see an actual decline sequentially in Q2 versus Q1?

It's possible. Last year, as you can see last year, we delivered $143 million in our second quarter. This year, we delivered $164 million in our -- this first quarter as compared to $136 million in the last year first quarter.

So I think that, obviously, our business will depend also -- the business we are going to get in the next few weeks. But I would think that there's an opportunity of doing somewhat similar close to what we did in the first quarter.

Okay. And looking at your inventories it looks very clean. And it did take up a little bit sequentially. But inventories declined year-over-year despite a pretty significant increase in sales. Is that a sustainable level? Should we expect some more modest increases or just how do we think about inventories for the rest of the year?

During the year, as we converted into custom, our finished goods inventory and our case goods of our domestic manufacturing went down. Now we are done with that. Now our inventories are where we need to be -- maybe perhaps a little bit lower than they should be -- based on the fact that we need to make sure that we are able to service our business. I do -- as we go forward I would say that our inventories would more or less remain at the levels that we have right now.

Okay. Well, thank you, Farooq. Thank you, David. And good luck to you on the rest of the year.

All right. Thanks.

Thank you. Our next question comes from Brad Thomas of KeyBanc Capital Market. Your line is open.

Good morning, Brad.

Thanks. Good morning, Farooq. Good morning, David. First of all I just want to thank you for the commentary around the sales and with the timing of the promotional events. If we kind of back some of that stuff out, could you just give us a little sense for what it felt like -- sort of the underlying consumer spending trend were during the last several months and into October?

Well if that has been reported, certainly there has been -- a consumer is becoming somewhat cautious in the last few months. And I think that part of that is due to the fact of this very, very negative campaigning that is taking place. People do get concerned.

The good news for us is that our traffic has increased. And the traffic that has increased has been even more qualified people coming in. They're working on projects. But what we are seeing is somewhat more of a reluctance of people closing at this time.

And I would hope that after the end of next week when this major, major negative advertising of these elections is over, there's an opportunity to start improving consumer confidence. And all these folks who are working on projects would be in a better position to close. And that's what we are seeing right now.

Okay. And then just wanted to follow up on advertising expense and the new ad campaign. You guys showed off some of the materials at the investor day in September. I thought the commercials looked great. You mentioned today that I think a majority of it was spent on direct mail and now I've seen the commercials. Could you just talk a little bit more about what you did during the quarter and what we should expect during the December quarter?

In the first quarter we did spend at the Company retail division $2.2 million more in direct mail. We maintained our spending in national television. Both the direct mail and the national television projected our new advertising campaigns were well received.

In this second quarter our advertising spending as compared to the first quarter will be somewhat lower. It will be higher than the second quarter of last year because last year, of course as you know, we were all just gearing down.

We would -- our objective is not to send out over 5 million direct mail that we did in the first quarter, because part of that 5 million also was for the closing that took place in October 18. So we'll have somewhat of a lower advertising expenditures than we did in the first quarter.

Okay. And I think you had said in the past it was going to be about a 35% increase in advertising dollars? Does that correspond with the 2.2 million or did you come in above or below that 35% level?

That 35% was increased for our retail division, and that's what I had mentioned. And we did that last -- that's what it -- we spent for the retail division 35% more in advertising than we did in the first quarter of 2010.

Okay. And then Farooq, we've talked in the past about how it's consumer backdrop where shoppers really need to see value and obviously you're making efforts to offer those special savings. Could you just talk a little bit more about the level of promotions that you're offering right now, and any potential that you might change that one way or the other in the coming quarters?

Right now we are offering a two savings options to our consumers. And one is that you can save 9% on your total purchase and get an optional nine-month interest-free financing. Or the second option, which is something very, very unique, we've never done it. We're offering a 36-month interest free financing to our clients.

We just started last week. And I think it's a very, very strong offering. And we have continued to have strong savings offerings from our everyday best prices. And our own associates and the clients see the value of it. And we will continue to offer savings for the foreseeable future because of the kind of economic environment we are in.

Great. Thanks so much, Farooq, and best of luck.

Thanks.

Thank you. (Operator Instructions) Our next question comes from Matthew Fassler of Goldman Sachs. Your line is open.

Hello, Matt.

Hi. Actually this is Mark-Andre filling in for Matt. How are you?

Fine thanks.

I had a question on gross margin just going back to the margin. Looking at the year-over-year change, excluding the one-time item it's better than it was on the face of it. But just wondering if you could talk to the slowing in terms of your view of progression given that the compares are pretty similar. Over the past three-quarters, you've seen like more than 300 bps increase then about 200 bps and now about 1.3% increase in the gross. If you could just talk to those drivers because we would have expected maybe a little bit higher increase given full utilization this quarter. That would be great.

And then if you could talk to commodity inflation impact on margins since we're hearing about that at this time. That would be great. Thank you very much.

All right. On the gross margins, last year in our first quarter our adjusted gross margin was 49.1%. Reported was I think about 42%. Now, this year our adjusted gross margin is 50.4% reported is 50%.

Now, our gross margins is a very healthy gross margin in our industry. However, the number of factors that we've got to keep in mind. First is that our gross margin is impacted by the relative retail sales or our retail sales of the Company retail division to total sales. The higher those are to the total, we have the opportunity of having a higher gross margin. But we got to be also careful that does not mean higher operating income. So that's one factor.

And in this quarter, our total retail sales to total sales were lower than they were in the first quarter of last year. I think Dave just mentioned gave the numbers. Was what 73%, was it 75%?

That's right.

And second factor is this you mentioned, which was very important on the manufacturing. While in our manufacturing we are making progress, but at the same time we are continuing to gear up and I think as we go forward we have the opportunities of continued benefit. We've gone -- our domestic case goods manufacturing has gone from basically flat gross margins to now operating between 15 and 20%, but still not where it needs to be.

And the third factor in our gross margins is this whole issue of the benefit that we are getting in that of training all these new people. And as that gets stable we have an opportunity.

And finally I mentioned earlier, we ran into very high overtime so that we -- to service our clients. Getting a lot of business is great, but it also end up costing us more. And that's what happened in the first quarter.

And the second one on inflation, I think that from our perspective it was flat. There were certain areas that went up. Our fuel costs have gone up because of the increase in the gas prices. Our lumber prices have somewhat stayed stable. Our energy in our plants is down on a volume basis but on an actual basis our energy costs have tended to go up.

So I think that from a case goods point of view it has been somewhat flat. In upholstery, we have had an increase -- most probably between foam and plywood has increased by about 6%. So I would think that on a consolidated basis the impact on our gross margin was between 0.5% to 1%.

Got it, thank you. If I could just one follow up on going forward. How should we think about the trajectory of the gross margin? Should we expect it to keep on the current trend on a year-over-year basis? Or given everything that you're seeing and everything you just talked about?

Yes, I think so. I think that operating between 50% and 51% for the next few quarters is something that is feasible.

Got it. Thanks very much.

All right.

Thank you. (Operator Instructions). Our next question comes from John Baugh of Stifel Nicolaus. Your line is open.

Hello, Farooq and David. Just a couple things. First you put out that matrix, which was very helpful. We're obviously in a very difficult sales environment still. And I'm curious, hopefully, we won't remain here forever, but given the fact that we are here now and you're running these sales events and increasing advertising. Should we think as some of those contribution margins that were laid out in that matrix being in line with all that you're doing right now, or perhaps a little bit optimistic with where you have to be to generate sales?

No, John, I think those metrics, if you follow the metrics you'll see that we are in line. And I think that they are very realistic.

Okay. And then on the Q2 shipments or deliveries that we need to model, you've implied that if you adjusted for the timing of your sales events your orders would have been up more like 5%. If we assume for the moment that Q-2 deliveries match Q1, that's up 14% year-over-year. And I'm struggling to get there with a 5% order up.

Your current sales event would end I guess at the end of November which only a portion of that would ship in the December quarter. And you shipped a fair bit of wholesale right at the end of the September quarter. So I'm struggling, I guess, to get up 14% or anywhere close to that given those factors. Am I missing something? Are you seeing something with your incoming orders on the first three weeks here that are very strong? Help me. Thank you.

Well, I'll tell you that the backlogs we have -- we had as of the end of the first quarter as you move forward should be about $10 million lower. And that's what you are missing.

So the backlog at the end of September relative to the end of June was $10 million lower?

No. What I'm just saying is that our backlogs at the end of September gives us an opportunity to ship $10 million more than the business that we are potentially going to receive this quarter. That's the number that you're missing.

Okay. So you've freed up productive capacity so that if orders come in you can fill them.

Or and also we will ship from the backlog that we already have in this quarter.

Correct. Okay. Thank you.

But keep also in mind this is toward the end of October. Any business that we get in the next two, three weeks we can ship that most or at least half of that we can ship it in this quarter.

Of course. Yes. Thank you much.

All right.

Thank you. (Operator Instructions) I'm showing a question from Todd Schwartzman of Sidoti. Your line is open.

Hi Todd. Good Morning.

Good morning, Farooq and David. Are you promoting the 36-month no interest option on your TV commercials?

We are. In fact if you go to the end of the tag line to see the two options, the 9% and nine month financing or the 36 months. We're also promoting it in our direct mail.

Great. And is there a level of volume at which you maybe start thinking about adding a second shift at your domestic plants?

I think that we still have the opportunity of increasing production at the first shift by hiring more people. Second shifts are a very expensive proposition, Todd. Especially, we are one of the few companies left making -- manufacturing in the United States, against all odds. And we will try as much as possible to first manage our production domestically in one shift. And we are doing that.

We are increasing our capacities both in upholstery and in case goods. And that will be our first focus for the next three to six months. And then we have an opportunity of going to second shift.

Back when imports and case goods were less pervasive than they are now, what did it take for you to require a second shift? At what levels were you going to a second or even a third shift at that point?

Keep in mind that in our case goods approximately 60% of the products is made in the United States custom; one at a time. And 40% is still outsourced from overseas. So we always have that balance. We always have that opportunity of balancing our future needs either domestically or overseas. So we have left that flexibility.

All our upholstery is made domestically with a cut and sew operations in Mexico, which we have been expanding in the last two years.

Okay. Looking at the selling expense for the quarter, how much can be attributed to previously-accrued commissions?

None. Right, Dave? Or a little?

We match up our -- the commission expense with the delivery of the product. So there's not an incremental hit in the quarter.

Last quarter, last conference call I thought you guys said that there was a little bit of a lag potentially.

Well, last quarter you recall that we had just converted back to a commission-based pay --

Six months back. Nine months back in February of this year.

-- with the previous quarter. And the fourth quarter we had a one time benefit when we had -- when we put it up on the balance sheet. So we had a prepaid commission plan that we recognized in the fourth quarter. So we had an incremental benefit to our P&L in the fourth quarter that we highlighted in the fourth quarter call.

Now, it's on an ongoing run rate. The commission expense that is reflected in the P&L is the roll off of that commission that had been paid out on the written business from the previous period as that product gets delivered. Do you understand?

Got it. Farooq, you talked about the ramp in the designers, how it looks like you've actually accelerated hiring in Q1 sequentially from fourth quarter. Is there a number looking out over the rest of this Fiscal Year that you'd be happy with in terms of a total of designers?

Todd, yesterday I approved, as you know, I approve every new professional joining. We approved, I think, 23 yesterday.

We are looking at design centers across the country. And in a number of them last year we reduced it in some cases more than we should have based upon what was taking place. So we are now putting people back up.

One of the reasons our retail division profitability is not where it should be is the fact also that in some of our design centers we don't have the adequate number of designers working there. So we are putting them back up. We'll continue to do that.

And we also keeping in view the traffic coming in. Because we also take a look at that as we are increasing traffic, we need to have people over our designers to be able to work with them. And design centers where traffic is increasing, where we have seen the need for people that's where we are putting them in right across the country. And I would say that in every quarter I think we would be adding 50, 60 designers in the retail division.

In recent months or maybe just looking at first quarter, can you talk about the productivity of the top 20%, 25% of your designers versus the Company's consolidated delivered sales?

Maybe David you want to take a look at it and perhaps talk to Todd about it.

You know, Todd, our business even though it has increased in the last nine months by -- you know, our delivered business has increased in the nine months. I'm just looking maybe about 25%. But still keep in mind we are down -- still down about 20%, 25% from where we were in 2008.

Our designers, the top designers that you mentioned, I'm just giving you some rough numbers. Dave can work on it. Over this last year their productivity, their sales have also gone down anywhere between 20% and 30%. And now our objective is to bring it back up.

Okay. Fair enough. Last question. The number of shares repurchased for that $5.4 million?

Dave? We paid I think around $13 but Dave will give you the numbers.

In total, Todd, there were 182.6 thousand in fiscal 2010 commitments and then 204.3 thousand in fiscal 2011.

And we paid $13.65 for those 204,000 shares, Todd.

Perfect. Thanks, guys.

Thank you. (Operator Instructions) Okay. I'm showing no further questions in the queue at this time.

All right. Well, thanks very much. And if there are any further questions please let us know and please give a call to Dave Callen. Thanks very much.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.