Ethan Allen Interiors Inc (ETD) 2017 Q1 法說會逐字稿

Well, good morning, everyone. I'm Corey Whitely, Executive Vice President Administration and Chief Financial Officer. It's my pleasure to welcome you to our Ethan Allen fall investor meeting and conference call.

I know most of you were able to tour the Design Center this morning and see the new Disney Magical Home Program. I hope you enjoyed the preview.

We have a detailed presentation lined up this morning, which will be followed by a Q&A where those on the conference line will also have the opportunity to participate. Let me remind you that some of the matters we will discuss today, including our business outlook, constitute forward-looking statements and, as such, are subject to both known and unknown risks and uncertainties including, but not limited to, those factors set forth in our Risk Factors section of our annual report on Form 10-K and other documents filed with the Securities and Exchange Commission. As such, our actual results could differ materially from those expressed or implied in the presentations, and they are not a guarantee of our future performance.

As always, the Company assumes no obligation to update any statements made in these presentations. Today's presentation, including reconciliation of non-GAAP measures, will be posted to the Investor Relations section of EthanAllen.com before the end of the day.

So with that out of the way, we'll go ahead and get started with the presentation, and I'll introduce our Chairman and Chief Executive Officer, Farooq Kathwari.

Well, good morning, everybody. Thank you, Corey and welcome to all of you here. We are meeting in one of our newest locations; it's 915 Broadway, and we just opened it a few weeks back. And we're glad that you are all here and also participating in not only our conference call but also the launch of Ethan Allen Disney.

I'm also very pleased that we have with us today some of our management team here, and also two of our newest Directors who joined us in the last year: Mary Garrett, she was a senior marketing executive with IBM; and Tara Stacom, she's the Vice Chair of Cushman & Wakefield. So pleased to have you here.

Today we'll be talking about change equals opportunity. As you know, the amount of changes that we all are faced with are major. In the last six or seven years, especially after the Great Recession, we've even seen more changes. So we'll talk about it, how -- what steps we are taking to manage that.

Our main focus is going to be that a customer experience has to differentiate us. To us, that means that we've got to have offerings that are relevant; they are stylish, livable, quality.

And then our offerings also are part of our vertical integration. It's our vertical integration that makes it possible for us to have offerings that have those attributes that I just mentioned.

Our personal service of our 1,500-plus interior designers is in this new world: luxury. Personal service is the new luxury, but today it must be combined with technology, and we'll talk about that.

We'll talk about our retail network, like what you see over here. Over the years, we have converted; taken it from a store to what we call a Design Center, and that process continues.

We'll talk about our marketing, and there's a new paradigm. Some studies have shown that in the last five, six years, 70% of all folks today first shop online. That's where the window shopping is.

We also would like to talk about the fact that in the last five, six, seven years -- not us fortunately -- traffic in retail is down by 60%. Ours fortunately is less than 20%.

We'll talk about the opportunity of creating an omnichannel presence. And then of course you might have seen a glimpse of the launch of the Ethan Allen Disney Magical Home.

We'll also talk about our good corporate governance, steps that we have been taking. And then we'll talk about our financial results and also comment on the first quarter and also the last fiscal year ended June 30.

We'll also -- you're going to hear more about this: that is, redefining custom. For many, many years, custom has meant more finishes, more colors, more options, which is very important. But we are redefining custom to mean our personalized service -- that's an important aspect of our customization -- backed with style, quality, value, and speed. And I'll talk about the steps we are taking to make and redefining custom.

That takes me to the customer experience, the study that I saw that customer experience differentiates more -- good customer experience differentiates more than many other elements. We always think of pricing, and of course pricing and value is important.

Think of this. That brand -- of course, we have a great brand -- but still if you don't, if you have poor customer experience, all of that is negated. So in our enterprise we are spending a great deal on customer experience.

Every week, in fact, our management sends me a note about how -- we call it a Wow experience. We have a couple of our Vice Presidents from the retail division here representing the Northeast and the Mid-Atlantic, and they all have to say what -- how did they Wow a customer? Small things, big things. And that is, I believe, a very important element of our business.

Like for instance, again, what we learned is that successful companies are also most effective at customer service. Look at this: 85% of businesses that survive have had good customer service experience.

And also innovation. Morale is more important than just cost-cutting. We are, of course, very cautious about what we spend, but it is also important to have great morale, and we are pleased to have a strong morale within our organization.

Then in terms of our offerings, as you know in the last two years or in the last year, we have been making major changes to make sure our products are relevant. So we're going to talk briefly about our various offerings.

Just for purposes of this discussion we are defining them as Country Classics, Urban Classics, World Classics, and Uptown Classics, like all our product lines. Like Santa Monica, Brooklyn, and others fall into this category, and I'll talk about that.

Our vertical integration, as I said earlier, is a great competitive advantage to make sure that these products are not only designed, but we can service them. I'll talk about our manufacturing and sourcing in North America; it's still about 70% of our product is made in our North American workshops.

Then we'll talk more and more about social responsibility and our environmental policies and safety, here and everywhere else. We first introduced under the Country Classics Buckhead and Santa Monica. It was the base. It was introduced in July and August of this year.

Well received. You can see the attitudes: they are stylish, they are livable, they are quality, because all of those are the ingredients that we need today. And it's also one-stop shopping for us.

Then in August we introduced Brooklyn. It is under our Urban Classics attitude. Here again you can see it's somewhat of more of a modern perspective, but again with classics with a modern perspective. And this was this August.

All of this, of course, involved a lot of changes in our manufacturing. It takes about a year for our manufacturing to learn to make the product, to get all the initial visions. Last year that's all we've been doing.

And the good news is still, despite all of that, our gross margins improved despite these products. And then I'll talk about the Disney; that has its own implications.

Under the World Classics in the last year or so, again we introduced last fall Sonoma.

Also last year within fiscal 2015 and fiscal 2016, we introduced and strengthened our Uptown Classics with the introduction of Capitol Hill. This is some of the more formal offerings.

And then the Ethan Allen Disney. This is the fifth -- as you know, I like five things. So we got the four offerings and the Ethan Allen Disney.

It started about a year or so ago, but like everything there is a story. Last spring we took our two grandchildren to Disneyland -- to Disney World in Florida. So we're walking, we're going around, and into that -- what's -- that It's a Small World. So I was trying to sing too, and my granddaughter says: You don't know how to sing.

But we thought about it: we should do something. Of course, I have known Bob Iger, so I called him up and he immediately said: Yes, we should do something -- but we should not just do products; we should create a Magical Home.

And really he collaborated with us. This has been a major, major undertaking of doing in the last, less than a year, 500 different items. Made beautiful products, meeting our standards and even Disney's social responsibility. Every area, every location, 70 of them had to go through an intense review, every one of them, by an independent organizations that they meet the social, environmental, safety, child labor.

And we are pleased, because we have high standards. It's good to partner with an enterprise that also has very, very high standards of social responsibility.

So the product lines, you will see there a glimpse of it, and later on I'll talk a little bit more in somewhat more detail later on. But it goes from the baby to the child, and then even the hub for their parents.

Now, we have continued to strengthen our vertically integrated structure. We operate nine manufacturing facilities in North America: seven in the United States, one in Mexico, one in Honduras.

Mexico, as you know, started about eight, nine years back. And it does take about four, five, six years to get one of these manufacturing operations operating at a level that they are making reasonable profitability.

Mexico still our operation is doing well. And Honduras is now getting started, and they've also been making a lot of the Ethan Allen Disney product; so they've had a lot of, you might say, start-up costs in doing it.

As I mentioned, 70% of our products are made in our own North American plant as well each year. Now we get accents and others and source them from many different parts of the world.

Our environmental and social responsibility is extremely important, and we maintain uniform manufacturing standards. We also have two national distribution centers and 30 retail division service centers which receive the product and then provide what we call premier home delivery or our white-glove services to our clients.

Now, quality craftsmanship is a cornerstone of the brand. We have one standard of quality.

All our upholstery, for instance, all the sofas you see here, are made with one level of quality, whether it's $1,400 or $3,000. And that goes into our other product programs.

And when we select product partners internationally, it's very important that they are also committed to our level of quality, best in construction, the techniques. We have an in-house design team, engineering team in our corporate headquarters as well as in our plants.

Now as you know, we go from buying logs -- this is in Vermont, northeast country. So we go to the forest, we get logs. We still are one of the very few ones left that go from the log to the design to the engineering to making the product to retailing. It's a lot of work but gives us a competitive advantage.

Then we have been introducing technology. To manufacturer in North America is not easy. Easier to give it up -- and you're always tempted, because in short term we can even have higher margin.

But this vertical integration, this ability to service, control our destiny, we always think about those factors as well. So we have been introducing technology to our manufacturing.

We have also been training people. Like for instance, this gilding was not done, so we had to train 30 or 40-odd people to make them into artists in Vermont and Carolina.

We introduced in one of our -- in North Carolina a new rough mill. All this equipment is important, because today, if you do not have the right equipment and technology, you better close. Not an option. Because all the folks who are doing well have the latest technology internationally.

So there is all these equipments, and some of them we purchase new and some of them we purchase from folks who close their manufacturing in the United States. In fact, many of them; so we were able to get them at decent values for us.

Now, distribution and logistics is tremendously important. We maintain two major distribution centers.

Our products that are made in our own manufacturing, products that come from all over the world, goes into two major distribution centers: one is in Dublin, Virginia, which is about a 630,000 square foot facility; and then this under 0.5 million facility in Tulsa, Oklahoma, which basically to a great degree receives product that is shipped by UPS.

So this stands in the middle of the country, and we are able to ship it. Most orders our received in a day and the next day they are shipped.

Then we operate five regional, large service centers. These are now operated by our retail division. The national distribution systems are operated by our wholesale division.

We have five regions in the country. We have -- this is in Connecticut, and -- which is responsible for delivering products from Manhattan to Maine. The products are all received; they are prepped; they are blanket wrapped and delivered to the consumer's home.

Chester Springs is in the Philadelphia area, which services Washington, Greater Philadelphia, and so far the Mid-Atlantic. So 15 Design Centers are serviced by this regional service center.

And we have one in Detroit that services the Midwest, from Chicago to Detroit; then in Pomona is in California, Southern California; and then in Florida. So these five Design Centers are -- these five service centers, larger ones, are supported by 23 smaller service centers as well, all around the country.

Because service in our business is critical. You can make money or lose money in returns. So our returns are, I believe, the lowest in our industry, and we do it because of the fact the care of the product and then through the operations that we have.

Environmental stewardship and sustainability I mentioned is tremendously important for us. We have similar standards of safety, of environmental, in Mexico and Honduras as we have in Vermont or in North Carolina. We believe that we must treat our people well and they must be safe.

So that has really -- we have received, as you know, a lot of awards from the EPA and from various states. And that's all very, very important.

So we have tremendously important in terms of looking at our environmental, health, and safety records -- and as you can see, including the usage of oil. For instance, in Vermont, where we used to one use hundreds of thousands of gallons of oil, we are now using zero. We produce our electricity; we produce steam. So all of those are good for environment, but also good for the bottom line.

We also manage a number of health clinics and doctors. We are just in the process of establishing a new one in Maiden, North Carolina, because health cost, as you know, is a big cost and we basically pay most of the health cost of our 5,000 employees.

So we have health medical clinics and focus on the question of managing the health costs. It's one of the bigger costs.

The next important thing I want to take talk about is our competitive advantage of personal service. I believe it's the new luxury. In this age of mediocrity, age of technology, personal service is important.

We've got 1,500 design consultants that work in our network full-time. They work for the Company.

And 6,000 now what we call Interior Design Affiliates. They don't work for us, but they are independent, and they work with our interior designers when they bring in their clients.

Other important element is now combining our personal service with technology. So we have started a very interesting and an important initiative which is called Live Chat. We're starting to have our interior designers connect with clients all over the country.

It's interesting. I see the results now. We're just training people, about 15, 20 a week to be able to get on.

For instance, when I look at it, we had recently a designer in Michigan, a client in Florida, delivered to their home in California. It was about $35,000, $36,000 order all done seamlessly.

And now I see when I look at it, our designers are -- they could be anywhere. And we see this -- and this, as we know, is a good start because a lot of folks don't want to come into the Design Centers. This will start the process.

End of the day, of course, we want them to come to our Design Centers, interact with our designers. Most of our business is done -- even a lot of our business is done when we make house calls. So we want to take this customer and turn them into a [live] client, but today you just can't wait for them to come in the door. You've got to be -- this is one really important.

Now with that, we also launched what we call an IDEAL. It is Interior Designers with an Entrepreneurial Attitude and Lifestyle, and it's all done in the last three months.

This program, now as we are launching this Live Chat and also reflecting the new age, so this IDEAL gives flexibility to our designers now. They can work two days or three days in our Design Centers; they can work from their home; they can work at midnight, in the morning. Because today the customer is not a 9-to-5 customer.

So we have now started this IDEAL program and we have launched it. We tested it this summer, and as of October 1 we've launched it nationally.

Then, our premier in-home delivery, very important, because this is their personal service. Our personal services of our designers, in Design Centers, using technology; and now -- then we have to give them the flexibility to be able to work. So all of these are initiatives that we all have to -- and a lot of issues, as you can understand, but the good news is it's being well received by our network.

We are, as we have said, a leading interior design enterprise with 1,500 interior designers. 60% of our interior designers today have entrepreneurial background. These are folks who run their own businesses.

So we want to create an entrepreneurial attitude, but a discipline. Discipline is our brand. They cannot go in and bring other things. They've got to market it our way.

But when you combine their entrepreneurial attitude and the discipline our brand provides, it's a good combination. And we said -- I said, long-term associations are important. We have expanded to the 6,000 members, and they are; and many of them or some of them end up working full-time for the Company.

As you know over here, we have a number of our interior designers right here in this Design Center. In fact, this was interesting: when we opened this one up, a number of them came from other Design Centers, some from Connecticut, some from all over. Because we have a very good trained group of people in this Design Center.

And where is Michael? Are you here? Michael is a manager of this location; he used to be managing the Uptown. So how many designers do you have?

Here? 12.

12. So he's got 12 designers and they came from different parts. And frankly all of them, or most of them, had Ethan Allen experience because they're paying us rent and to make it up Michael has to do a lot of business.

So our design service is important: putting it all together, making sure that we are able to have the products for them. So it's very, very important.

And they play an important role. In fact, the next week -- in two weeks, we have our annual interior designer conference in Danbury. They've been doing it for 30 years, where 250 of our top interior designers are recognized. It's like our Academy Awards.

But it's not just recognition, but we also spend half of the time listening to them, because they come with a lot of experience. So it is half and half: we tell them what we are doing, and then we want to know their perspective. And it's a great experience for both.

As I said, premier home delivery is very important for us. It's a flat rate; no surprises. No heavy item charges.

And they not only deliver, they set it up. And again, a very important part of our customer service.

Now, this -- we have just launched a marketing campaign on this IDEAL, that, is bringing new designers in and even giving the opportunity to our existing designers -- if it makes sense -- to work on flex time. Being an employee, flex time, I think today in this world you have to be able to do both.

Then investing in technology, I think adding technology at all levels of our business is critical. We are now including technology, as I said, in manufacturing, in our retail, even in our financial services, operations, warehousing.

And that element is -- we're continuously making sure that -- in this vertically integrated enterprise that the right kind of technology is there and we're current for technology.

We have been working on -- as I said, 70% of the folks today go to our mobile services. So our mobile better be right. So we're investing in our mobile, the positive increases in KPIs over prior year.

And online sales -- we're still from a small base, and they are growing 55%, even though as I said our objective is to take those customers and turn them into long-term clients meeting our designers.

For us, longer-term is better for them. But on the other hand, we also have to do business online. So you're going to see more of that. As I mentioned, our technology provides an opportunity of interacting with clients and then helping them come into our Design Centers.

I talked briefly about Chat; and here we have launched it. As I said, it is something that combining personal service and technology is important.

Every year -- every week we are training people because we have to -- and giving them a certification that they are qualified with our own interior designers that they can qualify to be on Chat.

When they get on Chat, it's all through our website. They are able to interact with people, and they can also -- most of the Chat is done online, but also about 30%, 35% of the business is done where they also talk to the people; so they are doing both.

The other important -- all of this is interrelated, so 3-D product visualization becomes important. The experience on our website is critical. So we've launched now the 3-D with the Ethan Allen Disney programs, and on a very accelerated basis we are now going to put it right across all our offerings.

Then our next important initiative is our retail network. Our focus has been in the last few years to take it from a store to a Design Center.

The continued repositioning: keep in mind also about 35 years back our Design Centers, our stores were developed; they were mostly in suburban locations; they were also about 15,000 square foot freestanding. But the world has changed, so we have been repositioning almost 60%, 70% of our retail network has been repositioned or in the process of doing it. Most of it's already done.

Our -- today we have 296 Design Centers, about half of them in North America and the other half internationally. In the past five years we have opened 34 in the Company's retail division Design Centers, including 18 relocations. In the past five years, our independents have opened 69, most of them internationally and including 12 relocations.

We have with us today, Phil Esposito. Phil, where are you? Phil is our independent retailer from New Jersey, Pennsylvania. He operates four Ethan Allen Design Centers, and he's also on one of our committees on quality, and he spends a lot of time in helping us look at quality and also reduce.

They've done a great job in reducing the time of reducing -- rescheduling. Rescheduling in our business is an issue, so we have reduced rescheduling by, what? In the last year alone by what, 80% or so?

Major undertaking by a group of people including our independent retailers. And Phil has only been with the Ethan Allen system -- and his family -- for just a little over 50 years. And the average association of our independents is now 35 years at Ethan Allen.

In the last number of years we had to not only reposition but to change the design of our Design Centers. We have today what we call the Classic Design, which is the one that was converted from the early American Colonial Designs; some of you remember it.

And, Maggie, you saw -- you remember our designs at a Colonial Ethan Allen Carriage House; and Budd too, there; and I'm sure others as well. But I know these two folks at a very deep level where looking at those.

So we change it in the early 1990s. Now we have 122 locations, what we call the Classic Design, with about an average of 15,000 square feet.

Then, before the Great Recession, things were great, so we opened up larger Design Centers. We called them the Neoclassical Design Center; average is 18,000 square feet. Great locations, great projection. Much larger than what we need today, but we have them.

Then in the last five, six, seven years, we've been opening what we call more in the lifestyle centers. So we've opened 33 locations with an average of about 8,000 square feet.

And in the last year or so, we have now started looking at our Design Centers from a store to an interior design center. Like for instance over here, you see this has -- where the interior designers are right in the middle.

We started it by calling it a kitchen concept, that a great kitchen is right in the middle of the restaurant. Our designers used to be somewhere in the back. We have brought them in the middle, and you're going to see that in all our new Design Centers. The design focus is critical.

This is in Wichita, Kansas. As you can see, it's a smaller Design Center; 6,000, 7,000 square feet, but the focus is on interior design.

Then in Pittsburgh, we opened it and again you get just a glimpse of the fact it's gone from a store to a focus on interior design.

We went back to Toledo. We used to have a 15,000 square foot in Toledo. Pittsburgh also was 15,000 or 18,000, and now we're in a lifestyle center, smaller location last year also in Toledo.

This is one or only one we have in a mall, in the King of Prussia Mall. Again we went from a 20,000 to about 10,000 square feet over there. In the Baltimore area, also we relocated into a smaller and again the focus on interior design.

Then we've been also going internationally. We've just opened a few in Germany with some partners over there.

These are Ethan Allen Design Studios within large stores in Germany. Because you know in Germany they've got 200,000, 300,000, 400,000 square foot, big huge stores. So we're pleased with -- very strong partners.

Hesse, Inhofer, these are good. We used to have an Ethan Allen in the 1980s, and then the dollar change and all of that we are back -- getting back into San Francisco.

The Dublin area, we relocated it again. A lot of focus on interior design.

Cranston, Rhode Island, we went from a suburb to a lifestyle center. Rockville, Maryland also; we opened up a new one there.

Hyannis also this year we opened in a lifestyle center. And Savannah, Georgia, where we had been absent for many, many years, we are back there this summer.

And now, of course, right here in Manhattan. We opened it officially in August.

We also opened -- we had an independent retailer who retired; his family retired after 60 years, but an 18,000 square foot. So we worked with him and us and our Company retail division took it over, so we opened up about 8,000 or 9,000 square foot Design Center in a great location in Virginia Beach.

And in Germany again, our focus first in Europe has been in Germany with our great partner there. So we opened in Mainz, Germany; in August in Potsdam; and in September opened in Frechen, all in Germany. Again, these are all within large stores.

Korea, we also opened up. And there's again a relocation, two locations.

China, of course, has been a major undertaking for us. We have a great partner over there, and they have been opening new.

They've also been relocating. Even though they started 15 years back, they've now gone in the process of relocating their Design Centers too. So we can see these locations are -- and as you know in China, our partner has -- we have two stores in this building with the Marker and Ethan Allen. Ethan Allen represents part of -- about 40% of the offerings in each of these stores.

We've got two stores in one, and Dan Grow is here. Dan Grow is head of our business development, and he spends a lot of time in China. Interestingly, while on our wholesale business in China our sales are somewhat down, but on the retail over there the good news is they did well last quarter.

So lot of activity in China. They are really, again, relocating, repositioning, opening in China in a major way. This is a major flagship in Beijing.

Then, we talk about marketing. There's a number of studies that we have seen that in the last -- from 2010 to 2015 in all retail, now I'm talking about department stores, talking about all kinds of specialty stores, traffic is down by 60%. Fortunately for us, we're also down, but not as much.

That's good news. But still, traffic will not increase. It's gone down.

70% I said, shop online. So this is extremely important, that even though we've held up -- and we've held up to a great degree also by relocating it from these freestanding Design Centers to more lifestyle. If we had not done that, the chances are our decline would have been much, much greater than less than 20%.

Now in marketing, of course our Design Centers are important, but we're also using our other marketing. For instance, our direct mail is important.

Now we have increasing our advertising in the digital mediums. Social mediums are important. Less and less, TV and print, so it's direct mail, digital, social, then TV and print.

Then we also entered into a number of partnerships. Of course Disney is the main one.

In this fiscal 2016, we sent out in a 15-month time frame 33 million copies of our direct mail. You have the one now of the October here that you can have; and I understand we're also giving you one that we are launching for the New York area, because we love New York and actually it's being launched next month.

We expanded our digital and social campaigns; a lot of focus on grassroots marketing. And the interesting thing is where we are launching our social mediums it is as much as possible, and more and more through our own 1,500 interior designers -- I call them ambassadors.

They are starting to do a great job. We're helping them and we're going to help them more in creating videos which they put on social mediums.

And then as I said, grassroots marketing, select partnerships are very, very important.

Last year we launched an important book called Muses. You may have all received it. It started projecting the Ethan Allen attitude in design, in style, and attitudes of drama, of different lifestyles, laughter, music.

And then there is my photographs. So it reminds everybody that I like mountain climbing, as you know. And mountain climbing teaches you that you've got to pace yourself. If you go too high too fast, you get water in your lungs; you keep on going, you die.

A lot of businesses go fast. The example -- the world is littered with great companies with great products; go too fast; get water in their lungs; and of course the stock price reflects it around 30%, 40%, 50%, 60%.

But more importantly, their business is down. Their impact and their customer experience is affected.

So we watch very carefully how -- what do we manage our pace? I know everybody would love us to have tremendous, great quarterly sales. But we've got to manage it. We've got to make sure we're profitable.

We've got cash; we pay dividends. To me those are as important than just focusing only on climbing. You can climb to death. Anyway, that's mountain climbing.

Then, coming back to -- we just launched last month our next book; and I believe you have a copy of that in your bags. It's called The Journey of American Style.

This book again is very well received by our clients, by our designers because this now projects and has all our product offerings so far -- excepting, of course, the Ethan Allen Disney product. It projects again stylish and livable. Certainly quality and good value are important ingredients.

So all our offerings are there. Then also what it has, which is a little bit different than our Muses book, towards the end it has an element of the catalogs, which clients and our designers love. It is more of a book that they can use.

Then this June, just a brief overview, we started launching some of these new product lines. In June we launched Buckhead: 3 million to 4 million direct mail, digital marketing, and other marketing to support it. In July we launched Santa Monica. In August we will have launched our Brooklyn program.

And we had to make sure now, again, all of these products had -- we had to take products off our Design Centers, so it created more clearance. So we had to manage the clearance as well.

We still have products that we're selling as clearance and will continue for the next year, because we don't have outlets. We have done in the last year 70% major off products. Now, good news is from now to the next year it will be a much, much slower rate, so will have an opportunity on a planned basis to sell our -- this discontinued floor clearance, which does have an impact on our margins.

But despite that, our gross margins both at retail and wholesale were higher, despite all of that. And still -- and you'll see the impact of that at least for the next year or so.

In September, we had our direct mail, which was a special invitation to getting the book, because we wanted people to come in and get this book. And people are coming in.

In October, we started focusing on this great customer experience, this direct mail, which again, went to what, 3 million? Yes, Bridget, is that 3 million households?

Here you will see us focusing about our -- these customer experiences. Our designers can help you as little or as much. That's our competitive advantage. Certainly quality is important.

Our financing experience of going platinum. We have a great financing program.

The quality of our product lines. And then, speed: so fast delivery is important, and we started this with our quick-ship upholstery product lines last year. Very well received.

We are now delivering that product on an average about 15 days anywhere in the United States. Some of them right in the Northeast are seven or eight days; up in the West Coast, maybe about 24, 25 days. But 14 days average we're delivering custom upholstery.

It's been a great experience for us to learn how to create great products and speed. Speed is important.

Here we are talking about all the things that our designers do. Our custom; our home delivery.

And then in November -- you don't have it because this offer will be effective next week. We are again focusing on our services; actually the cover photograph is this Design Center right here and back there.

Then we show about our fashion. We talk about, again, as little or as much, our designers can help.

And this in November, reaching -- going to 4 million households; the first time we'll be launching this thing. Then our direct mail in November, Disney is going to be launched.

Again, we also focus on our speed, custom design delivered in less than 30 days. On a plan basis, we're going to expand the speed of delivery across our product offerings.

Our finance programs. This is some of our print advertising: designing a great experience; focus on the quality, on experiences.

And we are also taking a look at our -- we're focused on our website. You're going to continue to see us make major, major enhancements to our website and to our digital mediums.

Our email [drops] take almost every day. And here we also continuing to see how do we make it smart, how do we make it effective so that people open them? That is always a focus.

Social media focus is important, and you're going to see a lot of that. As I said earlier, what we are doing nationally, regionally, incorporating our interior designers into social media.

We're also involved with real estate partners. Last year, we entered into an association with Century 21 Coldwell Banker, Sotheby's, in which basically we are involved with their new homeowners program, where our direct mail information is sent to new homeowners. They advise us of the people who have been moving into the area, so our local Design Centers can also contact them.

We have -- we are enhancing our wedding and gift registry. Still relatively small for us, but this is a focus that we have, and you're going to see more involvement in this through our Design Centers and our interior designers.

Then, we come to our Ethan Allen Disney. As I said, we started this about last spring, summer, and our team really has an amazing job in putting it together in terms of the offerings and the projection in our Design Centers and marketing.

As you saw and you'll see some of these products -- or you will see, those who came a little bit later -- that we have -- they're here in this Design Center, and now they are being received all over the country in our Design Centers.

They go from the baby, and it of course reflects the Disney attitude, but Ethan Allen quality. We designed it all, our teams did it. They were involved in terms of giving ideas; but we really ran with this.

And after -- the good news, with all that we have spent a lot of time in the previous year in developing all those four attitudes I mentioned, ending in Brooklyn. So when this came, our teams were ready.

We couldn't have done it two years back. It would've been very hard for us to do.

So it's about 500 different items made in 70 different locations all over the world, and a lot of the furniture is made in our own North American facilities. Soft goods; many of them are made in India.

I must tell you this: 15, 18 years back, many of those people in India would not have met the social responsibility that they are meeting today, and almost every one of them met it. They would not have met it in terms of child labor, safety.

Similarly, we have operations in Indonesia, some in China and Italy and Portugal, and of course right here in the United States. So this will give you a good perspective of the product lines.

Then the next one was projection. We are launching it in three different sizes, a 1,500 -- it is like a home. As I said the concept was developing a Magical Home.

So we have a 1,500, 1,000, and 500, depending on the size of the Design Centers, how much they can take. But all of it is designed with our associates and practically all of them are going to have the new flooring because they've been installing in the Design Centers. Phil, I got your video yesterday, the installation of your flooring in your Design Center.

Now the marketing of Disney is very, very important, so we are partnering with the Disney organization. We are -- a few weeks back it was first launched through -- on email to what is called the Disney enthusiast: about 250,000 people. So that they got it, so they -- and they liked it.

And now in November, next month is when we are launching it to -- first direct mail, and a lot of digital and social media marketing. We are actually also working with digital interactive so that it will be also marketed in a lot of Disney channels.

We're also talking to them and discussing also making -- offering a group of it on Disney.com, but it will be serviced and worked through our Design Center. So we're working that out, but that will be one of the first ones that will be utilizing another channel, but that will be -- it will be serviced and serviced by our regional network.

In January, we also will have in addition to a 32-page book that is going to be available for them next month, we'll have a 140-page storybook that will be available for our Design Centers in January.

This is the 32-page that's going to be available next month, so you can get a little overview of this book. That's me eating apples because nature is very, very important, and that tells a story of how this came about. Again, it's a story about a family going there; that's how it all started.

By the way, all these folks you see are children of our employees. We decided that our folks should be the main actors in all our advertising for the Disney program.

We talk about our design services. As I said we are going from the baby to the child to also the hub; that's where their parents stay, which is what you have here in the Design Center. And we'll show -- we'll mail this to all of you, and Corey will take care of it as it comes.

Now you also heard a lot about this US State Department. I think it was a year and a half; the government takes its time to work.

So finally after a fair amount of time, we were able to get the contract. And the contract is divided as -- in three lifestyles called the Contemporary, Traditional, and Transitional.

This is a book that we have just developed. This book is going to go through all the U.S. State Department -- there's diplomats all over the world, their embassies and where the American diplomats are. And this will be mailed in a few weeks' time.

There are three, as I said, three programs: the Contemporary, the Traditional, and the Transitional. And there are some multiple sources; so others will also send their books, I believe, so that the folks in the embassies will then determine which of the -- were there three or four? Four, including us, yes. So they will then determine which ones to utilize.

So we have a whole logistics. It's a fairly major undertaking to make it work.

Also, this year we also launched an interesting partnership with Army and Air Force Exchange in which a selected number of products are offered to the service people, but again serviced through our network. They can also meet our designers. The benefit is the service people do not pay tax if they go through this Exchange; that's the main benefit to the service people. Otherwise, the offering is exactly the same as to any other customer.

So we're going to see how it works. We just launched it. Slowly building it as well.

Now, again as you know, the governance is an important issue. Last year we continued to again review a number of ideas that were presented last year. We have continued to implement, as you can know that we have a nonbinding vote on executive compensation, eliminated shareholder rights. All of this was done a few years back.

Lead Director; classified Board terms. Drawback -- clawback on executive compensation. Required Board and management to own stock.

And also at the 2015 annual stockholders meeting eliminated requirement that business combinations be approved by a majority of the continuing Directors. All of these is our charters, bylaws that was done in the early 1990s. We really didn't pay as much attention to them.

But with what happened last year, we said: Let's bring them up to current. So like for instance, in this 2016 annual stockholders meeting which is next month, we looked at and said we must make sure that we have the most relevant and the current governance. So we implemented proxy access. We are most probably one of the leaders in doing it.

Implemented majority voting in uncontested elections. We allowed for stockholder removal of Directors with or without cause; in the 1990s, it would have to be only with cause.

Made changes to our governance documents to implement the 2016 proposals and conformed them to customary standards. So we've done all of these things, making sure that we have -- we also continued to strengthen our Board.

As you know, two of them are here. The average tenure is only 2.8 years. We have continuously brought in new Board members and independent.

The good news is they always have had 100% attendance by our Board members. They are very engaged.

And what I do with the Board members is I send them a lot of our internal memorandums that are relevant, so they can understand. Otherwise for them to come to a Board meeting with one Board book, hard to get an understanding of this vertically integrated, complex organization. So they are really involved and participate in our internal meetings as with all the Board members.

Now, Corey is going to give you an overview of the financials. But a number of years ago, right after the Great Recession, we developed these opportunity scenarios. This was when our sales had gone down by almost 40%; that was a value of $600 million. And basically our operating income went from $147 million to $1 million.

So we had to get back. We had to reposition.

At that time we said what would happen based upon our many changes that we had implemented at $800 million, $900 million, $1 billion, and $1.2 billion. So, as you can see, we already are close to the number A, this last fiscal year, $794 million. And very interestingly, they are pretty close to what we said.

Now we did change the A, B, C to reflect our current gross margins. At that time, as you see, our gross margins were 50%. Our gross margins have improved, a lot of it due to the fact of more Design Centers operated by the Company; so we've got to keep that perspective in mind.

Efficiencies also. Our operating income last fiscal year was 10.9%. We maintain good operating income. Great, good cash flow.

And we also said what would happen if we were the previous peak of $1.6 billion? That was 2006.

Keep in mind, look at our share count. Our share count just even after the Great Recession is down by 17%, even after the Great Recession. And that's why we have an opportunity, if we go back to the previous peak, of having an EPS of $3.51 versus $2.59.

So we have those opportunities, and this also reflects the operating leverage of our business. We also continued to focus on other important areas.

Look here, we have purchased 40% of our Company back very quietly over a period of time. This last quarter also we purchased 107,000 shares. So you will see, as I said, 17% right off the Great Recession, and you're going to see us on a planned basis, to some degree opportunist basis, buy our stock back.

We also pay dividends. We have paid $365 million of dividends since we took this Company public. We just increased this last quarter by, what was it, 17%, Corey? 20%-plus, so we've continued to increase our dividends.

But on the other hand, we also continue to invest in our Company. We have invested $763 million in capital expenditures, in our manufacturing, in our retail, in our technology. So with that, what I'll do, Corey, how about giving a perspective on the quarter and last year?

Thank you, Farooq. First, an update from last fall on our total shareholder return metric, which has shown good improvement. Our five-year return of 22.1% and one-year return of 29.4% outpaced each of the S&P 500, the Russell 3000 Index, and the S&P Retail Select Industry Index for both the one- and five-year periods. Over the same period, the one- and five-year periods, our TSR also compares favorably against our peers; and these numbers are as of September 30, 2016.

I'll give a quick update on our financials. For the first quarter of fiscal 2017, our consolidated net sales of $193.3 million reflected a year-over-year 1.5% increase for the quarter. Retail comp sales increased 5.7%; retail total sales increased 4.3%.

Wholesale net sales decreased 4.9%. Retail written orders increased 8.1% overall, and comp written orders increased 8%. Wholesale shipments for the quarter were negatively impacted by reduced plant throughput due to the first run of the Ethan Allen Disney product and also our annual summer vacation planned downtime that coincided with the Disney launch.

International sales were 10.9% of consolidated sales, and that compared to 11.9% last year. The mix of retail segment sales -- the consolidated net sales for the quarter were 78.8%, and that compared to 76.7% in the prior year. That change in mix helped drive the consolidated gross margins of 56.1% from 55% in the prior-year first quarter.

Now, our adjusted operating expenses increased $5.8 million to $89.5 million, and that excluded a $600,000 loss on the sale of one retail property. The past four quarters have run at approximately $90 million a quarter, and this tracks fairly close to the opportunity slide at that scenario A level that Farooq just talked about.

We mentioned several discrete items impacting operating expense this quarter, including the impact of new Design Centers. As we sell off older legacy properties, we are opening new leased locations that incur higher startup costs. We consider locations operating less than 15 months and acquired locations operating less than 12 months as new locations. These are not included in our comparable sales.

At September 30, 2016, there were 13 new locations; and that compared to seven new locations at the prior year quarter end. Of those 13 new locations, 10 of them have opened just since January, so that did have an impact on operating expenses on a comparative basis.

Our adjusted operating margin was 9.8%. And adjusted net income of $0.43 per share compared to $0.46. We maintained strong adjusted EBITDA at 12.4% of sales.

Our effective tax rate for the quarter was 36.5% and we expect that rate to continue for fiscal 2017.

We continue to focus on maintaining our strong financial structure. We ended the quarter with a healthy balance sheet.

At September 30, there was $40.6 million outstanding under our credit facility, together with $0.1 million of standby letters of credit, and we had $89.9 million of availability.

We generated $27.5 million of cash from operations during the quarter, compared to $16.1 million in the prior-year quarter. Our total cash and securities -- during the quarter, we also paid out dividends of $4.7 million in increased our dividend per share by 21.4% compared to the prior-year quarter.

We repurchased about 108,000 shares for $3.4 million. And our remaining repurchase authorization at September 30 was 1.7 million shares.

Our capital expenditures increased this quarter to $7.4 million. That was split equally between retail and manufacturing; and our manufacturing portion of that before technology is in our new plants that we're bringing online in Silao in Mexico. We continue to expect $24 million to $25 million in capital expenditures with depreciation of about $20 million for the full fiscal year.

Quickly on the year, our fiscal year ended with strong results. Net sales increased 5.2%; adjusted operating income of $87 million, 10.9% of sales, and that increased by $16.5 million.

Adjusted EPS of $1.92 per share, that increased 36.2% to the prior year. These results really demonstrate the leverage of our vertically integrated structure.

Throughout the fiscal year we maintained a strong balance sheet. During the major product transformation we managed our inventories carefully, a modest 6.9% increase in inventory, and we improved our in-stock positions and launched the custom quick-ship promotion.

We managed our expenses and help generate cash. That lowered debt by 45% from the prior year-end.

We paid out 24.7% more in dividends than in the prior fiscal year, and we repurchased about 700,000 shares for $19.3 million. And with that, I'll turn it back over to Farooq.

All right. Thank you, Corey. What we're going to do is we'll open it up for questions first from the audience here and then we can open it up also for the folks that are online. And if -- you have the microphones? Yes, we have microphones. If you could, please, because as you know this is being webcast, and if you could kindly identify yourself also.

Hi, good morning; it's Jessica Mace from Nomura Securities. My question is about the environment overall, if you could talk a little bit about what you are seeing just competitively and in your category.

And maybe as a follow-up you could talk about the promotions that you ran last year in this quarter and, along with your comments on the environment, how you see your plans for promotion in the second quarter of this year. Thanks very much.

Well, if you take a look at on a macro level, the environment is difficult. Many, many factors.

You have first, election campaign -- and we'll be glad it's over in two weeks, and it's been tough. It really has impacted customers and clients. It's taken a tremendous amount of attention from especially discretionary budgets. So I think from that perspective, the environment this whole last six months has not been good.

In terms of competitive situation, I don't think that there has been a major change in the last six, nine months, except in the fact that you again continue to see a focus on the digital mediums, online sales, and heavy promotions -- very heavy promotions across the board.

As far as our marketing this quarter, this is going to still -- our marketing is going to be strong this quarter. We have actually in October launched our new products. All of the new products that were introduced, we marketed them through our direct mail.

We have increased -- it still is a relatively smaller number, but we almost increased our digital advertising by 60%, 70%. You're going to see us much more digital advertising.

In fact, using the digital services of Disney is going to also get us an opportunity of utilizing their channels, and most of it is digital. So you're going to see us maintain and increase our advertising.

Now keep in mind our advertising does change from quarter to quarter. You know it's not something that -- like this last quarter our advertising represented 4.2% of total sales versus 3.5% the previous quarter. As we go forward, there's going to be -- we're going to accelerate advertising; but again, advertising -- total dollars will increase, but as a percentage of sales we'd like to keep it around that 4% or so number for the time being.

Thanks. Jeremy Hamblin from Dougherty & Company. Wanted to ask you some questions on the Disney collection. I think it looks like it's covering about 10% of the square footage based on that 1,500 square feet total.

Can you just give us a sense for what your internal expectations are? You haven't done a whole lot in the past with kids' collections, and so it feels like it's incremental.

Do you think that it's going to have any negative impact -- things you can't show on the floor because you're replacing it with this? Just any additional color would be --

No, Jeremy, it's a good question and we have been ourselves discussing it. First of all, the amount of space varies. This is relatively large for a 9,000 or 10,000 or so square foot, giving 1,500. We are giving 1,500 when we've 15,000 to 18,000 square feet. So in here there's a little bit more because of the presence of Manhattan.

In most Design Centers, it will be between 500 and 1,000. 1,500 will be, what -- do we have four or five in the country? About five or so in the country; our sixth will be 1,500. Most 1,000 and many 500.

Yes, we had to take products off the floor as we had to do in the last year. 70% of our products had to be changed last year.

Now the impact is positive in the sense that this should help us expand our reach to younger customers, to their children.

So the objective is twofold. It is to reach -- our customers are still -- even over here you're right in downtown; there's a lot of young folks around. But our customer is still -- and which is okay for us -- is between 35 and 45 to 50 in this market as well. We have a relatively small number of folks in their 20s who will be able to get Ethan Allen.

30s? That's when they have kids. So, we are starting to see people in their 30s with children coming in, right in this Design Center. And as we launch it nationally, we believe that we will have an opportunity of expanding our reach to the Millennials who right now may not feel that -- they are not coming in to see what we have.

Our advertising will also gone through and reach a lot more Millennials, whether it is the digital mediums or through our direct mail. We are looking at direct mail to see how do we reach more of the Millennial crowd; but again with a demographic that's going to be able -- that is relevant for us.

Now, in terms of what the impact is going to have on our sales, really it's hard. You have to, of course, make a commitment on inventory because one of the things on this is faster speed. These folks don't want to wait. You can't tell them that you've got to wait.

So we have made commitments. And the good news is that even with our inventory and everything else and our Ethan Allen Disney inventory coming in --- mostly coming in this quarter, in October, November, and December is when most of the inventory is coming in -- it's going to be anywhere from $25 million to $100 million. It's hard.

I just want to follow up on the points on inventory and just think about potential impact. You did note that there is some spending that happened on this quarter on last week's release. How should we be thinking about -- I think the delivered of sales probably don't occur with the November 18 launch until primarily in the March quarter, I would think. Maybe a little bit that you capture at the end of this quarter.

In terms of the spending though, I have to imagine a lot of that is going to happen this quarter, on top of what you've done last quarter with a launch like this. Last question, in kind of --

Well, let me answer that first, okay? So this way I remember, right?

You're right, Jeremy, that we'll be spending at this stage more money. And also keep in mind last year we had a very major increase in business; and, of course, we made it public last October when we launched for the first time that major designer save 30%. Our business in October increased 32%.

We then followed it in November with our Black Friday. It increased also by, I don't know, 25%, 30%. So we had a very strong written quarter last year.

But what it also reflected was that because it was such a unique offer, it took business from the past and some from the future last year. We've launched that offer again this October; it's strong, but not the same impact that we had last year.

So we're going to take -- so we are also comparing our written business against a very strong quarter last year. It does not mean that we are not going to do better; but we've got to always keep that perspective in mind: a strong, strong written last year.

Now this year, I think from an expenses point of view, yes, we would be -- because we continue to spend money on -- at all levels. For instance, which is somewhat hidden, is the fact that what Corey mentioned is what we are spending on manufacturing. Our manufacturing, especially our Honduras shop, actually where most of this product for Disney is being made, they really have to go through a really, really major undertaking with a major impact on margins. It will improve it, but that will also be an impact in the next -- in this quarter.

But, overall, we remain positive, but keeping in mind what we did last year.

Should we be thinking that there is a little more clearance year-over-year because you've got to move out some product to make room for this on the floors?

A little bit more. But keep in mind our clearance, we're going to take another year or so at least to get rid of what we did last year, because we cannot bring all the clearance in here and mess up this. So we are on a planned basis selling.

What our design folks are doing is they're incorporating in the presentations that they make to clients every day some product that's clearance as part of their presentation. That's how we're selling it.

Thank you.

Budd? Budd Bugatch, I want to give (multiple speakers) --

Budd Bugatch with Raymond James. Thank you. Congratulations on the launch of Disney and the opening of this beautiful Design Center.

I guess part of my question goes to the gross margin performance in the first quarter. It was up. You did reference the fact that it had an impact due to the change in mix of business.

But how is factory margin doing with the launch of these new products. And what should we think about factory margins going forward? And I have a few more questions, too, after that.

Yes. While our total gross margins increased, as Corey mentioned the first quarter -- the fact of the mix between retail and wholesale. Second while relatively we had less clearance this quarter than the previous year -- relatively; but as I said, it does not mean that we are not going to continue to have clearance.

So those are the two factors. Negative was the fact that our wholesale margins were lower. They were lower because we had about, what, 5% less wholesale shipment. And as you know, that operating leverage of 5% less or 3% higher makes a difference. So we had that impact.

In this quarter, we will continue to have some challenges on our manufacturing side in our domestic. Overseas which reflects products -- approximately 30% of the product program, furniture and non-furniture products come from overseas, so they are not impacted on the gross margin line. So I would say that the opportunity is being pretty close to where we are in the first quarter.

And capacity utilization in your wholesale division and your factories is --?

We have capacity now, which means that -- and keep in mind the State Department contract specifies the products be made in the United States or countries where we have treaties, which includes actually Philippines; it includes also Honduras and Mexico.

So we are well positioned, but our manufacturing capacities in the United States is going to help us on the State Department contract. We have the capacities.

But then you've got to hire people, because that's -- from a physical perspective, machinery perspective, we are in great shape. I would say if we had to guess, we have 65% utilization, but not from the people point of view.

Aren't you increasing Mexico by 300,000 square feet? Is that in place? Or how does that work?

It is being completed this quarter, under the (inaudible). Keep in mind, we started with I think 30,000, 40,000 square feet then added -- made two major additions to it. The count is 300,000 square feet; started with 70 people to 1,000. They are the ones that do all our cutting and sewing and shipping it to our plants in North Carolina.

We added another upholstery plant in North Carolina last year. So we have three upholstery plants in North Carolina. Our plants in Mexico we have now producing most of the product for China. We're shipping directly from Mexico to China; and that product was made in the US.

It's much better because of fact that it is being shipped from the Pacific Coast of Mexico. Also all our leather which you will see over here is now made in our Silao operation, which seven years back we were importing from offshore. So we have the capacity to make the product.

Now, obviously, it's a chicken-and-egg situation if you don't have the capacities, as you cannot ask for new business. But if you've got the capacities, you've got to get business. So we have more capacity than business, so we've got to get more business.

Okay. Finally for me, you have these two new programs. Is that going to change some of the geography of the results on the P&L, particularly in the revenues for Disney, where they get reported and the State Department?

And also, I guess, there is probably a royalty you pay to Disney. How does that get booked into the P&L?

Good question. All the sales are reflected in our total sales. And it -- pardon me?

But within the segments, where does that show?

Within the segments, it will fall into either case goods, upholstery, or accents. So we will not show it separately as Disney. We may, but at this stage we don't have any that sort of plan so far. So it will be shown in our three categories.

And as far as Disney is concerned, you have very little royalty, which is part of our cost of goods.

Yes, Brad Thomas with KeyBanc. I first just wanted to ask for a little more color on recent trends and how you are thinking about the outlook for this upcoming quarter, particularly in light of how tough the consumer backdrop has been. I think just about every company in our home-related coverage has missed numbers or had slowing results as of late.

In addition, as you mentioned, your comparisons were pretty volatile quarter-to-quarter last year. Could you just talk a little bit about what, from a written standpoint, you had been seeing through the quarter and how reasonable it may be to expect a positive written comp in this subsequent quarter when you did I think 15% last year?

Well, our two Vice Presidents of the retail division are here, and we had calls only this week given all their management teams. And my question always is every week about 30 of them send me information about business and what do they think of business -- a question that you asked.

They are positive, but they are cautious. This week is going to determine how well October is going to do. Last year, that increase of 32% -- 50% of that was done in the last week of the month.

Now, unfortunately, if the elections were finished in October rather than November, which was not the case last year, there is some [that] uncertainty. But they feel comfortable, only because the fact of our interior design network is stronger, it's working.

So they are cautiously optimistic. But it is a challenge meeting those high numbers of last year.

Great. Then just a follow-up on the State Department program if I could. Seems like a very promising opportunity. We've talked about it for a while now.

From a timing standpoint, when do you think you might see some revenues from this program? And could you remind us what you think the scope of the whole program is that's addressable?

And as you look out perhaps the mix of business that used to be done by the legacy suppliers, what would be a reasonable percentage that you all might get if you're one of four that could be selling into that (multiple speakers)?

As they have indicated, the total in five years is about $300 million. That's what the State Department has mentioned in their contract. So talking about $60 million or so a year.

Now, Dan Grow and his team, I told them we've got to get $60 million. But we've got three other folks there.

So we can go anywhere from 20% to 70% of that. That's opportunities there.

But it all depends upon the other folks and their programs and how -- we're positioned well, because we have strong operations. We are vertically integrated, so we'll be able to service it well.

So we believe that we have a good opportunity of getting a fair share of that. But then we'll see, and what time it will start -- orders will start coming in by I think the start of January of next year.

Thank you.

Hi, Cristina Fernandez with Telsey Advisory Group. I wanted to follow-up on the Disney collaboration. You've been selling presale online for a couple of weeks. Can you talk about what the early feedback has been?

And knowing that this is like a multiyear program, how is this collaboration going to evolve over time?

Yes. So far, it basically has been more informational, more excitement. Some business. The [trend] is really small because the whole program was not shown to them. I think it was only, what, 30 items?

35.

35 items were shown, just to give an indication what this program is going to be. So we'll launch it in November; it is being launched on November 18.

It's a very, very important date. It's Mickey Mouse's birthday, so we're launching it with that on that day and with a lot of activities going on. Events taking place here, events taking place -- in Manhattan we'll be launching it at 1010, and we'll send -- I'm sure we'll get the information on that.

And, I'm sorry, what about the question on that [term]?

So, longer-term, this collaboration is --

Oh, yes, collaboration. We've started with Mickey and Minnie; that was -- and what we are now looking at is the opportunities of including other characters. So we already started thinking about the next introductions.

We've got to manage it because you just -- we haven't even shown this one. But the next one, the next year, we will add a better plant and other characters to this program; and by most probably next summer or fall we will incorporate those ideas.

We are also looking with Disney -- we're talking about the possibilities of expanding it to other countries. China is an important one, so there's a possibility of our partnering, of -- so we're right now in the process of developing and discussing taking it to China.

Then one other question. If I look at where your fiscal-year 2016 results came in relative to your long-term scenarios, your gross margin was 55.7%. If you look at the next target for $900 million in sales, you have 55.5 with most of the -- all the operating margin expansion coming from lower operating expense as a percent of sales.

Can you talk about the puts and takes of that? What are the different drivers and where you can get the operating margin leverage when you look at the investment in marketing and in digital?

Right. At this stage, we believe that maintaining or keeping our 55% is a pretty good number. And the leverage we will get is increase in sales and the leverage, as you rightly said, through operating expenses.

It's always possible that we have some increases in margins, gross margins. But we also have to keep in mind the fact that we also have to be -- we offer special offers, promotions; so that has an impact on our margins. And all of that is somewhat unpredictable.

So we have at this stage left it at 55% which is -- if we maintain that, increase our sales, it's a great leverage to our operating earnings.

Thank you. Justin Bergner with Gabelli & Company. First question is: Could you talk about the cadence of sales or written comps during the September quarter?

In September quarter, most of the business came in July, and that reflected the fact of our price increase; as you know it was a difference in timing. And then that was the major impact; somewhat lower impact in August and September.

Thanks. Second question: Could you maybe talk about any initial effects on sales, to the extent you can quantify, from your three new accents, as well as the registry, as well as this flex employee model and online chat function?

Are you seeing a meaningful uptick as these programs get more advanced? And can you try and quantify them for us?

Well, it's really hard to quantify it, but the fact is that we are having sales every day, every week. It's still relatively small because in terms of -- compared to the total numbers.

But I believe that it has a tremendous potential of becoming relevant today. Keep in mind I said traffic is down; even for us it's down. It's a challenge.

We need to make sure that we get more people and we interact with them online, in Design Centers. And whether we do the business online or whether we get them into a Design Center is okay with us.

So you're going to see us increase our online business. You're also going to see us maintaining much more of a presence of our designers online.

And flex time becomes very important. We just launched it.

And what it's also done is this, that many -- it's also very important for our existing designers. Some of them already in some of our districts, they were $2 million writers who wanted to retire. When we give them this opportunity, they said: No, we'll stay because now we can work three days rather than five days.

Family, children. So I think it's a tremendous opportunity, tremendous potential because creating a flexibility is one of the great opportunities that we have.

And the three new accents, are they matching your early expectations?

The accent programs?

Santa Monica, Buckhead, Brooklyn.

Yes, they are. In fact, that's where most of our business is, along with, of course, Capitol Hill and Sonoma. There's a little variation in different items, different product lines; some are doing better than others. But they are all doing well.

Now, Corey, do we have to open it up for the --?

(inaudible - microphone inaccessible)

Okay, let's open up the lines and we can come back. Okay, how do we open it?

I'm not showing any questions from the phone line at this time.

All right, then we go to Budd Bugatch. Hi, Budd.

Farooq, Let's just talk a little bit about cost if we could as well. Because I think you had a price increase, had some impact in this quarter, maybe if you could quantify that.

And where do we stand on cost outlook? We're seeing steel rise significantly and some issues with foam, particularly in other parts of the world.

Yes, you know, this is a moving target, Budd. We took a price increase of 3% or 4%, and then we give a 30% savings this month. I mean on one hand, you have these price increases; but then promotions are a tremendous impact of what at the end of the day we are going to have.

On the cost factors, we have -- we don't -- our energy costs remain somewhat stable. Some increase in plywood, some in fabrics.

We have to be -- of course, our medical costs is one of the major factors we have to contend with. But I think the cost price increase net of 3%, 4%, will take care of most of the cost increases from our medical costs, compensation costs, and these other costs.

Hey, thank you. Jon from Robotti & Company. One question. Can you talk about -- I see you guys have been avid share repurchasers over the years. What factors go into your decision to buy back shares and also the timing of -- the factors that go into the timing of buying back shares as well?

Well, first important is you've got to make sure that we've got enough cash to run our business. That's paramount. We've got to make sure we have cash.

We also look at the economy to make sure that we feel comfortable with the economy, because we think long-term. And then we say: Okay, what else should we be doing?

Next is, do we invest in our business in terms of priority? First is making sure that we run our business on sound principles and that we know it's a cyclical industry.

Look at what happened in the Great Recession. We went from making $147 million to making $1 million, 1,000 in two years. So we are in that business.

Look at the stock price of some of our competitors. Some went to $0.49. Our stock went down to $7, too, in the Great Recession. So we've got to keep that perspective and not forget it.

Then we take a look at our dividend. We believe that having regular dividends and as opportunity takes place of increasing it already. But that's important. Over the years, we've also given special dividends.

But as we go forward at this stage, we're thinking maintaining and increasing our regular dividends; making sure that -- keep in mind we also have $62 million of customer deposits. So while Corey mentioned all that cash, $62 million is customer deposits; we keep that perspective in mind, too.

But we will continue to purchase our stock. And what goes on is that some of this dilution that takes place in our options and other stuff, by buying this 107,000 shares we have negated that annual dilution.

And the next one is opportunities. You folks sometimes take steps to take the price down. So if you take it down, we will buy it.

Hi, Farooq; Jeremy Hamblin again from Dougherty. Just following up on the point that you were just addressing.

You have built the balance sheet to be much stronger; nice net cash position. You did some share buybacks over the last 12 months, but not incredibly aggressive.

Just in terms of a high-level view of where you think the economy is, there's been some signs of softening as were noted in home furnishings, certainly; but also maybe some signs of concern around just the housing market in general, the economy. How do you feel we stand in regards to those things today?

Yes, that's an important question. I said in the press release that we are cautiously optimistic. I've of course used that a lot of times, but we are.

You have to be cautious, but you've got to be an optimist. We're an optimist because of the steps we are taking.

If we take a look at what the numbers are out there, what economists tell us, and other experts, you would -- we would pull back. But if it wasn't the fact of our own initiatives, we feel that our initiatives differentiate us.

We have great offerings. We've got a network that is stronger. We are just in the process of getting to use technology which -- in terms of sales I'm talking about.

So we have the opportunities of doing better as a competitive differentiation, not necessarily because of the fact that the economy is going to grow.

You guys have had probably the strongest year in some time for the Company. Congratulations on that.

I wanted to ask about one area that did see some softening this year, and that's on the international side of your business. You had grown that to be about 11.5% of the business; it took a step back this year to just over 9% of sales.

Wanted to just understand: How much of that is currency impact? How much of it is softening in China?

Actually, it's again a good question. In terms of our biggest business overseas is China and of course Canada, where we operate our Design Centers. Canada, there we were impacted by the currency. China, a lot of it is impacted by the shipments.

Interestingly last quarter, in the last six months, at the retail level, our business, the Ethan Allen business in China increased; yet our shipments decreased because they also purchased in the previous year that you referred to inventory. They do sell a lot based on inventory.

So their inventory impacts our international sales rather than what's happening in China. Interestingly, I was myself concerned that the business in China actually in the last quarter -- the retail business improved; Ethan Allen improved actually a little bit better than the total business.

But the inventory situation will dictate their -- this quarter we have an opportunity of doing somewhat more shipments than we did the same quarter last year. But it's a question of timing.

How long until that resolves (inaudible)?

I think it's already resolved. Yes. Right, Dan?

Yes, correct.

All right. Well, it's very good to have you all here and the opportunity of discussing. We'll continue to maintain this twice a year.

And I know that we've a better audience when we do it right here in New York. So we will see what makes sense, because in Danbury we have an opportunity of showing more offerings and more things.

But glad to have you here. Any questions, comments, please let us know and I would be happy to talk to you. Thank you very much.