Ethan Allen Interiors Inc (ETD) 2013 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Ethan Allen Q2 earnings release call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). I would now like to turn the conference over to your host today, David Callen, Vice President of Finance and Treasurer. Please begin.

Thank you Sean and good morning everyone. I'm David Callen, Ethan Allen's Vice President of Finance and Treasurer. Welcome to Ethan Allen's earnings conference call for our second fiscal quarter ended December 31, 2012.

This call is being webcast live on EthanAllen.com, where you will also find our press release which contains supporting details, including reconciliations of non-GAAP information referred to in the 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 materials discussed during this call.

After our Chairman and CEO, Farooq Kathwari, provides his opening remarks, I will follow with 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's Farooq Kathwari.

Thank you Dave, and also thank you for all participating in our conference call.

We are pleased with our results, considering a challenging operating environment. As you have noted, our in our press release, there are several moving items that I would like to focus on on this part of the call.

Delivered sales increased 4.4% to $191.3 million. Company Retail division net sales increased 6.1% to $151.8 million with comparable design center sales of 4.9%. Our written sales in the Company Retail division were impacted by several factors, including in fiscal 2013, second-quarter Hurricane Sandy impacted 28 Company-operated design centers and eight licensee design centers. We estimate Company Retail division total and comparable written sales was negatively impacted by about $4 million.

In fiscal 2012, due to major new product introductions, about $4 million of clearance product was sold by the Company, Retail division impacting written business during that quarter and also negatively impacting gross and operating margins in the second quarter of our fiscal 2012. Gross margin in the second quarter of fiscal 2013 is 54.4%, and in fiscal 2012 second quarter 53.6%. Improved gross margins in fiscal 2013 second quarter was positively impacted by lower clearance sales, and then negatively impacted by Hurricane Sandy as we took downtime in our manufacturing operations. In fiscal second quarter 2013, operating margin, ex special items of $20 million, compares to $15.6 million, a 28% increase.

A few observations on our operating margins. Wholesale operating margins, ex special items, was 9.9% versus 14.4%. This was an abnormal decline. Major factors included fiscal 2012 second-quarter sold to Retail division about $10 million, that's from our Wholesale to our Retail division, about $10 million higher floor sample products with a higher mix of accents and higher margins for new product introductions. As you know, last year, we had very major product introductions.

Hurricane Sandy impacted written orders in late October and November. We have continued to increase our capacities as our manufacturing capacities by becoming more efficient. We have reduced our delivery time in custom-made product to four to six weeks. Any disruption in incoming orders impacts our manufacturing. We had to take downtime in late December -- in late November and December.

During the quarter, we increased our national advertising by $1.5 million, which impacted our Wholesale operating margins. The Retail operating margins increased in the second quarter fiscal '13 to $6.9 million. That's 4.6% of sales, versus a loss of $500,000 in the previous year second quarter. We are pleased with this major accomplishment by the Retail division. Our sales increased and operating -- our sales increased and operating expenses were also lowered.

During the quarter, we entered the European and Montreal, Canada markets. These two initiatives required extensive investment in translation in French and Dutch, one-time recruitment costs, a new website for Canada, establishing a logistics operation in Belgium, and preparing to show our programs in the Paris Home Furnishings Exhibition which took place earlier this week. We invested in startup costs representing and impacting about $0.02 per diluted share.

We have made excellent progress in selling most of our vacant properties. In our second quarter, we wrote down the carrying value of two vacant properties resulting in a charge of $0.03 per diluted share. We expect to dispose these properties in this quarter.

We maintain strong cash and securities of $90.6 million at December 31, 2012 as compared to $92.8 million at December 31, 2011. During the past 12 months, we paid $23.6 million in dividends, including a special dividend of $11.8 million, and accelerated payment of another $2.6 million. We invested in capital expenditures and increased our inventories by $5 million. However, our inventory from June 30, 2012 was reduced by $13.4 million.

With that, I would like to have Dave give us some more financial information. Then he'll also give you exact numbers about our capital expenditures during the quarter. So Dave?

Thanks Farooq.

Net sales for the quarter were $191.3 million, up 4.4% over the prior-year second quarter. Our Retail segment reported net sales of $151.8 million, an increase of 6.1% versus the prior-year quarter, including comparable design center net sales growth of 4.9%.

Written orders booked during the quarter by our Retail division were, as Farooq mentioned, negatively impacted by hurricane Sandy and by lower clearance product sales, which affects both our written and delivered in the period of the sale. Our Retail division written orders grew 1.2%, including an increase of 0.1% in comparable design center written orders. At December 31, 2012, the Company's Retail division operated 149 design centers compared to 147 design centers at the same time last year.

Our Wholesale segment net sales were also affected by Hurricane Sandy, and the prior-year sales included significant shipments of new prototype products to support the Retail product overhaul. For the second fiscal quarter, Wholesale net sales were $108.2 million, up 1.4% over the prior-year quarter.

Consolidated gross margin for the quarter was 54.4%, up 80 basis points from 53.6% the prior-year quarter. Our Retail division made up 79.4% of our consolidated net sales for the quarter compared with 78.1% the second quarter fiscal 2012. The higher mix of Retail business helps the consolidated gross margin, but our Retail division also benefited from 33% lower clearance event sales. As Farooq mentioned, the lower volumes of prototype product shipments negatively impacted our Wholesale efficiency during the quarter, as did the impact of Hurricane Sandy.

Our operating expenses in both years include items that we have adjusted from our non-GAAP results. In the current-year quarter, we recorded charges of $1.6 million, or $0.03 per diluted share, to write down the carrying value of two vacant manufacturing properties with impending sales we expect to complete in our third fiscal quarter. We also recorded charges of $1 million, or $0.02 per diluted share, in support of our international expansion efforts in Europe and French-speaking Canada. A reconciliation of these non-GAAP adjustments, along with those recorded during the second quarter last year, to our US GAAP reported results is attached to the press release issued last night.

Excluding special items for both years, our operating income for the quarter was $20 million, or 10.5% of net sales, compared to $15.6 million, or 8.5% of net sales, the prior year.

Our income tax rate during the second quarter of both years was affected by the usage of certain deferred tax assets for which we had previously established reserves. As a result, the reported tax rate for the quarter was 35.6% compared with 31.6% the prior-year second quarter. These non-cash reserves may continue to reverse in future quarters, resulting in tax benefits that will cause fluctuations from our normalized tax rate which is approximately 36.5%.

When adjusted for the items noted above in both periods, the earnings per diluted share for the quarter were $0.39 compared to $0.30 per share last year, a 30% increase on an increase in sales of 4.4%.

Net sales for the first half of this fiscal year increased 2.8% to $378.7 million. Our Retail division's net sales year-to-date grew 5.8% to $300.9 million and Wholesale net sales of $219.6 million compared to $223 million the prior year. Consolidated gross margin for the first half was 55%, up 170 basis points from the 53.3% gross margin the prior year-to-date. Adjusted operating income, excluding special items in both years, was $39.6 million, or 10.5% of consolidated net sales, up 35.5% compared to the $29.2 million or 7.9% of net sales the first half of the prior fiscal year. Our adjusted earnings per diluted share year-to-date increased 43% to $0.77 from $0.54 the prior year to date.

As Farooq mentioned, our balance sheet and liquidity continue to be in good shape to support our initiatives. At December 31, we had $90.6 million in total cash and securities compared with $92.8 million this time last year. During the 12 months between, we paid dividends of $23.6 million, including special dividend payments of $14.4 million in December, invested $25.1 million back into the business through capital expenditures, and another $6.2 million through inventory increases. We continue to manage our working capital closely, resulting in a reduction of $15.6 million in inventories during the second quarter as planned.

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

All right Dave. Thanks. You know, when I look at my own notes, I put in $25 million of capital expenditures, which is for the 12 months, but I also know we spent $13.5 million for the six months ended 12-31, December 31.

Now, we continue to focus on improving our marketing and operations. Our offerings were strengthened by introducing the American Colors program in the second quarter. This program reflects our ability to make custom products in our North American facilities, offering many options, including an array of attractive colors. During the quarter, the second quarter, we finalized the development of the Fresh Colors program, expanding our reach to younger consumers of ages, say, between four and 16, and obviously their parents. This program is being delivered to our design centers at this time with soft marketing in February and a national advertising campaign starting in March.

During the second quarter, we developed a very important program which we call Impressions. This consists of wood, upholstery and accents. This program was developed from concept to engineering to manufacture and shipment in about ten weeks, a record for us. We plan to have this product in our design centers in January, late January and February, and a national marketing campaign come April.

As I mentioned earlier, we entered the European market, in Montreal, Canada, we opened a flagship design center in Brussels, and this past weekend participated for the first time in the Paris Exhibition to develop licensees in Europe and other countries. During the second quarter, we also opened new design centers in Seattle, Washington and Las Vegas, Nevada.

During the quarter, we also sold two of our Retail division design centers in Houston to our longtime Retailer, the Tesnick family, who operate six Ethan Allen design centers in Houston, San Antonio, and Austin markets.

This week, we are also opening a flagship design center. This is our 74 in Shenyang, China with our licensee, Markor.

We continue to migrate our website to the cloud environment, and as stated earlier, launched the Canadian website in the second quarter in English and French. Our objective is to migrate our US website to this cloud environment in early fourth quarter and by early first quarter for fiscal 2014 also launch the European website. We continue to improve many aspects of our North American manufacturing and logistics.

We remain cautiously optimistic for the remaining second half of our fiscal 2013. We have entered the fiscal third quarter with lower backlogs, primarily due to the impact of Hurricane Sandy, and at this stage are building our backlogs to help improve our efficiencies in our Retail and particularly in our manufacturing, part of our business for the third and particularly for the fourth quarter.

At this stage, we would like to open for questions and comments.

(Operator Instructions). Brad Thomas, KeyBanc Capital.

Good morning. Farooq, it was obviously an unusual quarter with the hurricane and the election and the fiscal cliff going on. But if you step back maybe, I was hoping you could talk a little bit more about how your core customer is performing and how the express line and new customers are starting to react to your new products.

Our Express program is doing what we intended it to do; that is to deliver our products fast. The interesting thing is this. As you know, we developed certain room packages for Express program that with the intent of letting people know that they can have a whole room with a great design at let us say a $7000 or $8000 of financing at 48 months. That message is getting across, but what we see is that people are selecting and choosing items from our Express program and then also taking products from our custom, because custom is also now being shipped in four to six weeks. So Express is helping us get the message across.

And now what we're also doing is we are adding to our express Program more products that are already in stock, because we have a lot of products that's in stock in case goods and upholstery, and the next quarter you're going to see us also have those products added. All in-stock product will be added to our Express program because, if we have it in stock, we ship it Express.

We are starting to change the consumer profile of getting younger people in, and I believe, Brad, that our Fresh Colors program which we are going to launch this quarter is a very important program for us. If you -- in the next few weeks, you will start seeing some of our advertising on our website. It's also reflected in our direct mail that we just set out in January. Our objective is not just to get the young people, I'm talking of products for the young people, but also get their parents who are also in the 30-plus age group. So I believe that we are going to continue to expand our reach.

Okay. Great. Then just in terms of the -- some housekeeping items about the financial statement, on the adjustments, would those have been in gross margin or SG&A? I apologize if I missed that in the press release.

(multiple speakers)

They are all in our operating expenses. None of them were in cost of sales.

And then I think this is the first quarter in a while you haven't broken out selling versus general and administrative. Is that what we should what we should start modeling going forward, just one line and then maybe any comments you could give on those two different pockets?

I'll tell you why we did that. And you are right. We should -- what we did was we decided that some of the items that we previously were having and selling really belong to -- technically belong to administrative. And some administrative belonged to selling, mostly in our Retail division. Just to give you an example, it's all internal. For instance, all compensation paid to our designers was in selling, but all the benefits were in administrative. It doesn't make sense because, at the end of the day, it's all one bucket. So you're going to see it all together as we move forward. We internally know the differences but externally it will be confusing, so we thought it would be good for you to see one number.

Okay. And then just lastly, with those kind of pieces in mind, so it looks like your gross margin increase was not as great as it's been over many of the last five or six quarters but you did get a lot more operating expense leverage. I would've thought it might've been the other way, given you're anniversarying a lot of discounting that you did have strength in the Retail sector. Could you talk a little bit more about why the margins played out the way they did this quarter?

Yes Brad. This quarter, our gross margin of 54.4% was the second-best we've ever had. The only better we've had was last quarter of 55.6% where we were not impacted by Sandy as well as impacted by the other factors that I mentioned, downtime and things of that nature. So I think that 54.4% is still at the record levels.

Okay. Great, thanks Farooq. Thanks David.

Budd Bugatch, Raymond James.

Good morning Farooq. Good morning David. Congratulations on the quarter, particularly in the face of some obvious disruptions in the quarter. I'd like to focus, if we could, on Retail profitability, which was superb, at least on a comparative basis this quarter, maybe get a little more color of was it fostered by gross margin, by expense control, and how much might have been due to either.

A number of factors. First is we shipped almost $152 million. Shipments are very important because we do have a leverage. Second is there was somewhat of a higher gross margin because of the fact that our clearance products are much less this quarter than last quarter. Third factor was that we had lower -- we did cut down expenses and we are very careful in cutting our operating expenses, including about $1 million we reduced our advertising at the Retail division. So as you know, we had an operating income of $6.4 million. Sort of $1 million was due to a reduction in advertising at Retail, and we also increased our advertising by $1.5 million on national television on the Wholesale side. We felt it was important for us to increase advertising at the Wholesale side with national television because that also benefits our licensees.

So was there a seasonal impact to the second quarter which usually has I think more accessory sales in the mix, more of those? Is that something, or (multiple speakers) --

No, no Budd.

Budd Bugatch -- profitability going --

No, Budd. We had -- the main thing was that we had $6.9 million of operating income, excluding some special charges, and those special charges are really the costs associated with Brussels and Montreal. It was basically a higher gross margin and higher sales and somewhat lower expenses. As I mentioned, overall we are looking very carefully at our operating expenses, and also this quarter about $1 million less in advertising, but still we did $6.9 million of operating income. It's a record but the top lines are very important going forward. And that I think you've got to keep in mind.

And I think you said, let me make sure I got this right, that the actual level of operating expenses in the Retail segment were less this year on a dollar basis than last year? Is that correct or did I --?

Yes, they are lower this year on a dollar basis than last year.

Got you. Okay. And I think you also called out some items on the Wholesale profitability that you called out, I think David called abnormally low this quarter. And I'm curious as to what you think the ultimate level of Wholesale profitability should be for the Company going forward, now that the Company is at a little differently structured than it was in the last cycle.

That's right. And again, as you noted, the Wholesale operating margin also reflects products that we sell from the Wholesale to our own Retail division. And then, on consolidation, it's eliminated. So last year, we sold a lot of product from Wholesale to our Retail, and then, in consolidation, eliminated it. So that's one factor one has to keep in mind.

The second one is that we were impacted in our manufacturing, as I mentioned, with Sandy. And we took some downtime. But I would think that anywhere in the range of 12% or so is what my objective is to have Wholesale margins.

And the number of days of downtime you took because of Sandy, what was the impact to you?

I think that we have not given that out as yet, but Dave is -- let me talk to Dave and to see how much information we can give out.

Okay. And finally for me, I think you said that Retail backlogs were down but you said due to Sandy. Without Sandy, would Retail backlogs have been up?

The Retail backlogs are approximately the same as what we had last year. The Wholesale backlogs are down due to, to a great degree, the impact of not having as much of new product being introduced.

Got you. Congratulations. Good luck on the balance of the year, and years to come.

Thanks Budd.

Todd Schwartzman, Sidoti & Co.

Just to follow up on Budd there, just kind of interested in the ex Sandy lay of the land if you were to look at maybe both deliveries and orders, kind of giving your best guesstimate as to what those would look like, without those affected stores in the mix.

David, what's your perspective?

The analysis that we did, excluding those 28 locations, Todd, look like the other locations were up about 3% to 4% relative to -- 3 or to 4 percentage points relative to where those 28 locations were.

And is that deliveries or both written business and sales?

No, it's written. Deliveries are not impacted as much because we did have the backlog. As you know, anything -- any orders that we get in November, the chances are we would most probably deliver them towards the end of December or January. And so the impact was felt in late October when Sandy hit. And as some have noted, it is the last week of the month that we do get a lot of orders and we were impacted in the last week of October, first week of November, and that affected, to a great degree, our written -- it affected some of our -- as I've noted, our deliveries on Retail would have been higher too without Sandy. But I think the impact of Sandy was more on the manufacturing side where we had to take downtime.

So normalized, about 5% increase in written business?

That's right, yes.

Okay. How should we think about, without even getting into the distinction of Wholesale versus Retail related expense, but just on a total-spend basis, marketing and advertising sequentially, looking to the third quarter, how should we look at that?

Our overall advertising in the third quarter will be close to what we spent, about anywhere between 5% and 10% higher.

5% to 10% higher than Q2?

That's right.

Okay. Great. What about the -- on the international side, you've now entered Brussels and Montreal. Just kind of maybe using those two as examples because they are your newest markets, maybe you can kind of expound on it a little bit to talk about the future markets as well. But in Brussels and Montreal, let's say, what's the optimal number of stores for Ethan Allen to operate?

In Montreal, it's going to be, as I said, only one. Montreal is part of our Canadian Retail division. As you know, we are already in Canada in a number of cities. However, going to Montreal was a major undertaking because it is -- we had to convert everything into French from -- and develop a new website and our information systems as well as all the information that we have had to be in French. So, that was done for Montreal.

But for Brussels, our objective is to have two design centers in Belgium. We just opened one in Brussels, which was a major undertaking. The second one would be less of an undertaking because we have all the logistics in place now in Antwerp, we have all the general management into place, so our Antwerp design center should open in the fourth quarter of this year. And this stage, that is our objective for the Company-operated design centers. The rest is to get licensees. That's why we also showed for the first time in the Paris Home Furnishings Exhibition this last weekend, I also had gone there for a couple of days. Our objective is to open up licensees in Europe and other countries as well. And we made some good progress, good contacts, and we have a team of people now in Europe and their objective is to get new licensees in Europe.

And on the websites for the Canadian market, having to create both English and French versions, is there anything that you've learned, anything that is problematic that cropped up that might affect entry or how you handle creating websites for other countries going forward?

This was of course a great learning experience because we also converted all our information into Dutch for Brussels. For Belgium, we have it in French and in Dutch. This is also our first test site of converting our website to a cloud environment. As you know, our website right now is operated by servers in our headquarters in Danbury. The cloud environment gives us a much greater flexibility in developing more of an e-commerce business. So in Canada for the first time we started to do eCommerce, it is just the beginning. We are also working in Canada to get more people to our website. And as we get the US website in by April of this year, just under two or three months on this cloud environment, you're going to see a faster reaction time and much more flexibility in terms of people's ability to not only navigate the website, but even on e-commerce. And then after we have done that, by July/August, we will be also establishing our website in Europe. And obviously, the Canadian one is in Canadian prices; in Europe it's going to be in euros. And it will give us an opportunity of not only having a website with information, but our objective is also to develop more e-commerce business.

Got it. On the backlog, how does that look by product category?

Backlogs by product categories -- David, why don't we go on. David is going to get that information. We are actually in New York, not in our offices, not in Danbury. So he'll get information for me.

Overall, as I said, our Wholesale backlogs are substantially down from last year. The result -- with two factors. One is that we don't have as many of -- we have new orders for new products. And the second is our backlogs are down because we deliver now faster. So there's good and bad news. Good is we are delivering faster; we are more efficient. The challenge is that we need to continue to keep business going, otherwise we've got to take downtime because we don't build inventories. In the olden days, we used to build inventories and would take less downtime. But today we can't do that because basically other than a very small little product program in Express that is domestically made, everything is custom. So going into this third quarter, we are going in with less backlogs on the Wholesale side, and about the same backlogs on the Retail side. So, I think it would be somewhat of a challenge in the third quarter in terms of shipments, but I think, I hope, that by the fourth quarter, it will equal out.

Regarding the mix of products, it's slightly less, as Farooq mentioned earlier, less in accents, more in upholstery and -- (multiple speakers)

(multiple speakers)

This is -- upholstery Because all is custom ordered is case goods and accents that we would have a backlog in, and we have much less of those at this time. And that's why our case goods plants are affected more. Our objective -- now we are starting to build backlog now. In January, business is starting -- we are starting to build business. We will not know exactly everything until the end of the month, but we do see positive signs in January in building backlogs.

In terms of second-quarter deliveries, did case goods continue to lag at about the same rate vis-a-vis upholstery that we've seen in recent quarters, or did it close the gap a little?

No, it's about the same. As you know, for a number of reasons, in recessions people do buy a pollster and we have also focused a lot of our advertising on upholstery. So upholstery as a percent of total business has continued to increase.

Okay. And last question, I realize this -- there's one weekend to go in the month, but just kind of looking at January to date, demand trends, just traffic, orders, ticket, average ticket written, what can you tell us about these first 20 some-odd days?

They are positive. But keep in mind last January was a very, very strong month for us. And we have been building it and we have seen positive. We've had increasing traffic, and -- but still in the next eight, nine days is going to make -- will determine how much of the business we are going to get. We are I would say cautiously optimistic. We've got very strong programs in January, February, March. The question is going to be how much we can deliver this quarter and how much is going to go into the fourth quarter. So just keep that in mind.

Would you say traffic is flat year-over-year in January?

I would say traffic has overall increased this January versus last year.

Just to refresh, last January, what made it so good was preparation for product launches, or are there other factors there?

I think last -- even though last January we did have very strong product introductions, especially the Elegance product was introduced, other new products were introduced. That did help us. And on top of it, we are also selling a lot of clearance, as I mentioned earlier. This -- even in January this year, we are not selling as much clearance. Last year, while we had more sales, it did impact margins. This year, we have better margins. So I think that, this year, it is much more clean. Still some clearance is still going on, because we continue to introduce new products, take off products that are not performing at the level we want them to perform. But overall, I think last year, most probably I think -- I don't remember now but we didn't have the same problems, still the economic environment, the cliff, and now the next thing that is coming up. Even though I think consumers are somewhat not paying as much attention to that as they did in December, but still that is still an overhang on consumer confidence.

Sounds good. Thank you very much guys.

Thanks Todd.

John Baugh, Stifel Nicolaus.

Good morning Farooq and David. Nice margins. On that, I wanted to ask you about the Retail margin. I'm going off my memory here, which is dangerous because it's been a few years. But that 4.5% roughly was right at the high end of the range of what I remember in the glory days you achieving. Is that the new normal, or how do we think about Retail margins over the next few years, assuming you get more leverage in the sales picture? Do we expect the operating cost to creep back up, or we're going to keep a tight rein on that and we're going to see mid to high single digit EBIT margins in Retail?

To answer your second question first, our operating expenses are going to be controlled very well, so that's not an issue. I think where the challenge is, again, is making sure that we are driving more business. And at $151 million of delivered sales, we were able to get 4.6% of operating margin, which is more or less you are right. It's very close to record numbers. I'm very, very happy and pleased that we are able to do this, which means -- John, your first question is the more sales we get, we have an opportunity of increasing that operating margin.

And you made the comment that you need to "build back your backlog". Of course, one way to do that is to advertise more, and maybe promote discount, get a little more aggressive here in the near term. Is that something you're doing when you mention you've got some strong programs? And then I want to clarify on that advertising comment. Was that 5% to 10% increase a year-over-year increase that you plan for the March quarter, or was that compared to the December quarter and is that a valid comparison if it's the latter?

Yes, I think, to answer the question, I think I want to clarify that because Todd had asked that question. It is compared to the second quarter, second quarter this year, and third quarter compared to the second and third quarter, yes.

Okay. So the March quarter, your plan is to advertise 5% to 10% more than the prior-year March quarter?

No, more than the second quarter of this fiscal year sequentially.

Sequentially. Okay. So again my question there, are you going to maybe just short-term, in order to get the manufacturing backlog back up, maybe be a little more aggressive with not just advertising, which is going up obviously, but in some sort of event, promo, discount, sale event?

Yes. John, we are doing that. In fact, in January, if you go to our website, you're going to see having a special promotion, you might say, on upholstery products where we are giving anywhere between 10% and 20%, which normally we give 10% off on most of our products. We're going to continue this special event in January, February and March.

Okay. And how do we put that into numbers? You've got to give offset. If it works, you get more throughput through the plant. And it sounds like there was a lot of downtime in the last quarter, so maybe that gets better, but then you're giving away some margin. How do we balance that in terms of thinking about how to model Wholesale margins and/or Retail for that matter?

Well, you know, John, that's what you've got to do. But as I've said all along, you folks missed it, I don't miss anything. But John, I would say that I'm just giving anywhere between 10%, 12% of Wholesale margin. While my objective is 12%, I would be happy between 10% and 12% Wholesale margin. And then, you know, the Retail margin really will depend upon -- that's much more variable as we go forward. It will depend upon the volume that we are shipping. 10%, 12% is good for Wholesale if you're not taking downtime. Retail really is dependent upon the amount of business that we have put -- that we are shipping that month, so -- or that quarter. So I think you've got to keep those perspectives in mind. We are operating at 10% after the special charges, operating margins, so -- which is pretty good. Our objective would be -- I think in the third quarter, as I said earlier, we just got keep in mind that we do have these issues of backlogs. And then in the fourth quarter, it's possible that we will be able to make it up. So keep -- I would just keep those factors in mind.

(multiple speakers)

I would just do the third of the fourth quarter together, because you folks -- you're all short-term thinkers. I've got to think at least six months if not five years.

And then just lastly, a point of clarification on the Sandy impact. You said $0.02 or $0.03 a share in the release. That equates to I think about a little over $1 million of EBIT, which in your contribution margin there's more like $2.5 million I guess of shipments. So your $4.5 million comment would be to written orders, correct? But the $2.5 million would be closer to the impact in the quarter from the lack of shipments?

Go ahead David.

Just to clarify, you asked about $4.5 million? I don't recall --

I think Farooq made a comment, if I'm not mistaken, during the call that the estimated impact on written from Sandy was $4.5 million. Did I not hear that?

$4 million. Approximately $4 million in written, but not all of that impacted our net sales during the quarter.

Okay. So the delivered to get to the $0.02 to $0.03 a share -- I calculate it around $2.5 million.

Around $3 million, maybe, yes.

Okay. Great. Thank you. Good luck.

Thanks John.

Cristina Fernandez, Telsey Advisory Group.

Good morning. I wanted to clarify the sales cadence for the quarter. It seems based on your commentary that October started pretty strong, and then you saw the impact from Sandy in late October/early November, and then December was a little bit better. Is that the right way to think about the quarter?

Yes, absolutely. I think that we were down substantially in November, we were down a little bit less in December and we were strongly up in December in written sales.

In written sales, but as far as delivery, was that consistent?

Delivery, as you know, it was somewhat more consistent because of the fact we already had backlogs. With the written business in November and December, it affected some deliveries in December, but most of that would have been shipped in January. So I don't think our deliveries were to any great degree impacted by Sandy.

(multiple speakers)

You mentioned earlier that you're seeing consumers shift more to upholstery from case goods and accents. Are you seeing any changes in consumer behavior at the price points that they are buying?

Well, certainly the consumer is much more focused on looking at products that are promotional. In the last two or three years, people are looking at and they are looking at savings, so I think that it doesn't matter what level of consumer it is, so some savings is an important factor.

Now, in terms of our business, I would say that our customer base to a great degree is still buying products at price points that have been -- that we've been doing for the last two or three years. I don't see a change, except that I would say in the last six months or year, as consumer confidence is improving, there has started to be a shift of people interested in larger products, and I would say not in a major way, but we do start seeing people interested, even spending more money, in terms of the products they are buying.

And then lastly on the international side, it seems like the startup costs are mostly behind. Should we expect some of these one-time costs in the second half of the year? And then just looking further out, can you comment on what you see the opportunity for your international centers? How many could you have over the next three to five years?

Yes, on your first question, I believe it has still some costs but they are going to be at this stage I would estimate that for our third quarter maybe 25% of what we did in our second quarter, and about, again, about 25% or so in that range for our fourth quarter. So it's substantially coming down because we still have some startup costs associated with entering into Europe. Then as we establish our design centers in Belgium, our objective is to open up licensees in Europe and neighboring countries because we have also now for the first time established our own logistics center in Antwerp. As you know, we have 74 locations in China with a very strong (technical difficulty). We have also strong individual licensees in Dubai and Kuwait and Oman, and in fact there are also -- a new licensee is in process by April or May of opening a design center in Saudi Arabia. And our licensee in Dubai is going to open up another one in the UAE in the next one year. Now, our European operation is important because we are supporting it through our logistics and also established a design center which people can come to and see, and they are coming and seeing. And I think that, as we go forward, you will see us get licensees. At this stage, our intention is not to open any more Company-operated design centers in Europe.

Thank you.

Soraya Benitez, Cougar Trading.

Thank you so much for taking the questions. Just back to the international (inaudible) have a little bit of start up costs. But are there any other working capital requirements we should think about as you sort of think about the international side?

Well, the working capital requirements in opening up two design centers in Belgium are somewhat more than when we open up design centers in the United States, not tremendously more, but I would say that most of that -- or half of it we are behind. And when we open the next one in Antwerp, we have additional money to spend on inventory, and also some leasehold improvements, and also entering into lease for the next location. So overall, it's not a major capital investment. It's basically opening two design centers.

Great. And then lastly, understanding it's just design centers, but sort of how we think about at least in Europe in terms of the competitive environment, who are you going up against there and who do you sort of admire potentially, maybe competitively?

That's a good question, because we did some studies of course for many years in Europe that, on one hand, there's a lot of, a lot of home furnishings and large-scale home furnishings, commodity type businesses. On the other hand, there are also you might say boutiques with high prices, and we are in the middle. We are providing great products. And what we have brought into Europe is -- which is an interesting proposition -- is interior design service. Service is something that is our competitive advantage in Europe. And people are appreciating it, that we are providing the Ethan Allen programs. We have good quality and good values from European price points relative to our quality and also service. And I think that is our competitive advantage and that's what we are marketing in Europe.

Thank you.

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

Thanks very much. Any questions, comments, please let us know. We're going to back in the office later this afternoon. So take care.

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