Ethan Allen Interiors Inc (ETD) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ethan Allen fiscal 2016 second-quarter earnings release conference call. 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)

Now, I would like to introduce your host for today's conference, Mr. 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 second quarter and first half ended December 31, 2015. This telephone call is being recorded and 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, 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 quarter ended December 31, 2015.

We are pleased with our results. Our written orders in our retail division increased by 15.3%. Delivered sales increased 5.3%, resulting in a gross margin of 55.9% compared to 53.8%, an increase of 210 basis points. Operating earnings adjusted for gain from sale of real estate was $25.3 million, a 35.1% increase. Adjusted EPS of $0.55 compared to $0.37, an increase of 48.6%. During the quarter, we utilized $12.2 million to repurchase our shares, paid a dividend of $0.14 per share, an increase of 16.7% from the previous year quarter and a 40% increase over 2013, same quarter.

As we mentioned in our press release, we are pleased that our many initiatives and operating leverage of our vertically integrated enterprise have resulted in increased sales and substantial increase in profitability. During the quarter, our focus was in implementing our new offerings in the retail network and in manufacturing, continued selling off floor samples and discontinued inventory, using our various marketing mediums, especially the digital platform, to drive qualified clients to our network of 200 design centers in North America. Once there, they interact with some of our 1,500 in-house interior design associates, resulting in stronger written orders and building a client relationship.

We are also pleased that we have this week also announced two initiatives. Work on both started about a year back. We are particularly pleased to announce that we are developing a new line of Disney-inspired products for the home with a focus on children and younger consumers. We expect to start consumer marketing this Fall.

Our program with Army and Air Force exchange service announced today is expected to go live by February 1, 2016, and reflects the combination of utilizing digital selling and service by our retail network.

After Corey gives more details on our financial results, I will provide our current business initiatives.

Thank you, Farooq. Our financial results reflect that our many initiatives are making an impact, and we continue to benefit from the operating leverage of our vertical integration. Second-quarter fiscal 2016 consolidated net sales of $207.5 million increased 5.3% compared to the second quarter of fiscal 2015. The first half 2016, consolidated net sales were $397.9 million, an increase of 2.6% compared to $387.8 million in the first half of fiscal 2015.

The strong consolidated gross margin of 55.9% for the second quarter of fiscal 2016 improved 210 basis points from 53.8% the prior-year second quarter, primarily benefitting from improved efficiencies in our manufacturing and a higher mix of retail sales to consolidated sales that offset the impact of clearance sales and promotions on retail gross margins. The retail segment net sales for the second quarter were 79.4% of consolidated net sales. That compared to 77.7% during the fiscal 2015 second quarter. The first-half 2016 gross margin of 55.5% improved 109 basis points compared to 54.4% in the prior-year first half.

Consolidated operating income for the second quarter was $26.5 million, with an operating margin of 12.8%. That compared to $17.7 million in the prior-year second quarter with an operating margin of 9%. The 2016 year-to-date operating income was $47.4 million, with an operating margin of 11.9%. That compared with operating income of $38.1 million with an operating margin of 9.8% in the prior year-to-date period.

Consolidated adjusted operating income for the second quarter was $25.3 million, with an adjusted operating margin of 12.2%. That compared with $18.7 million in the prior-year second quarter, with an adjusted operating margin of 9.5%. Adjusted operating expenses in the second quarter increased $3.4 million over the prior-year second quarter, primarily due to variable expenses. As a percent of sales, adjusted operating expenses were 43.7% of sales this year compared to 44.3% of sales in the prior year. Year to date, adjusted operating income was $46.2 million, with an adjusted operating margin of 11.6%, compared to $40.6 million with an adjusted operating margin of 10.5% in the prior year.

The wholesale division net sales for the second quarter increased 8.8% and generated both GAAP and adjusted operating income of $19.7 million for an operating margin of 15.6%. That compared to 11.3% GAAP and 12.1% adjusted operating margin for the second quarter of fiscal 2015. Year to date, wholesale division net sales increased 2.5% and generated both GAAP and adjusted operating income of $40.3 million for an operating margin of 16.3%. Which compared to 14.4% GAAP and 15% adjusted operating margin in the prior-year period.

Retail division net sales for the second quarter increased 7.5% and produced operating income of $6.7 million with an operating margin of 4.1%. That compared to operating margin of 1.9% in the prior-year quarter. Adjusted operating income was $5.5 million, with an adjusted operating margin of 3.3% compared to an adjusted operating margin of 2% for the second quarter of fiscal 2015.

Year to date, retail division net sales increased 4.2% and generated operating income of $8.3 million, with an operating margin of 2.7% compared to an operating margin of 1.6% in the prior-year first half. Year-to-date retail division adjusted operating income was $7.1 million, with an adjusted operating margin of 2.3% compared to 1.9% adjusted operating margin in the prior year. Retail division comparable net sales increased 3.9% for the first half.

Total written orders by the retail division for the second quarter of fiscal 2016 increased 15.3%, compared to a strong second-quarter fiscal 2015, which had a 7.8% increase. Comparable written orders increased 14.6%. Year to date, fiscal 2016 total written orders increased 1.8%, and comparable written orders increased 1.2% compared to the first half of 2015. The retail segment undelivered backlog at December 31 increased 12.7% compared to December 31, 2014.

The retail division operates a total of 5 design centers in Canada. And the strengthening US dollar negatively impacted net sales written orders and comparative written orders for the retail segment by 0.9% during the second quarter. The Company's consolidated net sales for the second quarter were also negatively impacted 0.7%.

For the second quarter 2016, international sales accounted for 8.5% of our consolidated net sales, compared to 10.7% in the prior year, with most of the change in mix due to a reduction in sales to our independent retailer in China, partially offset by stronger sales to our domestic independent retailers.

Consolidated net income for the quarter ended December 31, 2015, was $16.5 million, or $0.58 per diluted share, compared with $10 million or $0.34 per diluted share in the prior-year quarter. Net income for the first half was $29.7 million, or $1.04 per diluted share, compared to $21.9 million, or $0.75 per diluted share, in the prior-year period.

Our effective tax rate was 36.7% and 36.4% for the three and six months ended December 31, 2015. And that compared to 36.7% and 36.6% for the three and six months ended December 31, 2014. Adjusted net income for the second quarter was $15.8 million, or $0.55 per diluted share, compared to $10.8 million, or $0.37 per diluted share, in the prior-year second quarter. Adjusted net income year to date was $28.9 million, or $1.01 per diluted share, compared to $23.5 million, or $0.80 per diluted share, in the prior year.

Our adjusted results in the second-quarter fiscal 2016 exclude $1.3 million gain associated with the disposition of real estate and a $0.1 million expense related to a restructuring adjustment. The prior-year second quarter excluded $0.9 million in losses on the disposition of real estate and a $0.1 million restructuring charge.

Our normalized income tax rate for both the current and the prior year was approximately 36.5%. Please refer to our press release reconciliation tables showing the adjustments made to our results for all periods.

Our global retail network included 302 design centers at December 31, 2015 compared to 297 in the prior year. The Company operated 142 design centers, including 5 international locations. Our independent retailers operated 160 design centers, including 105 international locations as of December 31. This compares with 144 operated, including 9 international locations and 153 independently operated, including 95 international locations, last year. Our global retail network had a total of 110 international locations at December 31, 2015, and 104 in the prior year.

We continued to improve our capital structure during the first half while also focusing on shareholder returns. And at December 31, 2015, our balance sheet is healthy. During the quarter, we made a $16.5 million prepayment on the term loan. That brought outstanding borrowings under the facility to $57.3 million at December 31, 2015, and a revolver at $74.8 million of availability. With this partial debt repayment, the facility's six charge coverage ratio financial covenant ceased to apply, providing as much greater flexibility with our capital allocation as we move ahead.

For the fiscal 2016 first half, we generated $21 million of cash from operations. Our total cash and securities at December 31, 2015 totaled $64.8 million, a decrease of $65 million compared to December 31, 2014, mostly due to the $73.9 million reduction in debt.

For the quarter, we paid out dividends of $4 million, an increase of 14.7% compared to the prior-year quarter. We also repurchased 12.2 million of our shares during the quarter, bringing the total repurchases for the past 12 months to $28.7 million and approximately 1.1 million shares. Our remaining repurchase authorization at December 31, 2015, was 2 million shares.

We plan to continue to enhance long-term shareholder value by continuing to invest in our infrastructure, payment of cash dividends and repurchase of our stock. Our second-quarter capital expenditures and acquisitions totaled $4.2 million compared to $7.7 million in the prior year. We expect total fiscal 2016 capital expenditures of $20 million to $23 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, and continuing the buildout of our new plant in Mexico. Second-quarter depreciation was $4.8 million, compared to $4.7 million in the prior-year period. Inventory of $157.5 million increased as planned by $5.7 million from December 31, 2014, as we continue to maintain an in-stock inventory program at the wholesale level for many of our new product introductions.

With that, I will pass it back over to Farooq.

All right. Thank you, Corey. I am pleased to provide now a brief overview of our various initiatives. In our offerings, we continue to implement the major transition. Phase 2 and 3 were marketed from June 2015 and have shown good results. Phase 4 products consist of three attitudes -- named Brooklyn, Santa Monica and Buckhead -- will be introduced to our retail network next month at our retail conference. Consumer marketing will start in spring through summer of 2016. At this stage, our objective is to have a consumer launch of the Ethan Allen Disney program in fall of 2016.

We continue to strengthen our regional network with talented associates, renovation of existing design centers, and relocating and opening new design centers. Since March 2015, design centers were opened in Chattanooga, Tennessee; Wichita, Kansas; Pittsburgh, Pennsylvania; Toledo, Ohio; Philadelphia, Pennsylvania; and in Hanover, Germany. Last week, opened a new design center in San Francisco. And under construction are in Columbia, Maryland; Cranston, Rhode Island; Hyannis, Massachusetts; Rockville, Maryland; Savannah, Georgia; and a second location in downtown Manhattan.

Combining technology and personal service is an important initiative. As mentioned earlier, during the quarter we used digital mediums to drive qualified customers to our design centers to interact with our 1,500 in-house interior design associates in our 200 North American design centers. We continue to develop a strong omni-channel platform.

This morning, we announced our partnership with Army and Air Force Exchange Service. This association will allow Army and Air Force personnel to order Ethan Allen products online via a special website developed by the Army and Air Force Exchange Service by Ethan Allen. The products will be delivered by our retail logistics network.

During the quarter, we also continued aggressive marketing with direct mail, national television, print and social media. In March, we are launching an important initiative of custom quick-ship upholstery. We have taken selected sofa and chair frames and in limited fabrics and leathers, and objective is to deliver the custom quick-ship upholstery in less than 30 days to our customers in North America. We believe this has a good opportunity of expanding our sales and also reaching more consumers.

On the issue of strengthening our capital structure, as you know, were considering raising about $250 million in debt last quarter. Due to market uncertainties and disruption in the capital markets, we decided it was prudent not to proceed. We will wait for better opportunities to proceed.

We will continue to generate healthy cash and utilize some for investment in our enterprise to repurchase our shares and pay cash dividends. We will continue to strengthen our vertically integrated structure. We announced adding 2 new upholstery plants in North America and continue to invest in technology.

With that, we are very happy to open it for any questions or comments.

Ladies and gentlemen, at this time, if you have a question or a comment, (Operator Instructions). Jessica Mace.

Nice quarter. My first question is about your comment in regard to accelerating sales growth in fiscal 2017. I was wondering if you can tell us if there are any other disruptions you expect throughout the rest of this fiscal year or any reason it wouldn't continue sales wouldn't continue to grow at the rate of this quarter.

We have, as I mentioned, many initiatives in place, and we have this quarter grown sales and profitability. And despite a number of disruptions that are associated with the introduction of new products, selling off the floor samples and some inventory. So I would think that at this stage, unless there are external factors beyond our control, I would say that we have the opportunity to continue to grow our business.

All right. And then, my second question is about your inventory levels still growing a little bit slower than sales. I was wondering where you think that will end at the end of this fiscal year.

You know, that is a good question, Jessica. At this time, we have about $157 million have increased by $5 million. I would say that most probably, under the maximum another $5 million or so increase, possibly. And that would be due to the fact that we are taking an aggressive position of getting some more of our products in stock. And, as I just mentioned, we are launching this custom quick ship, which involves having more fabrics and more cut and sew products available for immediate shipment. So it is possible that we could increase by $5 million.

All right. And then, just finally, with maybe some higher inventory levels, what kind of investment advertising will you be comfortable making in the back half of this year and into the first half of fiscal 2017?

Yes. This quarter our advertising was flat because, as we had mentioned, that in our first quarter we had spent more money. And we had mentioned that the month of September we had a major amount of distribution of our direct mail, which resulted in the first half, which increased our advertising at that quarter. So I think that as we move forward there will be an increase in advertising. But as a percentage of sales, I would think they will remain somewhat consistent with what we have done in the past.

Jeremy Hamblen, Doherty and Company.

Thanks for taking my questions. I just wanted to add my congratulations on the really strong results. I wanted to ask about -- you clearly had a little bit different promotional cadence in October and November where you ran the -- I think maybe some of the most aggressive promotions in the Company's history, and that obviously yielded strong traffic gains.

Wanted to see if I could understand the latest promotion. There are two items, 25% off, which is also pretty aggressive. Is the intent behind that to try and grow the average ticket size? And how are customers responding to that particular promotion?

Yes, Jeremy, in October and November, that 30% savings on one item and, as I mentioned previously, practically all the advertising was done digitally, some print, but most was digitally because of the fact that our direct mails had already been mailed, created an opportunity of bringing customers in, interacting with our designers. And obviously we had some good business in those months, but it also helped us create an opportunity of continued business with them.

About 24% of our products were sold or at that one 30% savings. And while the rest was sold at our current offerings, whatever the savings were at that time.

Now, in December, as we also had mentioned, that we decided to start the January event from December 26 rather than end it in December because we had already taken a lot of business in October and November. And we felt that January is a big month for us. And we have a strong program in January. And these two items for the saving of 25% is helping us generate interest. And, obviously, the last week, which is this week, and the next four or five days will determine the strength of this whole initiative. Because 30%, 40% of the business does come in the last four or five days of the month. So we will see how we end up.

And do you expect the average ticket size to potentially grow as you are going -- if you have got 25%, roughly a quarter of your product being sold at these discount rates, if you are getting two items -- my assumption is people buying two items, the average ticket on that sale is going to be a little bit higher. Are you starting to see that on the kind of early returns from that promotion?

So far, the last quarter, Jeremy, we have seen the average ticket has somewhat remained consistent at around $1,800. It has not changed.

Okay. Let me move on, then, to your gross margins. And, obviously, I think that was really impressive. You know, some of that was related to the higher percent being -- of business being retail sales versus wholesale. Are these sustainable gross margins up in this -- almost 56% range? Is it something where we should be thinking, if you continue to see mid-single-digit sales growth, you can sustain gross margins up at these levels?

Well, we have already sort of shown that it is feasible despite the fact that we still have the impact of clearance sales. While our manufacturing did a great job in improving their margins, but they are still have been under a lot of stress with all the new products that are going through the manufacturing.

It is an opportunity, but, again, there are a lot of factors that one has to keep in mind. That we have to take a look at market conditions. We have to take a look at promotional activity. We have to take a look at how much promotions we have to do, how much of discounting we have to do as we move forward. We have the opportunity, but, again, we always have to keep in mind the overall economic conditions, market conditions, which dictates how much of discounting we do.

Corey, I wanted to see if I could just ask a quick follow-up on that. I know last year in this -- in Q2, you had -- you spoke to some operational inefficiencies because of all the new product introductions. Could you give me a breakout of how much the improvement in operational production and efficiencies helped gross margins on a year-over-year basis? Was it 50 basis points? 100 basis points? Do you have that figure?

I do not have that figure, Jeremy. And I will tell you that, last year in the second quarter, was just the start of our rollout of phase 1 and getting ready for phase 2 at the same time. So that had a little -- and all the clearance was the very first wave of clearance. So, together, those had a much bigger impact than this time around, where we are at the tail end of that.

And, also, Jeremy, there are a lot of moving parts. You have got to remember, we have got accents. Most of our accents are products that come from overseas with higher margins. Some of our cases come from overseas. So there are a lot of, lot of moving parts that impact our gross margins. It is not just our US manufacturing. So I think that there are a lot of, lot of moving parts. There is not an easy way to describe it.

Thank you and best of luck for continued success.

John Baugh, Stifel Nicolaus.

Congratulations on a very strong quarter. I was wondering -- sort of following up on the gross margin or sale event. So, just to be clear, the 30% and the 25% you are running now, are those on top of underlying sales across some percentage of the lineup as well, or not?

No, John. These are from our everyday best prices.

Okay. And could you talk about -- well, one, a little more clarity about China? It sounded like it was weak. And then any update on the government contract?

Yes, John. China, there are a couple of factors. And Corey mentioned that we had lower shipments to China, which is a reflection of two things. One is that last year, our second quarter, they were building inventory. So we did ship them some inventory products.

And the second is, there has been somewhat of a slowdown. So the combination of the two, if I had to give just a guess rough estimate, I would say our slowdown in China was 70% due to the inventory, the timing of the inventory, and 30% due to the fact that the business in China has been slower.

As far as the State Department contract, sort of. Unfortunately, I don't know why they are taking so much time. They had last month -- or in December, come back to all the number of people who had made the bids to rebid because there was some legal issue that they had. So we all had to rebid, and they have now said that any day they will make the decision. So we are waiting for that, John.

Well, nothing the government does surprises me. But -- and just last as a quick follow-up, are you seeing any benefit on input costs at this time?

Not really, John. As you know with about over 70% of the furniture products made in our North American plants, I would say that there is some benefit. It has mostly been for the energy related. We do see maybe a 7% difference in terms of for the lower energy costs across the board so far.

Other than that, I think there has been some stability. Certainly our labor costs are going up based upon annual increases. But, across the board, as far as lumber, materials, it is pretty consistent. It is the labor that, to some degree, we will have to give increases to our people, and we give increases based on merit.

And then, just finally, your orders were awfully good in the quarter. I know you did the direct mail I guess it was in September along with 30% off, and it seems to have really driven orders. It seems like things have slowed a little in December, January in terms of general economy. Would that be reflected in your order pattern as well, but really has nothing to do with the economy, just the timing of your advertising and promoting? Or any additional color there would be helpful. Thank you. Goodbye.

All right. John, in December, our business -- we had very strong October and November. But by design, as I mentioned earlier, we decided that we would take some of the December business into January. So far, it is holding up. But, as I said, it is the last few days that do matter. We have some slight disruption in the eastern United States in the last weekend, which, as you know, Saturday and Sundays are our big days. But we have one more week to go. So by the end of this month, we will know.

All right. Good luck. Thank you.

(Operator Instructions) Kristine Koerber, Barrington Research Associates.

A couple of questions. First, can you just -- as far as the quick ship goes -- the quick-ship initiative, is that going to be across all upholstery products? Are there a certain number of SKUs that you are targeting as far as the 30-day shipment?

Kristine, we are targeting and we have taken some of our, you might say, better-selling, very limited number of sofas, but available in the whole array from chairs to sectionals, and a limited number of fabrics and limited number of leathers. And with the combination of our operations in Mexico and, importantly, our ability to make them in our operations in North Carolina, in Maiden North Carolina, will be -- our objective is to launch it as a soft launching in February and a market launch in March with a limited number of frames and fabrics.

Okay. And then, with regard to the Disney partnerships, can you be a little more specific on the timing of the product launch and the number of SKUs that you are targeting? And how big is your children's business now? And, as far as the marketing of the Disney products, is that going to be a joint marketing effort?

It is a little bit too early to give a lot of details. This is going to be -- we are very, very pleased with this association. It started about a year back -- our discussions with them. And it is going to involve developing products for children and also some limited products for their parents. So the objective is to get children and their parents, who, in most cases, happen to be Millennials. And the objective would be to launch it to the retail network this summer and market launch in the fall of this year.

Okay. Looking at your children's business, how big of a business is that for you now?

It is relatively small. And we do have some business, but this really gives us an opportunity of launching it. And then we are discussing with Disney the collaboration of launching it through our channels and their channels. So we are in the process of doing that right now.

Okay. That's helpful. And then, just lastly, you talked -- you mentioned in the press release and also in the call that digital has helped drive -- is helping to drive your business. Can you just give us a little more color on how we should we think about advertising going forward, especially since digital is a less expensive means of advertising? Can we see a shift to more digital? And, I guess, as we look back at the 76-page catalog that you launched, did you -- what are your thoughts on that? Did you get the return on investment on the print advertising?

Well, certainly, our direct mail is a very important part of our marketing initiative. Overall, in the print, one has to always look at it from -- as you said, from a return perspective. We have to have a mix of advertising. For us, we believe direct mail is important not only to reaching our customer client base, but also to prospects. But it has to be supplemented with other mediums. And today, digital mediums are important.

So we have a very strong, you might say, email blast. We also have digital advertising, which you are going to see us continue to increase. And then, I think that with our collaborations with Disney -- and, in fact, we had also announced a launch of our first, you might say, marketplace with Army and Air Force Exchange, which is going to be launched February 1 -- that is next week -- in which Army, Air Force personnel, active as well as retired, would be able to go on this special website, which we have developed in coordination with the Army and Air Force Exchange. They will be able to buy our products on the -- on this very special website, and they will be serviced and delivered by a retail network. So we are going to be combine this -- you might really say the omni-channel, that is best way. And that kind of situation, we are looking at what other opportunities we have where we combine the digital as well as our physical presence.

Will the omni Air Force launch -- will they -- or the special website, will they be entitled to a discount? Special discount?

Not the customer. The customer is going to pay the same price as any of our customers do, but because of the government, the special thing is they don't pay any sales taxes. That is a benefit the Army personnel get. And we are treating them as -- the exchanges as one of our retailers. It is no different than a business that is done online on the omni-channel where the retailer -- two retailers get to share the margins. The one that sells and the one who delivers. So we are exactly treating them as a retailer.

Got it. And then online sales through the quarter, I know it is a relatively small piece of your business, but you are trying to grow online business.

It is growing, but still small. But I think the initiatives we are talking about will make it grow. And I think -- no question about it. But our best, most important is really the great advantages of our 1,500 interior designers is to bring them in because we brought people in through our digital mediums. When we did this 30% in October and November, we said, you cannot buy it online. You have got to come in. And we had a 33% increase in October. A strong increase in November. And they had to come in because then they were able to interact with our customers, and then it becomes a longer-term client relationship. But we have got to do both.

Cristina Fernandez, Telsey Advisory Group.

I will add my congratulations on the strong quarter. Going back to your comment about the strong traffic at the 30% off or broad, how much of the activity you saw in October and November -- how much was it new customers versus existing customers that have purchased with you before?

You know, we are in the process of really making a whole determination of that. And as soon as that information is available, we will see whether it makes sense to give it out. But we will do it -- perhaps we will give it out later.

Okay. And then, would you be able to quantify for us how much of the clearance and promotional activity in the quarter -- how much did that impact the gross margin?

It is hard to do that. But I would say that this will continue. That if you take a look at, for instance, -- Corey, we give the margin on retail? We don't. Okay. I mean, overall, it did reduce our gross margin at retail, but we substantially increased our operating margin at retail because we had over a 7.5% increase in sales at retail. It resulted in a substantial increase in operating margin despite somewhat of a lower gross margin, which we don't disclose, because that is what Cory tells me. But, overall, I think that the opportunity for us increasing as we move forward is to improve our margins. But, for the next few quarters, our gross margins would be under pressure, as they have been. But, our vertical integrated structure is such that, with an increase in sales, a lot of it flows down.

And, certainly, Cristina, that gross margin wasn't impacted as much in clearance this quarter as it was in the prior-year quarter.

And can you comment on the performance of accents versus furniture in the quarter? Do you see any noticeable differences in sales growth?

Corey, if you do that, and --.

Yes. It was about the same as our percent of sales this year versus the prior year.

While Corey is checking it, John, what is the number? Or what is it?

No. It was -- our retail accents this year were 22%, which was the same at as last year at 22%.

And one last one. You put out a press release earlier this week about the expanded capacity in North Carolina plus the new R&D facility. Can you talk about what new capabilities or technologies that you will have as a result of this expansion?

Yes. In North Carolina, we are in the process of converting one of our distribution centers which we are not using. We used to have seven distribution centers, and now we have two major ones, one in Dublin, Virginia, and a second one in Atoka, Oklahoma. A number of years back there were seven of them.

So this is being converted into part of our upholstery operations with a state-of-the-art R&D, which we have just put into place. And we are going to make this also our central fabric and cutting, and give an opportunity for our two other plants to establish more cutting lines and be ready for more business. So that is the objective of that.

Justin Bergner, Gabelli.

Congratulations on the quarter. My first question relates to this discounting 30% off one item. When you sort of aggregate the additional sales that this promotion brought in, did you actually find that the average level of discount declined versus prior quarters because of the additional sales of full-priced items that this discount drove?

No, it was about flat.

Okay. So that would be on a year-on-year or sequential basis?

Yes, both.

Okay. That's interesting.

Secondly, on your international sales, can you remind us how large China is and if there were any other meaningful headwinds outside of China that drove the decline in international sales year on year?

Corey?

Yes, the China sales were the biggest headwinds. There was some impact of the change in the dollar and the economy in other regions as well. Also impacting international is our 2 retail operations that we had in Belgium. We wound those down this year, so they were not comparative any longer to last year. So that have also impacted it as well. The exact numbers on the individual retailers, that I don't have available at this point.

Okay. Great. Thank you. And one more, if I may. You mentioned that retail composition of sales being up, I think, to 79.4% versus 77.7% year on year. How should I think about the impact on Company-wide gross margin operating margin? Is that a tailwind? And how should I think about the magnitude of the tailwind?

Typically, we are running closer to around 78% for retail mix. And I would say that, looking ahead to the next half, that that would probably be a more normalized rate for us. The 79.4% is fairly high from where we have been. So I think 78% is more of an average that you can look forward to.

Okay. Great. Thank you. And just in closing, Farooq, not to bring up any bad memories, but you didn't -- go through the proxy contest -- process this quarter. Were there any costs associated with that that were material in your December quarter earnings?

What you talking about? What proxy contest? No. Yes. (inaudible). I have forgotten it because, you know, we have been spending time on more important things. No. The good news is this -- that we decided that we would not get a lot of advisors. So our costs were less than $0.01, so that is why we have not reported it as a special item.

Thank you. Best of luck in the rest of the year.

And I am showing no further questions or comments.

All right. Well, thanks very much. This is good, and we are pleased with the progress that we have made. And, of course, objective is to continue with this. And we have got a lot of, a lot of good initiatives in place, and if there any questions, comments, please let us know. Thanks very much.

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