Ethan Allen Interiors Inc (ETD) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ethan Allen second-quarter earnings release call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time.

(Operator Instructions)

Now I will turn the conference over to your host, David Callen, Vice President of Finance and Treasurer. Please begin.

Thank you, Tyrone, and thank you for joining the call.

Today is Ethan Allen's conference call for our second fiscal quarter ended December 31, 2013. I'm David Callen, the Company's Vice President of Finance and Treasurer. 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 matters discussed during this call.

After our Chairman and CEO, Farooq Kathwari, provides his opening remarks, I will follow with details on the finance 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.

Thank you, Dave, and thank you for participating in this call. I apologize for the change in timing due to my having to attend a funeral of a close family friend.

A brief overview of our second-quarter results are: sales of $193.1 million increased 1% from prior year; adjusted earnings per share was $0.41, up 5% from the previous year; gross margin of 54.9% improved 50 basis points over prior year. For our comparable retail division, retail sales were lower by 1.8% while for the six months increased by 6.6%.

As we mentioned in our press release, sales are impacted by external internal factors, including the government shutdown, challenging weather, delay in receipts of our offshore products. Another factor, which I will address in greater detail in my later comments, was that the fact that our modeling programs had less urgency due to the predictability of our own promotional offerings. We will discuss steps that we have taken in becoming more aggressive. And we see the positive impact of this already in traffic in January so far.

Our adjusted operating margin was a healthy 10.7%, compared to a 10.5%. The wholesale operating margin was 12.7%, compared to 9.9%. Our adjusted retail division operating margin was 3.3%, compared to 4.6% in the previous year.

The shift of advertising from national television to direct mail has impacted the improvement of margins at the wholesale level, while it had a more of a negative impact because most of the increase in advertising was done at the retail level. We have projected to increase advertising, as we had mentioned last time, about 10%. For a lot of reasons we decided not to go through with that and increased it by 2.3%.

And as I mentioned, the bulk of advertising was direct mail. It did impact our operating margins of the retail division on a comparable basis by 0.7%. So therefore, on a comparable basis, our retail margins would have been 4%, compared to 4.6%.

We also ended with a stronger backlog in the retail division that increased by 14%. We continue to strengthen our balance sheet. Our cash and securities increased by 24% to $113 million as of December 31, 2013. I will again, as I said, give you an overview of some of our marketing objectives and most of them is really to see how the opportunity we have to increase sales because, with a vertically integrated structure, which is operating really well as you can already see increase in sales has a very positive impact to the bottom line.

With that, Dave will give a brief financial overview.

Thank you, Farooq.

Consolidated net sales during our second quarter were $193.1 million, up 1% from net sales of $191.3 million in the prior-year quarter. Our wholesale division net sales grew 4.6% to $113.1 million. The growth in wholesale was driven by higher shipments to our independent retailers. Our retail division net sales of $151.5 million, as compared to $151.8 million the prior year. Comparable delivered net sales for our retail division grew 3.4% over the second quarter last year.

Our retail division's written orders in the second quarter were 4% lower than last year, including comparable design center [written orders], which were 1.8% below the prior year. Our retail backlog at December 31, 2013 is 14% higher than a year ago. We operated 147 design centers during the second quarter, which is 2 fewer than we operated a year ago.

Our global retail network included 295 design centers at December 31, 2013, compared with 305 locations at the end of last year. Independent retailers operate 148 of these, including 68 in China. This compares with 156 independently operated last year, including 74 in China.

Our consolidated gross margin of 54.9% in our second quarter improved 50 basis points over the 54.4% gross margin in last year's second quarter. The leverage on our wholesale operations with a higher sales and favorable mix of accents and upholstery products were the key drivers of this improvement. These favorable factors were partially offset by a lower proportion of retail net sales to our consolidated net sales and a $1.2 million lower benefit and consolidation than in the prior year from sell-through of retail inventory.

Our operating costs were well controlled during the quarter. Our adjusted results in the current quarter excluded $754,000 of international startup losses, and the prior year second quarter includes $1 million of international startup losses and $1.6 million of write-off charges on vacant manufacturing plants. Please refer to our press release reconciliation tables showing the adjustments made to our results for all periods.

Our adjusted operating income for the quarter was a strong $20.6 million, or 10.7% of net sales, compared with prior year adjusted operating income of $20 million, or 10.5% of net sales. Our normalized income tax rate for both the current quarter and the prior year were approximately 36.5%. Adjusted earnings per diluted share for the second quarter were $0.41, which is 5% higher than the $0.39 per diluted share earned in the prior year second quarter.

Our year to date net sales of $374.8 million were 1% lower than the prior year to date $378.7 million. Gross margin was a strong 54.6% with adjusted operating profit margins of 10%, compared with 55% and 10.5% respectively in the prior year-to-date period. Adjusted earnings per diluted share for the six months of this year were $0.73, compared with $0.77 in the prior year-to-date period.

Now for some brief comments on our balance sheet and liquidity. Our cash and securities at December 31, 2013 totaled $112.7 million, and our inventories at $140 million are healthy, but a bit low given the backorder status of the imported products mentioned earlier. Our capital expenditures year to date were $8.6 million. We expect capital expenditures for the full year to be approximately $17 million to $18 million with depreciation and amortization for the year of $17.5 million to $18 million. We continue to be well-positioned to pursue our business initiatives.

And here again is Farooq to discuss those initiatives in greater detail.

Thanks, Dave.

As I mentioned, our focus remains to increase our sales. While our recent sales increased 6% for the six months ended December 31, we are taking several important initiatives, which include stronger marketing program to create urgency and traffic. From late November 2013, we started taking predictability out from our sales offerings by creating a number of promotions, which are resulting, as I said earlier, in higher traffic in January. We plan to continue these initiatives as we move forward.

Starting February, we are introducing a major initiative, which for us is a paradigm shift. Historically our focus has been on providing custom-made products. Last year we made the initial effort to introduce the in-stock program under the express program. From February, that's next month, we will, on a gradual basis, convert many of our products that we show in our design centers to in-stock programs. The marketing umbrella under our eclecticism umbrella will promote both custom and in-stock.

In this age of instant gratification, having a large product offering on demand will make us approachable and achievable to more clients. Our in-stock products will continue to be offered in custom, which is a competitive advantage for us. We will continue to [accelerate] our advertising programs with special emphasis to enlarge our digital presence. From our website enhancements to advertising in digital mediums, we already started a stronger digital advertising program in January, and which will continue as we move forward.

We continue to introduce technology on all areas of our business. We are currently shipping the Ethan Allen tablets to over 1,200 design -- interior design consultants for the retail division and also additionally to our independent retail associates. We are seeing the benefit of more efficiency in design centers and in-house visits. We expect major increase in productivity as we move forward.

In the next 12 months, we plan to make significant product enhancements to have competitive differentiation and reach a larger client base. We are continuing to strengthen our retail network by adding more qualified interior designers, a stronger more experienced retail management team and relocating to better sites in certain markets, consolidating to fewer prime locations and opening in new markets. During the last quarter, new design centers were opened in the greater Washington DC area; Portland, Maine; Cleveland, Ohio; Vero Beach, Florida, and also internationally in Bucharest, Romania, and Jeddah, Saudi Arabia. And another design center in China.

Our focus is to mostly leverage from our current base of design centers. Relocations are important, putting our design centers in the right locations, adding more qualified interior designers is the best opportunity for us to increase sales and also profitability. We will also, of course, continue to open new design centers but the focus is to make sure that 300 design centers that we have are in the right place and we leverage them well.

Our manufacturing logistics is operating well. Our US manufacturing has an opportunity to increase gross margins with higher volumes. Max Corporation is operating extremely well, and, in Honduras, we continue to invest and increase the production capacity.

Our ability to produce over 70% of furniture products in our own facilities in North America will continue to provide us an advantage, as we see issues relating to product availability at our level of quality from offshore. During the last several years, our vertically integrated structure has been strengthened in all areas and we remain cautiously optimistic to increase sales and profitability.

Now I would like to open for questions or comments.

(Operator Instructions)

Brad Thomas, KeyBanc.

Hi, Brad. Good morning.

Hi Farooq, good morning to you. Good morning, David. Wanted to just ask about trends in the quarter and then the new marketing plans. It was obviously an unusual and difficult holiday season for a lot of retailers. Difficult weather.

Could you maybe speak a little bit more to what trends were in the quarter and maybe what the written comps looked like in December in some of the markets like California and Florida that weren't affected by difficult weather?

Good question. We had sunshine in sunshine states. We had good businesses in California, in Florida, and in fact what happened was that October, as I had mentioned also in the last previous call, government shutdown did have a major impact on us. We were down 10.5% in October.

November was somewhat better. We were up 3.6% and then the bad weather affected us in December and we were down 2.6%. And again, however, due to the fact that our first quarter, as you know, sales were high. We maintained and we did end out the year with a very strong backlog in the retail division, 14%, and now the good news is that most of that product is hitting now and we are going to ship to our clients who are looking forward to this product being received because of the delays. So I think the other thing that we mentioned here, our best market really, the biggest growth we have had has been in Florida and the West Coast.

Great. And then to that point on the backlog, how quickly will you be able to improve some of the issues on the imported product? Will we start to see that in the coming quarter or could that take a few quarters to work through?

No, coming quarter. By actually -- most of it in January and the rest of it in February and March.

Okay, great. And then just lastly with respect to the marketing, were there some changes in your December quarter that you think maybe hurt you because you weren't pushing urgency as much as you had been in the past? And how much of a benefit do you think you might see from some of the changes that you're putting into place now?

Actually, we were very strong. We started this in late November, you might recall. We started a program of saying that Black Friday goes west. That worked for us. For the first time we saw very proactive and it did make an impact because we continued in December -- for the bad weather really was bad, and that affected us. But we were very strong marketing programs and now we know we are continuing that within January.

As I mentioned, that old saying in my office is that, if we keep on doing the same thing over and over again, we are not going to get different results. However, predictability of our offerings has been a factor and we've changed it. And we've got to change it -- and we've changed it in a major way. Yet on the other hand we've got to protect our margin.

So while we're protecting our margin we are creating more urgency in our offerings. We are using a lot more digital advertising, as I mentioned, and we are also looking like everybody else. What mediums are going to work as we move forward? Whether it's television, we are of course very strong in direct mail, our e-mail blasts that we are sending out to our own clients and we are now even buying prospect lists. So we have a fairly strong program, Brad, to continue.

But as you know my focus is not just one quarter. We want to build this business for a longer period of time. We are positioned well because our retail network is good. We do need to get more traffic into our design centers. That's why this next initiative of on-demand and custom, and if you haven't received it I'm sure Dave is going to all send you our newest direct mail hitting the first week in February to our clients. And we are starting it with obviously a limited number of products, but by the time we are done in six-months period, almost everything that we are showing is almost -- will be available in stock. And all those products are also available in custom. On demand and custom I believe will create a competitive advantage for us.

Great. I did get the January mailing and it does look very good. Thank you so much, Farooq, and good luck.

Thanks Brad.

Budd Bugatch, Raymond James.

Hi, good morning.

Good morning, David. I'm interested in the issue on advertising. I do agree that I'd love to see more traffic in the stores and I think that's a great initiative and I hope that you continue on that. But you said -- I think you said that you had planned to increase advertising 10%, but you only increased it 2.3%. Did I hear that correctly? Can you talk about what's your look length in the future now?

Yes. We did increase by 2.3%. I felt the conditions and environment was not conducive to spending a lot of money last quarter. So we pulled back some things. And I think it was a wise decision because even our rate -- we spent a lot of money in September of last year. We spent a lot of money in October, and then we were impacted by all this government shutdown. Of course it helped us build our brand, build the story of our eclecticism, but I think that it was a wise decision for us not to spend that money.

As you all know, you never know which 50% of advertising works. And especially you, Budd, being in retail. Now going forward we will continue to expand. We will have more advertising. But, Budd, we are also taking a look at how do we maximize the efficiency of advertising.

We spend what we usually spend and we've stopped it for the time being, a lot of money on national television. Now we have started a fairly major program on digital advertising. We have done some shelter magazine advertising. So the mediums are changing. So the objective really is not necessarily only increasing dollar amounts. The objective, as you know, is to see how we've become more efficient and, in fact, we were spending less is better as long as we are efficient.

So we've got to spend more money, but really I'm not going to spend money just for the sake of spending it. We are working very hard to make our advertising more efficient in an environment where everybody is as you know looking to see what is what advertising is going to work in this new world.

Okay. And I think you also said that January was up, I couldn't remember whether it was traffic or business or both. Did I hear that correctly?

Traffic was up. Generally, also, as you know, some parts of the country, like for instance all of the Midwest was almost -- we stopped doing business in many of the markets in the Midwest, also in the Northeast. Our stores, in some cases, were closed. But it was not just a question of closing the stores. What really the issue was that people, our designers couldn't come. While we did open the designers or skeleton staff -- a few places we had to completely close them, but in most places we like to keep them open. But as the designers don't make it, hard to do business.

But our traffic was up and, as you know, the next six, seven or eight days are very important for us. What we have also done in January, which I'm sure you've noticed, but instead of having one sale ending the end of the month, which meant all our business would go to the end -- wait to the end month, we have created a number of events during the month. One of them just ended at Martin Luther Day, last Monday. It was good. We got traffic, we got some business, but that is positive. But of course we got to wait to the end of the month to see the overall results.

I understand, but it begins with traffic so that's a good sign.

Yes.

And I also like the idea of varying the promotions and not being predictable. I think that's a good situation too.

You talked also about the on-demand. Is that going to have -- how much inventory is that going to impact? What's the increase on that look like?

Yes. As you know our inventory is about $140 million, is on the lower side. And again part of it was the fact that a fair amount of the product from offshore did get delayed is coming in this quarter. We had said that we would increase it up to $10 million as we move forward, so keep that perspective in mind in the next few quarters.

And what caused the offshore delays? Is there something specific or systemic that caused that?

There were a number of reasons. Our business has now become back to normal in China, and so that's good news. There were some increases there. And the other one was the fact that, in some categories that we buy from overseas, especially our more of our high-end traditional, we had higher sales, our projection was somewhat lower and they were also delayed over there in manufacturing. All those factors combined created a higher backlog.

Primarily high-end wood furniture coming from China in that region?

Yes, right. In the Philippines, Indonesia, as you know there are a lot of challenges there now.

Oh yes, in the Philippines for sure. In [Cebu for].

The Philippines, Indonesia, China.

Okay. And lastly for me the retail margin, very flat sales, you had 130 basis points lower margin. I think you said some of that was because of the advertising shift. Can you quantify that, David, for us and maybe walk us through what caused that margin differential?

Go ahead, David.

Yes, Budd. As Farooq mentioned, we had higher advertising charges in the retail division that was offset by --

Budd, did you say gross margin or operating margins?

Op margin, Farooq. It was 130 basis points, I think 3.3% this year and 4.6% last.

That's right. Go ahead, Dave.

Right. So, as Farooq mentioned, that advertising accounted for about 70 basis points of the change. Which would have brought it to about a 4% operating margin versus a 4.6% operating margin last year. Of course the 0.2% decline had some impact. We had some merchandising charges in the quarter, as well, in support of the new rollout during the quarter starting over. That about covers --

The gross profit, as I recall you entered the quarter with some, still some highly discounted floor samples in the backlog that I think you said would take the first couple of weeks. And I suspect that had a depressing effect on the gross margin. But then I thought with the higher accessories you would've had a lift in gross margin. So how did that wash out?

Let me address that, yes. We have continued to sell off product in this quarter and as we move forward, as I mentioned, we are going to be introducing new products. So that next year is going to be pretty aggressive on that, Budd. So we will have some impact on gross margins.

So I think that 0.5% difference, that's what we are talking about, between [aren't we] just advertising reflected mostly the fact at the gross margin level of products that we've sold from our floor samples and, as we move forward, some of that would continue, but the gross margin level that we are operating at is more or less -- could stay at that level, as long as our sales remain at that level. If they increase we have an opportunity for increasing gross margin and operating margin.

Okay. So just a last thing on that, operating expense levels are -- there's not a big mix shift of even Company-owned stores or anything like that that caused the retail situation? And is a 4% operating margin a kind of a reasonable bogey going forward for retail? What's your goal margin target in retail?

Our goal is to do it even better than that. At 4% we are still operating at levels of sales that I think we have a much greater opportunity of increasing, so that's what I said. Our focus is to leverage what we have, increase the productivity of our design centers, and that has a tremendous leverage, both at retail and at wholesale. So 4% is a reasonable number, but as we move forward increase in sales we have an opportunity of increasing it.

Just one comment I would add, Budd, is this is a seasonally lower quarter in terms of written, some of our costs aren't as high. So keep that in mind as you are projecting for Q3 that that's typically a lower margin quarter.

Got you. Okay, thank you, David. Thank you, Farooq. Good luck on the quarter and good luck on the year.

Tyrone?

Matthew Fassler, Goldman Sachs.

Good morning.

This is Holly Goodman on behalf of Matt Fassler. We were wondering just how customers are responding to the new furnishings and furniture in stores that are part of the new eclecticism?

As you know the main objective of the new eclecticism was really adding color. Basically -- practically all of the existing product the objective was to add color, mixing of the products. It is creating an interest and I think that what it is doing is it is taking us, which our objective is, which I have stated previously, that really we have been considered a leader in furniture but as we move forward we have to be a leader and fashion. So this eclecticism, really -- the objective of the eclecticism is to project in a fashionable way.

People are responding well. We are also understanding it better and as we move forward we will continue to project it in a very fashionable way, whether it is on demand or whether it's custom.

Thank you. And one follow-up. What is the current mix of accents and accessories and how should we expect this to trend over the next year?

Yes. That's very good because we did spend a fair amount of money this last quarter in projecting our accents. They did go up around 15% to 17%. And opportunity, really, is to continue that growth because we are still -- our business model out of our [divest] of over close to 2,000 interior designers is somewhat different than many people who sell accents from their store shelves. People come in, buy it and take it away or of course very strong e-commerce business.

Our business so far to a great degree is focused on the fact that our customers come in, they work with our designers and our accents are used as part of their decorating projects. So now our objective is to, of course, keep on increasing that, plus also letting people know that we have these actions available, either in our design centers or on our website. So you are going to continue to see improvement. We did see an improvement from 15% to 17% last quarter.

Thank you.

Todd Schwartzman, Sidoti.

Good morning, Todd.

Good morning, Farooq. Good morning, David. On the closeout, the clearance inventory, is that going to impact Q4 gross margin, as well as current quarter?

This is obviously a continuous process, Todd. It's going to have some impact, but I don't think that it is anything extraordinary. So we always have -- we are making changes, we are not going to introduce too many new products in the next quarter or so. Products are going to be start being introduced in our fourth quarter and then the first quarter of next year. So somewhat less activity, but normal activity of floor samples and returns and all that kind of product that we sell.

I appreciate there's a lot of moving parts, but from where you sit right now is it Q2 of next year when impact becomes more or less inconsequential?

No. As I said, our objective is that once we have got great products, Todd, we are reevaluating all our products to see how do we even make them stronger. We have a great team of designers, internal, external, so we are going to start -- from first quarter of next year, start seeing some major changes to our product offerings. Which will take us a few quarters. Which means we will be selling some products off. But we'll let you know as we move forward. But overall it also depends on our overall sales growth because sales growth takes care of a lot of these problems or issues of somewhat of a lower margin on floor sample products that are sold.

Okay. And on a January pickup in traffic, was that up around 2% or 3% by the way? Or how would you quantify that?

Todd, it's hard to quantify. I would say that it was probably close to between 4% and 6% range.

That's helpful. Thanks, Farooq. What gives you the confidence that the recent change in your marketing is responsible for that 4% to 6% pickup and not the government shutdown or maybe some other external factors?

It's a combination of them. Certainly the fact that on one hand there is no government shutdown this quarter. On the other hand we still had pretty bad weather in many parts of the country. In fact today as you know the Northeast is freezing.

But I think it's a combination of both. Slightly better environment than we have had in the last quarter and our marketing efforts, promotional activities are stronger too. I don't know, 60/40, 70/30. I think maybe 60/40 or 70/30 is our own activities and the rest is environment is better.

Got it. Lastly share buybacks, looks like you were not active at all in the quarter. When do you -- what would it take to get more aggressive there?

We are always opportunists, you know that. In the last 15 years we purchased $600 million of our stock. So we'll watch it carefully. We see when it makes sense.

And we do have, as you know, our total debt is now between our cash and debt is maybe $10 million or $12 million. We are relatively low in debt, so we'll watch it carefully and look at that opportunity also.

Great, thanks.

Thanks Todd.

John Mackey, Stifel.

Good morning.

Good morning, Farooq. Good morning, David. I wanted to ask -- and this isn't a March quarter question as much as it is a calendar 2014 and/or 2015 or beyond question. And that is with the changes you're contemplating in marketing, you've referenced some inner month promotions. Whatever it is you're thinking about needing to do to drive traffic, does it alter in any way the contribution margin that you've last guided us to as you think about the business model? Or is it just shifting advertising you say from TV to digital and no change?

John, I don't think all of these things are going to change in any material way the projections that we did. Because you're not -- there is a possibility that on one hand it is, and I think you're referring to the fact that more proportional activity could have an impact on our gross margin. That is a possibility.

We are also -- on the other hand higher sales have even a more positive impact. So that's where the issue is. For us to give all these extra promotions and not increase sales it certainly is going to impact our gross margins. But we have increased sales.

And then you mentioned a paradigm shift moving into stock. Where do you sit now as a percentage of product that's of your revenue that's equivalent in stock and what's the goal? How big a shift are we talking about and in what time frame? And in my mind $10 million if it's a material change isn't a big enough increase in inventory. But I'd love your color on that.

I think that, at this stage, starting in February, about less than 10% of our product that's on our floors is on-demand, meaning in stock. We've progressively increased it, but that 10%, you will notice in our February magazine, is prominently shown so that people know that all those -- and those are great products, these are some of our best selling products where we are starting it with.

A year from now almost all or a very substantial part of our case good that we show on our floors are going to be on-demand. Most of our accents are going to be on-demand and maybe 30% to 40% of upholstery will be demand. And keeping in mind all those products, or most of those products are also available in different options and finishes, certainly in upholstery we've got a lot of options. So we'll maintain both in-stock and demand and it's going to take us about a year to get there.

And that would take the numbers -- I mean if you are less than 10% today and virtually all of the accessories, and maybe that's not much of a change from where you are today. But all the case goods that you at least display and then all the accessories, where does that consolidated in-stock number do you think go and what would the inventory level be to support that?

You know it also will depend how much of that -- now we're talking of furniture. As your rankings tend, many of the accents we do stock, although lot of the accents are also custom like our soft good products, the draperies, bedspreads and all that are custom-made and will continue to be.

There's an interesting -- as we go forward, we will see how much of our case goods is going to be produced domestically or in North America, and how much is going to be produced offshore. Almost all our upholstery is made in our own plants. We have a much better control in terms of inventory management of that. When you have offshore, the lead times increase, much more unpredictable, it's not under our control, which means we have to make greater projections on inventory.

So we will see, John. We are already low in our inventories to some degree. So this $10 million that I'm talking of initially in the next few quarters is -- or for the next few quarters. After that we will see how much more investment we have to make. But that investment will also reflect the business we are doing.

The plan for on the case goods in terms of what you display in the stores to skew that even more heavily than currently to domestic to avoid the inventory lead times from offshore?

As you know, at this stage, domestic margins are much lower than offshore. We are better controlled. Overseas margin are much, much better. We don't have much control. But on the other hand as we increase -- as I said in my comments, as we increase our domestic volumes, they do improve our margins. So it's sort of a relevel balance.

There are some products that we will have -- that have to be made overseas at this stage because of their complexity and a very high labor content. So we are looking to make products in our United States plants. We have little more flexibility in Honduras. In the US plants our products are designed, are going to be made which are more compatible for US manufacturing. Meaning less labor, but great quality, great lumber, great wood, I'm talking of wood products now. And that's how we are designing them.

Okay, thanks on that. And my last question on the Chinese business, the stores there. You mentioned that the store number is down. Could you just kind of walk us through -- I know there were some over inventoried positions there that you worked through this past calendar year. Give us a flavor for the flow of China in calendar 2014 versus calendar 2013.

Yes. First of all, the store closings, really the ones that didn't close are relatively very small, 3,000 to 5,000 square feet. Most of our business is done in the larger stores, which are all operating. That's where we get most of our business. But the numbers are what the numbers are but behind the numbers as -- if they are to close a lot of their larger stores that will be an issue.

In the last six months or so the inventory positions that we had, they are back to normal. So we're starting to get normalized business. The business of Ethan Allen has been up and we are looking forward to a good business in calendar 2014 versus calendar 2013.

So you describe that business as having a positive sales and earnings trajectory to your overall business?

Yes, absolutely.

Great, thank you, good luck.

Thank you.

Cristina Fernandez, Telsey Group.

Hi. Good morning, Cristina.

Hi, good morning. I wanted to see if you have a sense of the increasing traffic that you are seeing in January as well as those regions where you're performing better, like Florida and California. If that improvement is coming from your core baby boomer, more affluent customer or is that aspirational customer you are trying to reach is also coming to the stores?

Good question. At this stage most of our business is still being done by our core customers, which you might call baby boomers. Today, of course, age is not a factor in design. People today of all ages are buying all kinds of different sections but, yes, most of our business is still this increase is baby boomers. Good news also is we are starting to make an inroad into younger people.

And that's one of the reasons this on-demand is very important. Because the younger people don't want to wait. This will make it possible for them to get in in less than two weeks, while the custom product is they generally have to wait from anywhere -- by the time it gets into their home from six to eight weeks. And I think that time factor is an important factor in reaching the Gen X that you refer to.

And then just touching back on the on-demand program and how that's different from the Ethan Allen express program from a year or two years ago. It seems like, if I get it correctly, you're just going to have more inventory and the lead times may be a little bit shorter. So instead of two or three weeks it's two weeks. As far as marketing, how that is going to be different?

The marketing is what's different. In the express program when we launched it, we launched it somewhat as a separate program from our main programs. The on-demand is an integral part of our total merchandising, and if you look at our February offerings when we are introducing it, you will see that on-demand and custom are both integrated to be able to show everything we do.

Express was somewhat on the sidelines and also we did -- we saw -- took some of the products that we took over there were, as you mentioned, more for the baby boomers. The on-demand -- the programs we are putting in are going across the board. That it will be all customers whether they are baby boomers or they are Gen X are going to be benefiting from this. You are going to see a lot of the products that we'll be showing on the floor, as I said earlier, are going to be available in stock as we move forward.

We have started it in February, I think we are going to see how well it does, how do we modify changes, improvements as we move forward. But it's critical that today what has to have both on-demand and custom. And as you know a lot of people when they come in and they do have an option, a lot of times they do end up by buying custom, but they need to have the option that they can get it on-demand if they want to.

And then just lastly on the promotional cadence or where your plans are, I got the sense that your plan is to do more shorter promotions but more of those instead of the month and sales and probably still be at that 10%, 15% off that you've been offering in the last few months?

That's right, I think you're absolutely right. However in our -- for instance in January, as you know, we had three different offerings. One we called umbrella offering, which in January, this month, we are going in. It offers about a 10% saving across the board. Then from the beginning of the month to the end of this Columbus Day, we offered a special program on upholstery. Which offered maybe 15%, up to 15%.

Then we also offered, as you might have seen, a special offer of $750 savings if they buy $3,500 and above. That is ending this coming Sunday. And then we have other offerings that will end at end of the month.

So we are -- what we are learning is, which we knew all along, is that our customers need a little bit more time, that then the typical retail that you give them two days and they come and buy. We need to give them one week to at least -- from one week to two weeks for them to work with our designers and make the decision. So that's why most of our promotion is one week, two weeks and then an umbrella program for the month.

Thank you.

Jeremy Hamblin, Dougherty & Company.

Hi, how are you?

Good morning. How are you? So I wanted to just talk in a broader brush strokes about marketing and your spend going forward. Not just in the near-term quarters but in thinking about how you are going to use your marketing dollars and you're shifting a little bit more towards digital. Do you think over time that the spend is likely to stay level or increase a little bit? Or is it really just a function of you'll increase it as you see better results on the sales front?

The whole advertising world is in a flux. I wish we were as predictable as we use to do business ten years back but that's not the case. Today lots of changes are taking place, digital medium is coming in. Our e-mail blasts are making an impact. Less and less people are reading newspapers. We have direct mail; we are also looking at the impact of direct mail whether should it be 30 pages or 60 pages or 700 pages, as some folks have done? All those things are being -- one has to look into.

But to -- bottom line at this stage, unless I see. If we see an opportunity that our advertising is going to make a difference we will put more money into it. In the 1991, 1992 period you were not there, we repositioned Ethan Allen. We had lots of debt. We've changed 40% of our product line and I've borrowed $30 million, $40 million on advertising. We are not spending that money right now.

If we have to we are going to spend a lot more money. We have the resources to do it, but I want to make sure it brings results. But Jeff [sic], we're going to watch it very carefully. Lot of moving parts. But at this stage the minimum you're going to spend is what we have been spending with slight increases for the next few quarters.

Just a follow-up to that, really with the new eclecticism and the marketing changes in general, it seems like you're looking to broaden the demographic and the appeal of the Ethan Allen brand. And you've seen kind of your sales flatten out here. I'm wondering how do you look at it in terms of how long it will take to educate a new demographic about what Ethan Allen stands for and to bring them in to be a customer of the Company's goods?

It is -- it's going to be -- it's an ongoing event for us. We have a brand that is very well recognized. Certainly our main customer is folks that you might refer to as baby boomers. However, with the changes that we are making with this eclecticism which is style, fashion -- eclecticism really is projecting fashion and color. That's what we will continue to do whatever name we use for it. That will continue.

On-demand is going to be very important for this new demographic and, as I mentioned earlier, we are also going to make some major adjustments to our product lines, which is going to also be good for the baby boomers and also for the Gen X as we move forward. And I would think, to answer your question, I think we are going to start seeing the impact of this in the next 12 months to 24 months. I am talking a major impact.

One last follow-up. We didn't talk at all about platinum rewards program and I think, as I've talked to some stores and been in some stores, I think it seems like the program hasn't really taken hold either with your customers or the design associates. Are there any plans to make adjustments to that program, which at this point is really just kind of a discounting program. Is there any longer-term plans to make adjustments, to potentially have more loyalty to the program?

Yes, that is a good question. We did introduce it but we have somewhat kept it very low key in the last couple of months. The reason is that we have introduced a lot of new initiatives.

Yes, however I talked about going from the predictability to the unpredictability of the various offers we felt that at this stage more important than continuing to offer under the platinum umbrella, Jeremy I'm sorry, I didn't use the right name. But what you are going to see is that we will get it back in and offer it as one of the options and offerings as we move forward. In other words, giving those members who are ready platinum, give them an opportunity of having a special offering like we are doing two or three times a month.

The second thing is that determining whether we should make it into a point program. That's what all, as you know, the rewards are. We didn't make it into a point program for a number of reasons. One of them is that once you start doing it, it's something you've got to continue to do with it.

Is it a liability because once it's out, you've got to then create a financial liability. With all the moving parts we decided for the time being to hold it and in the next couple of months we'll go back to see how better we use it. Whether it's a point system, we have got to get back into the bridal registry there, this is a very important part of it. So for the next couple of months it will be low key and then we will start utilizing it.

Thanks so much.

Thanks Jeremy.

(Operator Instructions)

Kristine Koerber, DISCERN Securities.

Hi, good morning.

Hi, good morning. A couple of questions and follow-up to other callers' questions. First it sounds like you have a lot of flexibility with regards to advertising. But can you just give us a little more color on the lead times you needed for advertising? How quickly can you react to change in advertising? Is it days or weeks?

The good news is that we run our own in-house advertising group. Both from the creative side, the photo studio side, the video side, we create our own television commercials. Now, where the lead time is greater is on the direct mail magazines. But even that we have cut down to now for instance our March magazine has just been finalized now, which is record time.

Previously it would take three months, four months before. It would have been done this coming March. So we reduce that time period.

The way we have gained a greater flexibility is in the new mediums, like for instance the digital mediums. Our e-mail blasts, those we have the flexibility of putting in programs on a two-day notice. Previously just couldn't do it. So lot of flexibility in the digital world.

Where somewhat less flexibility on this direct mail, but even that we have cut it down by more than 50% or more time in terms of being flexible. So you will continue to us to remain very flexible and determine where as we need to spend the money we will.

Okay, that's helpful. And then can you clarify -- you talk about faster delivery for the on-demand initiative. Are we going to see more products delivered within two weeks? What is the faster delivery? How much faster are we talking?

Yes. This stage most of it will be delivered within two weeks. And we are going to -- and then we will take a look at it, whether it makes sense for us to keep some of it on-demand program, for instance more closer to the West Coast, or in the West Coast.

Right now is it going to be shipped from a distribution center in Virginia then it goes to our service centers at retail. Now it also depends, for instance our service centers, our major service centers, whether it's in the Washington, greater Washington, Philadelphia, New York, they receive four to five containers a day. So in stock from Virginia, Dublin, Virginia where we have our major distribution center, they can receive the product the next day. But then they have to reschedule it. So within two weeks is a time we are giving to most of the country.

Okay, as far as the accent or decor product, that's still within 48 hours, correct?

Yes, if it is shipped by UPS. We are shipping it all within the next day.

Are you still targeting the decor product to be about 35% of the mix over the long term?

Over the long term it's 17% and you know that is opportunity that we have. So we've got to take it up and every 2%, 3% makes a big difference.

Okay, thank you.

All right. Thanks very much. Tyrone, I think I will have to be leaving. I've got to go to Brooklyn. We've got to see how the traffic is here to Brooklyn.

If any questions, please give a call to Dave Callen. And thank you for all participating in this. Again, I apologize for change of the time, but -- good to have the opportunity of talking to everybody.

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

Thanks, Tyrone.

You're welcome.