Ethan Allen Interiors Inc (ETD) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the earnings release call.

(Operator Instructions)

Later we will conduct a question-and-answer session, instructions will be given at the time.

(Operator Instructions)

I would now like to turn the call over to Mr. Farooq Kathwari. Sir, you may begin.

Hello. Thanks, Shannon. Actually, this is David Callen, Vice President of Finance and Treasurer for Ethan Allen. I apologize for the slight delay this morning. We had some technical difficulties with the phone lines. However, let's get into it.

Welcome to the Ethan Allen's earnings conference call for the fourth fiscal quarter, ended June 30, 2011. This call is being webcast live on ethanallen.com, where you'll also find our press release, which contains supporting details including reconciliations to non-GAAP information referred to in the press release and on this call.

Our comments today will include forward-looking statements that are subject to risks which may result in actual financial performance materially different than contemplated with those statements today. The risks include, but are not limited to, the risks and matters we have noted in our filings with the SEC. The Company assumes no obligation to update or revise any forward-looking matters discussed during this call.

After our Chairman and CEO, Farooq Kathwari, provides his opening remarks, I will follow with some details on the financial results. Farooq will then discuss in detail our ongoing business initiatives before opening up the telephone lines for questions.

With that, here is Farooq Kathwari.

Yes. Thanks, Dave. We are pleased to report our results for the fourth quarter and fiscal year ended June 30, 2011. During the fourth quarter, our net sales increased by 9%, our gross margins were 52.9%, as compared to an adjusted 50.3% in the previous year.

Excluding special items, our operating earnings and net income increased by 32.1% and 32.7%, respectively. Our retail division's written business increased 14.6% over the prior year quarter, with comparable written orders increasing by 12.9%. These increases in written business were especially positive, as they reflect strong growth over a 23.5% increase in written orders the prior year fourth quarter.

Our written business in the fourth fiscal quarter in both years was positively impacted by price increases that would be effective in early July, that were announced in June in both years.

Our results were also strong for the fiscal year ended June 30, 2011. For the year, net sales increased by 15.1%, and our net income per diluted share, excluding special items, was $0.58, compared to a loss of $0.15 in fiscal 2010.

During the year, we reduced our debt by $38.2 million, and were able to end our fiscal year at June 30, 2011 with cash and securities totaling $107.8 million. During the fourth quarter, and fiscal year ended June 30, 2011, we made major improvements to our vertically-integrated structure, which I will discuss after Dave gives the financial overview.

Great. Thank you, Farooq.

Net sales for the quarter were $178 million, up 9% from the prior year quarter. Our retail segment reported net sales of $136.8 million, up 13% versus the prior year quarter, and comparable design center net sales increased 12.1%.

Written orders booked in retail increased 14.6% over a strong prior year fourth quarter, with comparable design center written sales up 12.9%. Wholesale net sales were $110.5 million, up 10.4% compared with the prior year fourth quarter.

Consolidated gross margin for the quarter was 52.9%, compared to 49.5% in the prior year quarter, or 50.3% adjusting out the transition cost reported in the prior year fourth quarter. Our retail segment made up 76.9% of our consolidated net sales for the quarter, compared with $73.7% the first nine months of fiscal 2011. This higher mix of retail business results in a higher consolidated gross margin rate, but also results in a rate of operating expenses that are higher relative to the consolidated sales.

Our income, before income taxes reported for the quarter, was $8.9 million compared to a reported $11.6 million in last year's fourth quarter. Remember, though, that the prior year fourth quarter included a net pre-tax benefit of $4.3 million, primarily from a change to our designer commission plan. Excluding the special items from both years, the income before tax this year was $9.7 million, compared with an adjusted $7.3 million last year, or an increase of $2.4 million, or 33% on a 9% increase in net sales.

As a result of continuing to adjust our deferred tax assets with valuation reserves, the reported tax rate for the fourth quarter this year was 19.8%. You will recall that in the fourth quarter last year, we establish those initial valuation reserves, resulting in a $34 million tax expense charge in the prior year quarter. These non-cash reserves may reverse in future quarters, resulting in future tax benefits that will cause fluctuations from our normalized tax rate of between 36.5% to 37%.

When adjusted for those items noted in both periods, the earnings per diluted share for the quarter was $0.21, compared to $0.16 in the prior year fourth quarter. Net sales for this fiscal year grew 15.1% to $679 million from $590.1 million last year.

The retail division's net sales were $505.9 million, up 15.4%, and our wholesale division's net sales grew 16.7% this year to $422.9 million.

Consolidated gross margin this fiscal year was 51.5%, versus 47.5% in the prior year. Excluding transition cost from both years, consolidated gross margin improved to 51.6% from 50.1% in fiscal 2010. Operating expenses, excluding special items, in both years were leveraged lower as a percent to net sales to 46.6% in fiscal 2011 from an adjusted 49.9% last fiscal year.

Diluted earnings per share, excluding special items in both years, was $0.58 in fiscal 2011, up from a loss of $0.15 per diluted share in fiscal 2010. Our total cash and securities was $107.8 million at June 30, 2011, up $5.6 million from the prior year.

During the year, we retired $32, excuse me, $38.2 million in debt, repurchased $5.4 million of our stock, invested $9.1 million in capital expansions, and paid $5.8 million in dividends to shareholders. We also extended the life of our $50 million revolving credit facility, while reducing its cost and adding flexibility for expansion to $100 million.

Our inventories continues to be closely managed, and were $141.7 million at the end of fiscal 2011. Our liquidity and balance sheet are well-positioned for us to execute against our business initiatives going forward.

Farooq will now provide detailed comments on those many business initiatives underway.

Yes. Thanks, Dave. During the last fiscal year, we have continued to make progress in repositioning Ethan Allen to meet the challenges of the great recession. We have strengthened each of the five priorities that have been our focus, resulting in major improvement in our financial position.

Our priority of projecting a relevant message, focused on getting aspirational and attainable message across. We are increase our advertising spending by $5.5 million during the fiscal year, or a 26% increase, aggressively utilizing direct mail, national television, and digital advertising.

During the fourth quarter of fiscal 2011, our advertising expenses also increased by 27%. We are pleased that our average ticket in the fourth quarter increased by 7% versus prior year, and 5% from the third quarter.

Our second priority was to accelerate the development of stylish and attainable products. During the year, we have accelerated the development of our product programs. We focus our efforts in the projections of our five signature of lifestyles, that's elegance, vintage, romance, explorer, and modern.

Products were developed for both our domestic and offshore manufacturing. We are planning to launch a major product program, introduced to our retail network earlier this year, to consumers in September 2011. That's next month. In addition, we are finalizing major new products to be introduced to consumers from January to June of 2012. We are in a strong position to continue to project relevant offerings to our clients.

Our next priority has been to strengthen our retail network. We took steps this year to add more than 225 qualified and entrepreneurial Interior design associates to our network. We continue to relocate our design centers to more advantageous sites, and to close and consolidate poorly performing locations.

At the end of June 2011, we have 287 design centers in our retail network, 53 of which are in China, 147 of the design centers are operated by our retail division and 140 by our licensees. During the year, we made major investments in our retail division. This included adding management and qualified interior design associates. We believe this incremental investment of $6 million will provide an opportunity to grow our business.

Moreover, we are gratified that our independent licensees have also done relatively well, despite operating in one of the most challenging economic environment.

Our priority of investment in the relevant technology also continued our investments, both at the wholesale and the retail level. At the wholesale level, we completed the upgrade of our information systems in upholstery manufacturing, and started the process for our case goods manufacturing.

On the marketing side, we continue to upgrade our vibrant website, and also add other digital mediums to our messaging, such as through our Facebook page. On the retail side, we upgraded our point-of-sale and client information systems, introduced touchscreen technology, and we have begun to develop touchpad technology for our retail associates.

Our next priority of developing relevant sourcing and logistics, we continued the process of repositioning our manufacturing, sourcing, and logistics. Our upholstery manufacturing made important strides in establishing a strong base, both in made in North Carolina and Mexico. The US case goods manufacturing plants are operating more efficiently.

The conversion to custom manufacturing upon receipt of customer orders has been challenging, but it is beginning to pay dividends through improved plant operating margins and efficiencies throughout our logistics operations. We are also working closely with our offshore partners on some of the great new products hitting our design centers floor this summer and autumn. We continue to manufacture about 70% of the products in our manufacturing plants in the United States.

Our cost structure was impacted with a fuel increase of about 30% during the last year. In addition, petroleum-based products and other costs had an impact of about 5% on our cost structure. Our increased efficiencies, higher volumes, and price increase countered these increases while keeping in view that we offered stronger incentives to consumers during this period as well.

The net impact was basically a wash. We have an aggressive marketing program for fiscal 2011 to continue the progress we have made in the last fiscal year and the fourth quarter, and at this stage, I'd like to open it up for questions or comments.

Shannon, are you there? Are there any questions lined up?

(Operator Instructions)

Our first question comes from Budd Bugatch with Raymond James. You may begin.

Good morning, Farooq and David. This is actually Chad filling in for Budd.

Yes, Chad.

Your retail written comp of 12.9% was very impressive, particularly given the growth that you are comparing against in the prior year. Can you give us, or share with us, a sense of kind of how that comp trended from month-to-month during the quarter, April, May, and June? And you noted in your commentary and the press release that July was a positive, but could you put a little more detail into that, kind of maybe quantify that for us?

Chad, we had increases on all the three months. However, June we had somewhat of a higher increase this year, as well as the last year, because as I said, when we announced the price increases, it does tend to take some business to the June period, and that's what happened. But overall, we had increases in all the three months.

Would it be fair to say if June pulled a little bit forward from July that July is running kind of below that 12.9% written comp?

Well, it is too early to tell, but that is not the case. We are running better, but we, as you know, we are having monthly sale events, and in July sale event ended in end of July, last year it ended in the middle of August. So that did have a very positive impact on July, but also this month we're going to also end another event at the end of August.

Got you. Okay, and I think in your comments, did you say that you added 125 design professionals? Was that for the year or for the quarter? And if you could, just kind of give us an update on that designer affiliate program, how many designers do you have total now, what kind of contribution to sales is it generating, and, I guess, with a little time under your belt, how is it performing relative to your original expectations?

The number is 225. That's what we added during the year. And the net impact was somewhat less because some people left our system, and our objective has been to increase with very qualified interior designers. And I would say 90% of the people who joined us ran their own interior design business. That is a tremendous opportunity in our industry, because there are approximately 50,000 interior design businesses, and they have been under a tremendous amount of pressure due to this great recession.

And we see that an opportunity for interior designers to work under, what I call, an entrepreneurial and a disciplined system, and they like it.

Okay, and I think in your comments you also said that average ticket was up 7% year-over-year in the quarter. With the remainder of the comp increase traffic, or did you also see a contribution from a better close ratio? And, I guess, in the past you've talked about the stock market as being a pretty good indication of, I guess, the mindset of your consumer.

With the recent weakness that we've seen, have you noticed any down tic in terms of traffic in the near term, or maybe increased reluctance for consumers to commit to bigger projects?

No, what I've said is overall consumer confidence, and of course, stock market is part of that. That affects consumer confidence. Things are pretty difficult from a perspective of the news that we all hear. I mean, look at today. The stock market is down, and that does have an impact.

However, I was concerned that that might have affected our July business, but fortunately it did not. So far we have held up because, I think, we are getting market share. Our programs are very strong, our interior designers are working with their clients. So, far we have held up well.

Going forward, we don't know. We are, of course, continuing to take very aggressive steps in our marketing to position us well, but so far, Chad, we have weathered this storm.

Okay. Thank you, Farooq. Thank you, David, and good luck to you.

Okay, you too.

Thanks, Chad.

Thank you. Our next question comes from Brad Thomas with KeyBanc Capital Management. You may begin.

Hello, Brad.

Good morning, Farooq. Good morning, David. Wanted to just follow-up on the price increases. Farooq, could you just quantify what the average price increase was for the July price increase?

This year it was 4%, last year it was, it averages about 7%. It averages 4% this year.

Great, and so as we think about the impact on the P&L going forward, I look at customer deposits that were up, I think, 19% year-over-year. So that would suggest you won't get the benefit from that price increase in your fiscal first quarter, maybe a little bit, but then it's really the second quarter that we would see the benefit of that price increase? Is that the way to look at it?

It is, but also keep in mind that price element, price is one factor. The other factor is also our aggressive marketing and giving some special incentives to consumers. So, all of those factors have to be taken into account, but as far as the impact of this price increase would be felt on a delivered perspective for our deliveries in September and onwards.

Got you. And then in the fourth quarter, I think you had three promotional events versus two last year. What does the September quarter look like, and how are you thinking about promotional events going forward? Will you keep it at about one per month?

That if the plan so far, one a month.

Great, and then, Farooq, with respect to CapEx, you have had a couple of years that you've really spent at pretty lean levels. What is the plan for fiscal 2012?

The good news is that we spent a tremendous [amount] on our money before this great recession hit us. We were lucky. We spent an average of $60 million a year before -- but good news was that we had completed most of the work that we needed, that needed to be done, but we still will, of course, be aggressive in our retail as well technology, and our manufacturing, but I would think that in this next fiscal year, you are talking around $12 million to $15 million.

Okay, great. And then just lastly, I know you added a new Vice President of International Business Development. Farooq, could you talk of little but more about what your focus is in terms of international in the coming years? And then where is international as a percentage of sales for the most recent year?

Yes, we are very pleased that Arne Borrey joined us. He comes with a very strong background of international sales for Coach, and before that, he, for many years, he was president of Samsonite in Europe, running a fairly integrated business model. So we are looking forward to having Arne join us. And, of course, Dan Grow, who is our Vice President of Business Development, has also played a very important role in working with our international and domestic licensees.

We are looking to see, as we move forward, of establishing somewhat of a stronger base of operations internationally. And that includes South America, it includes Europe, it includes more penetration in Southeast Asia and Middle East. China has become a fairly important licensee with 53, and it projected in this fiscal, I mean, this calendar year to end at least up to 60.

And that model we are going to take into other countries. And Arne and the team are going to see, how do we establish a stronger presence, and even a logistics presence, in several regions of the world.

At this stage, our international business still is under 10% of our total business. We have a great opportunity to build that business.

Great. Thanks very much, Farooq.

All right. Take care.

Thank you. Our next question comes from Steve Keegan with Ethan Allen. You may begin.

No, I don't think Steve had a question. Let's see who the next question is.

Our next question comes from Matthew Fassler with Goldman Sachs. You may begin.

Thanks a lot, and good morning.

Hello, good morning, Matt.

A few questions, if I could. First of all, when we look at our calculation of wholesale sales to independents, it looks like that number was just about flat with the prior year, which is a bit different from the underlying growth trajectory you had in your stores, and it sounds like your licensees had in their end markets. So if you could explain what accounts for that.

Just to tell you the number we are looking at, we look at the total wholesale number, and we remove the intersegment elimination. So if we are doing the math right, that was $41 million versus $42 million a year ago. So that number was different from what we expected. Any help would be great there.

Yes, there are a lot of factors. For instance, the wholesale sales in the fourth quarter were lower, and have consolidated due to a low case goods mix. It was driven, in part, by the import product in transit at year-end. We had close to over $5 million increase in transit inventory.

The increase in transit inventory was 61% of the increase in inventory from March 31st, and that has an impact on the mix. And if you are talking about comparing our third quarter to fourth quarter, we had some extraordinary order that we shipped that quarter from China, which had an impact, a very positive impact, on our wholesale business in the third quarter versus the fourth quarter.

Okay. That is helpful. Secondly, if you think, if you take a step back and you think about incremental margins, if I look at the scenarios that you spelled out, I guess it's about a 10, 11 months ago now, the $600 million, $700 million, $800 million, $1 billion numbers.

At this stage, the journey from $600 million to $700 million, the incremental margins or the margins on the incremental revenue that you expect to get are in the high 40s, and it looks like for this year, I guess, they are a bit lower than that -- so, for the year that we just ended. I'm wondering if there's anything that sort of changes the scenario you have for the profit progression of the business as you have continued to see yourselves recover.

No, Matt. I think that as you know two years back is when we gave those indications of what our opportunities were --.

Sure.

At different levels, and it is remarkable, considering the fact the amount of change that has taken place. We are pretty much on target. If you take a look at the fact that when we said about a $700 million, these are opportunity scenarios, which I believe you are referring to.

Yes.

Take a look at $700 million. We said we would have an operating income of approximately $43 million. Our pretax income of $34 million, we are pretty much close to operating at that level. And I think that there are a lot of, of course, a lot of other factors we haven't taken into account, but at this stage, more or less, $800 million, we are tracking those numbers.

Keeping well with a 15% increase in sales, we have had a 32% increase in operating earnings, and that leverage is very important for our business. And that leverage, I think, even though we have made progress in utilizing our leverage of our vertically integrated structure, we still have a lot more to go.

Got it. And then if you could talk about the rollout of touchscreens. I know it's been progressive over the course of the past fiscal year. How fully those are rolled out, and whether you are seeing those have direct impact, so far as you can tell, on your close rates?

Yes, we have. They have been rolled out. They are rolled out to all the company retail design centers, and most of our licensees, and they are putting it in a little bit slower, as one can understand. They are having a very positive impact, because our objective is to add technology to the personal services that our interior designers provide.

We want to realize more from within. That is really where the greatest opportunity is, and there is an opportunity for sales, opportunities for margins, opportunities for rate-of-return on investment, is realizing more.

And our system today, our internal objective is, that we have anywhere from 50% to doubling of business within our existing structure. How to do that, we have to hire -- we have to make sure that our design centers are in the right places. Fortunately, they are. We are relocating some more, we will add a few more, but a lot of that work was done.

Second is, making sure that we have a strong management team. I mentioned that we last year spent about a $6 million in a lot of strong managers in place in our retail division and hiring interior designers. All of those gives an opportunity of realizing more from within, and that is what you are going to see Matt.

Great. And then my final question is just to get a little bit of clarity on what you said about the timing of promotions in July and August versus last year. I know you said you had a promotion that ended last year in the middle of August. Did you say that this year's version of it ended in July, such that you might have front loaded some of the sales? I could not quite tell if that was your point about the month to-date, or the quarter-to-date numbers.

It was. There are a number of things. In July, we had a strong July, but a strong July was also impacted, as I said, by the fact that this year we ended a sale at end of July, last year it was middle of August, but last year we did not end anything in the end of August, this year we will.

So, I will give that information, because people want to know how we are doing currently, in these tough, difficult environments. End of the day, of course, we have to wait for the whole quarter to determine how well we do.

So is their second promotion that you are running in August, distinct from the one that you ran last year, that ends at the end of this month?

We are -- we are running one in July and August and September. Last year we sort of ended up running two promotions. This year we will run up three, as we have been doing every month since January of this year.

Got it. That's the clarity I needed. Thank you so much.

And Matt, this is a joke, but one of the days we should meet our estimates. Other way around, you folks, all the analysts, it's a crazy world. You analysts and you folks really don't know our business.

We are trying, Farooq, we are trying. Thank you.

I'm going to give you grades for meeting our numbers, not the other way around.

Thank you.

That's a joke, but not really, but go ahead.

Understood. Thanks, we're done. Thank you.

Thank you. Our next question comes from Todd Schwartzman with Sidoti. You may begin.

Farooq, you had talked a little bit, you started to mention, with regard to raw materials before, oil-based inputs up about 5%. Can you maybe speak to some of the others, lumber, fabric, leathers, metals maybe?

Yes, Todd. Of course, the biggest one for us is fuel, because we deliver our products to our consumer's home at one cost. So the fuel charge is a major one, because of the fact that we get surcharges. We have our own fleets, our own trucks. So that 30%, was a major factor, and on the other hand, we increased our volumes, that counted it.

We have not seen much of an increase in lumber. What we have seen is increase in fabrics and textiles, petroleum-based, our finishing materials, we have seen. We have seen anything, of course, cotton-related has -- last year was a major increase. So fabrics, finishes, and then transportation, even on products coming from overseas. We have also seen increases from our offshore manufacturers. Anywhere in the range of 4%, 5%.

And how much, just to maybe update some past statements, what percent of your products are now made in the US?

70% of our products are made in the United States, keeping in view that our cotton sofa fabrics is now done in our Mexico plans. 70% of our cotton sew is done there, but all the products are made in the United States. That is 70% of our total product is US-made.

And for fourth-quarter, what was the US case goods utilization?

You know, approximately, I mean, at the level of our employees, at the level of people we have, it was approximately, I would say, we didn't take any downtime. I mean, we just say that, obviously, utilization is a very relative term, but you can say that at this date, we are operating at 80, 85% of utilization of our facilities, but of course, we can increase it because we have the physical plants, we have.

Obviously, you guys have been zigging, others have been zagging, in terms of your approach to source or not to source offshore case goods. Would you rule out taking a portion of what is now made domestically, once again, offshore?

No, we are not doing any zigzags. We are very, very clear that we are going to maintain a strong presence of US manufacturing. We have consolidated our manufacturing from many plants to now two major operations in case goods in Vermont and North Carolina. We have consolidated our US upholstery manufacturing to one major facility in North Carolina. We used to have seven plants, but now one is doing a great job, certainly helped by Mexico.

What we will do is, what you are going to see, we are going to introduce a fairly large production -- introduction of products to our consumers next month, and most of that is coming from offshore. So what you are going to see is that our growth, while we are going to continue to grow our case goods in the US, but a lot of the growth would come also from products that we get from offshore.

As a percentage, I think it's possible that while our total business --- as our total business increases, the percentage of offshore as a percentage of total, would most probably increase.

Got it. By the way, my observation really was that you people are really heading in a direction opposite the bulk of the industry in terms of your approach to sourcing, that you are coming back while others are still, although at a declining rate, taking some more production offshore. That is all. I wasn't saying that you were zigzaging.

David, you had mentioned, just a quick question on the gross margin. You talked about the mix of retail contributing there. How much did that change in the retail mix impact the gross margin for the fourth quarter?

Well, Todd, I mean, you looked at our overall margin for the year, and it was 51.5%, and that was with retail making up about 74.5% of the total sales. And you compare that to what we did in the quarter, of 52.9% on a consolidated basis, when retail was up to it 76%, almost 77%, of our consolidated sales.

I think, Todd, most probably 50 basis points most probably were added to our gross margin with a change in the mix.

That's great. That's great getting to hear numbers from you, Farooq. I appreciate that. What about the new product launch for September? I know you gave that little tease before. What's that going to be?

It is going to be, of the five lifestyles, we focus on elegance. And elegance is the one we introduce to our network in February, and it's actually being delivered right now in July, and I mean, it was delivered in July and in August to our network with a fairly strong marketing program in September. This is great product. This is elegance in terms of upholstery, fabrics, case goods, accents.

And this also is a product line that really helps differentiate us even more so, because in our industry, this product line, which you might call the more of, you might say, we call it classic with a modern perspective, but it's more classics.

Classics has somewhat been eroded in the marketplace. There are not many people who are offering it at the level of quality and price we do. So we see that as a great opportunity, and you are going to see a major presentation in a direct mail, in television, and in our digital mediums starting in September.

All right, and on average ticket, is there anything else that you could mention, any quantification?

Well, the average ticket is about $1600, if that's what you are looking for.

And versus what a year ago?

I said it is approximately, what, 7%?

Versus a year ago, yes, 7%.

7%. It was 7% lower a year back, Todd.

Right, and you said it was up 5% from third quarter, right?

Right, yes.

Okay. What about the case goods versus upholstery versus accessories? What were the respective sales deltas there for the quarter?

Are you talking about the mix?

The growth.

The growth.

Well, as Farooq mentioned earlier the in-transit case goods product did affect case good growth in the fourth quarter? It wasn't quite as high.

What he's talking about is what percentage did we grow in case goods, what in upholstery, and what in accents, right, Todd?

Right.

Do we give that information out?

We don't.

Todd, we don't give it. We just give one complete figure, and that I gave you, 9%.

How meaningful, I know you've made a push in the past year with artwork and such, and some new types of accessories, how meaningful a contribution was accessories in that 7% ticket growth?

It was, I think as a total, as a composition of a total, it's still running 14%, 15%. But in the last year, in the last quarter, the increase in accents was much greater than case goods and upholstery.

Great. Thanks, guys.

All right.

Thank you. Our next question comes from John Baugh with Stifel Nicolaus. You may begin.

Hello, John. Good morning.

Good morning, Farooq and David. Let's see. Could you tell us how you're thinking about, I guess, marketing or advertising dollars in 2012 versus 2011 or as a percentage of revenue? Are you going to get more aggressive? So whatever you are forecasting, and I don't expect you to give us your revenue forecast, but if you thought your revenue was going to be up 10%, do you plan your ad dollars to be up 20%, or any color on ad spend?

Well, as I mentioned, that in fiscal 2011, our advertising increased by 27% -- 26% during the year and 27% in the fourth quarter as well. And in this fiscal 2012, now that we have raised the advertising expenditures last fiscal, John, it will more or less remain about the same dollar amount.

Okay. So dollars in 2012 to be relatively flat to 2011.

That's right, yes.

Okay, and you mentioned, I think, already that you anniversaried the monthly promotions halfway through the year, correct?

That's right. It will be -- we started in January of last -- this 2011.

And there is so many moving parts in gross margin, including the mix which you touched on, but I'm curious as to, given the increases we've had in fuel and all the other things you mentioned, and relating that to the 4% price increased you have announced, how -- again taking mix of retail out, which obviously, if that goes up influences gross margin up, but excluding that, how the increase in price may offset the raw material and other cost increases you've had? Is it a wash -- do you expect it to be a wash, do you expect it to still be a drag, or a help?

Well, again, you are absolutely right. There are a lot, a lot of variables that can take place. Some are under our control, some not.

Last year we ended with a gross margin, and I will take a look at our adjusted gross margin, because if you take a look at our gross margin was -- for the fiscal year, adjusted gross margin was 51.6%. This is our fiscal year ended June 30, 2011, as against the adjusted gross margin of 50.1%. I would think that approximately in that 51.6% range or so, is feasible.

At this stage, looking at what we know, could change with all, John, things that are beyond our control, but if you are talking of looking at what kind of a gross margin opportunity is there. It's possible it could be more, but I would say that our objective is to see if we can operate it around that range, and if you think of it, even when we gave two years back, the opportunity scenarios, we said at $700 million, our gross margin would be 51.5%.

Your are right. Yes, you've done well in a tough environment. Could you tell us about store openings, and then maybe a net number with closures for 2012, where you expect to be? And then break it out internationally versus domestically, please?

Well we don't give much of that information. There's still a lot of things doing, but I would say, at the net, most probably in 2012, it's going to be pretty close to where we have domestically. Internationally it will continue to grow.

And could you comment on stores. With your smaller design center footprints, how those are tracking. I assume the sales per square foot is up, but I am curious as to maybe another metric, the way you look at it and how that's working versus your bigger footprint stores.

They are working well. We open up a number of them. In fact, we are opening one, approximate a 10,000 square-foot, this weekend in Annapolis, which is replaces a 20,000 square-foot. We are opening, in a couple of weeks, in Seattle, Washington a 10,000 square-foot replacing a 15,000.

The other characteristics of this is they are in much stronger locations. Not only are they in smaller in size, they are in much better locations, and that is what we have done. We opened a couple of years back with Raleigh. In Raleigh, North Carolina, we opened approximately an 8000 square-foot replacing a 15,000.

Now, this is a different world and economy, but we are tracking at that 7000 square-foot, similar to what we were tracking at 12,000. And the fact is really, what determines is the fact, a lot of factors. Having the right location, having great people, our customization of our product line is helping so that today we can, for instance, in our domestic case goods, we can show one dining table, and we can show six or seven different finishes, we can show different legs. We have been doing that in upholstery for many, many years.

So customization, technology, good people, smaller spaces, is working, and we want to open more of those, John.

Okay, and my last question is, I think one of Dan's charges when you hired them, was to go after government business. Could you give us an update there, and is there a time of year they buy, or is it sort of one contract, multiple contracts, multiple times of the year? When do they look at the possible new vendors, et cetera?

Yes, Dan Grow is spending a lot of time on that area. He's also working on the contract area, which you are going to hear more about it as we move forward. We have also hired somebody, a strong team in the contract, but government contracts, a number of them, they are from contracts for domestic offices through military to the State Department. So we are looking at all of those, and they come at different times, but you are going to see us continue to be involved with that, and hopefully we will get some big orders there.

Any progress yet, Farooq? Thank you.

I'm sorry?

Any progress yet?

Progress on?

On any government contracts?

Contracts -- on the contract, we have added a couple of very strong members to our team, and we are working -- we've gotten some contract business, yes, but we are looking at utilizing our interior designer's network to help build contract business. So it is just in the beginning stages, John, and I think in the next three to six months, perhaps we should have more news.

Great. Thank you, and good job in a very tough environment. Thanks.

Thanks, John.

Thank you. Our next question comes from Barry Vogel with Barry Vogel & Associates. You may begin.

Hello, Barry. Good morning.

First, I have, a couple small questions for David. Can you give us the D&A for fiscal 2011 and your projected D&A for fiscal 2012?

Sure, Barry. D&A for fiscal for 2011 was $20.8 million, and for 2012 it should be in that same kind of range.

Okay, and as far as your scenario table Farooq, it's amazing to me that two years ago without knowing what was going to happen in terms of everything that's happening, which is unprecedented, you actually are ahead of your scenario based upon your 51.6% gross margin, at a $679 million sales for the year, as opposed to the $700 million, which was in your table.

So you are doing a great job, you and all of your colleagues. And so the question I wanted to ask, is if you can continue to have sales momentum, and you continue to get the benefits of what you've brought in terms of all of these changes, are you -- is it possible that your scenario table can be met, if you do approach an $800 million revenue year, given what you know today?

You are right. We did these right in the middle of the greatest recession and a tsunami hitting us. You are right, and we are —- [we did] gratifying to see that we are pretty close to it. Barry, there are a lot of factors that could impact it, but it is potentially, at this stage, we have the opportunity of doing it, if we do $800 million.

Okay. The other thing I wanted to commend you on was your measured approach towards investing in the business, doing all these things you've talked about, and at the same time, you repurchased 55.4 million shares of stock, and you bought back $38 million, face value of debt, which is an amazing accomplishment, considering what's going on out here. And so the first question I wanted to ask David is, how many shares did you buy last year?

It was early in the year, Barry, I don't have that number. I can call you back with it.

Okay, he'll get you. You are talking about maybe, where is it shares? He'll let you know. We purchased them about $14, $15, -- at $14, $15, and here share repurchase. In fiscal -- we repurchased 204,000 shares in fiscal 2011, and in fiscal 2010 we repurchased 182,000, and we paid it in, I think, fiscal 2011. So it was $5 million, and the total was a combination of 386,000 shares.

Okay. Now, the reason I ask you that, is your stock has come down with the rest of the stock market, and by buying back debt and buying shares in [traffic] price, you are really doing a service to the shareholders. So considering what we know today, given results, is it probable that you would continue to buy bonds and lower your leverage and lower your interest expenses and continue to buy shares, given your tremendous cash generation that you are probably going to have, certainly this year given your start in terms of your written orders momentum?

Barry, we will keep that in mind. We have about a 1.2 million shares authorization to buy. Last year it was $38.5 million, reduced our interest expense by, on an annualized basis, by $2 million. So that is great, to save $2 million is not easy.

So buying our bonds back really gave us an opportunity to use that money and invest in other areas. We will continue to do that, but, on the other hand, after this great recession, it also told us what could have happen. So we want to keep reasonably healthy cash balance, and on a proactive basis, continue to reduce our debt, and if it makes sense, from time-to-time, also buy our stock.

All right. Thank you very much. You've done a great job.

Thanks, Barry.

Thank you. Our next question comes from Joe Feldman with Telsey Advisory Group. You may begin.

Hello, Joe. Good morning.

Hi, good morning. I wanted to ask, if you looked at what you guys are selling right now, is there anything you can glean about your customer, and maybe their behavior, within the ticket that they are buying? So, for example, are they buying just the entry price product? Are they buying more middle-of-the-road, are they buying the high-end, and just trying to get a sense. I know you have given us an idea in the past of how the customer has been behaving, and I just want to get more color.

I think, Joe, I think the recessions and tough times, a certain consumer attitude. We see that the consumers we are dealing with, the demographics we are dealing with, they are more of a buyer -- more of an owner than the user. So they are very much interested in quality. They are very much interested in service. They are more interested in details.

I meet people around the country, and they talk to me, first they say is, we had a tremendously great experience with your interior designer they, in fact, know the name of the person. So our demographic service becomes very, very critical. Knowledgeable people who work with them, make house call, is a critical factor.

The second thing is, they are also very much interested in quality, because a $2000 sofa, almost sometimes look like $1,000 sofa, unless you understand what has gone in making it. So the details of quality, and ability to explain that is our competitive differentiation. So are the customers that we are dealing with, are interested in owning product, which means better quality. They are interested in our service, and of course, where we have lost is people who have been impacted more by this economic downturn, and they have sort of gone to more of the mass markets. And as the economy improves, hopefully, we'll have the opportunity of getting them back.

Got it., that's helpful. Then another question was about, again, I know you gave us some more color on the average ticket, that $1600. I guess we wanted to get a sense of what was comprising the increase in the average ticket? How much was just, again, maybe people trading up to the quality product, or was it the mix of what you were selling any different, or was it just simply the pass-through of that, well, I guess 4% might be the inflation, I guess?

Well, I think what's happened is, as I was mentioning, this is part of your first question. That more of our business is done by people who are not necessarily just buying an item, although the $1600 ends up, by the fact that when people also buy lamps and more picture, it takes our average down.

But most of the projects people work on are anywhere from $5,000 to $15,000, when they make a house call, when our designers works on a project. And that you have to keep in mind, the average ticket, I give that information out, but it's not as much relevant for us as it is to some folks selling housewares. But I give it out because people want it, but keep that in mind, Joe, $1600 is not tremendously relevant in our business because of the fact that a lot of our business is done in design jobs, in jobs which are more than $1600.

Got it, understood, thank you. And then if I could just have one more. I may have missed it earlier in the call, but I thought in the past you've helped us out with the backlog number, or some measure of the backlog, and maybe where it stands currently versus last quarter and versus last year?

You will see this in our numbers, in our case that are being [fought]. Our retail backlog is approximately 14% higher than it was a year back.

That's helpful, thanks. And good luck with this next quarter. Thank you.

Joe, take care.

Thank you. Our next question comes from Maggie Gilliam with Gilliam & Company. You may begin.

Maggie, the best for the last. Maggie, how are you?

Fine, thanks, and I think all my questions have been answered, but I did want to ask one thing concerning the expansion, or contraction, in terms of square footage of the design center. In the old days, when they used to be called stores, you used to give us a fairly detailed projection as to how many you were going opening in a year and that sort of thing. Is that no longer relevant, and is one of the reasons why it's no longer relevant due to the fact that the smaller ones are easier to locate, and to build, and get opened?

Maggie, there is a lot of factors. One of them is what you just said, see but our business has now moved on from selling a product to selling a service.

Right.

Our business has also been impacted by technology. Our business is impacted by much more qualified interior designers. They need less space.

If you are selling a business, as you know very well, Maggie, that if you are selling a commodity, you need a lot of space. In Germany they have 250,000 square-foot furniture stores, because all they are selling it is as a commodity. So we have found out that space is important, obviously, we need some reasonable size space, but other factors are important.

The second is, we have also been consolidating our stores in areas that make more sense. For instance, look at Manhattan. We used to have three more neighborhood stores, and now we have one major one on Third and 60th. Similarly, in Long Island, we had two, 15 minutes away from each other.

In today's environment, market, cost of occupancy, it does not make sense. So the reason you are not hearing us is that those old days somehow we felt that the more stores opened, the more business we were going to do. Today we have got to realize more from within, but the more stores we open, we means we've got more costs.

Okay. That's good. Congratulations.

Thanks, Maggie. You take care.

Okay. Thanks.

Thank you. I'm showing no further questions at this time.

All right. Thank you very much. Any questions, please let us know.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.