Ethan Allen Interiors Inc (ETD) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the earnings release conference call. (Operator Instructions)

I would now like to introduce your host for today's program, Mr. David Callen, Vice President of Finance and Treasurer. Please go ahead, sir.

Thank you, Jonathan.

Good morning, and welcome to the investor and analysts call for the quarter ended December 31, 2010, for Ethan Allen Interiors, Inc. I am David Callen, the Vice President of Finance and Treasurer for Ethan Allen. After a few administrative comments, Mr. Farooq Kathwari, our Chairman, President, and CEO, will provide his 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 our 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 discussing future expectations, trends, or objectives are subject to various assumptions, risks, and uncertainties. Actual events or results could differ materially from those forward-looking statements, and the Company assumes no obligation to update or revise those statements.

Now, to Farooq Kathwari for his opening comments.

Yes, thank you, Dave.

I am pleased to report continued increases in revenues and profitability during the quarter ending December 31, 2010. We continue to take actions that position the Company for growth. Our sales increased by 21%, our gross margin improved to 51.8% from 48.2% in the previous year quarter. Our operating earnings were $10.5 million, or 6% of sales, as compared to a loss of 0.4% in the prior year. Our EPS, after adjusting for a one-time tax benefit, was $0.19, compared to a loss of $0.06 last year, ex-restructuring and special charges. We have maintained strong liquidity. Our written business for the retail division increased 5.7% with comparable written increasing by 10.7%. As our production has caught up with our backlogs, our focus now is to increase written business in the current quarter. During January, despite poor weather in the first two weeks, we have started to see increased traffic.

I will discuss in greater detail our initiatives after Dave Callen gives a brief overview of the financial results.

Thank you, Farooq.

Net sales for the quarter were $173.3 million, up 21% from the prior year quarter, and up 5.2% sequentially from the $164.8 million in the first quarter this fiscal year. Our retail segment reported net sales of $131 million, up 22.3% versus the prior year quarter, and comparable design center net sales increased 28.7%. Written orders in retail increased 5.7%, while comparable design center written orders grew 10.7% versus the prior year quarter. Wholesale net delivered sales were $100.8 million, up 19.3% compared with prior year quarter. Consolidated gross margin for the quarter improved to 51.8% compared to 48.2% in the prior year quarter.

While we continue to have some excess costs from plants we have closed in prior periods and from our efforts to ramp up plant production, these are largely normalized into current operations at this point. Operating expenses during the quarter were $79.3 million, excluding $59,000 of restructuring charges for lease termination true-ups. As a percent of net sales, operating expenses ex-restructuring were 45.8%, compared with 51.3% last year as we continue to leverage our footprint and infrastructure costs with the higher revenues.

Our net income for the quarter was $14.7 million, or $0.51 per diluted share, compared to a net loss of $3.3 million, or $0.12 , in the prior year quarter. The current quarter benefited from strategic tax initiatives that enabled the use of deferred tax assets previously reserved. These efforts will also result in a federal tax refund of $17 million that we expect to receive later this fiscal year. Excluding special items from both periods, our earnings per diluted share this quarter was $0.19, compared with a loss per diluted share of $0.06 last year.

Net sales for the first half of this fiscal year were $338.2 million, compared with $279.5 million in the first half last year. The retail division's net sales year-to-date grew 19.9% to $252 million, and wholesale net sales grew 25.7% to $208.3 million. Consolidated gross margin for the first half was 50.9% versus 45.6% in the prior year first half. Operating expenses year-to-date were $156.1 million, excluding restructuring charges, or 46.2% of net sales compared with 52.6% last year, excluding restructuring charges. Excluding special items in both years and applying our normalized tax rate of about 36.5%, our earnings per diluted share year-to-date was $0.30, compared with a diluted loss per share the prior year-to-date of $0.25.

We continue to cautiously and opportunistically repurchase our outstanding bonds and stock. During the quarter, we retired another $4.5 million of our bonds, bringing the total debt retired for the year to $6.9 million. We also paid $5.4 million for stock repurchases year-to-date. With the traditionally slower written business over the holidays and the strong plant production and shipments in the quarter, our customer deposit liability has come down $11.5 million in the quarter and $13 million year-to-date. However, we continue to closely manage our inventories and the rest of our working capital, and, as a result, along with the solid profitability, our cash from operations was positive in the quarter and year-to-date.

So far this year, we have invested $4 million in capital expansions, including for our new Silao, Mexico upholstery operation, which is set to go live later this fiscal year. We have also paid $2.9 million in dividends to our shareholders year-to-date. We ended the period with a healthy $85.6 million in total cash and securities, and as noted earlier, expect a $17 million federal cash refund later this fiscal year.

With that, I'll turn the call back over to Farooq for detailed comments on our

Yes, thank you, Dave.

As I have discussed in the past, we continue to focus on our strategic priorities. A brief update is as follows. We continue to strengthen our team of interior design associates. The recession has provided us an opportunity to have talented and entrepreneurial interior designers join us. During the quarter, the Company retail division added 99 interior design professionals. In addition, we continue to add to the independent design affiliate program, which has now grown to 1,850 associates. Strengthening our offerings has enabled us to offer relevant products to our clients. The products -- the new products introduced recently are in our design centers and are being well received by our clients. We plan to introduce a very comprehensive new product program to our network next month, with a consumer launch in late summer, early fall.

We continue to increase our advertising exposure. Our primary advertising continues to be via national television and direct mail. During the six months ended December 31, we doubled our direct mail advertising from somewhat of depressed levels of the previous year. For our current third quarter, we plan to increase direct mail by over 50% compared to the previous year third quarter. We believe that with consumer confidence showing signs of improvements, it makes sense to continue to invest in our marketing and advertising efforts. We have also continued to increase our advertising exposure through the digital media from our enhanced website to electronic magazines to email blasts.

Our retail network of 281 design centers, 143 are Company operated and 138 are operated by independent licensees. During the quarter we opened a flagship design center in Estero, Florida covering the Ft. Myers-Naples market. In addition, we opened four outside the United States. Our retail network of both independent and Company-operated design centers has weathered this storm and is in a good position to grow. We are also benefiting from relocating over 60% of our retail network to prime locations prior to the advent of this great recession.

During the last two years, we have taken many steps to consolidate and restructure our manufacturing and logistic operations. We have made major progress, and with increased volume, we expect to continue to see improved operating margin contribution, including in our domestic manufacturing, where we produce about 75% of our products. We continue to invest in technology in our vertically integrated structure. During the quarter, we have installed touch screen technology in the retail design -- retail division design centers and in many of our licensee locations, with the objective to improve the efficiency and productivity of our interior design associates. In manufacturing logistics, we also continued to add the necessary technology to help improve efficiencies. And as indicated in the press release, we are cautiously optimistic about our ability to maintain the momentum.

I am now pleased to open for questions and comments.

Certainly. (Operator Instructions)

Our first question comes from the line of Chad Bolen. Please state your company name, please.

Hello, this is Chad Bolen from Raymond James. Good morning, Farooq.

Hello, Chad. Good morning.

Good morning, David, as well.

Good morning, Chad.

Let me first just offer my congratulations on a very nice quarter.

A couple of quick questions from me. In Q1, I recall your written comps were up 3.5%, but that had been negatively impacted pretty significantly by a shift in the promotional calendar. In the 10.7% written comp increase you showed this quarter, was there any quantifiable impact, either positive or negative, from the timing of promotions?

Chad, no, not really. Keep in mind that in the previous year we did, in the retail division, close 15 -- we have 15 less design centers in our Company-operated retail division. And those design centers were closed because leases were coming up. We also felt that, in some cases, they were taking business from other design centers in the area. So that's -- that's why there is a little bit of a disconnect between the comp and total. But overall this quarter, there was not -- I don't think there was any of a timing issue that had an impact, that was anything abnormal in terms of our promotions.

Okay.

And could you give us a sense of -- I know you talked about January traffic improving. Can you give us a sense of traffic versus ticket in the second quarter and kind of how that played out?

Our traffic has continued to increase in the last six months. As I've said, you know, the consumers are somewhat cautiously optimistic. We are also increasing our traffic, of course, compared to the previous year when the traffic had been down. Our tickets have also somewhat slightly gone up from the previous year.

Okay. That's very helpful.

And now, as we look ahead to the second half, you obviously are going to be going up against much more difficult prior year comps, particularly for the written business. Can you give us a sense of how you're thinking about it and sort of what would be a reasonable range of expectations for comps in the second half of this fiscal year?

Chad, the steps we are taking are, as we mentioned, being aggressive in investing in our marketing and advertising. We are now sending out a direct mail every month, January, February, March. Like last year, we sent out one direct mail and one was some postcard. That's why we are increasing our investments, we have also have invested in getting very qualified and talented interior design entrepreneurs join us. So we feel reasonably comfortable, but to give numbers is hard to do. I would just say that we are reasonably well positioned, and I also said that even despite the fact that this is one of the worst weathers we've had in many, many of our major markets, but in the last 10, 12 days we see strong consumer traffic coming in. And each one of these events, as the sale events ends at the end of a month. So the last few days we've generally seen become -- be very strong, which gives us opportunity also to build some backlog so we can deliver in the rest of the quarter.

Got you.

And one last question, with regard to the increased investment in direct mail advertising. Can you give us an increase sequentially versus 2Q, what will the spending be? Roughly flat with where it was a quarter ago, or will it be increased from where it was in 2Q?

It will be increased because in quarter two in December, generally we do not do much advertising. So in -- you can say it will be approximately one third higher in term of -- especially our direct mail, and I would say most probably 15% to 20% higher advertising in Q3 versus Q2.

Could you offer a dollar figure on that?

No, not yet.

Okay. Well, thank you, Farooq, for taking my questions. Congratulations again. And I'll give up the floor.

Thank you very much.

Thank you.

Our next question comes from the line of Matt Fassler from Goldman Sachs. Your question, please.

Yes, Matt. Good morning.

Hello. This is Mark [Andre] actually filling in for Matt. How are you?

Fine, thank you very much.

Congratulations on the quarter.

And I had a few questions. The first, on the delivered comp and the relation with the written comp. In the past, we've seen a pretty good relation between the written comp in one quarter and the delivered comp in the following quarter. This quarter, it seems that the delivered comp was way, way higher than prior quarter's written comp. And I was just wondering if you could give us some color on what may have caused that.

During the last year, Mark, we took many steps to improve our manufacturing capacities. We consolidated our manufacturing to fewer plants. We took our case goods products and turned it into custom. What that transition created was it did create some backlogs. And what we saw was in our second quarter, we had -- we were able to substantially increase our productive capacities, so that we were able to deliver the somewhat of an excess backlog that had been build up in the previous periods.

So as we go forward, the good news is we are in a much, much better position to service, because we have increased our capacities, domestically, overseas, and still of course, as I said earlier, close to 75% of what we make -- what we sell is made in our US plants. So we have a better opportunity now of balancing our deliveries to incoming orders.

Got it. Thank you.

And I have a follow-up on the electronic touch screen. Could you tell us what the rollout, where the rollout stands, and what the impact you've seen so far has been?

Yes. We have completed the total rollout this quarter in all the Company-operated design centers and also many of our independents. This is a very important step for us in terms of bringing the most current technology into our design centers to help clients, as well as to help our interior design professionals. Now, it's all -- we have spent about a year and a half in developing it, but this last quarter it was all rolled out across the country, and the impact is very good, because what it does is, it helps both the clients and it also helps our interior designers to show many more things that may not be in the design centers. Show options. And what it's also -- what it's also leading to is developing the right kind of technology, which will enable our interior designers to have access to information so that their efficiencies are improved. And the touch screen technology is also going to help us bring the new level of technology at the retail level, whereby our designers will have the right equipment, right technology to be able to work with our clients. So we have just a very, very positive development for us.

Great. Just have one more follow-up, on gross margin. Could you talk about the components of the 130 basis points increase, and what -- what part of it was volume, what part of it was the increased efficiencies? That would be very helpful.

Thank you very much.

Yes. Our gross margin is impacted by a number of factors. First, it is impacted by the relative sales of our regional sales versus the wholesale sales. And when the retail sales increased, it has an impact of increasing the overall gross margin. The second component is the improved efficiencies in our manufacturing, which is now giving us an opportunity to also leverage our margins. The third is also our gross margins are also impacted by the relative shipments of products from the retail division to the consumers. In other words, if the retail division inventories are lower during the quarter, it has a positive impact on our gross margins, because that part of that inventory that is lower creates a gross margin -- very positive gross margin at the wholesale level. S

o to answer your question, I would say approximately 60% to 70% of the increase in the gross margin that you saw was due to the fact of the relative increase of retail sales to wholesale sales and also the higher shipments from the retail division, lowering of our inventories and approximately 30% was due to our efficiencies on the manufacturing side.

Thank you very much.

Okay.

Thank you. Our next question comes from the line of Todd Schwartz.Please state your company name.

Hello, Todd.

Hello. It's Todd Schwartzman, Sidoti and Company. Hello, Farooq. Hello, Dave.

Regarding that mix that you just spoke of, contributions to the gross margin, how do those factors play out in third quarter, Farooq?

Yes, that's a good question.

I think that we are continuing to, you know, the volumes, of course, are very important, the volume has something very, very important to -- a role to play. And I believe that in the second quarter we had the benefit, as I said earlier, of having a higher retail component to the total sales that we had. Now, in the second quarter, it's possible to be somewhat moderated. But on the other hand, we are improving our operations in our logistics and our manufacturing. And the good news is that, you know, while the gross margin that has increased by retail has shown the higher gross margin, but gross margin improvements also at the wholesale side has a much greater impact on the operating margins. So keep that perspective in mind, that our increasing gross margins do not necessarily mean that our operating margins are increasing at the same level.

And that 30% piece, the efficiency gains, does that improve proportionately about the same? Does that dissipate a little bit in the current quarter?

No. It will continue to -- You know, we have doubled our production of our wood products in the last one year in our US plants. We have increased our production in Maiden, North Carolina by 50%, a positive effect because of the fact we consolidated it. I think for as long as our volumes continue to stay and increase, we will continue to benefit from efficiencies.

Have you learned anything new? Is there anything new to report to us on the custom case good, how that model is now continuing to be received?

You know, Todd, two years -- for two years prior to this six months to maintain our US manufacturing in case, because we operated at a negative gross margin. Now we are operating at a -- in a decent gross margin, not where we need to be. And it -- it is the result of the fact that we are now learning to make this custom products in a more efficient manner. As you know, we had to create a supermarket of parts, we had to bring in information systems. And from a consumer point -- from a customer's point of view, we are seeing the benefit. We are seeing that our designers are able to show options, more options. And on a continuous basis, we're also reducing the number of SKUs, so fewer units with more options makes it more efficient and gives an opportunity for our designers to work with our clients in the interior design projects by creating really custom product. But right now we are also shipping, at the average, in five weeks from our plants.

Okay.

The comp orders you mentioned were up 10.7. What did you say comp sales were, at retail, for the quarter?

Todd, they were up 28.7%.

28.7% comp?

Yes.

Delivered sales for the quarter?

Right.

Okay.

On the bump in advertising, on the direct marketing side, what was the prior year spend on direct mail? Could you quantify that?

No, Todd, I don't ever give all that information out. But overall, for the last six months, we have increased our overall advertising by approximately 32%. For the last six months, our total advertising compared to the previous -- six months of the previous year, up by 32%.

And with the commitment to TV, is it safe to say that the increase in direct mail, that's incremental spend, that's not at the expense of TV, correct?

No, it is not. Actually, we are somewhat increasing our TV also, but most of our increase is in direct mail.

Okay.

Can you quantify the increase in TV, for the current quarter?

It's not -- it would be more or less close to what we spent last year.

Okay.

And lastly, if you would, could you quantify the effect of the winter storms on second quarter sales and orders and traffic, more recently, heading into this quarter.

Yes, Todd. In December, we were very negatively impacted both in traffic and business. In fact, as you know, in the first three weeks of December, we generally don't do much business. It's the last week, when we do a fair amount of business. In fact, more than 60% of the business in December is generally done in the last week. And that week was very -- was tremendously impacted by weather in many of our major markets. And so in the first, you know, 10 days of this month, too. In fact, today also it's snowing, as you know, in the New York metropolitan area. Another storm is coming.

The only good news is this, that we have in -- when the days are good, we have seen increased traffic. We're seeing increased commitments. We have seen an increased commitment of booking house calls, which for us is a very important indicator. Now, we expect with all these house calls and increased traffic, this last one week is very, very important. There is some tremendously negative weather which holds people back in this last one week. We should be able to make up substantially what we lost in December and early January.

Would you guesstimate that the weather related traffic decline was of the 10% to 15% magnitude?

Well, you know, as you see, in the last quarter we were up a comp of 12%, which was very good. But in December, we were down because of this weather and traffic. So we would have done much better if the weather had held up. But, you know, we don't want to spend a lot of time worrying about the weather, we just have to make it up. I think we've got over that two months in this quarter, so we're looking forward to maintaining our momentum.

In the back half of this fiscal year, due to the storms, is there any plan right now to increase the number of sales events in the second half?

Well, we have already increased, Todd, we are having one every month now. From six to eight, six to seven weeks previously, every month we have a strong program, and we'll continue with that.

And how long is that expected to continue?

You mean in the future?

Yes.

Well, you know, we have to be flexible -- right now, we have it for three or four months, and we'll see how it goes.

All right. Thanks.

Thanks, Todd.

Thank you.

Our next question comes from the line of John Baugh from Stifel Nicolaus. Your question, please.

Hello, John. Good morning.

Hello, Farooq. Good morning.

A couple things. You talked about these promotions now every month. Am I mistaken in remembering that last year you did a January-February promotion, but started up then a March-April promotion? As you talk about it back end loaded when you get the business and, therefore, March was not as good. Is that right? Is that the comparison with now doing one every single month?

It's a different calendar. I think that last year we took approximately -- each of the promotion periods was about six weeks. This year, it's -- it's 30 days. So it is somewhat of a different comparison, but -- and it also reflects our commitment to greater advertising. I think that we -- we have a stronger opportunity of building business with this calendar of events that we have.

And if I were to look at your percentage of product that's on sale in any one of these recent, either second quarter or third quarter sales events, would the percentage of product that's on sale be different year-over-year from the second or third quarter last year, and would the percent off of that sale be appreciably changed?

John, this is somewhat of a different program. Last year we -- we had for the most part, we had all of our products available at some savings. 10%, 9%. This time what we have done is -- and as you know, we have to keep on making some creative changes in this, so that it -- it's not the same thing all the time. But this month, for the next few months, we have taken an x portion, approximately 30% to 40% of our case goods and upholstery, and we have priced it with the savings. And we are offering all our accents at a savings, based upon how much people buy. That's worked very, very well.

In fact, you may have seen our direct mail. I'm sure that it was sent to you, and all of this information is on our web site, too. So you can see that we are very -- you know, we also have to be credible. We have to also let our people know. We have 1, 500 professionals out there with clients. So we are exactly telling them what we are doing, and we tell them tell their clients because I don't want them to get a surprise.

So the 30% to 40% of the lineup that's on sale, is that less or more discounted than the 9% to 10% of all the products of, say, a year ago?

No, I think approximately the same.

Okay.

So if that's true, you've actually -- you're actually reducing the amount of discounts you're giving year-over-year?

No, not necessarily, John, because what's going to happen -- what happens is that 85%, 90% of the products we sell are the products that are on sale.

Okay, that's helpful. You wish it weren't that way, but --

Right. Yes.

Promotions drive the sales.

And it's been a lot of discussion around the increase to direct, TV, flat, what -- if we look at the third quarter and we have this conference call 90 days from now, what roughly will be the dollar spend on advertising, including TV, direct, increase year-over-year, in the third quarter? 15% to 20%?

In the 20% range, right? And all of that is going to be in the direct mail.

Okay, great.

And then my last question is around raw materials and what, if anything, you're doing. Because I'm sure you're seeing all of your costs, including delivery costs, rising. What, if anything, are you doing with pricing?

Well, that is a big issue. In fact, as you know, we are vertically integrated, so that when we go down everything is impacted negatively and when we start going up, we start getting benefits. And I will talk about some of the benefits that we have not talked about so far in this call.

On the negative side, our fuel costs have gone up 18%. And that's a big, big cost for us. Our energy costs are -- yesterday, I was talking to our manufacturing in Vermont, it was minus 32 degrees there. Minus 32. So fortunately, we produce a lot of steam. We even have also our own electric-producing steam engines. So we are able to at least have some of it, less of an impact on those. But I think fuel costs, for our trucking, has been a major factor.

On the other hand, as our business has increased and the retail shipments increase, as Dave just said, about 28% in our comp deliveries, it helps us improve the efficiency of our trucks going out. In the last two years, our trucks approximately ,I think, were 40% inefficient. Because we still have to ship the products. But now we are starting to get the efficiency and as business develops, we're going to start -- we're going to get the better efficiencies of our trucks, which is going to counter a lot of the increases in fuel.

Now, our domestic wood products, there has not been much of a change in the lumber prices in the United States, where we are now starting to see price increases are coming from overseas. We are seeing price increases in some petroleum related and fabrics.

So all of those are going to have an impact, and as we go forward, John, we're going to take a look at the possibility of having a price increase.

Thank you very much for answering my questions.

Thanks, John.

Thank you. Our next question comes from the line of Brad Thomas.

Yes, Brad. Good morning.

Good morning, Farooq. Good morning, David. Congratulations on a great quarter here.

I wanted to just follow up on the backlogs. I know, as you guys have worked to gain efficiencies in manufacturing, that it's led to a little bit more of a backlog as the demand picked up over the last several quarters. Where do you stand today? And are we starting to get to a point where your book sales will start to track a little bit more closely with the -- the sales log-in stores, the written orders?

Yes. That's a very important issue. That is maintaining -- on one hand we want to have a sufficient backlog so we can operate efficiently. On the other hand, we don't want too much because all of that product is sold. Keep in mind, 75% of all our products are now custom made. So we basically make it when we get an order. That has created a lot of efficiencies, in terms of inventories, in terms of cartoning, in terms of packaging, in terms of parts.

But maintaining that balance is a very, very important challenge -- one of the reasons we also went into every month marketing program, because this will help us maintain and been our backlogs better so that we can also produce it more efficiently. Right now, based on, you know, the next two or three -- next week, it looks like that we will have sufficient backlogs to keep on operating well, and then we start with a very strong fabric program, as well. We have a much greater balance between orders coming in and shipping. But you're right, that in case there is a blip in the business, it can have an impact on our production and shipments.

Okay. Thanks.

And then during the fall, Farooq, at your analysts day, we talked a little about -- I think it was four scenarios of profitability at differing revenue levels. And, you know, I was hoping that you could just perhaps comment on that, you know, as we take into account, you know, perhaps what you're seeing from an inflation standpoint, as well as some of the new initiatives you may have in place now, like the Mexico upholstery facility that will open later this year.

Yes. Brad, if you take a look at those four scenarios, based upon the amount of business we did and the amount of shipments we had in our second quarter, we are running on the scenario called B scenario, that is about a $700 million of sales. We are doing somewhat better in terms of margins and operating margins, but those scenarios, which were done about two years back, are pretty much still -- a little bit better than the scenarios we had indicated.

Great.

Then just lastly, as we think about the third quarter sales, you know, I think if we look back historically, your third quarter has generally been a little bit smaller in revenue than your second quarter. Although I think last year was an exception to that. And any guidance or color that you could help, as we think about the third quarter relative to the second quarter?

Yes, Brad. I think generally speaking, our second quarter has -- has strong delivered sales. And third quarter has stronger written sales. January, February, March are generally our stronger months. But generally on the delivered side, you have to be a little bit cautious, because the deliveries reflect also the business in December which is generally weak. So we build it up in January, February, and March. So exactly what you just said, that the January, February, March is our strong written quarter. Somewhat more conservative on the delivery side.

That's very helpful.

Thanks, Farooq.

All right.

Thank you, our next question comes from the line of Joe Feldman of Telsey Advisory Group.

Hello, Joe. Good morning.

Hello. Good morning, guys. Congratulations on the quarter.

Had a couple of quick questions. I was thinking about the manufacturing efficiencies that you had this quarter. You know, and it -- it would seem that keeping the plants running with the backlog that you had last quarter would have helped somewhat. I'm wondering, how should we think about that going forward now that it seems that the backlog has dwindled down and we're kind of caught up? Will you still be able to get the same efficiencies in the plants, or will it even be greater because now, as a product is ordered, it's made right away and moves through?

Well, you know, as you know, when you're running a custom business, the balancing between incoming business and what you produce is very, very important. If at any given time we get too much business, that does create inefficiencies. Like for instance, in our first quarter and in the fourth quarter of last year, we were running overtime. We were working six days in catching up. And it was inefficient. Now we are not doing that.

I think at this stage right now, we are in a -- we are fine -- we have a good balance between the backlog and what we are producing and then shipping it on a timely basis. And again, it's very hard to have -- to have always this correct balance.

Right now we have it, we have also been investing in continuous improve -- increase of production. Keep in mind, we increased our production of case goods in the United States. We doubled it last year. We could have taken the position that this recession and everything else is such that we should not make that investment. We increased our production in Maiden, which is now a primary upholstery manufacturing plant, 100% of our upholstery comes from there, supported by our Mexico operation. That we increase it by 50%. So we've been making investments.

We've also been adding technology. In fact, some technology we're even buying from US plants that have recently closed.

Got it. That's helpful.

If I could ask one more, I recall last quarter there was a late quarter promotion, or late promotion in the quarter, that typically would have ended September 30, and I think it moved into early October. And at the time, when you reported last quarter, you guys said that had the -- had that promotion ended within the first fiscal quarter, your written orders would have been up 5% instead of down 2.4%. And I'm wondering how that promotion carrying over into the second fiscal quarter helped the written orders earlier in this quarter.

Well, Joe, it did. That's why we are up over 12% in comparable written during the quarter.

Okay. Is it the same magnitude as it was in the first quarter, or --

Well, the first quarter we had somewhat of a higher -- you talking first quarter of this fiscal --

Yes, this fiscal first quarter and then sequentially to the second quarter. Just the offset and the loss in the first. Was it the same magnitude of gain in the second?

You know, it's -- it's hard to say, but we did have a good end to that sale event in the middle of October.

Okay. That's helpful.

Thanks, guys, and good luck with this quarter.

Thanks.

Thank you. (Operator Instructions)

Our next question comes from the line of Davin Ang. Please state your company name.

Hello. It's Davin Ang with Chilton Investment Company.

Hello, David.

Hello, thanks for taking my question.

Just to be clear, should we look at the difference between the 22% increase in delivered sales in the quarter versus the 5.7% increase in sales as a one-time write-down of backlog? I think that's roughly $18 million, if you apply a 30% incremental margin, that's roughly $0.12 a share. Just trying to get a better understanding of that.

Well, there are a number of -- number of things to keep in mind. Yes, this did give us an incremental benefit this past quarter. However, when you talk it a benefit in sales and also margins, but, you know, we're also, David, keep in mind that every quarter we are getting better in our efficiencies. And improving our margins. So I think end of the day, if our sales, written sales this quarter hold up, and I'm not talking 20%, 25%, those are big numbers, but in a reasonable numbers, it has an opportunity for us to continue to operate efficiently and even more efficiently than the second quarter.

Great. Okay. Thank you.

And then could you remind us again in terms of what you view the long-term gross margin and operating margin potential for the Company. And roughly what --

I would say that if you take an approximately, even at an $800 million, you know, keep in mind a few years back when we had $1 billion of operating margins, we were close to between 15% and 16%. We have that opportunity of taking it back, but before we do that, our next objective is to take the consolidated operating margins to about 10%.

Okay, 10%. And that's at $800 million revenue?

That's right, yes.

Okay, thank you.

Thank you. Our next question comes from the line of Joel Havard from Hilliard Lyons. Your question, please.

Hello, Joel. Good morning.

Good morning, Farooq. Good morning, Dave.

Farooq, your opening comments, you briefly mentioned the shift in the stores, although the total number didn't change. I want to make sure that was for the quarter or for the first half, particularly you mentioned one new store in Florida. I presume that was a relocation, but then the plus-four international and where might those have been?

Those all were in the quarter.

Those were all in the quarter.

Yes.

And what was the physical location of the internationals?

They were all in China.

All China. That's a trend that seems to be continuing.

That's right. We now have 45 stores in China.

Wow. Okay.

And the Florida --

And, Joe, keep in mind, 60% of all the product that we sell in our Chinese operations is made in the United States.

Well, now, Farooq, that just blows out the classic question about how much you're making in China, how much you're importing. I guess we're years beyond that now.

Do you foresee the forecast staying relatively stable here? I know you've talked about a continuing relocation, you know, upgrade trend. Could you put a timeline on that?

Well, I think it's pretty stable right now. You're right, in Estero, I was there actually this Saturday in the grand opening -- grand opening ceremony. And this is a really a flagship design center, replacing two that we had, one in Naples and one in Ft. Myers. And I think this will cover that whole area and cover it very, very well. We've been doing that, as you know, in the last 10, 12 years.

We're going to continue to do some of that as we move forward, but also we are going to now as the economy starts to improve, we're going to go back to approximately 50 to 100 markets which are somewhat, you know, the smaller markets. And many of those markets we used to be, like Madison, Wisconsin is a decent market. That caliber of markets. We are going to go back into those markets, but at somewhat of a smaller format.

Was the Florida store, was that one of the big footprint?

It is. Yes.

So I guess then -- I guess then your dealers are still kind of on hold with these -- I forgot the term you used. The studios or the --

Studio, yes.

Yes. Are there any, by chance, tee' d up that they're starting to get enough confidence to step out with one of these smaller units?

Well, the first -- our objective with them is, I've just told them to survive.

Okay.

-- worry about going forward. Last year we did open a new dealer in Paducah, Kentucky. A 6,000 square foot. And they're doing well.

Right.

But there is interest in our existing retailers and new ones. But I want to make sure that these folks succeed. You know, opening up in tough environment and not be successful is not a good sign. I'd rather wait.

That's sound advice to all of us.

Thanks, guys, good performance and good luck going forward.

All right, Joel.

Thank you.

Jonathan, that does it?

I'm not showing any further questions in the queue at this time.

All right.

Thank you very much. Any questions, please let us know. And we'll be happy to answer questions. And you can always direct them to Dave. Thank you very much.

Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.