Ethan Allen Interiors Inc (ETD) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Ethan Allen fourth quarter 2014 earnings release. At this time all participants 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 introduce your host for today's program, Corey Whitley, Executive Vice President Administration and Chief Financial Officer of Ethan Allen. Please go ahead.

Thank you, Jonathan, and good morning everyone. Welcome to Ethan Allen's earnings conference call for our fourth quarter and fiscal year ended June 30th, 2014. 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 (technical difficulty) which could cause actual results to differ materially from those expected when making such forward-looking statements. Please refer to our SEC filings for a 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 John Bedford, our Vice President, Corporate Controller. After our Chairman and CEO, Farooq Kathwari, provides his opening remarks, I will follow with details on the financial results. Farooq will then provide further updates on our ongoing business initiatives before opening up the telephone lines for questions.

With that, here is Farooq Kathwari.

Yes, thanks. I am pleased to advise that Corey Whitely, Executive Vice President of Administration, who has been operating as an interim [CFO] of the company has been appointed as CFO. Corey has been with the company for 26 years and has experience in various areas of our enterprise.

We are pleased with our results, especially the fourth quarter results demonstrating the operating leverage of our vertically integrated structure. During the last several years we have continued to strengthen our manufacturing, retail, marketing and also to manage our operating costs.

The highlights of our fourth quarter, net sales of $198.8 million increased 9.1% compared to fourth quarter of fiscal 2013. Adjusted EPS, we are 47.1% to $0.50 compared to fourth quarter of fiscal 2013. GAAP EPS increased 107.1% to $0.58. Gross margin increased 60 basis points to 54.6% compared to fourth quarter of fiscal 2013. Adjusted operating income of $24.9 million increased 42.4% compared to fourth quarter of fiscal 2013. GAAP operating income increased 47.5%.

Retail division net sales increased 7.1% and generated adjusted operating income of $8.7 million, for an adjusted operating margin of 5.6% compared to 2.9% for the fourth quarter of fiscal 2013.

Cash and securities of $135.8 million increased $32.3 million or 31.2% of June 3, 2013.

Capital expenditures were $19.3 million year to date compared to $19.0 million the prior year, and inventories of $146.3 million increased as planned by $9.0 million.

Retail division, [retail] sales decreased by 5.5% compared to fourth quarter of fiscal 2013, and comparable written sales decreased 4.1% during the same time period. And as you know, the regular quarterly cash dividend was increased to $0.12 per share, an increase of 20%.

As I indicated in the press release, our net written orders were impacted with the timing of ending of the July sale, and a price increase effective July 8th, somewhat sluggish retail environment, Easter falling in the fourth quarter versus third quarter last year.

We had a strong end of sale event ending July 7th, reflecting taking the end of sale to July 7th from June 30th. And also accelerating price increase to July 8th compared to August 2nd in the previous year.

Our backlog and customer deposits increased. To fully understand the impact, we have to take into account the written business we receive in our first quarter of fiscal 2015. While it is somewhat early, but I know that you're looking for some guidelines, and despite a lot of factors that I mentioned, we estimate that our comparable written sales in the fourth quarter increased slightly from the previous year.

After Corey gives some further information on the financials, I will then discuss our business initiatives. Corey?

Thank you, Farooq. For the fourth quarter of fiscal 2014, consolidated net sales of $198.8 million increased 9.1% compared to the fourth quarter of fiscal 2013. Adjusted operating income was $24.9 million compared to $17.5 million in the prior year fourth quarter, with adjusted operating margin of 12.5% improved compared to 9.6% in the fourth quarter of fiscal 2013.

Adjusted net income of $14.6 million increased 48.3% over the prior year fourth quarter.

Wholesale net sales of $116.1 million increased 8.8% during the fourth quarter of fiscal 2014 compared to the fourth quarter of fiscal 2013. The retail segment net sales increased 7.1% for the quarter at $155.6 million compared to $145.3 million in the prior year fourth quarter. Both segments benefited from effectively [delivering] out the undelivered backlog that had grown in the third quarter, and in utilizing our stronger in stock positions on imports and on demand products.

The consolidated gross margin improved to 54.6% for the fourth quarter of fiscal 2014, from 54.0% in the prior year fourth quarter. The retail segment net sales were 78.3% of consolidated net sales. That compares to 76.2% in the third quarter, and 79.7% consolidated net sales during the fiscal 2013 fourth quarter.

As Farooq stated, total written orders by the retail segment for the fourth quarter fiscal 2014 decreased 5.5% compared to the fourth quarter fiscal 2013, while comparable written orders decreased 4.1%. The retail segment undelivered backlog at June 30th, 2014 is down 4.7% from June 30th, 2013. For the year to date fiscal 2014 period, the retail segment written orders are up 1.0% compared to fiscal 2013, with comparable fiscal 2014 written orders up 3.0%.

Our global retail network included 295 design centers at June 30th, 2014, unchanged from the prior fiscal year end. Independent retailers operated 152 design centers, including 91 international locations. This compares with 148 independently operated last year, including 86 international locations. Our global retail network had a total of 99 international locations at June 30th, 2014, as compared to 94 international locations in the prior year.

Our adjusted results in the fourth quarter 2014 exclude $0.7 million of international startup losses and a gain of $0.1 million on the sale of property. The prior year fourth quarter adjusted results excluded $0.9 million of international startup losses, and a $1.9 million charge associated with the buyback of senior notes.

Our normalized income tax rate for both the current and the prior year was approximately 36.5%. Adjusted earnings per diluted share for the fourth quarter 2014 were $0.50, which is 47.1% higher than the $0.34 cents per diluted share earned in the prior year fourth quarter. Please refer to our press release reconciliation tables showing the adjustments made to our results for all periods.

GAAP net income for the quarter ended June 30th, 2014 was $17.1 million, or $0.58 per diluted share, compared with $8.2 million, or $0.28 per diluted share in the prior year quarter.

Our continued profitability in our retail segment enabled us this quarter to reverse the valuation allowances on our state deferred tax assets. This noncash benefit, along with net favorable adjustments to uncertain tax positions, were the primary drivers behind an effective tax rate of 23.9% for the quarter. Our normalized future tax rate continues to be approximately 36.5%.

The fiscal year 2014 net sales were $746.7 million, an increase of 2.4% compared to $729.1 million in fiscal 2013. Fiscal 2014 gross margin and adjusted operating margin were 54.4% and 9.9% respectively, compared with 54.6% and 9.4% respectively in the prior year.

Adjusted earnings per diluted share for fiscal 2014 increased 10.7% to $1.45 compared with $1.31 in fiscal 2013.

Our balance sheet and liquidity improved this year. Our cash and securities at June 30th, 2014 totaled $135.8 million, an increase of 31.2% from fiscal 2013 year end. We have approximately $129 million of our senior notes remaining outstanding, which become due in October 2015. Our $50 million revolver facility remains undrawn, with only about $600,000 in standby letters of credit outstanding.

Our inventories at June 30th, 2014 of $146.3 million increased from $137.3 million at prior year end as planned, due to expanded assortment of in stock on demand products, and a better in stock position on import items.

Our capital expenditures for fiscal 2014 totaled $19.3 million. And depreciation and amortization for fiscal 2014 were $17.9 million.

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

Yes, thanks Corey. While we are pleased, our strong performance reflected continued improvement to our vertically integrated structure, control of expenses and the leverage created with increased sales, our focus for fiscal 2015 is to implement important initiatives to help increase sales.

These include introducing new product offerings. In fiscal 2014 a large new product program was developed under the umbrella of the next classics by Ethan Allen. The products are inspired by classic designs and are fashionable and more relaxed for today's lifestyle. The new product offerings include case goods, upholstery, soft accents, bedding, hard accents, rugs and other related products.

Most furniture products were designed to be made in our North America workshops. Products will be introduced by stages. During July, August and September, focus of marketing will also include selling of floor inventory to make room for new products. Some of the new products will be introduced in September, and a larger portion in October and November. Our objective during the year is also to increase our on demand, that is our in stock programs.

The external and internal projection of our design centers will be undertaken in August and September, reflecting the attitude created in our Danbury flagship design center. We plan to continue to strengthen our interior design associates, which today number over 1,500 in North America, and about 2,000 internationally.

During the last few years we have been able to attract experienced and entrepreneurial interior designers to join our retail division and our independent retailers. We also have expanded our IDA, that is the Independent Design Affiliate program, to now include over 4,800 interior designers.

We will continue to focus on relocation and opening of new design centers. In fiscal 2014 we continued with major progress of opening new and relocated design centers. In North America they include Winter Park, Orlando; the Burlington area of Boston; Portland, Maine; the Lyndhurst area of Cleveland; Calgary, Canada; Marlboro, New Jersey; Sarasota, Florida. Overseas we opened in Jeddah, Saudi Arabia; Bucharest, Romania; a second store in Amman, Jordan; a fourth one in Seoul, Korea. A number of design centers are opening in the next three months, including Doha, Qatar and a second location in Dubai, and relocations in Houston, Texas and Marlboro, New Jersey, and Marlton, New Jersey.

Introducing the redesigned website. During fiscal year we engaged outside specialists to work with us to substantially improve our website, and we expect to launch this in October 2014 as we increase our advertising presence.

Expansion of our North American manufacturing is proceeding well. As a substantial part of new furniture will be made in our workshops, we have continued to invest in our facilities in order to be ready for increased business.

As I mentioned, we will progressively increase our marketing in fiscal 2015, starting in the second quarter. At this time we are budgeting to spend about 30% more this fiscal year than we have spent in fiscal 2014. We also expect to invest about $28 million in capital expenditures to reposition our design centers and to invest in technology at all levels, especially in manufacturing, retail and marketing.

And at this stage, I'd like to open it up for questions and comments.

Certainly.

(Operator Instructions)

Our first question comes from the line of Budd Bugatch from Raymond James. Your question please?

Yes, hi. Good morning, Budd.

Good morning, Farooq. Congratulations on the quarter. Corey, congratulations on the permanent appointment.

I had a couple of questions to make sure I understand. Corey, were you giving the written sales so far for the new fiscal year? And could you go over those numbers if you were?

Budd, you're talking on new fiscal year, meaning fiscal 2015?

Yes, sir. I kind of got lost in a little bit of (multiple speakers).

No, what I said was that we did not give any numbers, Budd, on fiscal 2015 because, as you know, we're just into the fiscal year. What I did say was this, that our sale ended July 7th this year. It was June 30th last year. So that took our June business to July.

I said we did have a strong end to that sale, but I also said that in addition to the fact that the sale ended on July 7th, we also had a price increase. This year it was effective July 8th. Last year it was effective August 2nd. So we did take some business also into this July period from August.

So overall, as I said, we're strong, but keep in mind that we have to wait for the whole quarter to determine what our retail written business is going to be this quarter.

I understand that. That's what I thought, but I just wanted to make sure I didn't hear a number for something that you didn't give.

When you talk about the decrease in margin, or the impact of selling the floor samples, I think in last year's September quarter, gross margin was down for also the sale of floor samples, if I remember. And I think it was down about 120 basis points from the prior year. Should we expect gross margin for the first quarter, the September quarter, to be down sequentially from the fourth quarter and down year-over-year from the first quarter last year? Is that the way to read your comments on the sale of floor samples?

Yeah, approximately. What you are saying is more or less right. Obviously we can't say exactly what's going to happen, but I think that it is fair to say that we do have to sell $18 million, $20 million of floor samples between now to September, some in October, and that will have an impact. It of course hopefully will increase sales, bring in more traffic, but on the other hand it may have an impact on margins.

Okay. And the last question for me is when you talk about 30% more on marketing, are you talking about 30% more on the advertising you report in the K? And if so, since the K is I don't think out yet, what's the amount of advertising that you spent in fiscal 2014?

We spent approximately $30 million. And our objective is to increase that approximately by about 30%.

So about $9 million?

Yes, $9 million, $10 million. Yes.

Okay. Thank you, sir. Good luck on the beginning of the year.

All right, Budd. Thanks.

Thank you. Our next question comes from the line of Jessica Schoen Mace from Nomura Securities. Your question, please?

Yes, hi Jessica. How are you?

Hi. Good. Good morning.

By the way, you write great reports, Jessica. Very lengthy but I read all of those.

Oh thank you. I appreciate it. Congrats on the quarter, and congratulations to Corey.

My first question was about the smaller footprint stores. I was wondering if you could give us an update on where you are in that strategy and what maybe we can expect in the next fiscal year.

Jessica, I mentioned the new design centers that we had opened. Over the last, I would say 10, 12 years, our real focus has been to focus on our retail network to make sure they are in the right places. So relocation has been critical for us.

And in some cases, like for instance I mentioned Cleveland, Lyndhurst area, we over the years have closed -- we used to have three stores in the Cleveland area. Now we have one flagship location. And that we [have taken] -- Milwaukee, for instance, we had three, now we have one major one. Long Island, right here, we had in the Suffolk county we had three and now we have one major one in Garden City.

So, our strategies are, on one hand, to make sure that our design centers are in flagship locations. Then, wherever it makes sense, we have also taken these design centers and to somewhat reduce the size. We used to open up 20,000 square feet, and now, in some of these flagship locations, 10,000 to 15,000 square feet makes sense. Then in other areas, for instance Portland, Maine I mentioned, we had a 10,000 square foot and we have now opened up a 6,000 square foot. The smallest one I mentioned was in Orlando, in Winter Park, 1,600 square feet. Good performance, done well, but a little bit too small.

So our smaller locations are going to be in the range, in about 4,000 square feet, because in Winter Park we have only one designer, and if that designer has to go out on vacation, family leave or whatever, it sort of gives an issue. So we are in the process of looking and are going to open up, on one hand in markets like Winter Park, maybe 4,000 square feet. But in other markets, where we used to open up 15,000 to 20,000 square feet, it will be approximately 10,000 square feet, and Sarasota is a great example for that.

Got it. Makes sense. And then the second question I had was, on the strength in the topline that you saw in the most recent quarter, I was wondering if there's any additional color you could give? Maybe anything you've noticed about the consumer, different categories, or even different geographies in your business?

Yes, of course as you -- in our topline, first on the delivered represented, as Corey also mentioned, it represented some backlogs we had, some products. Our manufacturing is now gearing up. Some of the import products, which was delayed, came in. So our topline reflected our ability to ship products that we were making or receiving.

But in terms of the differences, what we have seen is for us, for instance, Florida has been very, very strong. It has continued to be strong. Southern California has been strong. These were the two major markets where we strength and others really represented to a great degree a lot of factors from our own positioning, our own marketing. And because, you know some markets, in for instance the mid-Atlantic and northeast we were strong, in some we were somewhat lower in sales.

Overall, as I mentioned, that in fact we did see some concerns of consumers. We saw them somewhat holding back. But overall, I think our marketing initiatives are strong and we should expect to, I think, get the benefit of it in the second -- in our first quarter and moving forward.

Great. Thank you very much for taking the questions.

Yes, thanks Jessica.

Thank you. Our next question comes from the line of Brad Thomas from KeyBanc Capital Markets. Your question please?

Thanks. Good morning Farooq, and good morning Corey. And Corey, let me add my congratulations on the appointment as well.

Thank you.

I want to just follow up a little bit about the outlook for the upcoming fiscal first quarter. I appreciate the color on the change in the timing of some events. Are there any other changes in events that we should be aware of as we think about the quarter? And then what sort of benefit do you think we should be modeling in, just from specifically the change in some of the timing?

Well Brad, as I mentioned, in the first quarter our focus really is to get the message across, the change is coming, that we have to make room. Plus of course we are also going to continue to market and sell our programs, because we still have a very, very large program in place. So it is going to be -- you are going to see us being somewhat aggressive in the first quarter. But the real marketing we're going to start increasing is in the second quarter, and then, even much more so, in the third and the fourth quarter.

Okay, thank you. And then with respect to the customer deposits, or the backlog, you clearly did a great job of reducing that in the fourth quarter. As we look ahead to the fiscal first quarter, is there an opportunity to continue to work through some of the backlog?

Well the backlog is now somewhat lower, obviously, maybe 4% or 5% lower. But then we made it up by the end of -- as I mentioned, that our sale ended July 7th, was stronger, so our backlogs increased. I think that we don't have, at this stage, excessive backlogs. They are a normal part of our business. Levels of backlogs, that's what we have.

But having said this, our good news, Brad, is that we have been investing a great deal in our manufacturing in North America. Now you know our model is quite different than a lot of other folks, who basically go out and buy a lot of product. They have it and then they sell it.

In our case, we make it. And almost 70% is actually in upholstery, and even in our wood products is custom. So we need to have the capacities to make sure that we are able to make the product and ship the product. So our capacities in North America, which is

Vermont, which is North Carolina, and now we have made a great amount of headway both in Mexico and Honduras. So are in a much better position.

But having said this, the new products that we are developing are being made in our own factories and it's much more complicated. You saw it. It has great finishes. And a lot of new products are coming up. So we're going to have some startup challenges, as we already have right now. But the good news is, our manufacturing is in great shape and we're going to continue to expand it so that we should be able to service as we increase our business.

That's great. And if I could just ask one more question about China. If you could just give us an update on how many stores you have there today and what the sales performances look like in China.

Well I'll tell you this, one of the things, I must tell you this about one of our great partners from China is (inaudible) sitting here. [We have] a whole team from our associates there are visiting us here because they are -- you know it's amazing how -- I had a conversation -- they are sitting here with me, and I invited them to join.

And they said, you know we know that we always operate with speed, but we're going to now even accelerate our own speed. Which means they're going to be expanding and they're going to be opening a number of stores. And I think, you know their chairman has set a goal in a relatively short period of time of going from 70 to 100. And so they are very aggressive. They've done a great job. And I think that our results also reflect the fact of this business, increased business that is now coming back from China.

Great. Thank you so much.

All right, Brad. Thanks.

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

Good morning guys, and thank you for taking my questions today. I wanted to just ask a little bit, Corey, about whether you could break out the monthly written orders as we've done the last couple of quarters? What you saw in April, May, June.

You know, Jeremy, we really don't have the breakout right here with me and I don't think that's something that we typically do. You know the numbers that Farooq talked about really (multiple speakers).

I tell you that it was pretty consistent. We didn't have big major spurts (inaudible) Jeremy from month to month. This was not something -- and again, the main reason being this. We took the June sale to July. That's where the main effect would have been. But the rest of the -- I mean March and April were somewhat consistent with what we had done in the previous years.

Yes, not a big change.

So can I assume then -- so were April and May then positive or negative?

I think that they were pretty much close to what we had done last year.

Okay, so flattish. Okay. Thank you. And then just in terms of -- you know, what's really stuck out to me was you had significant leverage on your operating expenses in this quarter, substantially more than you've had really in a couple of years, and at just over 42% of sales.

Can you just discuss a little bit about how you were able to achieve that type of operating leverage on your model? Is there something that's inherently changed over the last three or four months? Is it sustainable to see that kind of leverage going forward? How should we be thinking about that because that really was a pretty impressive job on controlling expenses?

Yes, I think, Jeremy, if you take a look at it, if you take our fiscal years, like the fiscal year ending 6/30/2012, our total operating expenses were about $341 million. The next year it was $338 million. And in fiscal 2014 it was $336 million. And even if we exclude some of the special charges, they're about almost the same.

So we've been able to really, to a great degree, maintain our operating expenses. And the main area that really we've had a great amount of impact has been in the retail division. And that also reflects what I said earlier in terms of consolidating our retail to more prime locations, but fewer retail. So that had a major impact of managing our operating expenses on the retail.

The others also, our retail expenses did increase in our manufacturing because of the fact that we have been expanding our manufacturing operations in Mexico and in Silao, in Mexico and in Honduras. And the rest is really, you know we watch every dollar we spend here.

Would you be able to provide maybe even a little more granular color in terms of where those save -- the leverage came from? How much of it was let's say kind of payroll? How much was G&A versus let's say marketing expenses?

I don't have the numbers in front of me, but Corey, when you get a chance, show them to me before you talk to Jeremy. How's that?

All right.

All right, Jeremy, he'll talk to you after he talks to me.

Okay, great. Thanks for taking my question.

Thanks, Jeremy.

Thank you. Our next question comes from the line of Todd Schwartzman from Sidoti. Your question please?

Hey Todd. Good morning.

Hi Farooq. Good morning. Hi Corey. Thank you for taking the call, and congratulations Corey.

Thanks.

I wanted to speak a little about just the long-term future of your domestic case good manufacturing. Farooq, you had pointed out that a number of your competitors do not manufacture anything. Of those that do, in the last year or two at least a couple of them have reversed course a bit after taking back onshore some manufacturing that had previously been sourced overseas. There was another reversal of [core].

So a question is, again thinking long-term, is there a big enough pool of available talented craftsmen do you think that are coming up that will be sufficient to sustain your domestic manufacturing presence?

Yes, Todd it's a good question. You know six or eight years back, the easiest thing was to do to close all the manufacturing in the United States. We did not do that. We consolidated. We had 31 plants in the early '90s. We had three sawmills. We decided that we'll consolidate them to our best locations where we had [the abilities], also had reasonable availability of crafts people, and as well as the locations with our facilities and equipment and everything else.

I think that we did maintain and we also worked on lower margins. Our products that we were getting overseas had higher margins. I stated that. So we decided, as a business, that we will do that because I was somewhat concerned that part of that -- you know I'm talking about six years back, or seven years back -- that we should not give it up and we should maintain that presence. And today I think we are now starting to see that it is important to have the presence.

But the question that you raise is an important one. That is the question of availability of labor. It is less -- so technology becomes very, very important. If you now go to our manufacturing in North America, and especially in the United States, you would see tremendous amount of technology, which has reduced the labor. We have to do that. They are doing in in China, so we don't have an option here.

So I think for the foreseeable future, while it is some challenge, but we are in good places where there is labor available. Where there was a shortage, for instance in our upholstery operations, getting qualified sewers and cutting of fabric was a tough, tough situation so we opened up in central Mexico. We have now 700 people working. We also gave them a lot of technology. Without that, our North American upholstery manufacturing would not be as viable as it is today. Combining the two makes sense.

Our Honduras operation is also helping us in our case goods. So combining that with our operations in Vermont, where we have a sawmill and rough mill and also a manufacturing plant, and in North Carolina, it works. So I think yes, if we do not invest in technology, and if we do not diversify, we could have made manufacturing in Southeast Asia, that was an option. But we said no, we'll go to the North American zone. That's helping us, Todd.

Well if you had to take a rough guess, Farooq, looking at the Vermont and North Carolina facilities, what would you say the average age is of the skilled laborer versus maybe 10 years ago?

You know we don't discriminate, Todd. I mean people -- age is not a factor, but I do understand your question. The average age, I would say, you know it depends. It is -- if you take Mexico, where the average could be 22, 24, in North Carolina and in Vermont it would be between 45 and up.

Thank you for that. With all the products to launch, and I just want to just ask for some clarification. You were talking about the timeline of the rollouts, and you initially said July, August and September. And that's consistent with what you had spoken to in the last couple of months. But then I thought I heard a reference to some event, some launches in October and November as well. Did I hear wrong?

No, let me just clarify, Todd. We are going to start shipping of new products to our retailers in August, but in stages. The products that we'll ship in August will be available to be marketed in September, it's a smaller portion. In September we'll be shipping a much larger, so that we can then start marketing it in October. And by the end of September, and early October, all the new products would have been shipped.

So from a marketing perspective, we have to market it. Once the product is in our design centers, our design centers also are going to get a fair amount of renovation from now to September, and even early October. You know 200 of them are going to be renovated. So we're going to be investing money to fix them, and that's why we're increasing our capital expenditure. So we are going to -- the products are going to be coming into our design center by stages, and our marketing is going to reflect that.

Got it. And could you repeat your CapEx expectation for fiscal 2015?

About $28 million.

Okay. How should we think about year-end inventory with all the puts and takes?

Well you know we increased $9 million last year. 66% of that was finished goods and the rest was between work in process and raw materials. As we move forward, we are, just for purposes of our own budgeting, we are expecting to spend under $10 million to increase in our overall inventories, which will also reflect (inaudible) more on a planned basis we're going to increase our on demand product available in our design centers.

So the increase is going to be a little less than $10 million year-over-year?

About $10 million, yes.

Okay. And lastly, did you buy back any stock in Q4?

No, we did not. We did increase the dividend by 20%.

Yes. I did see that. Thank you very much.

All right, Todd.

Thank you. Our next question comes the line of John Baugh from Stifel. Your question please?

Hey John, good morning.

Good morning, Farooq. And good morning Corey as well. Congratulations. Let's see, most has been asked, but did the price increase, Farooq, in terms of magnitude similar year-over-year? What was it?

It's approximately 4%.

And then your new brand manager position, could you update us on sort of what, if anything, has been learned, executed, et cetera?

I mean one of the main things our new brand manager really has spent time has been on our website. That's a very, very important part of the next step. But as you know today, generally speaking the retail traffic has declined, year-over-year. Department stores, malls, everywhere, because people used to go window shopping, now they do it on the website. And if the website is not great, you're not going to go to the next level.

So we have spent time on our website. So our marketing team and in fact you may remember, Nora Murphy was executive vice president of style and then sort of left for about four years, has rejoined and is now working also in our branding, because she also -- she's of course a very, very talented interior designer. So she and Dave Moore, who is the new head of our advertising, they're working together. So you're going to see some great things going forward, John.

And does it mean anything to measure website hits for Ethan Allen? And if so, what have they been trending over the last, I don't know, 24 months?

Well you know, we have so far -- because we have also taken part of our advertising has gone into digital advertising. We are sending out email blasts, which I hope you are getting. And what it has done is, it has increased substantially our traffic to our website, but still not enough. It has also increased some of our ecommerce, but not enough. So what you're going to see is a greater increase in traffic to our website. And even though we want people to go into our design centers and buy, but we are also going to increase our ecommerce business as well.

And that conversion is what October 1st, October 31st? What's the --

Probably around the middle of October.

John Baugh Middle of October, okay. And then could you just give us a guideline, you mentioned all the relocating and opening new stores, closing new stores. You know if we're at this time next year, what do we look like in store count in total? How many will be open? How many would we close? And what the maybe net square footage change would be. Thank you.

John, I think the net square footage hopefully is going to be lower, because we want to have less square footage doing more business. However, from my perspective at this stage, most probably by the end of next year, the square footage will be about the same. We'll have more design centers relocated, and most probably internationally and domestically about 8 or 10 new stores opened up.

So we'll have maybe a net store gain of 8 to 10 or is that a gross number that you're going to then close some off of?

Yes, I would say the net would be between 5 and 10.

Right. Thank you. Good luck.

All right, John. Thanks.

Thank you. Our next question comes from the line of Kristine Koerber from Barrington Research. Your question please?

Yes, hi there. Good morning.

Hi. Good morning. I have a couple of questions. First, as we look at the new merchandise rollout, how should we think about margins going forward? Because I know a lot of the products are going to be made domestically and I believe in the past you said we should expect higher margins. Is that correct? And if so, how should we think about the margins?

This is Kristine, right?

Yes it is.

Yes, yes. Kristine, how are you?

Good. Good Farooq.

Yes, good. Now Kristine, if you take a look at gross margins, and you should take a look at this last quarter, we have 54.6%. Previous, in the third quarter we had 54%. And if you go and take a look in the last three or four years, it has been between 53% and 54%, and you know 54.6%. I think approximately in that range is what our expectation is. Whether it has been between 54%, and when we got everything in you gear up maybe to 55%.

So while there's an impact, but I think because of the fact of our wholesale business, our retail business, and the gross margin to some degree is also impacted as a percentage of total retail to our total business. So if our total retail division business increases, our total gross margin goes up. But I would say that for purposes, if you use approximately around 54% or so, you're okay.

Okay, great. That's helpful. And then as far as the advertising, the step up in advertising, the $9 million to $10 million, can you give us some idea of the spread throughout the second and fourth quarters? And I know it's going to step up throughout the quarters, but what should we expect? And then as far as direct mail pieces, I believe last year in the fall there was a big bump in the direct mail pieces. I mean how many are you expecting to mail this year over last year?

Our advertising in the first quarter will be somewhat consistent with what we did last year. And the second quarter, we'll approximately increase it by between 10% or so or 15%, between 10% and 15%. And third quarter to fourth quarter is where we will be spending much, much higher levels.

Okay. And then the direct mail pieces, how should we think about that versus what you mailed last year?

Well Kristine, we are taking a look at whether -- we are right now in the process of determining direct mail, national television, digital advertising, shelter magazines. So you're going to see us in most probably in all those mediums. So there will be a much more -- or we'll be spreading our advertising in those mediums. Certainly we have a stronger presence in shelter magazines. We're increasing digital. We'll maintain direct mail. And looking also very -- right now looking very closely of getting back into national television.

Okay. And then just lastly, I guess you know throughout this repositioning, I'm just trying to get an understanding of, with the new product being rolled out, I mean when do you think the design centers will be positioned to where you want them to be, from a merchandising standpoint, et cetera? You know is that early next year, or later in the year? I know there's just a lot going on. I'm just trying to get an idea of when you think all this will be done.

This is of course always a continuous process. However, by end of October, the phase that you saw in Danbury is going to be implemented in some 100% the way, as you saw it, and in some maybe 70%, depending upon the location and the size. But by the end of October, this current projection that we have, our objective is to implement it. So it's a very, very aggressive program that our team is working on.

Okay, great. Thank you.

Yes, thanks Kristine.

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

Oh hi. Good morning and congratulations on a strong quarter. I wanted to ask about the impact of in stock product sales on written orders. So when someone comes to a store and places an order for an on demand or in stock product, does that not get booked as a written order?

It does. Everything is booked as a written order. And so there's no difference whether they buy it -- whether the product is an in stock or custom. It all gets into our written orders.

Okay. And the floor samples as well? I'm just trying to reconcile because it seems like within the last year there's been a wider gap between the written trend and your total sales, so the different components of what causes that difference.

Yes. Everything that we sold at the retail level goes into written, into our written business, whether they are floor samples, whether they are on demand, they are custom. And the difference that you just referred to was that in this last quarter or so you saw was the fact that we caught up on our manufacturing and also some of the imported products, so we were able to ship. So you know hopefully we'll always -- well we should have somewhat of a higher backlog than shipments, but we're getting more in balance.

So it's just timing?

It's timing, yes.

(Inaudible) difference. Okay. And then, I mean you mentioned traffic being weak across retail, and we've seen that a lot. I mean how does the traffic trend through your quarter? Was it better year-over-year? Or is the benefit you're seeing mostly from higher ticket and conversion?

Now Cristina, I mean let me just clarify this thing about traffic. What's happening is, as I said, window shoppers are going to the website and more qualified people are coming in. We've got to keep that perspective in mind, that the people who are coming in are much more qualified. And so today you cannot just compare the total traffic as it used to be before, before this whole technology and the websites and the mobile and everything else. So we're looking at it from a different perspective.

Certainly, and the good news is, we have much more qualified people coming in. Because when they come in, they have also done their homework. They've already gone on the website. They have studied us. So that qualified traffic is increasing. Overall traffic is somewhat down or flat.

Okay, thank you.

Thanks.

Thank you. Our next question comes from the line of Justin Bergner from Gabelli & Company. Your question please?

Yes, hi there.

Good morning, Farooq.

Good morning. How are you?

Good thanks. Good morning, Corey. Most of my questions were actually just asked, so I'll ask a general question. Which is, sort of looking at the June quarter versus the prior quarters, what aspect of your business provides you sort of with the most optimism going forward? And what aspect of the business continues to be challenging?

A good question. You know this is an overall question. I think that our structure is the most positive factor. We are a vertically integrated structure. We look upon our interior designers -- you know we are the leading, if not the largest interior design company. We look upon our interior designers as in-house entrepreneurs. We have strengthened them. And these are the entrepreneurs that really is the strength of Ethan Allen, 1,500 entrepreneurs right in North America, plus internationally. So that is our biggest strength.

The second one is the fact that we have 200 locations all over North America, now plus a hundred internationally. And today these locations are in better locations. We've spent in the last 10, 15 years has been relocating to better locations.

The third factor is our focus on our brand and our products. We have always been known for classics, but we needed to update them to make them more fashionable and relaxed. And now as we implement them, I think we're going to have an opportunity of reaching a larger consumer base.

Technology is very, very critical. And today, as I said, we're investing a lot in technology, in our manufacturing, in our retail, in our website. And finally, our manufacturing, that we have maintained. And it's not been easy to build new manufacturing sites in the last few years, which we have done. And [we've now geared] them up and I think as we go forward all of these are starting to get into balance.

Great. Thank you. One specific question, which is could you comment on how accessories trended this quarter and how large a portion of your business they are now?

You know they are increasing, and you're going to see a lot of emphasis on our accessory product lines. They are increasing and you're going to see a lot of focus on all accessories, which goes -- in fact we've introduced a very strong bedding program, and we are putting in sleep shops in our design centers, which we have done in Danbury and we are now launching it all nationally. So non-furniture is going to become a much more important part in our product offerings and in our advertising as we move forward.

Okay. Would you want to include any figures in terms of how (multiple speakers) trended at this time or just (multiple speakers)?

You know right now they are 16%, 17% of our total business. And in the next year or two, our objective is to take it to between -- to at least to 20%. And keep in mind, the furniture is also going to be increasing, and that's our objective.

Great. Thanks. And good quarter.

Thanks very much.

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

All right, Jeremy.

Hi. Thanks for taking one quick follow up. I just wanted to ask, in terms of your retail, the retail segment as a percent of total sales, I think last year in FY 2013 it was a little over 79%. This year it looks like it's a little under 78%. And just reconciling with the question that was asked about real estate for 2015. Should we be thinking that retail sales as a percent is likely to slightly go lower than what it was this year? (multiple speakers) just because of the changes in the real estate.

No, not -- go ahead Corey. What are the numbers that you gave?

Yeah, I would expect it to stay pretty close to that 78% range.

Okay. Okay, great. Thanks so much.

All right, Jeremy. Thanks very much. Okay, Jonathan, I hope you're done.

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

All right. Well this has been a good call and lots of good questions. And thank you for being on the call, and those folks who are also listening to us on our webcast. If you have any questions, comments, please let us know and you can always reach Corey Whitely here. Thanks very much.

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