Ethan Allen Interiors Inc (ETD) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to the Ethan Allen Fiscal 2018 Second Quarter Analyst Conference Call.

It is now my pleasure to introduce your host, Corey Whitely, Executive Vice President, Administration and CFO. Thank you. You may begin.

Thank you, Brandon. Good afternoon, and welcome to Ethan Allen's conference call for our fiscal second quarter ended December 31, 2017.

This conference 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 various 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.

After our Chairman and CEO, Farooq Kathwari, provides his opening remarks, I will follow with some 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 welcome to our earnings call.

Our second quarter sales were up 2%. They would have been higher, but due to bottlenecks on production and delay in shipments. We ended with wholesale backlogs increasing 56.8% and Retail Division backlogs increasing 7%. Several factors impacted our production, gross margins and shipments. We processed a large U.S. State Department order of mostly new product to be delivered in 60 days as per contract. Although a significant portion that was produced had to be held up for shipment until our third quarter at their request. We were also affected by political events in Honduras this quarter. These events are now resolved and production has resumed.

Our adjusted EPS of $0.53 increased 35.9% from the prior year, helped by change in the tax laws.

While we maintained a strong operating margin of 8.8%, we had the opportunity to have higher margins with more delivered sales.

While we are making good progress expanding our business with the U.S. State Department, worldwide residential furniture program and our contract division and internationally, we need to increase written business in our North American retail network.

With many already initiatives underway, including continuing to develop a strong talented team, strengthening our offerings and the projections and the locations of our design centers and improvements in our production capabilities, we plan to substantially increase our marketing efforts in the third quarter.

We expect to increase our advertising expenditures by 33% in the third quarter and 15% in the fourth quarter from higher levels spent last year in the third and fourth quarters.

After Corey gives a brief overview, I will discuss our initiatives in greater detail.

Thank you, Farooq.

For the second quarter of fiscal 2018, our consolidated net sales increased 2% to $198.5 million. Wholesale sales increased 3.8% on stronger international and Department of State shipments, while retail sales decreased 2.1%, primarily due to delayed shipments to retail as we geared up our manufacturing, especially with the impact of new products during the new quarter.

At the end of the second quarter, our Retail Division backlog was up 7% from December 31, 2016, and the wholesale backlog was up 56.8%, which includes the Department of State order backlog.

We ended the quarter with 148 company-operated design centers and that compared to 146 in the prior year quarter.

Our international sales were 10% of consolidated sales during the quarter which compared to 8.5% in the prior year quarter.

Our consolidated gross margin for the quarter was 54.3% and was impacted primarily by the mix of retail segment net sales to consolidated net sales for the quarter which was 77.1% compared to 80.3% in the prior year quarter.

Our adjusted operating expenses were $90.6 million compared to $91 million in the prior year. Adjusted operating margin was 8.7% and adjusted net income of $0.53 per share compared to $0.39 in the prior year quarter.

Adjusted EBITDA was 11.2% of sales. The adjustments in the current year quarter included $0.3 million favorable adjustment to restructuring costs. There were no adjustments in the prior year quarter.

Our effective tax rate was 16% for the quarter and 23.5% for our fiscal first half as a result of the Tax Cut and Jobs Act. We expect our effective rate for the next 2 quarters will be about 30.5%. And for fiscal 2019, we expect the effective rate to be about 24% to 25%. The second quarter rate benefited by 14.6% as we provisionally remeasured deferred tax assets and liabilities.

We have a strong balance sheet. At December 31, 2017, we had no debt outstanding under our credit facility. Our total cash and securities totaled $49.1 million.

During the quarter, we paid out dividends of $5.2 million, an increase of 11% compared to the prior year quarter, and we invested in capital expenditures of $2.3 million for the quarter compared to $3.8 million in the prior year quarter. We expect about $14 million in capital expenditures for the second half.

At December 31, 2017, customer deposits were $58.6 million, and inventory of $160.8 million was in line with our backlogs.

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

Thank you, Corey.

As I mentioned, our major focus is to increase traffic to our retail and digital marketplaces to increase sales, and we plan to launch a major advertising campaign to further create desire and action. The broadcast medium will be a major factor in this increased advertising.

We are in an advantageous position to make major investments. Our offerings continue to be strengthened. We recently launched the Passport collection. In early spring, we will launch the uptown collection: and this summer, we will introduce an important assortment that is classic, modern, and youthful with a smaller scale and even more attractive pricing.

The increase in our third quarter advertising spending reflects about a 33% increase from higher levels spent in the last year third quarter. In our fourth quarter, we plan to increase our advertising spending by about 15%, also from the higher levels of 2017's fiscal fourth quarter.

We also continue to focus on our priorities including on talent. We operate a vertically integrated business from design to manufacturing, to retail and logistics, and we continue to strengthen our teams.

For the retail division, we continue to create more what I say of entrepreneurial manageable business units. At corporate, we continue to strengthen our teams in merchandising and design, and we have made the important addition of two senior executives to our marketing advertising team in the last quarter.

Increasing capacities in manufacturing and improving service capabilities is important. About 75% of our furniture is made in our North American facilities, with about 65% of furniture custom-made on receipt of order. While this is a major -- positive point of differentiation for us, managing inventories creates issues when orders surge. Our focus is to increase production and also manage this major differentiation from service perspective.

Technology is also tremendously a focus. Combining the work of our 1,500 in-house interior designers with technology is an important initiative. We are in the process of deploying an augmented reality app of mobile devices, allowing clients to visualize furniture in their rooms. We expect to launch it in March.

About 600 of our interior designers have been approved by us to do online live chat with clients. We've also launched a reputation management system to monitor and manage consumer reviews and social media online, and we are adding necessary technology in our manufacturing facilities to increase production and efficiency.

Finally, operating our business with utmost attention to social responsibility continues to be a strong focus. Our enterprise relies on our 10 leadership principles, which state that good governance is good for the bottom line. And we maintain our focus on the environment, safe processes, social conscience, diversity, technology and a corporate culture to support our associates.

I am now pleased to open for questions or comments.

Brandon, we can go ahead and open it up then.

(Operator Instructions) And your first question comes from Bobby Griffin.

Just quickly, I want to make sure I understood the comments about the tax rate in the quarter. So 14.5% was the benefit you guys referenced for the revaluation of the tax liabilities, is that correct?

Yes. So about 14.6% was deferred tax assets -- deferred tax liability revaluation.

Okay. And then Corey, I couldn't hear. The rate for the next 2 quarters, what was the rate that you referenced? My microphone was breaking up when you were talking. I'm sorry.

Sorry. It was about -- what we said is 30.5% would be for the next 2 quarters.

Okay, perfect. I appreciate that detail. And then I wanted to talk about, I guess, on the retail segment, the written orders, any color on how kind of the quarter progressed? In the pre-release, you guys mentioned January was up, but we ended -- I guess, we ended last quarter with kind of close to 2% written growth and it kind of fell off. Was that coincide with the drop in advertising in the quarter? How should we think about that to get a better understanding of kind of the trends?

You're talking of written?

Yes. I'm talking about written. This quarter, I guess, comp written was down 6.2% and total was down 5.8%. And last quarter, it ended kind of on a positive note. So I was just trying to hope to get some more detail about what progressed during this quarter to change the trend.

Corey, go ahead.

Yes. Bobby was right. You got 2 parts to it. One is the advertising, as you recall in the first half -- first quarter, was lower than where we were in the prior year quarter. So as we moved into the second quarter, advertising was up just slightly and we increased it as we went through the quarter. So we did see written sales progress as the quarter progressed. December was actually our strongest month in the quarter from a comparative standpoint, and that's how we saw it.

That's right. I think, Bobby, also just giving you a color on this whole question of advertising. Now we are making a major commitment to increase advertising. In fact, if you take a look at it, when we take a look at our advertising on quarter 2, it was a little bit lower than in fiscal '16. But in quarter 3 of last fiscal, that is fiscal '17, we had increased our advertising quite a bit. Now we have gone from $9.4 million to $11.4 million. And now, we are talking of increasing it by approximately 33% on this base of 11.4%. Now the reason is this, that -- and it's an important differentiation, and I believe will make an impact. We have, to a great degree, relied, for a lot of reasons, on print as our major advertising medium. Direct mail has been a very important one. Now this quarter, while we are going to increase our advertising, we're going to have some direct mail, but we are also going to have a very strong television broadcast this quarter and similarly in the next quarter. And we believe that has an opportunity of reaching a lot of people. Now the issue earlier that while we are spending a lot more money, keep in mind, in 2016 third quarter, we spent $9.4 million, and now, we are talking of spending over $15 million. It's because of the fact that in this broadcast medium, unless you really make a great impact, you are spending money and you're not getting the benefit. So that's why we are going to now take a major -- we'll make a major investment, I would say, in advertising but the mediums are going to be different.

Okay. I appreciate that detail. And then I guess one more follow-up for me on the retail. So I noticed that 2 stores were closed during the quarter. From a modeling standpoint, how should we think about company-owned stores going forward? Should we expect you guys -- or were those, I guess, just relocations that we should expect to reopen going forward? Are those permanently closed? And is there any meaningful EBITDA impact that I should account for, for the next 4 quarters as those roll out of the comp base?

No. Actually, if you take a look at, in the second quarter, our company-owned increased by 2. Our -- in the United States, our dealer went down by 3. So our company, we have 148 locations.

I'm sorry, Farooq, I was looking...

You're right. We're down 2. But approximately, it will go -- approximately remain the same, Bobby. I'm sorry, yes.

Okay. That's what I was -- I was just curious if those were going to open back up as part of relocations in future quarters, but no worries. And that is all my questions -- oh, sorry, one more I had on my list. I apologize. But from the production standpoint, now that we think about the government being on -- you've got a little bit more understanding of the cadence that they're going to be ordering, should we assume that the production -- the production shift between you guys were having to balance making orders for retail or making orders for government, should we assume that is on a cadence that's more manageable now going forward?

Yes, absolutely. You see what happened was this that we got almost all these orders -- what was it, in September, which is the last month of the government fiscal year. And according to our contract, we were supposed to have made it in 60 days and ship it in 60 days. And lot of that product was new, so it did really complicate our lives, but -- and we made it. So now, the good news is we have shipped it and we also are in a better position with our manufacturing, having made the products. Because every time -- the first time is always inefficient. Considering that, we still ended up at 8.8% operating margin with all those inefficiencies. But right now, we are in a good position.

And your next question comes from Brad Thomas from KeyBanc Capital Market.

A couple of follow-up questions, if I could here, on Bobby's. I guess, first, starting with a question maybe about the backlog. Clearly, that's both at wholesale and retail. Can you give us a sense for how big that is? What the magnitude of that is in dollar terms, so we can maybe try to get a sense of the tailwind that you may have behind you as you work down that backlog?

Brad, we don't have those backlog numbers that we give out every quarter. I don't think we want to start doing that either. But that said, a lot of the wholesale backlog was the State Department, the orders that we brought in. We had shipped out just as -- a portion of it. We had probably about 1/3 of the orders that we shipped, and 2/3 of it was still on backlog at December 31. And that's what's shipping now. So a lot of that was related to that and then the rest is what we're catching up on the retail backlog, which was up 7%. So that, I think that the -- as we move forward, you'll see that now normalize.

Got you, okay. Okay. And then just as we think about some of the manufacturing challenges that you've gone through as you've expanded the assortment to cater to the State Department. It sounds like we're pretty close to that being worked up and being more efficient. So I guess, as we think about maybe the efficiencies of the plans and the gross margin on a normalized rate, do you feel like the underlying gross margin trend should be more back to normal on the -- as you move into the fiscal third quarter? And what kind of gross margin drag might we still see as some of these products are moving through the system for the State Department?

Brad, our gross margin, as you know, consists of gross margin from the retail as well as the gross margin from our wholesale business. So the percentage of retail to total sales is an important factor. So the gross margins are important. So they are, in fact, like for instance, this last quarter, our gross margins were lower, mostly due to -- there was some impact due to manufacturing, but they're mostly lower due to the fact that our retail sales as a compared to the total sales were lower. So keep that in perspective. So it also depends about how much of business we are going to do at the wholesale level in the contract business, in the government business. Although they're very, very good, it might -- while we're showing a lower gross margin, the opportunity of increasing the operating margin is better. So keep that in perspective.

Got you. And so just at a high level, do you think that the third quarter would still potentially have a lower gross margin trend just because you're still working through some of these newer State Department projects -- product and that they're hitting the P&L and it may take another quarter here before you maybe start to gain some of this back?

Yes. I think that's a good assumption. But again, as I said, the opportunity is on the operating margin side. But it's possible that the gross margin could be lower because of the higher component of wholesale to total sales.

Great, great. Okay. Maybe 2 more housekeeping items, if I could. Just on Amazon, Farooq, I was hoping for an update on how that is progressing for you.

It is progressing, and there's interesting observations we are getting. Yes, we are getting some sales, slower than what I had thought. But what we are now seeing is that people go to Amazon, they buy some, but they also end up coming to our retail design centers. That's what we thought would happen, but more of that is taking place because people want to see the product, feel it, touch it and also meet our designers. That's the positive thing we are seeing.

Great. And then just with respect to the tax reform, obviously, so you all have a lower tax rate, as we've talked about. You are increasing marketing here, but I guess, just to ask you directly, Farooq, are you and the team changing how you all approach business and how you want to spend money and hire and advertise because of the lower tax rate or tax reform at all? Or is that tax change not having any impact on how you're thinking about the business?

No, well, Brad, we always like the fact that we're going to get -- some credit and money is always good. I think on an annual basis, we most probably would get close to $10 million or so in that range, Corey?

About $6 million to $8 million.

Depends on our -- $6 million or $10 million, depends on what our business is. So it is important but not that critical. Most critical is the fact that we are spending money on our marketing. We are spending on capital expenditures. Yes, it's having an impact. In fact, today, we also gave a special -- the payable date was today for our special dividend. Was it about $13 million?

Right, with the total dividend.

The total dividend because it was a special and the regular -- and so today, we gave out $13 million out, Brad. So I wish we've gotten that kind of a money. So we did that. But we are going to spend money on marketing. And fortunately, we are in a decent position to do that.

And your next question comes from Jeremy Hamblin from Dougherty & Company.

I need to see if we can clarify a little bit more precision on a couple of the things that have been brought up. The first is when we look at the gross margins, you really have been running at a very nice run rate over the last couple of years. You saw fairly significant step-back to 54.3%. You called out a few one-off items that might have had a little bit of drag. But I think what we need to get clarity on is you really have been running above 55% for the last 2 years. This was the lowest level in almost 3 years with the 54.3%. I want to understand that there's not something that's a little more structural here, whether it's a State Department contract or whatnot. And I think it's -- you look at retail as a percent of total sales, it was 77.1%, and that's down 300 basis points from a year ago. But as I look forward to Q3, you had like 78.6% last year retail sales as a percent of total. I think what I'm trying to ask you is do we see a similar step-down? Like should we be thinking that retail as a percent of total sales in Q3 is more like 75% to 76% of total sales? Or -- and tied into this question is, you said that you've now shipped a lot of these State Department orders, but clearly, you didn't ship nearly the amount in the December quarter that you had expected when you hosted the call in October. So I'm trying to put those 2 things together to make sure that the expectations are appropriate for where your gross margins are as well as your sales level on Q3. Can you help me out in providing more color?

Let me give you some and maybe Corey will add to that. Gross margins at retail was still slightly lower this quarter than last quarter. And that reflects, again, like everybody else, we are under some pressure of giving higher discounts. And in fact, a lot of that happened where we gave free delivery, and that had an impact on our gross margin. So that pressure is there, but I think that we have the opportunity of managing that pressure. So that's one element, in addition to the fact of retail sales to total sales. Second one is somewhat of a pressure on gross margins at retail. And slightly, we also had some pressure of our gross margins on our manufacturing at the wholesale level because of these inefficiencies and production delays. So those were the 3 factors that had an impact on gross margin. But as I said, you're right, we've got to keep that in perspective, where I think as we move forward, you got to keep your perspective also on the operating margins.

I totally agree with that. I guess the point is we need the appropriate starting point. And I think what you've communicated is we're past some of those one-off issues. We don't anticipate any from here. And so if we kind of have this 55% starting point, is that an area where you feel comfortable, Corey or Farooq, as where expectations should be on gross margins?

Well, from quarter-to-quarter, it's possible it will vary. But around that range of 55% is where we should be.

Okay. Fair enough. The second point is on the marketing side, I think as I do my calculation versus what you disclosed last year, it looks like about a $4 million increase to your marketing spend in this March quarter. Corey, is that a pretty correct calculation?

Yes.

Yes, it is.

And then about $2 million in the June quarter. Where do you -- how does that compare to the, let's say, embedded structural SG&A run rate that you've been at? Because the last couple of quarters, you've been really more like $89 million to $90 million. I think, in theory, this would assume that you are going to be running more like $90 million -- maybe $93 million in SG&A in total.

I think, Jeremy, you're on the right track. It could be close to $94 million, $95 million. More closer to $94 million or so at that run rate. And of course, it also depends on how much of written business we write because that has an impact on our sales incentives and commissions. So that has an impact, too. But that would be related -- that is impacted by increase in sales. So you've got to keep all of those perspectives in mind. But if you think about on a flat basis increase in -- if we have no increase in sales, then from a perspective of -- our operating expenses will be close to $94 million range.

Okay, fair enough. I want to come back to State Department and finish with that. So I think the statement you made was that you've made really good progress on those deliveries. You didn't come close to the expectations you had in October on your deliveries. My gut says you're probably not going to fully catch up in this March quarter on your deliveries, but where do you stand on clearing through some of that backlog? Are you still going to be reporting in April that your backlogs are up 30%, 40%, 50%? Or do you feel like that will mostly be cleared through? And that's part one of the question. The second part is, are you continuing...

No, let's do it one at a time, Brad.

Okay. Go ahead.

I'm sorry, Jeremy. Jeremy, I would hope that we got a very, very strong increase in backlog, but I don't think it is going to be because of the past business from the State Department. That -- most of it will be shipping. We are getting new orders. But as I said, they do tend to give -- to write a lot of orders to us middle and towards the end of their fiscal year. So our order rate is -- we are getting orders, but they're relatively small compared to what we got in September. So I think as we stand right now, the State Department is not going to be a major factor in the backlogs going into our fourth quarter.

Are you continuing to -- I gather that probably in this quarter the order rates on an absolute dollar basis were quite a bit lower than the September quarter just because of the fiscal year-end and kind of all the budgetary concerns going on in the government. But as a share of the total business that's out there, are you still winning well over 50%?

That's what we hear.

And your next question comes from John Baugh from Stifel.

Several have been answered already, but I guess, wanted to go back to your Amazon comment. And you said your experience to some degree has been people coming into the store, which is obviously good if that's happening. But I'm trying to square that with the 6% down written order comment. It -- is it that these people are still putting together their thoughts that have been steered to your store from Amazon? They just haven't written an order yet? Or no, you really are getting orders from these people, but your day-to-day business is down on a steeper percentage from 6%? I know it's early, but I'm just trying to get a sense of how much traffic you really think you are benefiting the store from Amazon, if any.

We are. But John, it's still relatively small. I mean, it is not something that I can say we have major business coming in from folks going to Amazon and coming to us. I think it's incremental. It's growing every month. Still, it's like the Disney program. It's just growing but at a smaller rate. We're doing better with Disney in China. We just opened a Disney in the Middle East this past week. It's small, incremental, but not enough to make a difference to these numbers.

Okay. And then any issues as we think about manufacturing costs? A lot of materials and energy have moved here, and I'm wondering if there's any concern there. I know you took pricing, I believe, it was last summer, but how's the pricing decision working out versus input costs?

Well, it is a good question, John, that our raw material costs have significant increases in the upholstery material segment of our business. We have seen increases driven from plywood, foam, packaging materials. So they have been significant. And we are also considering in the next few months of a price increase to -- just for these increases in upholstery and material costs, which is, of course, as you know, has been faced by our industry as well.

Okay. And lastly, you talked a fair bit about marketing and increasing it. It wasn't clear to me. Are you -- and you mentioned TV. Are you increasing digital or mobile or online or whatever you want to call it, of total dollars? Is the mix changing more to TV? Or no, more to digital, but you're going to still be spending more on TV year-over-year?

We are going to substantially spend more on national television and digital. Somewhat less on print.

Okay. Okay. And can you help us when will -- I'm sorry, I don't stay glued to the TV. When will we see these, if we haven't already, start to see them hit? Give us a feel for -- because I know there's a lag between when you advertise and when you hopefully write business. And then that ties in, to some degree, to whatever monthly or quarterly promotions you're doing. So I'm trying to think about that when we talk 90 days from now, how this all plays out, hopefully in higher written orders. Or will we be measuring it on something else because it's lagged?

John, again, a good question. Most of our advertising in broadcast is going to start in the first week of March. So March is going to be very, very strong. And as I said earlier, unless you do it very, very strong, even on a national basis, you do not get any -- that much of a benefit. So we look upon the fact that we have an opportunity of increasing our business this quarter in written, and the impact of that in deliveries should be in our fourth quarter. We will, of course, continue our increase in advertising, including our -- digital and broadcast in the fourth quarter as well.

Okay. But it sounds a little bit back-end-loaded in the quarter, at least, in terms of the advertising dollars spent.

That's right. And as you may know, we already sent a beautiful direct mail, which you might have received in January and February. We sent 5 million copies of that. But then, in March, really, as I said, we are accelerating, increasing our exposure, advertising for lots of reasons. As I said, we are more ready today. We are more ready in our offerings, we are ready in our retail. Now what do we have to make sure also is -- which is -- that we are also able to produce it. And I mentioned that we have a fair -- a large portion of our business is done custom. That's great, but it also creates issues, which is what we saw when we got all these Amazon orders because of the fact that we don't have a lot of excess capacity, people sitting on the sides. I'm sorry, the State Department. What did I say? Yes, you got me. I was thinking Amazon, John. State Department.

State Department, yes.

So we will -- yes. So this managing gap, I think, it's important. So what you're going to see is that we should benefit strongly in our written this quarter. That's expectation. And then with that expectation, we should be having a strong delivery in the fourth quarter.

Okay. And then my last question is simply on the -- you mentioned having to discount a little bit more. That's not atypical from what we're seeing everywhere. Could you give us a sense of what you did in the December quarter? And I guess, year-over-year, would be the best in terms of discounting, and how the March quarter year-over-year may set up similarly or differently?

Yes. We did increase some of the discounts, and again, volume has a very important factor in our overall business. So that when we had a lower delivered and somewhat lower written, you'll see that impact on our gross margins, in our operating margins. So our operating gross margins are impacted by lower deliveries. So while we may have had given more -- some discounts, but keep in mind the lower delivery has as much an impact on our margins as discounts. So with higher increase in volume, we have an impact both on the gross margin and an operating level with increase in volumes. So decreased volume had an impact on gross margins and some increase in discounting.

Again, I was just curious, will there be any incremental or kind of a similar discounting level? I get that you certainly hope to ship more, particularly to the State Department, in the March quarter. I'm just curious as whether the planned discounts are fairly similar year-over-year, or even maybe more aggressive?

No. It will be about similar, John.

And your next question comes from Justin Bergner from Gabelli & Company.

A couple of questions of mine that, I guess, haven't been asked yet. If you could provide just a little bit more detail on the Passport collection and the timing therein and how that will relate to your stepped-up advertising, that would be helpful.

Justin, the Passport collection, overall, was well received. And of course, our main advertising medium was direct mail. And it was -- it went into our design centers, mostly towards the end of the -- of our second quarter. So from retail, we are hearing good news. And now, the uptown is getting into our design centers around in March, so we will also be marketing that. And I would think that we've had good reviews internally, externally. We need more traffic to our digital as well as our design centers. If we do that, I think the Passport, along with our other programs have a good opportunity of increasing business.

Okay. And just on the uptown, what -- how will that be different than anything that you currently have in your stores?

The uptown, as the name implies, is somewhat more, you might say, more of the up -- formal product but, of course, relaxed today. So while the Passport was more on the relaxed side, and before that, we introduced Brooklyn and Santa Monica and others, so uptown basically is the new -- you might say, the new traditional. And then as I mentioned, we are right now working -- our teams are working introducing the next product line for summer, -- which will then go in reaching more of, you might say, more of the younger people, the millennials as well as our core customer base.

Okay, got it. And then on the Disney sales, I mean, I think in the past you mentioned that maybe that was revenuing around a $15 million annual rate, if I recall correctly. Is that still sort of the ballpark that it's in? Or has it materially jumped up from that?

No. It's approximately in that range, Justin.

Okay. One or 2 more, if I may. Given the manufacturing issues and the need to deliver the State Department contract, is it possible that you could estimate for us the degree to which your retail comparable store sales or written orders might have been affected in the second quarter?

You're talking about delivered? And that delivered, we had increase in backlog in the delivered of 7%. And that had an impact of that 7% not being delivered. But 7% increase in delivery in retail would have increased our gross margins, increased our operating margins, and we would have -- we did well, but we would have done very, very well by delivering that 7% because that incremental volume really helps increase our profitability across the board.

Okay. Got it. And then just one clarification question. If I add up the profit in the wholesale and retail segments, I end up with something sort of on the order of high $14 million, and you're operating income on an adjusted basis is $17.2 million. So there's like a meaningful positive that is part of the reconciliation to your overall operating income. Could you maybe clarify, Corey, what that relates to?

Yes. Between the consolidation of the wholesale and retail, it's the inter-company profit adjustment that's made.

I guess, it was unusually large sort of just tracking through the history of the company over the last couple of years. Is there any reason why it's so large, just sort of the greater wholesale component -- I mean, is there something that's going to cause that number to stay sort of in the $2 million to $3 million range? Or is this just more of an outlier?

Yes. It kind of fluctuates all over if you look at it over time. It really -- there's a number of factors that go into it between changes of inventory between wholesale and retail. And then the -- and also how much retail sales versus the wholesale sales. So it's -- and on also the margins. So there's a number of factors that influence that. I wouldn't necessarily look to model that in. We don't look at that when we work with our models.

Okay. I mean, there's no -- like, the fact that retail was lower as a percentage of overall sales wouldn't have skewed that number consistently higher going forward?

No. It would not.

And your next question comes from Cristina Fernández from Telsey Advisors.

I wanted to see if you could provide a little bit more color in the marketing initiative. I wanted to understand if the messaging that you are going to be showing around the brand is changing. And should we think about it as you are going to be in the same networks with more time? Or are you adding, expanding the number of TV networks you're using to reach a wider customer? Just more color there would be helpful.

Cristina, really, we haven't had, for some time, national advertising, television, broadcast advertising at the level we are talking about now. So this is going to be major for us in terms of broadcast media. And the messaging is also very, very important. And you're going to see -- you have taken a look at our direct mail for January, I assume, and you saw the projection, the color, the details, it's all in the details and the story. And so you're going to see us talk about the details of differentiating Ethan Allen in a very attractive manner. And this is something we've not done at the level we are going to do starting in March.

That's helpful. And as it relates to the contract work, the other work you are doing as far as with some of the hotels, how is that progressing? Are there any new initiatives on that side of the business?

As you know, we have this first major undertaking with the Margaritaville projects in Orlando. We are just in the process of also starting to furnish the model homes in Daytona Beach there. They're building another -- a few thousand homes, and we are also in the process of furnishing a hotel, Margaritaville, with Ethan Allen, hotel in Orlando. And also right now, working on another hotel in the West Coast. So yes, we're making progress, and I believe that we will continue to make progress in the contract business.

Okay. And then just lastly, when you look at the new collections that are launching in the spring and the summer, how is the complexity of manufacturing that product different from Passport and, I guess, the State Department where you had the few issues?

Well, keep in mind, it's not the complexity of the product. The question was that it's also related to the structure of our business. And we, of course, are making some adjustments to it. When I said that we have a great, great advantage of having 1,500 interior designers, then it's about 65% of the business we get every day is custom business. That is great advantage, but then all of a sudden -- when incremental business is thrown to it from the outside, we then have to react in terms of creating capacities. So we are increasing capacities. Our model is that of a manufacturer who receives orders and then makes them. And not a retailer that builds up a lot of inventory and sells it. That's why our inventory management is very good at Ethan Allen. But we are adjusting to the fact of providing for making products in our North America and offshore because some of this product is being made offshore. Certainly, our operations in North America, including in Vermont, North Carolina, Mexico, Honduras, they're all now -- we're getting ready to not only make custom product, but to have some capacities for making this contract. Now if the contract comes with a very short delivery time, as we had initially on this U.S. State Department, that did create lots of issues. But I think as we get contract where there is lead times that are sensible that we can make, then we have no problems or less problems.

Next year, I'll just add that for State Department, we'll have a little bit better understanding of what to expect and be better prepared as we move into that final quarter.

And then also we -- these were the first time we made those products. These are all -- a lot of these were new products. And we all had to make them at a time when we were busy making our custom products, then this came in. Good news is we've gone through a lot of that, so -- and I think moving forward, we're in a better position, Cristina.

And your next question comes from Matt Kupersmith from Irons New Compass (sic) [Iron Compass Investors].

I just wanted to come back. It looks on -- like on the national TV advertising, you guys ran it for President's Day last year. What was the decision-making process not to have it for the holiday this year? And I guess how should we think about that impacting the quarter?

I think that most probably, Matt, to look at it, we may have done some advertising at the regional levels. So that, of course, from a person's viewing point of view, it's hard to tell whether it's national or local. We have been doing some TV. For instance, we've been doing TV in local markets, even today. Like in New Jersey, we have television going on at the local level, and in many markets. But this is -- the difference here is, this is going to be done at the national level and in major television networks. And a lot of it is going to be paid at the corporate level rather than at the retail, either the retail is our company-operated or our independents. When they do it at a local level, the retail pays. This is going to be done at the national level by the corporate.

Got it. Okay. So you're saying there was no national advertising last year for President's Day?

No, I don't think so. Corey, I don't remember having any national. And if we did, it was mostly local -- regional, not national.

(Operator Instructions) We have no questions in queue at this time.

All right, Brandon, thank you, and thanks, everybody.

These are -- I think, that the steps we are taking are very important steps in terms of taking our business to the next level. Some of you have always wanted me to really advertise, to spend more money. So we're going to spend a lot more money than anybody thought we were going to do, but we are ready to do it. So look forward to all of this increased business and keeping our plants busy. And hopefully, with all that business, we have an opportunity of having continued, strong profitability.

And this does conclude today's conference call. You may now disconnect.