Ethan Allen Interiors Inc (ETD) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Ethan Allen third 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. Now I will turn the conference over to your host, Corey Whitely, Executive Vice President, Administration and interim Chief Financial Officer.

Thank you Jonathan, and good morning everyone. Welcome to Ethan Allen's earnings conference call for our third fiscal quarter ended March 31st, 2014. 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 the release and on this call. Our comments today will include forward-looking statements that are subject to risks, which could cause actual results to different materially from those expected when making such forward-looking statements. Please refer to our SEC filings for our complete review of those risks. The Company assumes no obligation to update or revise any forward-looking matters discussed during this call.

Also joining the call today is our Vice President and Corporate Controller, John Bedford. 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 is Farooq Kathwari.

Alright, Corey thank you. Thank you for participating in our third quarter earnings call. As we reported we had a relatively good results considering the challenges of very harsh weather. Our sales increased 2.9% to $173.1 million, retail comp sales increased 2.1%, with total retail sales flat from last year quarter. The third quarter historically represents lower delivered sales.

Gross margins were at 53.8% compares to 54.6%. The change was primarily due to mix of retail and wholesale sales for total sales. This year, retail represented 76.2% compared to 78.5% last year. Adjusted operating margin of 6.9% was versus 7% last year was good considering disruptions caused by severe weather, including higher energy costs. Our adjusted wholesale operating margin was 11.7%, which was 11.9% last year, and adjusted retail operating margin was at 0.6% and flat with last year.

Written business was also impacted in the quarter due to weather. Comparable written division was flat with last year with total written down 2.4%. Our retail division backlogs increased 10.1%, as we reported, comp written sales in retail division were down 13.4% in January, 1.4% down in February, and increased 15.6% in March, due mostly to improvements in weather, and also due to the holidays falling in April this year. Adjusted earnings per share for the quarter was up 6% to $0.22. We maintained strong cash and securities of $124.8 million, an increase of 6.5% from the previous year.

Our net debt as of March 31st was $6 million, compared to $38 million net debt as of March 31, 2013. Inventory of $145 million increased as per plan by $3 million from 3/31/2013, and $7.7 million from 6/30/2013. The increase was due to improving our service position and on demand initiatives, which I will discuss after Cory gives a more detailed overview of our financial statements. And at this stage, Corey please go ahead.

Thank you Farooq. For the third quarter of fiscal 2014 consolidated net sales of $173.1 million increased 2.9% compared to the third quarter of fiscal 2013. Adjusted operating income was $12 million, compared to $11.8 million in the prior year third quarter, with the adjusted operating margin of 6.9%, down slightly compared to 7% in the third quarter of fiscal 2013.

Adjusted net income of $6.5 million increased 6.7% over the prior year third quarter. Wholesale net sales of $111.1 million increased 2.8% during the third quarter of fiscal 2014, compared to the third quarter of fiscal 2013. The retail segment net sales declined 2/10ths of 1% for the quarter at $131.8 million, compared to $132.1 million in the prior year third quarter.

The wholesale gross margin improved to 32.5% for the third quarter of fiscal 2014, from 31.9% in the prior year third quarter. The retail gross margin of 44.7% for the third quarter of fiscal 2014 remained unchanged from the prior year third quarter. The retail segment net sales were 76.2% of consolidated net sales, and that compared to 78.5% of consolidated net sales during the prior year third quarter. The higher ratio of wholesale segment sales to the total net sales brought the consolidated margin down to 53.8% for the third quarter of fiscal 2014, compared to 54.6% in the third quarter of fiscal 2013.

The impact from the extreme winter weather was most noticed in written orders booked by the retail segment, which for the third quarter of fiscal 2014 decreased 2.4% compared to the third quarter of fiscal 2013. Comparable design center written orders booked decreased 0.5% compared to the third quarter 2013. For the nine months year-to-date fiscal 2014 period the retail segment written orders booked are up 1.7%, compared to nine months year-to-date fiscal 2013. Comparable design center written orders booked growth of 3.9%. The retail segment undelivered backlog at March 31st, 2014 is up 10.1%, from the prior year.

Our global retail network included 296 design centers at March 31st, 2014, which is unchanged to the prior year March ending. Independent retailers operate 151 design centers, including 70 in China. This compares with 148 independently operated last year, including 69 in China. We had a total of 98 international locations at March 31, 2014, as compared to 93 international locations the prior year March ending. Our adjusted results in the third quarter 2014 exclude $0.7 million of international start-up losses, and a charge of $1.6 million on the sale of property. The prior year third quarter excludes $1.3 million of international start-up losses, and a $1.8 million declares charge associated with the sale of property. Please refer to our press release reconciliation tables showing the adjustments made to our results for all periods.

Our normalized income tax rate for both the current quarter and the prior year was approximately 36.5%. Adjusted earnings per diluted share for the third quarter 2014 were $0.22, which is 4.8% higher than the $0.21 per diluted share earned in the prior year third quarter. For the nine months ended March 31st, 2014, net sales were $547.8 million, compared to $546.8 million in the prior period. Year-to-date gross margin and adjusted operating profit margin were 54.4%, and 9% respectively, compared with 54.9% and 9.4% respectively in the prior year. Adjusted earnings per diluted share for the nine months year-to-date is $0.95 compared with $0.98 in the prior year-to-date period.

Now some brief comments on our balance sheet and liquidity. Our cash and securities at March 31st, 2014 totaled $124.8 million, Our inventory at $145.1 million increased from last quarter as our in-stock position strengthened on our case goods and on demand products. Our capital expenditures year-to-date are $12.6 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 millionto $18 million. Our $50 million revolver facility is undrawn, with only about 70,000 in stand-by letters of credit outstanding, and we have approximately $129 million of our senior notes remaining outstanding, which become due in about 1.5 years.

And with that, I'll pass it back over to Farooq.

Thanks Corey. I'm pleased we are making very good progress in strengthening our competitive advantages, including expanding the variety of styles. One of our major competitive advantages is that we provide a variety of styles for our home decorating, from casual to classics, in both the contemporary, and what we call the new traditional designs under the old umbrella of eclecticism, and migrating to home fashion.

Since last six months, we have a major initiative to make enhancements to our product programs, which we plan to launch to our retail network in our June conference, and for consumer launch starting in fall of this year. We have scheduled an Investor Conference on June 24th at our Danbury headquarters, following the Retail Conference. Expanding our message in both traditional and -digital mediums is a great focus . During the quarter, we maintained our advertising spending to similar levels to last year. The mix was changed to increasingly spending more on digital mediums. As I have discussed, we are developing a much stronger marketing campaign for this fall, with the introduction of these very large new product programs, and we believe a much more effective presentation in our design centers. Our On Demand programs have started to make an impact. We are gradually increasing more of the products shown in the design centers to our On Demand program. The On Demand program includes both furniture and accent programs. Most of the accent programs were already On Demand that is in-stock program. Since last year, we are now adding furniture products, shown in our design centers to the in-stock program. This is helping provide options and is also helping in selling our Custom products.

Expanding our investments in technology is also our priority. We continue to invest in technology at all levels, especially enhancing the technology in our marketing areas. We have now provided tablets to all of the retail division design associates, and our independent retailers are also starting to utilize them. These tablets are helping to improve the professionalism and efficiency of our design associates. We have also improved the effectiveness of our touch screen technology in our design centers, and are now adding larger size screens to all of our retail division design centers.

The strengthening of our design center network and our design associates is our net focus. At March 31st, as Corey mentioned we had 296 design centers, same number as last year. However, we continue to reposition the design centers. During last 12 months we have opened new design centers, including number two in Belgium, in Bucharest, Romania, Jeddah, Saudi Arabia, Seoul, Korea, Amman, Jordan, Calgary, in Boston, and Portland, Maine, Cleveland, New Jersey, in Sarasota, Florida, Winter Park, Orlando, and a few others. We will continue to add new design centers, and also to continue the relocation programs as we move forward.

In addition, we continue to recruit and invest in our interior design associates. Currently, in North America, we have over 1,500-plus interior designers who work in our design centers. Almost 50% of these 1,500 design associates have joined after The Great Recession, and most of them having run their own interior design businesses. At this stage, we have now also over 4,700 independent interior designers in our IDA, or Independent Design Affiliate program. Positioning our vertically integrated structure for growth is an ongoing process here. Our major competitive advantages, the level of consistent quality, and excellent values we offer. As about 70% of our furniture products are made in our North American workshops, our focus has been to invest in increasing capacities to meet our expected increase in business. As we depend primarily on our own manufacturing for our furniture programs, balancing our focus to increase sales, and ability to service is critical.

We are pleased with progress in our North American facilities, which includes the US, Mexico, and Honduras. Most of the new products that are being developed for our Fall introductions to consumers are being designed to be made in the US, Mexico, and Honduras workshops. In addition, we have a major focus to increase our accent programs, which currently represents about 17% of sales, our initial objective is to take it to 25% of sales. During the last year have we added a number of strong merchants in our accent programs to grow these categories, and at this stage I would like to open it for questions or comments.

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

Hi Budd, good morning.

Good morning guys. This is Bobby [Anastasi] actually filling in for Budd, thank you for taking my questions, and congratulations on the quarter. Farooq I was wondering if you could maybe comment on your ad spending plans going forward. When should we expect the ramp-up in ad spending over the next couple of quarters?

Thanks Bobby. Our objective at this stage is to more or less maintain it in the third quarter, and then really ramp it up in the fourth quarter and the first quarter, which is July, August, and in September. That quarter we would start in September with the launch of all of the new products. We will start increasing our advertising. And then we will ramp it up even further moving forward. So you're going to see us more or less maintain our advertising for this fourth quarter that we are in now, April, May and June. Then July, August and September, July and August more or less we'll maintain what it is, but starting September you're going to see us ramping it up.

Alright. Thank you. How big of the new product roll out does that compare to some of the product roll outs we've seen in the past?

In the past, really has been just small little introductions. This is major. This is going to be I would say at least five times more than what we've done in the past.

Alright. And that all comes on the line really in December quarter that starts taking an impact?

It starts in the, yes, that's right, October, November, December, that is the quarter. About half of the product line, or 60% to 70% we will introduce to consumers in, starting September, and the balance will start, we'll introduce it in January, because we have got to space it.

Alright. Perfect. And you mentioned accessories mix was 17% was that 17% year-to-date or for the third quarter?

That's year-to-date.

Year-to-date. And did it improve in the third quarter year-over-year?

Over year for the whole year it's improved from 15% to 17%.

Okay. Perfect. Perfect. I will jump back in the queue and let other people ask some questions. Thank you again, and best of luck going forward.

Thanks Bobby.

Our next question comes from the line of Brad Thomas from KeyBanc Capital Market.

Thanks, good morning Farooq. Good morning, Corey.

Good morning, Brad.

I want to just start with a big picture question. I know that the, maybe reinvention is too strong of a term, but the transformation of Ethan Allen as an ongoing thing, not just a one quarter thing, but you've been working on a number of different things from a merchandising and marketing standpoint for the last several quarters, and I know the weather has been tough and there have been other one-time issues, as you look at your customer database and demographics of who shops in your stores and website visits, what data points can you point to, to show us some traction from some of these initiatives so far?

One of the major initiatives, of course, perhaps you're referring to is when we started last fall under the soul umbrella of eclecticism, and this also migrating towards what we say, from furniture to fashion. It is a little bit too early, Brad, to really give an overall impact in the six-month period. It is somewhat of a short period. However, we have increased our advertising in the digital mediums. So that in addition to reaching our base consumer, which still is the Baby Boomer consumer, we are starting to make traction with the Gen-Xers, and I believe that a year from now, I say that we are going to have a much more of a greater impact in increasing our consumer base to somewhat more also from the Gen-Xs, but right now it's still primarily baby boomers, which are very important because baby boomers are the ones who are spending the money, and also our interest in our design services, but more and more increasingly we're seeing some traction, but I think we have got to wait another six months to give you some results.

Great. And then a couple of just housekeeping items. With respect to the backlog about 10%, I think that's a similar level that the deposits have been up the last quarter or two. Just as we think some of the new product roll-outs you have on the horizon, do you think you have an opportunity to work down the backlog and benefit sales, or structurally might that backlog need to stay where it is, or get a little bit bigger, just any color on that regard would be helpful?

Yes. The part of the backlog was really due to the effect of two factors. One was the weather impacted our deliveries, and secondly, we did have some delays of products coming from offshore. As you know still about 45% or 50% of our cased goods are coming from oversees, even though now we are increasing that from our own North American facilities. So those two have created backlog for deliveries at the retail, even though, as we saw, we saw flat sales but increase in backlogs. What we'll do is obviously most of that is going to be used up, and we do like to have somewhat of a higher backlog, but that will depend upon our business this quarter, Brad.

Okay. Great. And just lastly, if you could give us an update on what you're seeing in China, in terms of the underlying trend in growth rates, that would be helpful?

Yes. The good news is that we are back on track on China. We did have some issues, some inventory issues, that some of our businesses had maintained. Right now they have balanced their inventories, and business has been increasing in China. And in fact, it's also been increasing in other places for us, like for instance, even though relatively they are somewhat smaller, but we have had stronger presence in, say, countries like Amman, Jordan, or in Korea, or we are opening up a third one in Manila. We opened in Bucharest. We are just in the process of opening in Doha, Qatar, a second one in Dubai, a second one also in Doha, Qatar, and also in Riyadh. We are making some progress overseas, as well. And I think that will continue to give us that incremental business. But a great focus really is in our design centers in North America. That's where we have a tremendous amount of opportunity of increasing our sales.

Of course. Well thank you so much, and look forward to seeing you in June.

Okay. Thanks, Brad.

Thank you. Our next question comes from the line of Jeremy Hamblin from Dougherty & Company.

Yes, hi there, good morning.

Hi, good morning, and thanks for taking my questions. I wanted to actually just follow-up on China for a second. It looks like or if I recall back to my notes from last year, I know there was some disruption in deliveries, both in the third quarter and the fourth quarter. And I believe that you had indicated there were about $6 million in each quarter. Is that part of the reason why you saw a higher skew towards your wholesale business in Q3, and should we expect a similar skew in Q4?

I think you're absolutely right. I think you're right on the mark. The reason one of the reasons that our wholesale business increased was because of this, bring back and having the China get back on track. So yes, that was actually the main reason why the wholesale was higher this time, relative to what happened last year. Going forward, I do not know at this stage. It depends on how much of a business we get from international, that's China included, which is, and how much of the business growth takes place in our own retail division, because the retail division, if the retail division sales increase at a level, and today at 76% of the business coming from the retail division, that is a big, big number, and a relatively small, a good increase in retail division will change that balance fast.

Okay. So too early to tell on how in the June quarter that's going to skew in terms of the retail segment?

Right. But while you're looking at the retail gross margins I think you should really focus more on the operating margins. As Corey mentioned our operating margins are pretty healthy, both in the retail and the wholesale. That's really where it matters. So it is more an operating margin level at the wholesale level than, if our wholesale business increases it has a good impact on our operating margins, even though on a consolidated basis it might show a little bit more lower gross margins.

Let me ask actually a little follow-up question on that, tying back to China. I was surprised to see that although your wholesale business increased year-over-year by about $3 million, which again part of that as you said was due to China normalizing, that you did see your operating margins fall by about 20 basis points. Can you talk to maybe some other puts and takes on that from a wholesale operating margin?

Yes. Number of factors, too. Another one is that we have been somewhat more aggressive in our promotional activities, I'm sure that you are noticing, which we haven't done in the past, but we are having some of those products even being given at a sale price of 20%. So that is also having an impact and some of that impact is held at, takes place at retake, but it also impacts our wholesale margins because we then do adjust our prices to the retail, depending upon what our suggested discounting is at retail. So that is also a factor. And another factor is at the wholesale level I mentioned our energy costs. Our medical costs overall rose, were also a factor in increasing expenses at the wholesale level. And also at the retail level, too.

Thanks. And one more follow-up from just elaborating on the prior comment. About your new product introductions, which are going to be major, 5 times what we would normally see, I think in the past that has caused some changes in normalized patterns, in terms of clearance sales and the timing on when you see things. So should we anticipate that you're going to have a higher level of clearance sales in the early part of fiscal 2015 to make room for those newer goods coming in? And then historically you've also seen I think a sales bump when that does happen. And potentially slightly lower gross margins. Any potential color on that, and how we should be thinking about that flow would be very helpful?

I think you are hitting it on the mark. We will, our plan is that in July and August, we are going to have our retail conference in June where we will be developing all of our plans for introduction of these new products coming into our design centers in August, and early September, so we start marking them from September onwards. More of it will be in October and November and December. So we will be selling floor sample products starting in July and August. So you are going to see that quarter some impact on the margins. And at the wholesale level to a great degree we have been, of course, planning it, that this is going to take place, managing our wholesale inventories, keeping all of these things in view. But yes, there is a possibility that we might have an impact on margins in July and August. And I think that you should keep in view.

Thanks for taking my question.

Thanks very much.

Thank you. Our next question comes from the line of Todd Schwartzman from Sidoti & Company.

Hi Farooq. Hi Corey.

Hi, Todd.

I wanted to just talk about traffic, of course, the weather impacted overall numbers, absolute terms, but just on a year-over-year basis, what was the traffic conversion rate?

First of all, traffic is down, and this is no secret that traffic in all retail is down, almost all retail is down. And the reason is very obvious. As we know, the traffic in malls is down, fortunately we don't have, almost 99% of our design centers are not in malls, but the traffic is down because people used to go window shopping into stores. Today the window shopping is done on the websites. The websites are critical, and that's why we have been investing a great deal in making sure our website is enhanced. In fact, we have done a lot of work on it , and we have in fact also retained a boutique firm, to improve the experience on our website, on our mobile experiences, on people coming into our design centers on touch screens. So to give you at this stage, we know that our traffic was down in January, February and March, and now the good news is this. That traffic that is coming in is more qualified. That's the good news. So for all of the window shoppers shopping on the website, and the folks who really want to buy and coming into our design centers, that everyone has to keep in mind when you look at just round numbers, Todd.

It's a good thing that they're more qualified but just in terms of the prospects that walk through the doors, how many of them did you convert to customers in the quarter, and what was that conversion rate a year ago?

I tell you what, I don't have in front of me but Corey will get back to you to see what the conversion rate is. We do monitor it very carefully. We call it the performance index, that is the number of people who come in and how many we convert. I have a general understanding what it is, but you're looking for the whole network, let me see whether we make that information public. If we do Corey will talk to you.

Okay. Because you do have a pretty strong presence in the Northeast, I think those stores are probably hurt worst of all and the Midwest certainly I think due to weather, I would think that somebody who did walk into a design center in February in particular, was probably pretty motivated to buy something. So I would be curious to see what those numbers were?

We will do that, certainlyour performance, PI performance index was very, very high because those folks who came in did buy, but I'll have Corey give you the numbers.

Thank you. In terms of the written business, in April thus far did the written business pick up where you left off in March?

I also mentioned the impact of the holidays falling in April versus March. So April, of course, we have the tax season, and then we had the Passover and Easter, which is over. Right now we are somewhat trending similar to more or less to what we expected so far, but the last eight days or nine days is going to make a difference. That's when we expect to close the business. So we're going to see what happens. It's a little bit too early to tell about April, Todd.

Not to put words in your mouth, but it sounds as though if you normalize for the difference in holidays, timing difference of the holidays, that you're about even, about flat, is that--?

Well, so far what we've been looking at is this. We get a certain amount of business every day until the last week of the month. So more or less it is about the same. But the last one week is going to make a real important factor. So far it's looking reasonably good. Weather seems to be holding up all over. We have lots of initiatives in place. I'm sure you have noticed it, we have a special driver, we are putting these special promotion drivers, like all of our bedroom products, we have put on a special savings since last Friday to the end of the month. That's having an impact. We are also giving about 20% savings on that, which does impact our margins, as previous comments were made. I think we have a lot of initiatives in place to see that we do have a decent April. But then I think the main, May and June are generally good business months.

And if you look out to the end of fiscal 2015, so the end of next fiscal year, where do you expect to be, where do you expect to finish the year, in terms of domestic design centers and also international stores?

Yes. Good question. As you know I have said it in the past, our focus has been to improve the efficiency effectiveness of our design centers rather than just the numbers. For instance, we just opened up in Cleveland a design center in a great location, Lyndhurst, which replaced two design centers. We just opened up a great design center in [Falfentel] New Jersey, which replaced two design centers. So I think these numbers are a little bit, numbers are not necessarily the total story. Having the design centers in the right locations is more critical than the numbers. I would say that at this stage, more or less we should be close to where we are. Might be five or seven more, but not a tremendous amount, tremendously more than what we have.

Having said this, we are right now looking at about 50 markets where we used to be, and we are not there today. And where we used to be, like for instance Toledo, Ohio, Madison, Wisconsin, and many markets like that, good markets, we used to have 15,000 square foot stores. Today, we are now going to re-enter these markets, with a much smaller footprint, because we have an experimenting from 1,600 square feet to 8,000 square feet. And today, a smaller footprint is critical, because of space, because of the technology that we have, so we have 45 markets that we have 45 markets that we are targeting, 50 markets that we are targeting in North America in addition to a number overseas. I do not know how many of those we are going to get by end of next year, but we are focused to increase it, Todd, as we move forward.

So would you recommend that looking at the number of total design associates or number of associates design consultants per store perhaps, rather than the traditional metrics of square footage, or change in footage, or change in number of doors open, would be the best bet for modeling purposes?

Yes, we used a combination of both. For instance, we have 1,500 interior designers, and I look upon them as entrepreneurs. As you know when folks in the investment community ask me, are we going to acquire any company, I say yes we are going to acquire interior designers. And we have as I said acquired over 800 of them in the last few years, most of them ran their own businesses. And an interior designer on average gives us $600,000 to $700,000 of business. So putting in more interior designers, but to do that we have got to also be able to increase traffic. That's the other critical factor. Now we could spend a lot of money increasing traffic, but I want to make sure we're absolutely ready and in a much better position, not absolutely but really in a much better position in our offerings, in our technology, in our website, and I think by September we'll be in a much better shape than we are today, to invest lots of money to get more traffic into our design centers, which means we can then add more people.

Great. I think that's a good segue to my next question. Are you aware right now of any opportunities to buyback design centers in the next 12 to 15 months?

No, not really. Maybe one or two here or there, but not much. Right now we have a stable, independent retailers are stable. There are one or two or three that is possible. And in fact, some of them are also opening new ones. And our independent retailer just opened up a second one in Calgary, our independent retailer in Houston is opening one, our new design center in Houston. We have got some movement going on that way, too. You're not going to see too much of a change on that, Todd.

Farooq, you don't really speak too much about product categories within cased goods, specific categories within cased goods in particular. But a number, a couple of your major competitors in the kid's furniture business have recently announced plans to exit that business, and competitive pressures, and manufacturing domestically I think has taken a toll on some of the players in the past year in particular. What challenges are you seeing at Ethan Allen that are unique to manufacturing youth bedroom furniture, domestically, and what are you doing better or differently, if anything, than the competitors on the juvenile furniture front?

I don't think it is really an issue really or juvenile or adult, the issue really is, do you have the ability to manufacture competitively in the United States. With the plants that make our adult furniture are the ones that make juvenile furniture for the kids. So there's no difference from that perspective. Now, the fact is this, that if you are today selling products and you are selling it as a commodity, it's very hard at this particular stage to compete with manufacturers offshore. In our case, because of the fact that we have decided to maintain manufacturing in the US, and we have complimented it in manufacturing in North America, today gives us a competitive advantage, even though we have intentionally decided that we will operate at lower margins in cased goods, that's what you're referring to, then we could have done five or six years back, if we had closed all our plants and gone overseas, we would have had certainly higher margins, but we would not be in an advantageous position that we are in today, and I believe we will be in a greater advantageous position a year from now, by having manufacturing in the United States, and in other countries, other North American countries. Great competitive advantage for us.

Would you say that today's consumer, consumers of non-commoditized children's furniture still care much about the product's country of origin?

Well people prefer to be made in America, but then when it comes to the pricing if it's extremely expensive they're not going to buy it. So we have got to make sure that we have great quality and competitive pricing, and even on some categories we operate at lower margins, that's what we do.

So all-in from where you sit right now, I think that things could change of course, but is this a lucrative market segment to play in for the long-term?

Absolutely. In fact, we are going to increase our presence. Our operations, the Company as you know, we operate on what I call an averaging of gross margins between what we do in the US and with other North American facilities. And the products we are now making, which I mentioned earlier, most of those products are designed, two, three years back we didn't design products that are competitively to be made in the United States. They could be made anywhere. If that is the case you don't have a competitive advantage. These products are being made with the resources that we have, we operate a sawmill. We operate cased good plants, we operate rough mills, we operate everything in the world. Now we vertically integrate it, and it has been a challenge in the last few years maintaining them, but today I think is going to be competitive advantage, because sourcing overseas is also becoming an issue.

If you think children's bedroom is a source of potential market share expansion for Ethan Allen, is that something that we could expect to see, receive more of your advertising dollars going forward?

Well, we'll look at that. I think at this stage, we have a lot of great products coming in, and I think that most probably the children might come a little bit later for us. Right now we are looking at adults, and teenagers, but children we already have it. But I think you make a good point. And of course, I know what's happening in the industry, the people who had a tough time, and I'm sorry to hear that, that they had to close their plants to go overseas, but in our vertically integrated model, and the fact that we have Custom and On Demand gives us a competitive advantage. If we didn't have Custom, and it is all being sold as a commodity, hard to compete.

Got it. Thank you very much.

Alright, Todd.

Thank you. Our next question comes from the line of Dillard Watt from Stifel.

Good morning.

Thanks. Good morning Farooq. I was wondering if we could talk just a little bit about the weather, and you obviously were providing some great color with written orders in each month of the quarter, but John Baugh and I were wondering if you could maybe help us figure out, what impact in March was just from your Northeast stores that were no longer getting hit hard by weather, and maybe one impact was sort of an improvement in the business cadence, so I don't know if maybe you could help us with maybe what your good weather stores like in Florida did, maybe in January and February versus March, or kind of any color on that would be helpful?

Yes. Without giving you the exact numbers, which I don't have in front of me, but certainly California and Florida did well, in January and February. When you come to March, and what was very, very tough was Midwest, Chicago was, Minneapolis, Chicago, Northeast, even Washington was a big, big challenge in January and February. And while in March, all of them improved, while they improved obviously just to give an overall, they did better than of course California and Florida in March, because of the pent-up demand that we had in January and February.

But you are saying that the California, Florida stores did see some improvement in March?

Yes, they did.

Great. Thank you. I think all of my other questions at this point have been answered. Thanks a lot.

Alright.

Thank you. Our next question comes from the line of Cristina Fernandez from Telsey Advisory Group.

Hi, Cristina.

Good morning. Farooq, if I recall correctly normally in an average year you update 10% of your product assortment, and this year you're saying 5 times, implying 50%. What is different from the new products introductions you're going to be making in the Fall, versus what you've done in recent years?

Well, I don't want to give a lot of our secrets out there, Cristina.

Okay.

But basically, really, it is an attitude. It is an attitude of products reflecting the way people live today. It is also reflects, you will see that attitude, and it's no secret I will say this, that today people are living more relaxed, whether it's the casual or the so-called formal product, it has to be more relaxed. It has got to be liveable. The second thing is we looked at it, and said what kind of products can we make, where our competitive advantages could be utilized, that is our resources here, and in other parts of North America, that is Mexico, and also in Honduras. Now, Honduras, as you know, we just got it going two years back. In Mexico we got it back six years back, so Mexico is more mature in getting us going. Honduras was not, but we're pushing it. One of the reasons we also delayed what we are doing now, which impacts Honduras is that we were not ready. But on a very accelerated basis, we are getting it going into a major cased goods operation, a year from now it will be a major cased goods operation, because it is already getting there. So that was a factor too. So our first an attitude from a design, and second, utilizing the raw materials that are available to us in South America, and available in North America, and also this whole attitude, as I said, that's relevant design for today's lifestyles.

Okay. So based on that, it looks like we're going to see a change in the aesthetic of some of the products, as opposed to it being a continuation of the--?

That's right. It will be a change in June, and you're going to see it.

Okay. Thanks. And on the marketing side, did you make a change during the quarter, as far as how much you plan to spend on marketing? Because it ended up being flat, and I had been under the impression marketing was going to be up year-over-year?

No, it was approximately more or less flat. As I said we decided that six months back this was not the time for us to increase advertising. We will continue, we still have a healthy advertising budget, we spend about 5% of our sales on advertising, but we will take it up as we come in from September onwards.

Thank you. And just one last one, you've been more promotional in recent months. Are you seeing a direct correlation between the promotions and the traffic that you're seeing in the store? I guess in another way, how effective do you think this promotion has been driving?

I tell you this, and even the business we did in January and February and even in March, the kind of conditions we were faced with and weather, we would not have had flat sales or a slight increase in comparable if we had not had those promotional activities.

Okay. So then we continue to expect this cadence to continue over the course of the year?

We do, but we are very selective. We don't do it across the board. We use special events. But I think unfortunately whether we like it or not, our challenge is that we start with an everyday best price that is a very good price. We didn't develop these prices so that we could have regular prices, so we can then discount them. That's what most retail does. We don't do that. And that does put a challenge on us. So our 20% offering, or 15% is really a big deal. For other folks who raise their prices so they can give a 40% discount it doesn't mean much, but for us so it does mean much, so we are monitoring it and managing it as efficiently as we can.

Thank you. That's all I have.

Alright. Thanks, Cristina.

Thank you. (Operator Instructions). Our next question is a follow-up from the line of Jeremy Hamblin from Dougherty & Company.

Hi, Jeremy.

Hi guys. I had one additional follow up and it goes back to the promotions that were done in January. I know on the last call we talked quite a bit about having kind of a more traffic driving promotional messaging, which kind of translated into much shorter term promotions. I know in terms of visiting some stores, and it seems as though you've abandoned that strategy fairly quickly. I wanted to just see how much of the worst results in January is really attributable to the weather? And I know the weather was horrible, but can you give me a sense of how much of it was really the weather, versus how much of it was promotional strategies that just didn't work, that you kind of quickly moved back to more traditional strategies that seem to be resonating better both with your customers, as well as with your design associates?

Jeremy let me correct you. That's not the case. We did not abandon it, in fact, we increased it. Now what we did was in December, we decided to try a number of different initiatives. We decided that we would have in addition to our offerings for let us say for a whole month, we would offer something that would also be for a limited period of time, so we tried a number of things. We said that one of them would be drivers, that would be for about a two-week period. Then we said okay, let's see if we can take one of one item and say, that's probably what you were referring to, and said let's do it something like a fly sale for the weekend. We found that our people need more time on that, but the two-week drivers, which was mostly the more important part of it, we maintained it and we increased it. In fact, if you go and take a look at it right now, last Friday we started a two-week initiative on offering our bedroom products on sale. Similarly, we did the same thing in February. We did it in January, we offered different products, but we did it a two-week rather than a weekend.

Okay. I see. So just adjusting the time frame on that urgency?

Yes, because in our case, people just don't come and buy, they need to work with a designer and they need we found that two weeks is something that they need to be effective. And we just did, the other one we just did for a few items, just to try it.

Great. And so it sounds like then both the design associates, as well as the customers are responding better to the two-week time frame, as opposed to the five day time frame?

Absolutely. Right.

Yes.

Okay.

Thanks so much for taking my call.

Alright, Jeremy.

Thank you. And I'm not showing any further questions or comments in the queue at this time. I would like to hand the program back for any further remarks.

Thanks very much. We got a lot of things happening here, and I look forward to seeing you in June. Please as you know we have sent the date to hold the date. We also are going to send more information about it shortly. And if any questions, comments please give a call to me, or certainly to Corey. Corey is handling them, and Corey will be able to answer any further questions from you. So thanks very much.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect.