Ethan Allen Interiors Inc (ETD) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your earnings release for the third fiscal quarter conference call. At this time, all participants are in a listen-only mode. Later we will conduct a Question-and-Answer session and instructions will follow at that time. (Operator Instructions) I would now like to turn today's conference call to Mr. David Callan. You may begin, sir.

Thank you and good morning. I am David Callen, Ethan Allen's Vice President of Finance and Treasurer. Welcome to Ethan Allen's earnings conference call for our fiscal quarter ended March 31, 2012. This call is being webcast live on www.ethanallen.com, where you will also find our press release, which contains supporting details including reconciliations of non-GAAP information referred to in our press release and on this call.

Our comments today will include forward-looking statements that are subject to risks which may cause the actual results to be materially different than expected when making those statements. Please refer to our filings with the SEC for a complete review of those risks. 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 provide more details about our ongoing business initiatives before opening up the telephone lines for questions. With that, here is Farooq Kathwari.

Yes. Thank you, Dave, and thank you for participating in our third-quarter call. With an 8% increase in sales, net income per share doubled reflecting continued operating leverage from our vertically integrated structure. We had strong gross margins of 53.6%, compared to 51% in previous year, third quarter. The higher gross margin reflects higher percentage of retail sales to total sales, and continued improvement in our operating efficiencies. While strong gross margins, they were negatively impacted by about 65 basis points, or $1.2 million, during the quarter due to sell off of floor samples in the retail division to make room for major product introductions. This amount of $1.2 million is not treated as special items for our non-GAAP reported.

Our operating expenses for the quarter were $86.5 million, compared to $78.3 million in the previous year quarter, an increase of $8.3 million. The increase is due to a number of factors, including investment in strengthening of our retail management and interior design associates, adding about $1.8 million to our operating expenses during the quarter. Please keep in mind, during the quarter we wrote, that is our book orders, were $164 million while shipments were $131 million. It would have not been possible to write $164 million without the strengthening of our management and interior design associates. During the quarter, we expensed $800,000 in getting the Design Centers ready for new products.

Our advertising expenses increased by 23% during the quarter, much of which is for brand building in China, coinciding with presentation by our interior design associates to media and others in four major Chinese cities. The 23% increase in advertising is on top of 36% increase in the previous year third quarter. Our expenses also increased by $500,000 relating to our new Honduras plants. Other costs were volume driven, including our shipment and delivery charges, which are expensed to selling expenses.

The Honduras expenses are the only expenses treated as special items for our non-GAAP reporting. While all other expenses and the gross margin impact are reflected in our earnings per share of $0.14. For our fourth quarter, at this stage we expect to also incur costs and expenses for new products to be about 70% of what we spent in the third quarter. While our inventories remained substantially unchanged from June 30, 2011, inventories increased from March 31 of the previous year, mostly due to receipt by our retail division of sold orders pending delivery to customers. This also reflects inter company eliminations between wholesale and retail.

As stated earlier, the retail division wrote over $30 million more than shipments during the third quarter. After Dave provides an overview of our financial results, I will offer comments on our many initiatives, including the launch of a new Ethan Allen Express program. Dave?

Thank you, Farooq. Net sales for the quarter were $175.9 million, up 8% over the prior year third quarter. Our retail segment reported net sales of $131.4 million, an increase of 12.3% versus the prior year quarter and included comparable design center net sales growth of 9.4%. Written orders booked during the quarter by our retail division increased 11%, including 8.2% growth in comparable Design Centers written orders.

The Company operated Retail Group finished the quarter with 149 Design Centers, up from 145 at March 31 last year. Our Wholesale Segment net sales were $121 million, an increase of 16.3% over the prior year quarter. Our consolidated gross margin for the quarter was 53.6%. This compares to the 51% the prior year quarter. The consolidated gross margin during the quarter is benefited by the higher mix of our retail to consolidated net sales and also from operational improvements and favorable product mix. Please keep in mind that the higher mix of retail also drives higher operating expenses as a percentage of consolidated net cells. Our operating expenses during the quarter included $0.5 million of costs to ready our Honduras plant for operation. These costs have been consistently treated this year as special items relative to our non-GAAP results. Operating expenses, excluding special items in both years, increased 10% to $86 million, including a 22.7% increase in advertising during the quarter on top of the 36.2% increase in advertising investments during the third quarter last year.

We also continue to invest in our Retail Division with additional designers and management to support growth in the business, four more Design Centers than this time last year. And we incurred $800,000 in incremental costs to get our Design Centers ready for new product. These investments enabled our Retail Division to write $30 million more in orders than were shipped during the quarter.

Our continued improvement in our financial results enabled us in the third quarter to reverse the valuation allowances on our federal deferred tax asset. This was the primary driver behind tax income benefits of $23.9 million realized during the quarter. Certain state deferred tax assets continue to be reserved as our retail operations work their way toward break even. Our normalized tax rate continues to be approximately 36.5%.

When adjusted for special items in both periods, but not the impact of the new product introductions, the earnings per diluted share for the quarter was $0.14, double the $0.07 per share last year. Net sales for the first nine months of this fiscal year increased 8.6% to $544.1 million. Our Retail Division's net sales year-to-date grew 12.6%, to $415.7 million, and wholesale net sales of $344.1 million, grew 10.1% over the prior year-to-date. Consolidated gross margin year-to-date was 53.4%, versus 51% the first nine months last year. Excluding special items in both years, operating income was $37.5 million, an increase of 73% on 8.6% higher net sales. Again, our year-to-date results demonstrate the significant financial leverage of the business and aligns well with the financial opportunity scenarios we first published in October of 2009. Our adjusted earnings per diluted share year-to-date increased 83.8% to $0.68 from $0.37 the prior year-to-date.

At the end of the quarter, we had $99.8 million in total cash and securities. While essentially even with the cash and securities this time last year, during the 12 months, we have retired debt of $24 million, invested $23.2 million in capital projects, and returned $7.5 million to shareholders in dividends. Inventories continue to be closely managed and were $142.3 million at March 31, 2012. While macroeconomic conditions domestically have improved, continued uncertainties remain in global markets. So we continue to operate with cautious optimism while pursuing our business objectives.

Farooq will now walk you through details on the many business initiatives underway. Farooq?

Thank you, Dave. I would like to first mention that our quarterly dividend was raised to $0.09, a 29% increase. In our operations and marketing, our focus continues on our five priorities. The 60% change in new products by May has expanded our reach to more customers both in style and values. While this has been a major undertaking, our associates have accomplished this in a timely and efficient manner.

As you may recall, we introduced our Elegance Lifestyles in the first and the second quarter this fiscal year. And since January, we have been introducing new products every month. And by May of this year, we would have substantially introduced all the new products that we had first introduced to our retail network in the first quarter of this fiscal year. We have aggressively marketed the introduction of the new offerings with direct-mail, national television, digital mediums, and where ever appropriate with print. As I mentioned earlier, during the quarter, our advertising increased by 23%. Much of which was to help build our brand in China.

The initiatives in the regional network include, relocation of Design Centers to better locations. This fiscal year we have to date opened up new Design Centers in Annapolis, Miami, and Seattle. In addition, 18 new locations were opened internationally. As of March 31, we had 149 Design Centers operated by the Company Retail Division in 152 by our independent licensees. Our plan is to continue the process of repositioning our Design Centers.

We continue the major focus of acquiring qualified and entrepreneurial interior designers. This fiscal year, we have acquired 280 new interior design entrepreneurs. In addition, we have invested in strengthening the management in many areas, especially the Company Retail Division. We have now added 19 district design managers in the Retail Division. The independent designer affiliates, that's our IDA, also continues to grow. We have now been joined by more than 3,000 professionals. Last week, we had our first meeting with independent designers in Chicago, where over 70 entrepreneurs participated. We plan to have these meetings in other major markets.

We continue to invest in technology in all areas of our enterprise. During the quarter, we started shipping the Ethan Allen Tablet to our designers. We believe adding technology to the personal services of our interior design associates provides a competitive advantage.

During the recession, we further consolidated our manufacturing and logistics, and are seeing in continued improvement in productivity, despite a major increase in fuel costs and the cost associated with the major product introductions. Our newest [casetras] plant in Honduras has started assembling chairs with the first shipment made this month. We continue to produce about 70% of our products in the United States. Our tablet expenditures for nine months ended March 31 were $20 million, reflecting our continued investment in retail, manufacturing, and technology. For the full fiscal year, we expect to be spending about $22 million.

During June, our Design Centers will be ready to market the Ethan Allen Express initiative. The objective of this initiative is to expand our reach to more customers. The Ethan Allen Express program will project a fashionable and obtainable product program. The products are all from our five signature lifestyles, representing complete design packages, and importantly, will provide faster delivery, as our intent is to be in stock in the Ethan Allen Express program.

I'm also pleased to advise you that we plan to have an Investor Conference on June 19 at our Manhattan Design Center. We will review our major initiatives, including introduction of new products, and the launch of Ethan Allen Express program, which will be displayed in the Manhattan Design Center at that time. Dave will provide further information about this event. And at this stage, I would like to open for questions or comments.

(Operator Instructions) Brad Thomas; KeyBanc Capital.

Good morning, this is Bonanza Chalaban in place of Brad Thomas. I was wondering about your outlook for the next three to six months. How should we think about the next quarter with the new products being mostly rolled out? Is that going to be a net positive as it ramps up, or will the ongoing roll-out mute that impact?

You are talking about the impact in sales or expenses or what?

Yes, I guess both.

Well, we have had, as we have stated, we have had a good increase in sales, in somewhat of a relatively still uncertain times. As I said, I am somewhat cautiously optimistic because of all these many initiatives we have in place. Initiatives of having greatly strengthened our management in the Retail Division, added a lot of professionals. And I think the best we can do really is to be cautiously optimistic. I think perhaps it may be wrong to now come out with a statement like I did the last time that we have the opportunity to meet at that time $0.17, and of course, everybody puts it in as if it is written in rock. We run a business, we don't do it on computer modeling.

So, I think at this stage, the best for me is to really not give too much of indications for the quarter, excepting to say that we've got great programs in place. We have, as I mentioned earlier, that we'll incur some costs with the continued introduction of these products, but this next quarter they will be lower by about at least 30%. And then as you move forward, most of that will be out of our system.

Our investments in the retail have helped us to write $30 million more, which gives us a good opportunity and a good starting point in our backlogs for this quarter. But the rest will depend upon how we end April, how we end May and June. It's a little bit early to tell, other than the fact that we are positioned well.

Okay. And then, your advertising plans moving forward? Are you guys planning to keep that higher to build the brand in China?

This was somewhat of a special event, where we spent a lot more money in one quarter. Normally, we would spend that over three quarters. But we spent it because of the fact, as I said, we had one of our senior interior designers was giving sessions and seminars in these four major cities, and was very, very successful. But we also felt it was the right time for us to invest more in this quarter. But going forward, we will not be spending that in China every quarter.

Okay. Thanks.

Yes.

Todd Schwartzman; Sidoti.

I just want to make sure I have the numbers correct. The expected effect of the close-outs in fourth quarter around $800,000, based on that 70% number that you threw out?

Well, we have the impact on the gross margins. And we have the impact on operating expenses in this last quarter, and again, we didn't treat it as special items, Todd, as I mentioned. It was approximately $2 million. So, approximately 70% of that would be close to $1.4 million or so.

Okay. And looking at the fourth quarter, and more importantly as you start to think about fiscal 2013, what can you say about directionally, or incrementally, compensation expense with all the recent hires and the moving parts? I don't know what the net increase is. You talked about the addition of a bunch of designers. I don't know if that is a net number, or if they replace some less-performing people. Particularly from the managerial perspective, what should we think about as incremental comp expense for next year?

Yes, Todd. First of all, of course, as you know, the third quarter is somewhat always an unusual quarter for us. Because of the fact that this quarter we are pushing to deliver products because end of our second quarter we have had great shipments. While the written orders in the second quarter are somewhat lower, it does reflect what happens in the third quarter. This has happened historically.

I think that the operating expense levels in our management, in our retail, is most probably now stabilized. You're not going to see more. What you are seeing now is most probably -- unless, of course, we add more Design Centers, and also our business increases. Because keep in mind, our operating expenses are also impacted by both the selling compensation based on what we write, and also what we deliver. Because that we do not put in our cost of goods.

Our selling expenses, both on the wholesale side, and from our deliveries to the consumer's home, is all part of selling expenses. When the selling expenses increase as they do, it also reflects the fact that we are doing more business. On top of it, of course, 30% increase in field costs, which we absorb. To get to the point, I think that the operating expenses that you see are more or less, I would say, they're going to stabilize. And our objective is not to increase them, unless we increase substantially our business.

And what about the fixed costs of managerial salaries into Q4, and again, more importantly into next year?

They also are somewhat now stable. I think we have done, in the last, as I mentioned, in the last year or so, we added 19 District Managers -- always promoted from within. But we had to build this structure to be able to do the kind of business we are writing. And the objective, of course, is to write more. Without making this investment, we would not be in a position to do what we did in the third quarter, and especially not to be in a position to do what we believe we should do in fiscal 2013.

Our objective, of course, is to continue to grow our business. We are well-positioned. We've got great product programs. We're going to reach more people. And one of the issues always was -- how to make Ethan Allen more attainable. And attainability to me means both having great values and also delivering faster. And that's what our Ethan Allen Express is going to do.

And keep in mind, these are all existing products. We did not bring new products. Because within our product programs, we have lots and lots of products, which, from a price point view, are at prices which lots more people can afford. Our Ethan Allen Express program will highlight those products, will make them into packages. We're also offering great financing when we launch it in June.

Do you have a guesstimate, Farooq, on the number of managers that were not with the Company for the full quarter in Q3, but will be in the fourth quarter?

No. Actually, whatever we had in the third quarter, we are going to have in the fourth quarter.

Okay. On the Ethan Allen, on your new express program, will there be a dedicated catalog, a mini catalog of sorts, featuring these items?

There will be. It'll be a 60-page catalogue, which is just being published right now. In June, it will be available. This will also have -- in Design Center signage, even a dedicated space. In fact, in Manhattan, and that's where we are going to have the conference, most of our first floor in the Manhattan Design Center, which you know will be dedicated to the Ethan Allen Express program.

And the objective is to get the message across that Ethan Allen is attainable, and also this program will involve -- we are going to end up investing some in inventories. And that you perhaps will see some of it in the fourth quarter. But on the other hand, in the fourth quarter we would have shipped out the products that we were not able to ship out in the third quarter. It's a moving target, depending upon what happens in the fourth quarter, how much business we get, and how much of this inventory is still lying in the Retail Division. Our unsold inventory is in great control.

So, I think that what we are going to see for the Ethan Allen Express is faster deliveries, great values. It is also going to have, in addition to its own catalog, it is also going to have its own connection to its own website. It will also be having its special touch-screen technology in our Design Centers. And by July, we would also be marketing it with a strong direct-mail message. In fact, in June, we're increasing our direct mail by 60%. It's a major investment. On the other hand, we have reduced the sizes, so, the cost impact is not going to be major.

So, will there be a net incremental spend, in terms of your total advertising expenditures? If not, what is being forgone at this point?

I think in the fourth quarter, we'll be very close to what we spent in the fourth quarter of last year. That's our plan so far, Todd.

The 60-page catalogue, from where you sit, what is the planned frequency?

The 60-page catalogue is going to be a in-Design Center catalog. That is not what is going to be mailed out to consumers. In July, we are going to mail out to consumers a 28-page, which will include the Ethan Allen Express, and also include our other programs, Todd. But the 60-page is more for our in-Design Center, and will be given to clients when they come in. We are not going to mail that out.

Yes, that would be pretty heavy. So, what is the new target demo that you are striving for here -- age and income?

As I had mentioned previously, in this great recession, three years back we decided that it would make sense for us to expand our reach to people with higher incomes. And to some degree, people with somewhat of a higher age groups. And it worked. It made a great impact. But we've got to now increase our exposure to people who are making, in most markets, maybe $75,000 and up, and with ages of about upper 30s and up.

Upper 30s?

Yes.

Okay. On the Chinese advertising spend, I know you said that moderates probably pretty sharply this quarter. But can you quantify the level of the increase in Q3?

It's approximately was close to $1.5 million to $1.6 million.

$1.5 million to $1.6 million increase versus last year?

Yes. Last year we didn't have it in this quarter.

Right. Okay. Great. Also, for the quarter, what did you buy back in the way of bonds and stock?

We did not.

Nothing on either?

We did not buy for the whole year. We have, I think, $12 million, Dave? $12 million we had purchased fiscal year-to-date. And, as you know, we also decided it is time to increase our dividends.

All right. Okay. Thanks, guys.

Budd Bugatch; Raymond James.

Thank you very much for taking my question.

And also clarifying, I think there was somewhat confusion. I read your notes this morning. So, I thought it would be good for me to just clarify some of the questions that were raised.

I think so, and appreciate the detail. It's always appreciated, Farooq. I know sometimes you feel like you give too much. I am very pleased that you did. And I do understand, and I believe I understand that of the $2 million of incremental expenses to product launch, $1.2 million really is cost of goods sold, and about $800,000 is operating expenses. Is that right, David?

That's right.

A couple of questions. One, for next quarter, you talked about 70%, so, about $1.4 million of additional expense. You still have merchandise to clear off the floors to be realized?

That's right. I think the proportion is going to be still about the same between what we spend, and, Budd, as you know, what our policy is that when we spend money in redoing our Design Centers, not only the construction cost but also all of our selling aids, like soft goods and bed spreads and draperies, we expense them. We don't put them into inventory, or we do not capitalize them.

I think that's very appropriate, so I have no issue with that at all.

That's why you see these larger numbers. Otherwise, as you know, you have been in the retail business, you capitalize them. End of the day, you don't get much money when you sell these things.

Much money is probably an exaggeration. The Ethan Allen Express, did you say how much, what percentage of inventory that is? Or how should we think about -- what's the size of that program?

The size of that program, we have taken about, from our five lifestyles, we have taken about seven packages. Each package is like a living room, bedroom, dining room. And approximately each one is priced about close to $8,000 retail, and we'll also have about 48-months financing. And so, each one of those for a four-year period would be available. And the financing is interest-free, will be under $200 for consumers. It's a great, great value.

We would also have, in addition to living room, bedroom, dining room, we also will have an element of leather, both recliners and sofas. Mattresses, and then, of course, accents would be lamps, pictures, mirrors. And approximately all of this -- we really do not know the major impact it is going to have. Our objective is to develop an inventory, and then replenish it.

And so, the delivery timeframe on Ethan Allen Express will be what? A matter of two to three weeks?

Well, I am saying to the consumers, we are going to say it's faster. We are not going to say in stock, because that is the intent is to be in stock, which means we will ship it out of our Dublin distribution center the next day or third day. Then, as you know, depending on what part of the country it is, and the delivery, it could be anywhere from one to four weeks depending upon the scheduling of the products, the trucking that goes out to the various parts of the country. But the objective is to be in stock, but we will say that it is faster delivery, and the objective is in stock. Budd, at this stage, we are just projecting that we might invest about $4 million in inventory in this. And then we will see how it goes.

End of the day, we will replenish it. We might have less inventory. But we are launching it very, very strongly. And we need to also back it up. About 70% of this product is going to be made in the US, and 30% overseas. The lead times on the overseas products is longer this time. Lead time in our domestic products is less, so, the 70% helps.

Okay. And we will have to see how fast it is. With the explosion of written business, and the explosion of backlog and customer deposits, what's the delivery time right now? What are you averaging on case goods, and what are you averaging on upholstery right now?

90% of our case goods is custom. Now, keep in mind, it's custom, also. But 70% is custom, 30% of all of our products is from show. In our case goods, 90% of the products we are shipping in five weeks. And at this stage, 90% in upholstery is also custom product is being shipped in nine weeks -- I mean, in less than five weeks from our plants. And then you add anywhere between two to three weeks by the time it reaches the customer. So, approximately eight weeks or so is the average time for our customers to get our products. I believe our retail folks are most probably courting anywhere from 8 to 10 weeks to be on the cautious side. But we are shipping so that our products are shipped from our plants, 90% within five weeks.

That's about the upper bound of what you'd want. You don't want to get farther than that. That starts to lose sales. But that's the bound?

Keep in mind, if you also reduce it too much, it also is not good. It'd be hard to manage the production and manufacturing.

I know. We have been through that.

Five weeks, six weeks is good. If we do that and manage it on custom, but then on the Ethan Allen Express, they'll be faster deliveries. That's why we're introducing that as well.

Okay. Just a couple of other housekeeping -- well, one other question. I'm confused a little bit -- your comments about the Chinese advertising confuses me a little bit. I thought the Chinese operation was owned by another, and that the economics were basically the shipments to the Chinese partner. Are there other economics there that would cause you to spend the advertising there? Or was that part of an agreement that you had with Richard?

It was. And we have decided, of course, it's up to us. But I think they are spending a lot of money. They're growing at a great pace. They've already 70 locations now. And we decided that in addition to what they are doing, we will also spend some money, especially when it coincided with this interior design tours that we were conducting.

Okay. And the 70%, that's up from 67% at the end of last quarter. Is that correct?

That's right. Yes.

And of the 149 that are now owned by the Company -- you opened a couple this quarter. How many did you buy, and how many have you opened greenfield?

We purchased two this quarter. We had two retiring retailers. One in Indianapolis, you know the Kittles. And John Durkott retired after many, many years. And John Durkott was really watching the Ethan Allen portion of it.

I know John well.

We had a great relationship, and John is a wonderful, wonderful person. He has been operating Ethan Allen for I think about 35 years.

We are in total agreement.

And then we also had a retailer in Greenville, South Carolina who also retired after 30 years. And in that case, we also purchased their properties, nice property. And we also had acquired in [Orland Park] in Chicago, a design center from, again, one of our very, very good retailers, Jim Morrison, who had been with Ethan Allen for about, I think, over 45 years. He retired. We also bought their property.

And then we had also purchased, I think I might have mentioned the last time, a property in Boca Raton. And that is going to be replacing a Design Center that we lease right now. By end of June, we will move into that Design Center that we purchased. It's a great location.

So, the one in Chicago --you said you purchased two, but you actually listed three different operating companies and one piece of property. How do I --?

We purchased two retail operations and one piece of property.

But Indianapolis, Greenville, Chicago -- those are three.

Those are three Design Centers. That's right. The property is separate. Budd, it has nothing to do with -- that was a separate property we purchased, we just moved existing business into there.

Understood.

Yes.

David, if you could, now that you've reversed the tax issue and taxable, what's the proper operating tax rate to model going forward?

Well, Budd, we continue to have some valuation reserves on our eight deferred tax assets. So, it'll continue to impact our reported tax rate. We will continue to adjust back to our normalized rate of about 36.5%.

36.5%. Okay. All right. And as you bring states in, and you have different issues, I would think you would have -- that would move around a little bit because of different state taxes, right or no?

Yes. That's correct. And it's really primarily driven by the results of our retail operations.

Okay. All right. Thank you very much. Congratulations on the incoming orders. Go ship them, please, and write more.

All right, Budd. Thanks.

Matthew Fassler; Goldman Sachs.

A couple questions. If we could, just to clarify -- when you talk about the transition to 60% new products, that is essentially tied to the express program, correct? As opposed to a broader overhaul of the mix?

You are talking of the new products?

Correct.

The new products really -- Express is a very separate, and I'm glad you asked this question because this is a very important issue. The 60% product reflects all our existing product programs that are being replaced.

Okay. And as you think about the replacement, it sounds like Express will be a thematic discrete program that you are going to market. As you think about the turnover of your inventory more broadly, and of your assortments, is that also a development you intend to market with any kind of overlay?

Just to clarify it. We changed -- we have five lifestyles under which our products are grouped under. And 60% of those products, and I'm not talking about case goods, upholstery, accents, we redesigned in the last two years. Because with this great recession, we said -- if today we had an opportunity having the best of the best, what it would be? Normally, you know, it's 10%, 15%. That's what we change. Now, that reflects across-the-board -- since September of last year, we have been introducing these new products, which means we've got to replace existing product lines in our Design Centers. It also meant if you have some inventories, at the wholesale level, to sell it off. It also meant tooling of our manufacturing, learning of making of the new products. So, it really has been a major, major undertaking.

As we did all of these, then from these five lifestyles, we then developed a marketing program which we called the Ethan Allen Express, which represents items and products from these existing lifestyles, which are going to be marketed under the Ethan Allen Express program. They're going to be almost like packages designed by our designers. Design packages which have been designed specifically with the objective of getting the message across that Ethan Allen has excellent, excellent prices for those folks, especially reaching to a larger demographic base. And then also, our objective is to have it in stock, so we have faster deliveries.

What proportion of the aggregate inventory base, or SKU count, or range, any way you want to designate it, will be included in the Express program? Is it a very small number or --?

It's a very small number. It should be maybe less than 5%.

Got it. That's very helpful. Another question -- you talked about the amount of written business that you did, which was obviously up nicely. And you gave us a dollars written versus dollars shipped. As you and Dave think about the typical seasonality of your business, you think about what you write in, in Q4, which is always a bigger quarter for you seasonally speaking than Q3. But as you think about the magnitude of written business, relative to shipped business, how do those numbers compare to the typical seasonal relationship?

Well, if you take a look at now in the new era after the great recession, in the fiscal 2010, third quarter, we wrote $147 million. Then, in the fiscal 2011 third quarter, we wrote $162 million. And in the fiscal third quarter of fiscal 2012, we were now $176 million. We can see a progression and an increase. So, we are going in the right direction.

With that in mind, and I know you're not looking to make specific financial prognostications, and I sympathize with that. And I hate asking macro questions on conference calls, but it actually seems like perhaps the right moment to do so. You speak about cautious optimism, and the hangover from the recession, all of which make a good deal of sense. I think since the last conference call, we've probably had, while some of the macro data has been mixed, probably more independent, constructive variables on the housing market than we've probably had in any period in the past several years that did not include a housing stimulus. And as you think about the typical trigger for signposts of underlying housing recovery that you typically see in your business, whether they relate to traffic, they relate to ticket, they relate to the kinds of products people are shopping for, and how they go about it, what are the signposts that you look at telling you today?

We look at obviously the macro numbers. And in fact, one of my associates sends me all these analysis and estimates of what's happening with some very, very reputed economists. And if I were to look at them every day, which I get, I would go mad -- crazy. I don't look at them every day. Because I've got to plan three, six months, a year from now. Like I was mentioning yesterday to one of my associates that three or four years back we decided to build a 240,000-square foot plant in Mexico. If we had not done it, we would not be able to deliver the products we have.

So, I think that while we look at the macro numbers, I do take a look at -- I do see the trend of consumer confidence. And consumer confidence, we look at not only the numbers that we get from economists, we have 1,500 professionals. We have 149 Design Centers. Every week, they give us a sense of what is taking place. And certainly what we are seeing is -- there is better consumer confidence. There are project sizes are increasing. Yet, the amazing thing is that people are still waiting till the last minute to close. So, the last few days of a month make a big difference. We also see that consumer confidence having improved, but there are some negative news of what's happening in Europe, in other areas, people hold up. Fortunately for us, they just hold up, they have not canceled.

Overall, I would say, Matt, that I use the word cautious, again, carefully. Cautious people are somewhat more optimistic. People are moving forward. Yet, I think our market, our business is increasing because we are taking market share. Without taking market share, it would be difficult. And our objective is to continue to take market share, and to continue to invest. Because if we did not add these professionals in the Retail Division, and added all the interior designers, I cannot say we are going to grow our business.

All those investments are helping us write the business we wrote in the third quarter. And I believe it's hard to increase these expenses. It's not easy for us to increase expenses. I watch every dollar. But on the other hand, I consider them as investments. So, I made a long, long talk. But I think I am somewhat very cautiously, but we are optimistic because we are making investments for the future in terms of products, in terms of advertising, and in terms of even inventory.

Thank you so much.

Thanks, Matt.

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