Ethan Allen Interiors Inc (ETD) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the earnings release call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). I would like to turn the conference over to your host, Mr. David Callen. sir, you may begin.

Thank you, Renaldo. Good morning. Welcome to the investor analyst call for the quarter ended March 31, 2011 for Ethan Allen Interiors, Inc. I am David Callen, the Vice President of Finance and Treasurer for Ethan Allen. After I make a few administrative comments, 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 the Company's business initiatives before taking questions.

Please note that our earnings release and prepared remarks make reference to non-GAAP information, which excludes the effective restructuring, impairments, and transition charges and unusual income and tax impact in thee 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 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.

Thank you, Dave. As mentioned in our press release, we believe the economy is healing, and we continue to make progress on many fronts. We continue to improve our financial position, delivered sales increased by 10.6%. Our retail division sales increased by 9.3% with total written, as the book orders up 11.4% with comparable written up 13.4%. Please keep in mind these are against very high comparables in the previous year quarter. We had net income per share of $0.07, versus a loss of $0.05 last year quarter. Our retail division delivered deliveries of $117 million, were not sufficient to cover operating expenses.

Increase in operating expenses in the retail division, due to our positioning our retail division to grow net increases of 38% in retail division advertising and strengthening our management and interior design associates. We improved our liquidity position, ending with over $100 million in cash and securities after repurchasing 19.8 million of our 5.375 bonds. We also increased our quarterly dividends to $0.07, an increase of 40%. We continue to aggressively reposition our brand through increased advertising and with the introduction of relevant product programs. We have accelerated our investments and technology in all areas of a vertically integrated enterprise. We continue to make over 70% of our products in our US facilities and our focus is continued improvement as a major priority. I will discuss in greater detail our initiatives after Dave makes comments on the financial results.

Thank you, Farooq. Net sales for the quarter were $162.9 million, up 10.6% from the prior year quarter. Our retail segment reported net sales of $117 million for the quarter, up 9.3% from the prior year and comparable design internet sales increased.12.4%. Wholesale net delivered sales with $104.2 million up 7.9% compared with the prior year quarter. Retail written orders increased 11.4% over the strong written business done in the third quarter last fiscal year. Comparable design center written orders grew 13.4% over the strong bookings in the prior year quarter.

We ended the quarter with very healthy backlogs in both retail and whole sale which provides the opportunity for efficient operations of our vertically integrated business going into our fourth fiscal quarter and beyond. As noted in our press release, we established this quarter a dedicated warehouse at the request of and for the benefit of our independent licensee in China. This arrangement was to support their plans to add 15 new design centers, the remainder of calendar 2011 that is causing a shortage of space in their facilities in China.

All of the goods held in their dedicated US warehouse space inside our Dublin facility are sold in the normal course of business with definite transfer of ownership and a defined release schedule. For good order sake, we decided to provide this information in our press release, as will be including it in our form 10-Q we expect to file the first week in May. Consolidated gross margin for the quarter improved to 51% compared to 48.9% in the prior year quarter, as reported, or 50.3% excluding $2.1 million of transition costs in the prior year quarter. Our current gross margin rate is what we would expect given the annualized net sales of about $650 million for the quarter, though our retail segment made up just 71.8% of our consolidated net sales for the quarter.

Operating expenses during the quarter were $78.4 million excluding $109,000 of restructuring charges for lease termination. During the third quarter, we aggressively invested in incremental advertising and increased staffing in our retail operations to support growth in the business. Our pre-tax income, excluding special items in both quarters, was $3.1 million this year versus a loss of $2.4 million the prior year. Our tax rate this quarter was affected by changes in our deferred tax assets and the our tax valuation reserves.

While last year's third quarter was affected by the expiration of certain statutes, causing the recognition of certain tax benefits in that quarter. Applying the Company's normalized income tax rate of 36.5% in both periods and adjusting for special items in both periods results in adjusted earnings per share of $0.07 this year compared to a loss per diluted share of $0.05 in the prior year third quarter. Year to date net sales were $501.1 million compared with $426.8 million last year to date. The retail division's net sales have increased 16.3% to $369.1 million and wholesale net sales grew by 19.1% to $312.5 million. Consolidated gross margin for the nine months was 51% versus 46.7% in the prior year to date.

Operating expenses year to date were $234.5 million, excluding restructuring charges or 46.8% of net sales compared with 51.9% last year excluding restructuring charges. Excluding special items in both years and applying our normalized tax rate of 36.5%, our earnings for diluted share year to date was $0.37 compared with a diluted loss per share of the prior year to date of $0.31. Our cash generated from operations continues to be strong, resulting in over $41 million in EBITDA year to date, an increase of nearly $40 million over the prior year to date.

As a result, we finished the quarter with a healthy $10.2 million in cash and securities. During the quarter, we bought $19.8 million more of our 5 and three-eights bond bringing the total repurchases to date to $26.6 million. This debt retirement will reduce interest expense by more than $1.4 million annually. We plan to continue to cautiously and opportunistically repurchase our outstanding bonds and stock. We continue to manage our working capital closely. Inventories were reduced by $5.4 million in the quarter. But we expect them to increase somewhat as we grow the business and roll out new products to our design center floors. Customer deposits liability came back $13.9 million during the quarter with a strong written business.

We also received during the quarter the $17.3 million federal tax refund we discussed during our last quarter call. So far this year, we have invested $5.9 million in capital expansions including for our new Mexico upholstery operation, which is set to go live later this fiscal year. We also have paid $4.3 million in dividends to our shareholders year to date and spent $5.4 million to repurchase our stock.

As we announced during the quarter, we amended our revolving credit facility to $59 and extended the term by about four years. In the process, we reduced by about half the cost of this facility that we use primarily as an insurance policy but added the ability to expand it to $100 million if the business opportunity arises. As a result of our all of our actions, the liquidity and balance sheet of the Company are healthy and strong. Farooq will comment further on many business initiatives underway.

Thanks, Dave. I am pleased to provide you a brief overview of our priorities and the progress we are making on our initiatives. We are substantially increasing our advertising. During the last quarter, we introduced a monthly savings initiative supported by direct mail, national and television, digital media as our main components. We increased our overall advertising. That is by the Company, nationally and in the retail provisions standing by 31%. In addition our independent retailers also increased advertising.

While the retail division delivered sales of $117 million, they wrote $148 million in booked orders. In April, that is this month, we have launched a very aggressive campaign to launch the five signature lifestyles. In April, we mailed about two and a half million copies of our 40-page direct mail magazine, increased from 34 pages mailed previously. In addition, we continue to advertise on national television and the digital media. During the fourth quarter, we also plan to mail our direct mail magazines monthly. We have an aggressive plan to strengthen our product programs.

In our February retail conference, we introduced a strong product program which will be received by the retail network starting in June and followed by a major advertising campaign in September to launch the new programs. We have a strong retail network with 281 design centers, there were 278 a year back, with 136 operated by our licensees and 145 by the Company retail division. In the Company retail division. In the Company retail division, the focus has been to add qualified interior design associates.

The great recession has provided us an opportunity to add entrepreneurial interior design associates and in the last nine months, we have added about 200 very qualified associates to the retail division. In addition, we have substantially strengthened the management of the retail division by adding about 15 regional and district management positions. Our focus remains to have the retail division operate profitably, which has the major potential of leveraging our overall profitability. During the last three years we have invested in technology, in all aspects of our business, from manufacturing, the logistics to marketing.

We are continuously improving our website with major changes being made on a monthly basis. I would suggest you please look at our website if you have not done so. And finally, our fifth major priority is to strengthen our manufacturing and logistics in an ongoing process. We continue to produce about 70% of our products in our US facilities. After consolidating our facilities, the remaining seven facilities have started to make good progress. The case goods plants have doubled their production during the last 15 months and gone from a negative gross margin back to profitability and we expect this trend to continue. The major upholstery operations where we consolidated our remaining US facilities has increased during the last 15 moths by 50%. In our operating plants, in the last 15 months, we have added about 850 associates after consolidating the other facilities.

It takes about one year to train, even experienced associates, to meet the Ethan Allen quality standards. Our Mexico operations also is growing with a new addition of 75,000 square feet, taking the total now to 150,000 square feet, getting on live this quarter. We had an opportunity yesterday of having a board meeting in a North Carolina facility by touring and looking at all of the improvements that we have made.

At this stage, I will be pleased to be open for any questions or comments.

(Operator Instructions). Our first question comes from Budd Bugatch from Raymond James.

Good morning, this is actually Chad pinch hitting for Budd, and good morning, David.

Good morning, Chad.

First question, just to make sure that I completely understand, so with regard to the warehousing agreement that you have now, with independent retailer in China, did that agreement or the structuring of that provide any kind of a one-time benefit to the delivered sales in the quarter, or was that $5 million of revenue what you would normally expect to sell to that retailer?

We would. In fact, what's happened is that, one of the factors, also, that contributed to what they had to do was our going into Boston. Previously, they would draw on the inventories we had. So they would not need to have the kind of floor inventory that they need previously because they were drawing on inventories. But to (inaudible) custom, now the issue really was, either they were going to have inventstories or we, but our policy now is to only make on sold products. Now, in the United States our products are sold to the customers and then we make it. In China, while they are taking some custom orders, they do sell what they have. So they have got to keep this continuous flow going. And this gives them an opportunity to receive the products. They would have normally taken this in and taken it in, into China, and then delivered it, themselves. This does give them an opportunity instead of putting it in their warehouses, we will have them over here. But I think the amount of sales we did, approximately what we have done in a quarter.

Okay. Well, thank you. That is very helpful. And Farooq you commented that you thoughts orders in the quarter out stripped shipments by about $30 million or so, so given that sequential increase in the backlog and perhaps given what you are seeing in terms of ordering trends in April, can you give us a sense of what reasonable expectations would be for your delivered sales in the fourth quarter?

As you know, we don't make comments about what could tame place, but keep in mind, Chad, that our business, historically, has seen higher deliveries in the second quarter than the fourth quarter. Somewhat lower deliveries in the first quarter and the second quarter and you have seen that trend. First and third. I'm sorry. In the first and the third, generally, we have lower written. We have higher written and lower deliveries.

Yes.

And now, this is exactly what has happened. We do have. The good news is, our business now really depends on the fact that 70% of what we are making in the United States is all custom. So as Dave mentioned, we are starting the quarter with a good backlog, which will keep our plants operating well for at least for the first six weeks. The rest depends upon the business we will get in April and in May. We have a lot of momentum going on. I also said that while the economy is healing, we still have challenges. We are making a lot of progress, and I would expect obviously us to deliver more than we delivered in the third quarter.

Understood. And Farooq, you also, you talked about an aggressive campaign to launch the new lifestyles beginning in April, also increasing the frequency of the magazine mailings. So you saw 31% increase in advertising costs in Q3. Should we expect a sequential increase in advertising and marketing spend given all of that's going on Q4, or are we kind of at the right run right now and we should just make adjustments based on the level of sales?

Yeah, I think you should take, as an assumption of spending in the fourth quarter what we spent approximately in the third quarter.

Okay. Okay. Well, thank you very much, guys, for taking my questions. I will defer to others.

Thanks, Chad.

Thanks, Chad.

Our following questions comes from Barry Vogel with Barry Vogel & Associates

Good morning, Farooq. Good morning, David.

Farooq, in looking at the press release where you put 19, what was it, $19.8 or $19.6 million with bonds and at the same time, you raise your dividend by 40%.

That's uncharacteristic of you, given what's happened in the last couple of years. So what has changed your mind in terms of being that aggressive financially versus the last six months?

Well it's a good question. After this great recession, I decided that we are going to maintain cash in the bank. And we are going to see that we have approximately $100 million is in the bank, and that's what we have. So, Barry, we are going to continue to make sure, we are going to adjust what we do in terms of buying or repurchasing our bonds or, we will of course reduce capital expenditures and I will mention that in a minute, but we are going to be very cautious. But if it makes sense it's an opportunity that we had in terms of reducing by almost $1.3 million our operating costs with $100 million. Barry, we get less that 1%. We should get more, but that is not the case. So every time we buy $10 million of bonds, we have $500 million of savings, but you are absolutely right. We are going to be very cautious.

Yeah, David, did you book a profit on the bond purchases?

They were purchased below par. It wasn't that significant, Barry.

It was about 98 or so. Nothing significant, Barry. Okay. Capital expenditures, Barry, also, Dave mentioned EBITDA. Keep in mind that we were fortunate before the great recession, we spent a great deal of money on capital expenditures in our manufacturing and our operations, especially in our retail, 60% of our retail was relocated. 60% of what we relocated, we own. They are in good shape. Because of that, fortunately for us it's only one thing in this recession that we had done before this, was the fact that we had to spend all of that money. So that's why our capital expenditures now this year will run about $8 million, but our depreciation and amortization is over $20 million. That's where we also have the cash flow opportunity.

Congratulations. I think it's the absolutely right thing to do.

Thanks, Barry.

Thank you.

Our next question is from Brad Thomas with KeyBanc Capital Markets.

Good morning, Farooq. Good morning, David. I want to follow up on that delta between delivered and written. I think this is the first time in a couple of quarters you are a delivery system below your written orders and I know your customer deposits is up. I think the highest it's been in several quarters. What are your expectations for that, that delta in the fourth quarter?

Barry, now having gone to customs, our deliveries are dependent upon in what period we receive these orders. At the whole same level, we will then deliver to our retail, then to the customers. Just two years back, if you got orders, we had it installed, we would deliver it and you would fast deliveries and you would see that our retail division would have delivered more. Now, toward the end of the months and we have a fair amount of business increase in the last 10 days of March, which gave us an opportunity to start making it in this quarter, but it did not help us that in this third quarter. So our $148 million we wrote is the good news. That $117 million, as you can see, we use money in the retail division. Obviously we continue to get the benefit on the wholesale side even at $117 million, because we have a 12% operating income at the wholesale level. Our retail division at 146, 147 is a break-even point. Brad, we do that. It's a great leverage to the overall business.

Great. So if I understand you correctly, from a perspective of your backlog, at this point, excluding the timing of the end of the quarter, you are really running more in line with where you should be rather than the catch-up that you were doing in the first and the second quarter. And that the difference that we saw here in this third quarter was really a result of timing. Is that the way to think about it?

It is, but also keep in mind that it's great news what we did actually in the third quarter in the written business, which has good opportunity in the first six weeks of the fourth quarter. But in the fourth quarter, it will depend upon what we do in April and half of May. Our lead time in manufacturing is between four to six weeks. So to some degree, we have to keep that in mind. We have a lot of aggressive things going. As you know, I am always cautious so that I don't want to keep on a lot of guessing too much of what's going to happen. We have great things happening, but we have a good start, Brad, and now, we've got aggressive marketing in April and May, and we are well-positioned, but, as you know, there are so many factors beyond our control in the economy.

Of course. From a promotional calendar perspective, could you just remind us what the calendar looked like in this third quarter versus last year's quarter? Am I correct that it was a four-week promotions versus six-week last year?

That's right. This year, we changed our whole calendar. We went on a 30-day promotion, three times rather than twice last year in six weeks. That also helped. That also helped our business butalso increased our advertising expenditures during the quarter because now we had three events to work on, January, February, and March, each one with direct mail, increased direct mail and we increased the national advertising and it's our risk to do it but I believe that opportunity for us to gain market share is there and obviously our written sales, written orders show that.

And the plan going forward is to continue with those 30-day calendars and have, correct me if I am wrong, two more quarters before the anniversary that change, is that correct?

That's right.

I was hoping you could provide color in terms of what you are seeing from raw material input costs perspective and then what your plans are to do to offset any inflationary pressures that you are seeing.

Two elements. They are certainly from the perspective of looking at cost increases, and they are increasing. Our energy costs have increased by 35%. Our fuel costs. And, as you know, we deliver our products at one cost nationally. So that's a big hit to us. We have energy costs, and this year, especially in the northeast and Vermont, we had the coldest weather you can imagine that also we had to absorb. We had about $600,000 more in fuel costs this and I am talking of not fuel costs. Oil costs to run our manufacturing this year compared to the previous year. Part of it was the factory also had to increase our production, but also reflected increase in energy costs and as well as cold weather. I would, our lumber that we use has not increased much. We see the petroleum-based products are increasing, whether it's fabrics , foam, lacquer. We see our imported products are increasing. At the ends of the day, Brad, probably looking at 4% to 6% increase which has to be, I think, absolved. I think some in price increases and some we are going to absorb because of the leverage we get by increasing

Great. And then from a pricing perspective, is it still a plan to roll it out with a new line of products?

Both.

Yes.

We have been doing that and also we will take a look at it. If it makes sense to have a price increase, we will do that also at the appropriate time.

Okay. And obviously a lot is being made, in the minds of the investors around these concerns from an inflationary perspective. When you look at how that's affecting your business, do you still believe that the profitability scenarios that you have laid out are still achievable, given the pressures that you are seeing?

Yeah. You look at what we are given about almost a year and a half back, those different opportunities scenarios, $600, $700,$800 million. I think those are achievable because, on one hand we do have these cost pressures, but on the other hand, we have an operating leverage. Right now, in this great recession, our trucking fleets that were delivering at this one-cost basis were delivering at 50% of capacity. Now it's going to 65%. It really should be at 90%. Our sawmills are operating at 50% capacity. Everything is operating at, in a vertically integrated company like ours when we have a recession, we have an impact on every element. And then on the other hand, when we go the other way, we have the leverage on all of these areas. We have an opportunity for us improving our margins, but the cost factors are there. I think in between our ability to increase our prices, because we still offer tremendous great valves for what we provide. And then, continued efficiencies, we have the opportunity of maintaining those opportunity scenarios that we had discussed.

Okay. Thanks very much, Farooq.

All right.

I am showing no more questions at this time, sir.

All right. Well, thanks very much. Any questions or comments? Please let us know, and --

Actually, sir, I am showing we have three more questions. Did you want to take those?

We will take them, yes.

Great. Our following question is from Matthew Fassler with Goldman Sach.

This is Mark Hunter filling in for Matt, how are you?

Good, thanks very much.

First question was on expenses. Expenses came in better than we expected. I was just wondering if you could give a little bit of color, even though it sounds we are a little bit better than we expected, it was up even, if you want the expense ratio was not any more than we thought. If you could let us know how sustainable that is and how we should think about it for the current quarters.

Well, we increase our expenses. I would like to go have had them seen even lower than your models.

Yeah. I don't know how your models work, Mark, but we are going to increase, you are talking about expenses as a percentage of sales?

Yeah, exactly.

I understand. I think as a percentage to sales, our expenses are going to continue to improve. In other words, our percentages of operating expense to sales as we improve our sales, you are going to see that percentage remain more or less where it is or come down.

You mean it should come down from the 48% we have seen this quarter?

That's right.

That's an opportunity because, again, we have an operating leverage in every element of our business when sales increase.

All right.Then on the gross margin, that was a little bit light of our forecast. It decelerated a little bit on a three-year basis in terms of the gross margin change over year. I was wondering how we should think about it in terms of the coming quarters.

Having reupholstry went from what? I think we had 40 we went to 51% from 48.9%, as I see today. Right?

Yes.

From 48.9% is pretty good. So, it's impacted by the composition of our sales between wholesale and retail. This quarter, the composition in retail was lower, $117 million, composition was lower than in the previous quarter last year, our retail composition was probably 74%. This was 71% or so Dave.

That's right.

Because of that, the close margin is impacted at that level. And as our sales, we want both to improve. I think this question of having a higher gross margin, because of the fact that the composition of our retail division sales are it there, the gross margin percentage may look good, but it's not necessarily the right thing for us. I think about 51, within 51, 51 and a half is where I think the healthy gross margin for us and I believe an opportunity of maintaining it.

Got it. Thank you.

All right.

Our next question is from Todd Schwartzman with Sidoti & Co.

Good morning, Farooq, David. Could you tell me a couple of brief things? What did the 31% increase in ad spend amount to in dollars, both year-over-year and quarter over quarter basis?

David, you have that information. The 31% is, say, the 31% increase in approximately $2 million.

Once a year .

All right. Approximately $2 million there, Todd

Year-over-year, two million?

Yeah.

Sequentially from the second quarter?

I give you 50%, but I am not supposed to give you, Todd. We will see what information we can give you later.

Okay. David, on the fourth quarter tax line, is there anything unusual, any adjustments to be made to the normal statutory rate?

Our normalized raid, Todd, is 36.5%, in that range, and it was consistent, again, this quarter. The issues that we came through, why it looks so funny in the quarter is that we had some fluctuations in our deferred tax assets because we are in a loss situation and had valued those deferred assets, it has a funny, a strange impact on our income tax line. But I think you should continue to use the 36 and a half%.

Great. And obviously, you bought back some bonds but were there any share repurchases in the quarter?

No. None in this quarter.

Okay. And what's the remaining authorization?

1.2 million shares.

Okay. Did you give any description of the non-recurring gains, the items from the quarter?

Nothing unusual there, Todd

Was it asset sales? What are we talking about primarily? Was there one piece that was bigger by far than others?

You are talking about on operating level?

Yes.

I think it's about similar to what we had last year. It's consistent of a number of things.

Okay. Great. Thanks, guys.

All right, Todd. Thanks very much.

Our next question is from John Baugh with Stifel Nicolaus.

Good morning.

Good morning, Farooq, David. I just wanted to be clear, again, on the promotional challenge. We look at written orders for the quarter which were, I think you said, 11% or 12%. Last year, we had the two-month promotion that ended at February. Correct? So then, we started another two months that did not end at the end of March, and you also get kind of a rush of orders and your comparison this year is with a monthly calendar, so when you cut off in March, there would be a little bit of a benefit, though, from the year-over-year comparison, on that basis?

During the month of March?

Correct.

Yes. Of course.

All right.

I think that's the reason I did not mention how much of business we got in March, even though I did say that we did get a substantial increase of business towards the end of March. Yes, Johnny, right, last year, we had something. we had our, it ended in February, the one ended in April. This time, we are ending it every month.

Got it. And then, are you, the matrix you put out that was extremely helpful, and you, I guess, since then, I am assuming since that time, you put that out, your ad spend is perhaps higher than you would have thought at the time, and there is some raw material cost pressure. I assume on the latter point, you can get pricing to offset that, but I am wondering, you mentioned increased leverage as volumes go up, but I would assume in your matrix you had put that in. Is there something else going on that is enabling you to still hit those contribution margins that you laid out in that matrix, even though ad spend appears to be higher?

John, you mentioned, this operating leverage in our business because of the fact of vertically integration makes that possible. This last quarter, we had zero down time in our manufacturing. But still, we had inefficiencies. I mentioned the fact we have hired 850 associates in our manufacturing. Remember I said yesterday, our manufacturing plans, it's surprised to see how our associates are working and in fact we are shipping over $5 million shipping to China is mostly case goods, upholstery also. This leverage is important, and I think that it is going to help us offset some of these cost pressures. It will also give us an opportunity to maintain our margins and, also, keep in mind, we also need to make sure that we have very competitive values because we are competing with worldwide, as you know, in products.

Our values are good. We deliver our products at one cost nationally. We have complementary interior design services, but on the other hand, we have developed a very efficient system. Keep in mind, for instance, we had 100 warehouses in our regional division, only three years back. Now, we have 17. We have seven national distribution centers a few years back. Now, it's one major one supported by a smaller one. We have seven upholstery plants, now one in Mexico. So, in all of those we have done and we are improving it. And one of the major things, John, is converting to case goods. Out of eight years, putting our people through that was like putting them through, going through the Colorado River .So for eight days, in the rapids, for one year, they did, and I said, just do it. And then we will figure out the factor what does it cost us? We maintained our prices. We maintained our values. And, you can understand, learning process, inefficiencies, we are coming out of it and we still haven't completely benefited from all of the things we have done. So you are going to start seeing a lot. As long as the volume holds up and continues to improve, I think we have room for operating leverage, but then we also continue to take a look at the opportunities of increasing prices. That's why I think your question of maintaining those kinds of gross and operating margins are feasible

Good. Thank you. And then, have you seen anything in what's being ordered in terms of higher average ticket or more case goods than upholstery, or is it still more items than upholstery? And the items that are on sale? I am just trying to get a sense of whether they improved in volume, whether you are seeing in improvement in ticket or mix.

In the last couple of years, as we have also seen in previous recession, but also reflecting the fact that we have a greater competitive advantage in our upholstery programs, we have seen an increase in the upholstery business as a dollar percentage. Now, with changes in the case goods, with introduction of new products, I think we have an opportunity of continuing to increase our case goods, but I think what we have seen and are going to continue to see, is doing more business in upholstery than case goods. Okay and one last point on, I assume it's Mark or the warehouse. I assume they are carrying the inventory if you are going to account for it as a sale. They are going to incur the carrying cost of the inventory. Are you also somehow charging them for the warehouse space or is it just a transaction with all of that incremental volume that it makes sense for you to do?

John, what we did, we entered into a warehousing agreement with them. And we have agreement in which we have certain costs that we absorb, certain they absorb and we decided to help them get going, for the initial period, we will not charge them rent. But after that, we are going to charge them rent.

Great. Thank you for that call.

All right, John.

I am showing no further, I'm sorry. We have another question from Todd Schwartzman.

Hey, Todd.

A follow-up on the extent which you are going to absorb the inflationary pressures. Could you give us a mix of what's going to be absorbed and what's not, what's going to be offset?

Todd, the way we look at it is we look at every item, every category, and we look at it, what we believe should be retail price that makes sense. Now, today what we have done, as you know, we were on an everyday best price. So we have the every day best price today but on top of it, we give people savings. And earlier, John had mentioned about the fact that most of the time when we give savings, we give savings on the whole program so that everyday best price is further but people do have. Most of the time, the opportunity of buying anything they wanted to decorate. We feel that makes sense for interior designers and for our customers.

The mix.

The mix. Todd, I think I said and I said that previously, you are going to see us averaging every quarter 6% increase in prices as we move forward.

That seems commensurate with the inflation that you are expecting.

That's right. And the fact we are maintaining our prices relatively low.

Okay. That helps. Thank you.

All right. All right. I think those are all of the questions

Yes, sir. I am showing no further questions at this time.

All right. Thank you very much. And look forward to talking to you soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.