Ethan Allen Interiors Inc (ETD) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ethan Allen fiscal 2015 third-quarter earnings conference call. Now I will introduce your host for today's conference, Corey Whitely, Executive Vice President, Administration, and CFO. Please begin.

Thank you, Andrew; and good afternoon, everyone. Welcome to Ethan Allen's earnings conference call for our third-quarter and nine-months year-to-date ended March 31, 2015. 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.

As a reminder, our comments today will include forward-looking statements that are subject to risks and uncertainties which could cause actual results to differ materially. 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 and 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.

Thank you, Corey. And thank you for participating in our conference call to review the three months and nine months ended March 31, 2015. As we had advised in our press release of April 14, our sales for quarter ended March 31 are $173.3 million, and adjusted earnings per share of $0.18 compared to $0.22 in the previous year.

For nine months, our sales of $561 million showed an increase of 2.4%, with adjusted operating income of $50.6 million or 9% of sales compared to $49.4 million, also at 9% of sales.

Our sales and earnings during the quarter were impacted by several factors, including: gross margins remained strong at 54.3% compared to 53.8%; wholesale gross margins improved, despite major disruptions in manufacturing due to new product programs; while gross margins at retail divisions declined, due to sell-off floor samples and planned dropped inventory.

Operating expenses also increased, particularly at our retail division, due to strengthening of management and interior design associates. The overall environment is very promotional, with our competitors offering products at large perceived or real savings.

In the fourth quarter, while maintaining our credibility internally and externally, we plan to be more aggressive in our promotions. Our advertising increased 7.3% during the quarter, mostly at the retail division level.

We are pleased -- we continued to strengthen our capital structure. During the quarter we redeemed $129.4 million of the 5.375% senior notes. We also increased our dividend payments during the quarter by 20% compared to previous year and also further increased future corporate dividends by 16.7%.

We also resumed repurchasing stock -- during the quarter utilized $2.8 million for repurchase of our stock. And this month the Board increased the repurchase authorization by an additional 2 million shares, taking the repurchase authorization to about 3 million shares.

As we noted in the press release, our many initiatives are very important to our longer-term growth of sales and profitability, and we expect some disruptions in the next six months. We are adding strong product programs, freshening up our design centers, adding to our professional interior design associates of 1,500, and investing in our US and other North American manufacturing. I will provide greater details about our plans after Corey gives a brief overview of our financial results. Corey?

Thank you. For the third quarter of fiscal 2015 consolidated net sales of $173.3 million increased 0.1% compared to the third quarter of fiscal 2014. The fiscal 2015 nine months year-to-date consolidated net sales were $561 million, an increase of 2.4% compared to $547.8 million in the nine months year-to-date of fiscal 2014.

The consolidated gross margin of 54.3% for the third quarter of fiscal 2015 improved from 53.8% the prior-year third quarter. The retail segment net sales for the third quarter were 74.7% of consolidated net sales compared to 76.2% during the fiscal 2014 third quarter. This change, together with continuing discounts on clearance sales at retail, and manufacturing inefficiencies, and ramping up with the new products negatively impacted gross margins. This was partially offset by an increase in wholesale sales and a decrease in inventory profit elimination. The year-to-date gross margin was 54.4% -- no change compared to the prior fiscal year-to-date period.

Consolidated operating income for the third quarter was $9.2 million with an operating margin of 5.3% compared to $9.6 million in the prior-year third quarter with an operating margin of 5.5%. The year-to-date operating income was $47.4 million with an operating margin of 8.4% compared with operating income of $45.3 million with an operating margin of 8.3% in the prior year-to-date period.

Consolidated adjusted operating income for the third quarter was $10 million with an adjusted operating margin of 5.8% compared to $12 million in the prior-year third quarter with an adjusted operating margin of 6.9%. Adjusted operating expenses in the third quarter increased $2.9 million over the prior-year third quarter, primarily by increased advertising and additional expenses at retail. Year-to-date adjusted operating income was $50.6 million with an adjusted operating margin of 9% compared to $49.4 million with an adjusted operating margin of 9% in the prior year.

Wholesale division net sales for the third quarter increased 1% and generated adjusted operating income of $14.5 million for an adjusted operating margin of 12.9% compared to 11.7% in the third quarter of fiscal 2014. Year-to-date wholesale division net sales increased 4.6% and generated adjusted operating income of $50.6 million, for an adjusted operating margin of 14.3% compared to 12.9% in the prior-year period.

Retail division net sales for the third quarter decreased 1.8% and produced an adjusted operating loss of $4.3 million for an adjusted operating margin of negative 3.3% compared to an adjusted operating margin of a positive 0.6% for the third quarter of fiscal 2014. Year-to-date retail division net sales increased 0.6% and generated adjusted operating income of $1.5 million, for an adjusted operating margin of 0.3% compared to 1.5% adjusted operating margin in the prior year.

Total comparable written orders by the retail segment for the third quarter of fiscal 2015 decreased 0.4% compared to the third quarter of fiscal 2014, while total written orders decreased 0.7%. Year-to-date fiscal 2015 comparable retail segment written orders are up 2.5%, and total written orders are up 1.6% compared to year-to-date fiscal 2014. The retail segment undelivered backlog at March 31, 2015, is up 1.4% compared to March 31, 2014.

The retail segment operating operates a total of eight design centers in Canada and Europe, and the strengthening US dollar resulted in a decrease for the retail segment of 0.7% in both net sales and written orders and a decrease of 0.6% in comparative written orders during the third quarter. The Company's consolidated net sales for the quarter were negatively impacted 0.5%.

Our global retail network included 299 design centers at March 31, 2015, compared to 296 in the prior year. Independent retailers operated 155 design centers, including 97 international locations. This compares with 151 independently operated last year, including 90 international locations.

Our global retail network had a total of 105 international locations at March 31, 2015, and 98 in the prior year. For the third quarter, international sales accounted for 13.6% of our consolidated net sales compared to 11.5% in the prior-year third quarter.

Adjusted net income for the third quarter was $5.3 million or $0.18 per diluted share compared to $6.5 million or $0.22 per diluted share in the prior-year third quarter. Adjusted net income year-to-date was $28.9 million or $0.99 per diluted share compared to $27.9 million or $0.95 per diluted share in the prior year.

Our adjusted results in the third quarter of fiscal 2015 exclude an impairment charge of $0.8 million and $3.7 million associated with their early extinguishment of our senior notes. The prior-year third quarter excluded $0.7 million in international startup costs, a $1.6 million loss on the sale of real estate, and a $0.1 million restructuring charge.

Our normalized income tax rate for both the current and prior year was approximately 36.5%. Please refer to our press release reconciliation table showing the adjustments made to our results for all periods. GAAP net income for the quarter ended March 31, 2015, was $2.5 million or $0.09 per diluted share compared with $5.3 million or $0.18 per diluted share in the prior-year quarter. GAAP net income for the year to date was $24.5 million or $0.84 per diluted share compared with $25.8 million or $0.88 per diluted share in the prior year.

Our effective tax rate was 35.5% and 36.5% for the three and nine months ended March 31, 2015, compared to 32.5% and 35.3% for the three and nine months ended March 31, 2014. Our balance sheet remains healthy, and we continued to strengthen our financial structure during the quarter, now with 40% less debt than a year ago due to the early extinguishment of our senior notes.

On March 18, 2015, we redeemed the remaining balance of $129.4 million of our outstanding 5.375% senior notes, accrued interest of $3.2 million, and make-whole payment of $3.5 million funded with $61.1 million from the Company's existing cash balances and $75 million from our $150 million credit facility. In connection with this early redemption, the Company incurred a $3.7 million pretax charge consisting of the make-whole payment along with unamortized balances of bond discount and other costs.

At March 31, 2015, there was $75 million outstanding under the credit facility, together with $0.2 million of standby letters of credit, leaving $74.8 million of availability. The annual interest rate in effect on the credit facility is currently slightly less than 2%. Our total cash and securities at March 31, 2015, totaled $72.8 million, a decrease of $52 million compared to March 31, 2014, mostly due to our early redemption.

Year to date, we also paid out dividends of $9.9 million. The Company raised the dividend by 20% in Q1 of this fiscal year, and now again by another 17%, as announced earlier this month, taking the dividend to $0.14 per share.

During the quarter we resumed our stock repurchase program by utilizing $2.8 million to purchase 103,766 shares. The Board of Directors this month authorized an increase to the stock repurchase authorization of 2 million shares, taking the total open purchase reauthorization to about 3 million shares. We plan to continue to enhance long-term shareholder return by investing into our infrastructure, payment of cash dividends, and by taking an opportunistic approach in the repurchase of our stock.

Our year-to-date capital expenditures and acquisitions for fiscal 2015 totaled $19.5 million compared to $12.6 million in the prior year. We expect total year capital expenditures of $26 million to $28 million as we continue to invest in new technology in the retail and wholesale segments as well as incur capital expenditures related to improving and growing our design centers. We expect total-year depreciation and amortization for fiscal 2015 of $19 million to $20 million. Inventory of $154.9 million increased as planned by $9.9 million from March 31, 2014. With that, I'll pass it back over to Farooq.

Thank you, Corey. As we have discussed, our focus is to aggressively implement many initiatives to position the Company for growth. Developing products under the overarching umbrella of what we call classics, Ethan Allen has long been known as -- and continues to be known as -- America's classic design brand.

Our classics include a range of designs from what we call Romantic Classics to Casual Classics, all reflections of good design; fashion sense; superior quality; and good value. The offerings are being developed and introduced in phases.

During Phase I last fall, we introduced new products, and most fell under the umbrella of Casual Classics. During Phase II we introduced products early this year under the umbrella of what we call Romantic Classics. These products are arriving in our design centers now and will be substantially delivered by end of May. We have a strong advertising campaign starting in June to launch these new products. Our Phase III products also strengthen Romantic Classics and are planned to be marketed to consumers this fall.

Focus on the North American manufacturing: most of the new furniture is being designed for and being made in our US and other North American workshops. We continue to invest in technology and expanding capacities in our manufacturing facilities. We continued to strengthen our design center network by adding to management, interior design associates, and operational infrastructure. During the last six months, between the Company and our retailers, we opened new design centers which are either new or relocated in Chattanooga, Tennessee; Las Vegas, Nevada; Pittsburgh, Pennsylvania, and Redding, California; and another 10 in China.

Currently we have 10 design centers in the US under construction or about to start construction. In addition, we have an aggressive plan to refresh the interior and exterior projection of our design centers. We continue to invest in technology at the wholesale and the retail levels. In this regard we are focused on advertising and developing the right platform to increase traffic to our website and also, most importantly, to increase our e-commerce business.

We have a major campaign to increase our communications. The 328-page Muses book was launched last week. This book is a major communication tool, and we strongly urge you to visit our design centers to get a complimentary copy in May. The Muses book was sent last week to about 2,000 of our associates and 3,000 to individuals whom we call influencers in design.

In May we are mailing our 4 million copies of our direct mail to customers and prospects, inviting them to visit our design centers to get a complimentary copy of this very inspiring interior design book. We believe this book will further enhance our brand from being known to being even more desired and help drive more qualified customers to our websites and to our design centers. And as I mentioned -- this is very important -- we plan to be more aggressive in our promotions, starting in this fourth quarter.

We continue to also focus on improving stockholder returns. In our April 14 press release, we provided a perspective that since we took the Company public after a management buyout, we have invested in capital expenditures of $737 million, including investment in retail and manufacturing properties and acquisitions; repurchased 18.3 million shares for $535 million; paid cash dividends of $345 million; and repaid over $300 million of debt. During the quarter we substantially increased the current and future cash dividend. And our objective is to continue to -- and our main objective, really, is to continue to grow our sales and profitability.

And as you also know, as Corey mentioned, the Board authorized to repurchase up to 3 million of our shares. We are pleased that the many initiatives and, as you know, our vertically integrated structure provides us an opportunity to leverage our profitability with increase in sales. And that really is the focus.

With this I am pleased to open for any questions or comments. All right, we are ready for any questions or comments.

(Operator Instructions) Jessica Mace.

My first question is -- I was wondering if you could tell us -- in the context of your results for the quarter overall, if you can give us some color on how the new product is performing from Phase I last fall?

Yes. In the Phase I last fall the products that we introduced were more what would call under Casual Classics, as you know. In that, most of the products are doing extremely well, especially the upholstery products. The case products are sort of -- you know, sort of mixed results on those. Those that are somewhat more modern have less of an impact; those that are more classic are having a better results. And that's why, as I mentioned, this focus on the classics for us is very important.

Understood. And then as some of the disruption with regard to this transition has occurred, has there been anything that has been a surprise or different than your expectations? Or has it mostly been as you expected going into this process?

I think that from the operations point of view, from manufacturing, we have done extremely well. Isn't a positive in the sense that -- just tremendous disruption. But our overall wholesale gross margins improved.

I think that where I had mentioned, and I repeated it a couple of times, is really -- I think that our sales have been impacted because of the fact that we were competing against very high promotional activity, and we were not as strong as we needed to be. If there is any surprise, it is a fact that we need to be stronger in that respect, Jessica.

Okay. Great. And just finally, on the advertising expense, I think you said it was up about 7% in the quarter. Was that in line with plans? And could you give us any -- just remind us for the advertising increase plans for the remainder of the year?

Yes. Advertising was more or less on the plan. You know, we have been somewhat careful of not being extremely aggressive with all this trail of our -- what you might call the clearance sales and everything else going on. The advertising represents in the quarter were 5.5% of our sales versus 5.1% of sales in the previous-year quarter. So it was -- it is higher in terms of the percentage of sales. Our objective really is that it should be between 5% and 5.5% of overall sales, but of course the sales have to increase.

Great. Thank you so much for taking my questions.

Brad Thomas.

Good afternoon, Farooq. Good afternoon, Corey. My first question would be around everyone's favorite topic, the weather. And if you could just maybe give us a little bit more color on how much of an impact you think that had, and maybe what some regions -- how well some of the regions performed that didn't have the heavy snow that you all had in the Northeast?

Yes, Brad, as you know, we didn't mention about the snow because I've come to the conclusion that weather is going to be off and on all the time. But for us, now that you mention it, we were particularly held, especially because we have already strong presence in Northeast. So our Northeast was impacted, both in terms of written and delivered.

And it also impacted our manufacturing. In Vermont and, in fact, interestingly, more so in North Carolina, we had very bad ice conditions. So I would say that our retail delivered -- could have been somewhat close to or higher than last year. That would have had a positive impact on our retail margins and overall margins.

It's very hard to quantify, but I would say that's because of the issues of deliveries, and -- hard to quantify how much of business we lost, but certainly we lost some business because of the strong presence we have in the Northeast, in Mid-Atlantic, both in manufacturing and retail, Brad.

Okay. Great. And to follow up on your comment about promotions, I guess could you give us a little more color on maybe how significant of a drag you think that is that you are not being as promotional as your competition is? How much do you have to cut? How deep do you think that could hurt margins in the fourth quarter?

I think it's also a question of perception. It's also reality and perception. As you know, we start with an everyday best price that's a credible price. We have 1,500 interior designers out there who work with clients. They actually have clients.

And so we are always very, very careful about the fact of their credibility and the credibility of our clients. But having said this, for instance, if you take a look at in April, you will see that we have been somewhat more aggressive; but I would say that we have also been very much, you might say, carefully aggressive.

For instance, we have created what we call an umbrella sales for the month -- it's all, of course, on our website; you can see it -- and creating what we call two drivers. One ends in the middle of the month, and one ends in the end of the month. So I think previously we did most of our business toward the end of the month.

By creating these urgencies -- and our philosophy before was that our designers and customers need time; but now we find that both customers and our designers believe that they need less time. So right now we are giving them about two weeks to close, and we see that it had an impact. Already in April it is having a positive impact. It's still early, but I believe that not having that sense of urgency during the month and even having what you might call putting some more products on sale had an impact on our overall sales.

But your question: you know, it certainly might have an impact on margins. But if we increase our sales, our leverage is such that we have more positive impact on operating earnings than the negative impact of giving up margins at gross margin level.

Of course. Of course. And if I could just squeeze in one more about stores or design centers in the US: I think you mentioned a number that were under construction right now. Obviously, over the last few years, the number of stores you've had in the US has come down. Are we hitting an inflection point? Do you think we'll actually grow the US store count going forward?

I believe so, too. We have -- we are going back into markets, Brad, that we gave up. In the 1970s or so, when the Ethan Allen system was set up, we at that time had one size store, about 15,000 square feet, whether it was in Chattanooga, Tennessee; or it was in Washington; or New York.

But now, of course, we found out that today we don't need 15,000 square foot stores in Chattanooga; or Wichita, Kansas; or many, many, many markets like that. So we are going back into those markets. We did close them in the last 10 or 15 years; they were too big. Immense amount of inventory. Most of them were operated by independents, and as costs increased, it was hard for them to maintain these large stores.

Now we are going back, and you are going to see us go back into these markets. Like, for instance, we just opened in Chattanooga; we opened a smaller one in Pittsburgh. We have larger ones in Pittsburgh, too. We are under construction in Wichita, Kansas. We just signed a lease in Toledo, Ohio.

We are looking at many, many markets, like Savannah. So I think what -- you are going to see us go back into the markets. And as far as the number of stores are concerned, yes, you are going to see it. But really, still, my perspective is: we need to make sure the stores are in the right places and are the right size. Today we can do more business in smaller stores because of the fact of our technology, our designers, and the fact that -- and customization.

Thank you, Farooq.

John Baugh.

Could we dive into the retail EBIT loss for the March quarter and maybe understand a little bit better we're that's coming from? It sounds like sales, at least domestically, were down a little bit.

And then how maybe you see your comment about a little more aggressive promotional activity affecting that, and whether or not we are done with clearance, samples, etc.? Thank you.

John, if you will take a look at our retail sales, you can see that our retail sales were down. Our delivered sales were down about -- almost 1.8%, and that has an impact. It also -- overall gross margin was somewhat lower, and our operating expenses in the retail division were higher. That's reflected in the operating loss that you see of 4% loss.

We have a great leverage. All we needed was 4% or 5%, or 3% more deliveries. And some of the deliveries were also impacted, as I said, by -- due to weather. But the difference between -- at 4% operating loss and making 3% or 4% does not require a lot of top line, because of the factor of covering all our expenses. So those are the two factors that reflected somewhat lower sales -- a little less gross margin, higher operating expenses resulted in a 4% operating margin.

And how do you see the clearance sample sales, the flow of product that's still heavy in terms of new stuff? How does that influence margin over the next, say, six months or so?

The gross margin will most probably be a little bit lower, but an operating margin is going to reflect the amount of sales we do. As I said, the focus is important; somewhat higher sales takes care of that lower margin that we get due to selling of this discontinued product.

Okay. And the inventory -- is that for the -- that's the June launch, primarily? Is that the build or something else?

No, the inventory -- we were -- we have been somewhat -- our inventory position has to some degree been under control, if you take a look at our inventories even going back -- three years back. You take a look at -- I'm looking at Corey -- you're in a different office. Inventories today are about the same as they were in 2012.

But we increased the inventory the last two years, because they are somewhat lower. And also, John, our inventories are -- I would say that our sales should have been higher. We should have delivered more product. Inventories would have been lower.

So I think that as we go forward, our inventory is in good position. We do have this clearance product, but the inventories gives us an opportunity of delivering the products in the fourth quarter.

And my last question, I guess, was around -- I heard your comments on sort of having two monthly events as opposed to one, and that's certainly a form of being a little bit more aggressive. And I presume it's a little more advertising expense or what have you.

But I guess I'm curious about the comment of being more aggressive in general. Will you be putting a broader percentage of your product line on sale; or a deeper discount as well; or will it all be more or less cleverly disguised, so there's not much of a change in price? It's just that you are going to be promoting, let's say, twice a month as opposed to once a month? Thank you.

John, all the things you have said. That's what we are going to do.

Okay. (laughter) Super. Good luck. Thank you.

Todd Schwartzman.

Just interested to know about your approach towards courting younger consumers -- whether it's Gen X, Gen Y, Millennials -- the steps that you are taking to win these type of younger consumers? For example, how did focus groups or other forms of market research factor in the design of those 600 new products that you have rolled out already?

Good question, Todd. We do some research, but also, as you know, we have a built-in research of 1,500 interior designers who work very, very closely with us in terms of products.

Now, the question that you are raising is really an important question -- that is: how much should we be focused on expanding our reach to designs that perhaps you may think are going to be more attractive to younger people, like, for instance, more of the modern? We have come to the conclusion that we need to stay more closely with our brand, which is the classic brand, whether it is more on the, you might say, romance; or the formal side; or the casual side. Because that's what our brand is. That's what we are known for.

To go and expand our reach to become more modern -- I'm talking an added modern in terms of products, not attitude -- is something that we have come to the conclusion through focus groups and through our own people is not something wise for us. Other people are doing it.

Now, when we talk of younger people, it's all relative. It's more an attitude than age. But when you talk of people who are, let us say, in their 30s with younger families, they generally are -- you know, some of them like what we do; but others at that age are more interested in buying more of a disposable product.

When they buy Ethan Allen, it is somewhat more serious. It is something that they are going to keep for a longer term. If those folks are interested in buying something that -- while the children are young, children are growing up -- we find that those folks are buying a lot of products from those kind of sources than us so far.

When they graduate in terms of an interest in design, in terms of quality, then they come to us. And that's what our research has told us, Todd.

So a 30-year-old of today, for example -- does it concern you, or are you maybe -- just trying to paraphrase what you said, maybe a little indifferent as to whether the 30-year-olds of today even want America's classic designs?

I think that they do want the classic designs. The question is of quality, and the question is at what level they want it. The good news is that the folks who were 30 ten years back are now 40; the folks who are 30 today five years back were 25.

The good news is at this age, people do come and graduate to us. That's really where we are getting people who are first-time buyers, but really people come to us when they have purchased something else, and it has had its use. Then they come to us.

And in terms of the advertising mix, have you changed at all the proportion targeted at the first-time buyer?

We have, because most of that is really more in our digital mediums. What you are going to see is -- you are going to see we have increased our digital advertising. And as we move forward, a lot more is going to be there. Because today, when we talk of anybody -- it doesn't matter what their age is -- 85% to 90% of the people first visit our website, because the website is today the windows. Then they come to our stores.

You are going to see us become more aggressive. We have increased our digital advertising. You are going to see us more aggressive in digital advertising. And also, Todd -- which we have; we don't have an option but to get to more people to our website, and even through that process, get them to our stores, our design centers, and also do more business on e-commerce. You are going to see more of that. You are going to see us become more aggressive.

And what about currency in the fourth quarter? Is the headwind becoming a little stronger?

No. In the third quarter we had the impact, as Corey mentioned; but in the fourth quarter, it is not -- we don't see an issue -- I mean, there is no change relative to the third quarter. Certainly some change in the fourth quarter. It really was the Canadian dollar and the euro that impacted us, and mostly the Canadian dollar.

We have taken some price increases in Canada. We couldn't take -- you know, this was a 25% increase in the US dollar versus the Canadian dollar. We couldn't take a 25% increase, but we did take a 15% increase so that we were able to counter some of the impact that we had in the third quarter.

Okay. And I just wanted to get clear on the distinction between Phase I and Phase II of your latest reboot. What's actually going on? Aside from the casual focus I think you highlighted, characterized Phase I; and now second phase, a little more classic in nature. What are the other differences?

Actually, it's a lot more Classic. If you for instance go take a look at -- I do not know if you have received, Todd, our Muses book?

Just got it today. Yes, thank you.

Okay. If you take a look at it, the first section of that -- you know, there are 10 muses. And the 10 muses represent great elements of design. And the first muse is really focused on what we call the new classics that we are just introducing. And, in fact, they are just going into our design centers.

And if you go and take a look at it, these are really, you might say, formal classics with an lot of gold and silver gilding. All of that done -- frankly, all of these products are being made in our US facilities in North Carolina and Vermont.

Now this -- if you take a look at it, it is quite a bit different than anything else we have. The third phase is going to also be formal but is going to be much more towards what you might call a European attitude: still classic, but somewhat more relaxed in terms of its attitude. And that will come into our design centers in the summer and a consumer launch in the fall.

Between these two I think we are going to be extremely well-positioned in our -- you might say the more formal. But keep in mind, today the formal has been relaxed. It has to be customer-friendly. So if you look at the book, you'll get a very good perspective on what we just introduced, which is getting just getting into our design centers.

And you've talked quite a bit, Farooq, about the selloffs of the floor samples. What about the new products? Are there any introductory pricing offers planned?

There are.

Can you talk a little bit about that?

Well, we'll start it in June. Basically, as I said, we are going to be -- we've got to be careful how much margin we give up. But you are going to see us become somewhat more aggressive, because today we have to. We have to get that message across.

And in our new products, they are going to be -- there are going to be messages of savings. And for the new products, they'll start in June -- the one that is the new classics.

And starting in June, will the products on sale rotate monthly? Or how will that work?

Well, you know, I think you are asking me to give all the strategies, Todd. But I will tell you this: what you are going to see us -- like in April; if you take a look at our April, we cannot keep it completely -- it's got to be somewhat of a surprise, even to our own associates, not going to the consumers.

But if you look at April, April is a good example of our showing -- being much more aggressive. In April, for instance, we ended with a finance promotion, a very strong promotion which ended on April 19.

We also ended one more what -- we call it a driver. We took some of our products and ended it in the middle of the month. And now we have two other product lines that are going to end at the end of the month. So this gives two weeks of urgency, two weeks of products on sale.

Now, these are not our total programs. But we believe that you require today -- need to have that kind of an -- to create an urgency and also create real savings. Those are the kind of things you are going to see us have as we move forward.

Sounds good. Thanks a lot.

Jeremy Hamblin.

Good evening. Thanks for taking my questions. So just a quick follow-up, then, on the commentary around gross margins and the promotional plan. You had previously stated that you thought the second half of the year, gross margins would be similar to the 54.4% you did in the first half of the year. And you did 54.3% in this quarter.

Should we assume that there's maybe a little bit more downside now on those gross margins for Q4? And if that is the case, would you still say the same as what you did before, that the kind of 53.8% that you delivered in the December quarter is kind of the low end of what you might think you could do?

Jeremy, I think that you've got to operate within the range. And I think the range that you have mentioned is all reasonable.

Okay. Great. And then a follow-up question, really on capital structure -- and Corey, I want to make sure I understand this. So with the refinancing of your debt and where you have your current levels, it looks like your annualized interest expense would be about -- just a little over $1.5 million or less than $2 million in total with the current debt outstanding. Is that correct?

Yes, Jeremy, that's correct. It should be a little under $2 million.

So with your stock where it is and the flexibility to borrow significantly more money in cash, would you consider -- you historically, or not -- at least certainly in the last few years, you haven't really done much in terms of share repurchases to give money back to shareholders and provide value on that.

But with the stock here, with a plan that's ambitious and that you are hoping is going to do really well moving forward in a company that is still making a lot of money, why wouldn't you be a lot more aggressive in utilizing that new capital structure and the low cost of your debt to either buy back a ton of shares -- I mean, with the extra $75 million that you could borrow, you could almost deploy your entire plan in the next year, if you wanted; or in the form of some sort of a special dividend. Why would you not do something like that?

Jeremy, I'll tell you why. We are running a business that has got to take care of ups and downs. You folks don't have to worry about that. The great recession came. And if we didn't have the cash, we didn't own all the properties, I don't know whether we could have made it. So I've got to think about the cyclical nature of the business.

But still, having said that, I mentioned to you that people were surprised that the fact that over the last few years, we purchased 18.3 million shares for $535 million. Now, I also said that we have continued to increase our dividend. We increased by 16% and an additional 20%. We also said that we have been authorized to purchase 3 million shares.

But we are going to take a look at -- we don't authorize this without having the ability to buy it. So we are very aggressive when it makes sense, but we are just not going to do everything in one quarter or two quarters and jeopardize the welfare of this business.

Great. Yes, I don't think -- I'm not suggesting that you would do it that quickly, but it sounds like that opportunity exists to potentially be more opportunistic.

I understand, but we have got to use our judgment. That has got to make sense that we don't jeopardize the welfare of this business.

We have been very, very aggressive in what we have done in the last few years and continued to increase dividends. We even gave a special dividend a couple of years back. We have continued to do that, but still keeping in mind and understanding the cyclical nature of the business. And we are not going to do something in the short-term and jeopardize the welfare of this Company and our stockholders.

Okay. And one quick follow-up on that. In terms of working capital, which has been also a little bit of a drag on cash so far this year to the first three quarters, it looks like about a $33 million drag, I calculate, on working capital. And inventory actually only accounts for about half of that.

Is there anything structural that would make me think that should continue? Or would you recapture some of that in the fourth quarter or in the next several quarters, whether it's through accounts receivable or some of your payables and so forth? How should we be thinking about that on the working capital side?

Well, Jeremy, I think -- Corey can add to this, but as we -- you know, we have been somewhat aggressive in our capital expenditures. We are going to spend about $28 million or so this year.

We have to some degree somewhat increased our inventories. And our receivables increased a little bit, but a lot of that is because of our increase in our wholesale business. So I think that from a working capital perspective, I do not see us increasing our inventories to any degree higher than what we have; and that our capital expenditures this year has been somewhat higher due to the fact that of our renovating a lot of our design centers and also putting in a fair amount of machinery and equipment in our manufacturing. Corey, you have to add anything to that?

That's pretty good, Farooq. Certainly as we build more cash the earnings, our working capital will continue to grow. So I don't see that there will be a continued drag on it. We have the opportunity to increase it.

Great. Thanks for taking my questions, and best of luck.

All right, Jeremy. Thanks.

Kristine Koerber.

A few questions: first, just following up on the promotional activity, do you think that stepping up your promotional cadence kind of puts you on a path for increased discounting over the long-term? Clearly, it doesn't appear that the environment is going to get any better. I just always -- I just thought that you've always been concerned about hurting the brand by basically trying to compete on price. And it seems that that's what you are doing. Just trying to get a feel for -- you know, is this just a couple of quarters? What are you thinking longer-term as far as promotional activity?

This is a good question, because when we see around what is taking place, a lot of it is -- some is real savings, and a lot of this is perceived savings, when people every day are all 40% to 50% off. The fact is that the consumer looks at it. The consumer sees all of this. And when you look at department stores, when you look at furniture, you look at every commodity -- unfortunately, it's a disease out there.

Now, when we talk of increasing our promotion, it is relatively -- for us it is still relatively small. We are not talking of going into the levels that everybody else is around. We are also very, very cautious of the fact of maintaining our credibility, and we are balancing it. It's not an easy thing, but we are working very hard to maintain our credibility yet give people real savings -- and, on the other hand, also, be careful about what impact it has on our margins.

So to answer your question, we are very, very careful that we don't want to have our brand be negatively impacted by perceived to be in discounting. We are not going to do that. We are going to give sensible savings. And it may have an impact of not having as large of sales in the short-term as we would have if we go with larger discounts. But as you said, that's a short-term strategy. Long-term it could hurt our credibility and even our business. So we are doing it very, very carefully.

Okay. That's helpful. And then as far as looking at the discounts or the promotional activity in Q3, can you give us some idea of what the average discount was? Are you talking 25%, 30%? You have said you have been relatively conservative with the discounting.

Yes. We do not give discounts across the board, Kristine. We generally -- if you think of it, most of it ranges between 10% and 15%, and some portion of it 20%.

Okay. That's not significantly different than the past. The 10% to 15% is kind of where you've been.

It's just that it is -- we have been, but we are putting some more of the product at the 15% to 20% than we did before.

Okay. That's helpful. Thank you. And then did you mention how much of a bump in advertising we are going to see in Q4? And how should we think about advertising spend beyond the June quarter?

I would say that at this stage, our objective is to spend anywhere between 5% and 10% more in the June quarter than we did last year.

And what did you spend last year?

Last year, Corey, in terms of percentage of total sales in the fourth quarter?

As a percentage of sales -- I don't have that number in front of me. It should be right around that 5% -- 4% to 5%. The numbers we just really give out at the end of the year.

Okay. And then where is the average ticket trending?

The average ticket actually went up about 3% last quarter to about $1,700.

Okay. And then lastly, as far as the clearance merchandise, how much more do you have to work through at this point?

We have -- I can't give you any dollar numbers, but I've said in the next -- under the two quarters, this quarter and the next, in the summer is going to be the main quarter where we believe we will have most of the activity of clearing it. We are making good progress.

But on the other hand, you also see that while we did all of those, our margins were impacted, but slightly. So we are not being extremely aggressive in selling it off for a number of reasons. One is that we've got to sell this product in line with the new product coming in. So as the products are -- before they come in, that's when they sell the products that are in our design centers. So I would say in the next -- most of this will be done in this quarter and the next quarter.

Okay. Great. Thank you.

Cristina Fernandez.

Good evening. I wanted to see if you could tell us what percentage of the store base has now been renovated or refreshed? If I recall correctly, at December it was 70% to 75%?

Yes. You know, I've been doing a lot of traveling around in the last few months. We have -- what we have realized is we've got to do even more. We announced spending time in renovating the outside. Not major. Like, we need to paint the design centers; we are going to need to make sure our signage is right. So I would say that while interior, which is what we were doing, is in the 80% or plus range, we are now focused on also doing the exteriors as well, Cristina.

And is that going to be an increase in the CapEx or investment spending? Or is it already within the realm of what you had contemplated previously?

No, it's in the realm of what we have contemplated, yes.

Okay. And then my second question: are there any metrics you can share with us in e-commerce as far as how traffic to the website has been, or how sales have been trending for that channel?

Well, as you know, we don't give a lot of that information out, first eyes are more confidential. And the second one is: our traffic -- our e-commerce business is still relatively small. In fact, as I mentioned in my remarks, we are now ready.

And the reason we are ready is this -- for a number of reasons. You know, three, four years back, our independent licensees and our interior designers thought of e-commerce as their enemy, but not anymore.

Because the reason -- what we have done is: over the last few years we have created almost a seamless experience. All our e-commerce business is now processed through our retail network, because in furniture you've got to deliver it. They have the service capability.

So we share the margins with our retail network on all our e-commerce business, and they also then work with the clients. The even assign a designer. So we are now in a -- and it's taken us some time to make sure the logistics work, the technology works. But it is now seamless. Whether you buy online or you buy in our stores, we have made it so that our retail network wants to do it.

Three years back, that was not the case. That gives us now an opportunity that I can publicly say -- which I would not have said three years back -- that we are going to be much more aggressive in e-commerce.

And when you talk about -- sorry, a follow-up. When you talk about being more aggressive, is it just on the marketing side? Or where else can -- are you planning on doing to capture more sales in that channel?

Both. We are going to do both. We want to increase our business on e-commerce, keeping in mind that we don't sell a lot of items at low prices. Because we want people as much as possible to come to our design centers to work with our people, because in e-commerce on higher-ticket items, the returns are very, very expensive when somebody doesn't like it.

We prefer them doing it. But on the other hand, people today -- they want to buy e-commerce. They want to buy online. We have to be ready to do that. So you are going to see us do more -- to do both.

Thank you.

Justin Bergner.

My first question is just a clarification question. What is the other expense in the quarter?

Corey, go ahead.

The other expense in the quarter was the extinguishment of our senior notes.

Okay.

And the costs associated with that.

Okay. Thank you.

Justin, the question earlier was raised about the impact of this; and that's a good question. On the nine-months basis -- nine months on a pro forma basis, if we were operating at the new interest rate that we have now, our interest expense we have now, it would increase our earnings per share by about -- a little over 12%.

Okay. Thank you for that. Second question relates to this focus on classics. Should one interpret the focus on classics as suggesting that the new eclecticism has not been as successful as you would've hoped?

No, that is not the case. The new eclecticism is really the idea of mixing products, and mixing things. We still are working on it. What we are really talking of -- this is our products, not the question of mixing them.

So initially what we did was we basically focused on eclecticism. What you are referring to was seeing how we can do a better job in mixing what we had, in terms of mixing styles, mixing fabrics. Now what we are doing is we are adding a lot of new products; and, still, of course, eclecticism -- that is mixing of these classics -- is very, very important.

Okay. Thank you for that clarification. And then just one more question, if I may. If I sort of back out the international sales growth, I'm left with only about 1% year-to-date sales growth in your US business. And I guess if that is the case, I'm a little surprised to hear about the investment in new stores in the US sort of ahead of a sales acceleration as opposed to after a sales acceleration. So I would just love to hear a bit more about how you think about that investment decision.

You know, Justin, we've got to do both. We've got to increase our store base, and then we've got to increase our sales in existing stores and new states. We can't wait for store sales increase, then decide we are going to increase our stores.

I think our sales increase, as I said, is dependent upon having the right offerings, which we do. We've got a great network of designers. And now we are going to also be aggressive in marketing, and also make sure that we are able to promote our products even more so, because in a manner, that will get us more traffic.

If we do that, I think that absolutely -- our focus really is: we've got to increase sales. And we increase our sales, our structure, our vertical integration is such -- you already see that our operating expenses for the nine months are -- 9% of sales is pretty good. This is without having much increase in sales and increasing a lot of our expenses. I think the opportunity we have is leveraging by increasing sales. And that's an opportunity we have, and that's what our focus is.

Okay. Thank you. It just seems like the same-store sales increase would come at a lower investment for the Company. It might be a decent precursor to see before putting more money to work in new stores.

But, Justin, keep in mind -- that's what an earlier question was. The comment was perhaps we should be more aggressive in new stores; we haven't been. We have not been because we want to do more with what we have. Most of our new stores are relocations to better locations.

Okay. Thank you.

And I am showing no further questions or comments at this time.

All right. Well, thanks very much. Any questions, comments, please let us know. And, of course, Corey is available. And good to have you on the call. And I'm glad we had a lot of good questions. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.