U.S. Markets close in 35 mins

Edited Transcript of ETH earnings conference call or presentation 26-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Ethan Allen Interiors Inc Earnings Call

DANBURY May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Ethan Allen Interiors Inc earnings conference call or presentation Wednesday, April 26, 2017 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Corey Whitely

Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer

* M. Farooq Kathwari

Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President

================================================================================

Conference Call Participants

================================================================================

* Bradley Bingham Thomas

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* Cristina Fernandez

Telsey Advisory Group LLC - Director and Senior Research Analyst

* Jeremy Hamblin

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst

* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Justin Laurence Bergner

G. Research, LLC - VP and Research Analyst

* Robert Griffin

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, and welcome to the Ethan Allen Fiscal 2017 Third Quarter Conference Call. (Operator Instructions) As a reminder, today's program may be recorded. It is now my pleasure to introduce your host, Corey Whitely, Executive Vice President, Administration and CFO. Thank you. You may begin.

--------------------------------------------------------------------------------

Corey Whitely, Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer [2]

--------------------------------------------------------------------------------

Thank you, Jonathan. Good afternoon, and welcome to Ethan Allen's Conference Call for our Fiscal Third Quarter ended March 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 risks and uncertainties, which could cause actual results to differ materially. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call.

Also joining the call is our Vice President and Corporate Controller John Bedford. 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.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [3]

--------------------------------------------------------------------------------

Yes. Thank you, Corey, and thank you for participating in our review of the third quarter ending March 31. As we mentioned in our press release, we will discuss in greater detail the many initiatives to help us grow sales and profitability. We will also discuss our third quarter results.

I have always believed change or chaos equals opportunity. We are well positioned to take advantage of what one may say are disruptions in our industry, as well in most industries. We will discuss the advantage of our unique vertically integrated structure combining with newer distribution channels. After Corey's presentation, I will discuss in greater detail several factors that impacted our results, including very strong prior year comparisons, when sales increased 10% and EPS increased 89%, that's for our third quarter; the uncertain political environment during the quarter, especially in January and February, resulting in customer cautiousness, despite a soaring stock market; our initiative during the quarter to manage expectations of higher discounting contributed to lowering of our written and delivered while improving gross margins. Corey?

--------------------------------------------------------------------------------

Corey Whitely, Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer [4]

--------------------------------------------------------------------------------

Now thank you, Farooq. For the third quarter of fiscal 2017, our results reflect the comparison against the very strong performance in the prior year period and the continuing choppy retail environment Farooq mentioned during the quarter.

Our consolidated net sales of $180.5 million for the quarter compared to $190.6 million in the prior year. Retail net sales of $141.9 million, while down 6.7% from the prior year, maintained most of the prior year's 17.5% increase over Q3 fiscal 2015. The cadence for written orders during the quarter reflected a weaker start, with gradual improvement as the quarter progressed. March reflected the strongest period with a modest increase over prior year and tracked to our increased television advertising, and also partially benefited by the shift of Easter into April. Overall, total written orders for Retail were off 7.7% from the prior year quarter and comp written was off 10.9%, the differential reflecting more new design centers operating this year compared to last year. We ended the quarter with 146 company-operated design centers compared to 141 in the prior year quarter.

International sales were 10.1% of consolidated sales in the current year quarter and that compared to 8.1% in the prior year period, reflecting an increase in sales to China. The mix of Retail segment net sales to consolidated net sales for the quarter was 78.6% compared to 79.8% in the prior year quarter. Our strong adjusted gross margin at 56% benefited from improved manufacturing efficiencies and reduced clearance and promotional activity.

Our adjusted operating expenses were $90.8 million compared to $90.2 million in the prior year, excluding the prior year gain on the sale of real estate. We've mentioned in the press release several discrete items impacting operating income this quarter, including increasing our advertising spend by 21% or about $2 million, and the impact of operating losses of new design centers, which were about $400,000 additional losses this current year quarter compared to the prior year quarter.

As we leave older legacy properties, we are opening new leased locations that incur startup costs. These new design centers also have a ramp-up period before attaining profitability.

Our adjusted operating margin was 5.7%, and adjusted net income of $0.23 per share compared to $0.34 per share in the prior year quarter increased 89%. Adjusted EBITDA was 8.4% of sales.

Our effective tax rate was 35.6% for the quarter and slightly below our 36.5% structural rate. We have a strong balance sheet. At March 31, 2017, our total debt was $30.1 million, down $17.5 million from the prior year quarter, and our total cash and securities totaled $71 million, increasing by $14.4 million. Customer deposits were $60.5 million.

During the quarter, we paid out dividends of $5.3 million, an increase of 34.6% compared to the prior year quarter, and we invested in capital expenditures of $3.9 million for the quarter. Inventory of $154.2 million decreased by $8.1 million from the prior year-end, partially due to inventory write-down.

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

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [5]

--------------------------------------------------------------------------------

Thank you, Corey. As I had mentioned, our third quarter results were impacted by several factors, including very tough comparisons, uncertain political environment and our managing customer expectations of higher discounting.

One other major contributing factor to our strong previous year second and third quarter results were due to our accelerating discounting during that period. The expectations within our interior design network and customers was that we will continue to increase discounting. Keep in mind, our policy has been to have credible everyday best prices. And increased discounting impacts expectations, credibility and margins.

As mentioned in our January 2017 earnings conference call, our objective was to moderate the discounting. This also contributed to lowering our written in January and February and in March. And in March, as Corey said, we had an increase due to better consumer attitudes and the managing expectations on discounting. We believe as we have lowered the discounting expectations, we are in a position to increase discounts at reasonable levels in our fourth quarter and also moving forward. In our third quarter, despite lower sales at Wholesale and Retail, our adjusted gross margins increased to 56% from 55.5%.

Now focusing on our growth opportunities. As I mentioned, we are very well-positioned to take advantage of the changing distribution channels and customer expectations. Today, most enterprises have 2 choices: Be disrupted or be a disruptor and an innovator. Our unique, vertically integrated structure, developed over decades, provides us an opportunity to take advantage of the new reality and the new channels.

Ethan Allen brand is known and desired and is sold and serviced through our 200 design centers and about 1,500 highly qualified in-house interior designers. We do not sell our products through other retailers.

We continue to strengthen our interior design centers and teams. During the last 9 months, opened design centers in downtown, in the Flatiron area of Manhattan; in Virginia Beach, Virginia; Burlington, Vermont; Corte Madera area of San Francisco; and Indianapolis, Indiana. Under construction are 2 important design centers: Buckhead Area of Atlanta and Downtown Chicago.

Our other major competitive advantage is that 75% of our furniture is made in our North American plants, with a major focus on quality. We are implementing Quick-Ship programs. We have a strong custom Quick-Ship Upholstery Program, which is delivered within 30 days in the U.S., the average being 15 days. Starting January of this year, our policy has been to have most of our case goods and accent programs in stock, positioned for Quick-Ship.

We have, over the last 30 years, developed a strong white-glove logistics network delivering at one price nationally. This is a major advantage, both from service and also reducing returns.

We have continually made investments in technology at all levels in our enterprise, with recent focus on digital mediums. During the last 3 years, we have repositioned 70% of our product offerings to reach a larger customer base. And finally, we entered 2 strategic collaborations that combines the strength of major iconic brands. In January, we launched the Ethan Allen | Disney offerings, and a few weeks back, started offering the program on disneystore.com. The collaboration expands our reach, especially for children furnishings. As we also mentioned in our press release, we are also going to launch the Disney program with our partner in China this summer.

Two weeks back, we announced the collaboration with Amazon. This provides an opportunity to combine Ethan Allen quality and our vertically integrated structure with the vast customer base of Amazon. We expect to launch the Ethan Allen Design Studio on Amazon this summer. The products will be sold by Ethan Allen and shipped by our white-glove Premier In-Home Delivery operations. As we move forward, we will provide additional information.

With that, we are ready for any questions or comments.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Budd Bugatch from Raymond James.

--------------------------------------------------------------------------------

Robert Griffin, [2]

--------------------------------------------------------------------------------

This is Bobby filling in for Budd. First, I want to talk about the written orders for the quarter. I understand the quarter started out weaker in January and February and progressed a little bit, and there's some moving parts around the clearance, the amount of discount you offered customer in clearance, but was there any other significant things for us to consider about why the written orders kind of decelerated sequentially at such a big pace? The prior year comparison at 5.5 was significantly easier than 2Q at 14.6, so I was just hoping for some more color on that moving part.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [3]

--------------------------------------------------------------------------------

Yes. Always important, as I've said, certainly, our comparisons compared to last year where total retail increased, I'm talking about -- just on even the delivered basis, increased 17.5%. Our total sales increased 10%. On the written sales, we had, last year, a total increase of 4.3% and a comp of 5.5%. Now this year, in addition to an environment where people were not willing to make -- to buy in general, we also contributed to it. Timing is everything. I mean, hindsight is 20/20. This question of reducing or discounting, which I mentioned, had a major impact. We decided that, as you know, previous year, we had gone into giving some of our products off at 25%, some at 30%, and over a period of time, what happens is that customers and your own associates want to have a higher discount. So we had to take a position. Now as I said, if I have to make a decision today, perhaps with all that has took place and elections and everything else, I would have perhaps waited, but that also contributed to the fact that in January and February, our people felt that we're going to increase it, we're going to go back to the last level, both our customers and our own designers. As you know, our designers are pretty close to customers. But then they saw that, no, we meant what we're saying is that we're going to go back to reasonable discounting, they started getting back in March. And I think, as we move forward, their expectations are now much more reasonable.

--------------------------------------------------------------------------------

Robert Griffin, [4]

--------------------------------------------------------------------------------

So to help us understand, last year was 25% or 30% off, the 1 item. What did you decrease it to this year? 20%, or 15% to 20%, is that a reasonable range?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [5]

--------------------------------------------------------------------------------

Yes, most was 15% and some were 20%.

--------------------------------------------------------------------------------

Robert Griffin, [6]

--------------------------------------------------------------------------------

Okay. And then, when March turned positive on a written basis, was that on a total written basis, which factors in the 5 more design centers versus last year, or was that on a comp basis?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [7]

--------------------------------------------------------------------------------

Corey?

--------------------------------------------------------------------------------

Corey Whitely, Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer [8]

--------------------------------------------------------------------------------

Yes. We were positive on both written -- on both total and comp.

--------------------------------------------------------------------------------

Robert Griffin, [9]

--------------------------------------------------------------------------------

And is it safe to assume that, that type of trend continued in April?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [10]

--------------------------------------------------------------------------------

It's a little bit early because, as you know, the last few days make the difference. So I mean, overall, as I've said, as we move in this quarter from a written perspective, last year, we have not as strong comparisons with last year, which is good, last year, yes.

--------------------------------------------------------------------------------

Robert Griffin, [11]

--------------------------------------------------------------------------------

Okay. I thought I'd at least try to ask. And then, I guess, lastly for me, can you give us any update on -- you mentioned Disney real briefly, but can you give us an update on maybe how it performed during the quarter? I realize it's early. And maybe any type of update on the State Department contract?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [12]

--------------------------------------------------------------------------------

Yes, Bobby. The Disney is now starting to make some more impact, especially when we have launched it in the disneystore.com. It is getting more awareness, but we still have to do a lot more work. And what we have done is, we have right now maintained also -- we have not promoted it as strongly as we plan to do. But we wanted to make sure that it gets on to disneystore.com, and they also had to do some work in making sure all the programs and everything are ready. This is still not completely ready. When they are ready, I think, by May, we are going to start doing a lot more stronger promotions that should help us get the Disney programs going. And then, of course, the whole Disney program will also be on a collaboration with Amazon. That will help us, too.

--------------------------------------------------------------------------------

Robert Griffin, [13]

--------------------------------------------------------------------------------

And for the State Department contract?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [14]

--------------------------------------------------------------------------------

For the State Department contract, we've been getting some orders, but they have been so slow in the way they have been operating. We have actually -- we are -- we have made some progress. We've gotten some orders. But I believe that most of the orders, we expect to get it in the fourth quarter.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [16]

--------------------------------------------------------------------------------

I want to just come back to the environment for a second and talk about the discounting. Obviously, you made some decisions, as you noted, at the end of 2015 and the beginning of 2016, that kind of drove your written orders. I think, really, that ended by February of 2016 according to my records here. Can you -- just in terms of thinking about on a 2-year stacked basis, I think, the comparisons for the March -- the month of March were actually quite a bit easier because you no longer had 2 items 25% off, or 1 item 30% off. Is that -- I mean, on a 2-year stacked basis, Corey, has the trend improved here in March and April? Or are you still running negatively on that?

--------------------------------------------------------------------------------

Corey Whitely, Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer [17]

--------------------------------------------------------------------------------

No, I think you're seeing -- in the sales side, you're seeing sequential improvement, so an acceleration on a 2-year basis and, I think, on a 3-year basis as well. The discounts a year ago, we started off in January last year, it was 2 items at 25% off. So we didn't have that level this year. Everything was 10% to 20%. So it was a pretty big difference. And then, as we progressed through March, last year, we were up to 25% off on all of our modern casuals, and we had 20% off on all of our dining and bed coverings and our introductory on the Quick-Ship at that time. So it was a pretty strong promotional period last March compared to this March, where we still had cut it back a little bit with the buy more, save more event, which was also lower discount levels. At that point, it's worth mentioning, the customers were more acclimated to what the discount program was, and as were our designers, and we had a good response, although the overall discount wasn't as high as where it was last year at March.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [18]

--------------------------------------------------------------------------------

Jeremy, the issue really is that, unfortunately, as you know, this whole discounting is a disease. You keep on doing it, you've got to keep on doing more. So you've got -- and in our case, we don't have artificial regular prices so that we can give. Look, we're ready comparing with people who give 50%, 60%, 70% off every day. So when we even give 25%, 30%, the new people are somewhat dubious. And so they say, what is this 25%, when everybody else stays 60%, 70%? So that's the kind of an environment we have. But as I said, one of our biggest customers is our 1,500 interior designers. When they believe that the fact is, and they work -- and I don't blame them, they work very, very closely with their clients. Their clients are their clients. And if they believe, for their own credibility and for their clients, that we are going to somehow keep on increasing, then they themselves are not as aggressive as they should be. But now that they knew in January and February, and of course, I told them that we have to moderate it. It does not mean that we're not going to do discounting, but I think, Jeremy, our perspective is not only the question of margins, the question is the continued expectations that you're going to keep on discounting. I think the good news is we have, to some degree, broken the cycle. We are going to have, as I already said, even despite lowering sales -- we're a vertically integrated company. We have great margins when we have increasing sales and the multiplier works the other way, too. Despite that, we had an increase in gross margins. We increased our gross margins both in the Wholesale and the Retail level, despite. But having said this, having lower sales is not good for our profitability. So I think I also said, if I had to do it again, I wouldn't have done it with this very sort of a difficult economic and political environment where people were somewhat concerned anyway in January and February. Anyway, we're out of it. The good news is we have an opportunity of getting back on track.

--------------------------------------------------------------------------------

Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [19]

--------------------------------------------------------------------------------

Right. I understand that logic. Let me ask a direct question then as it pertains to kind of the June quarter. So if I look at your written orders on a dollar basis, and Corey, I appreciate the increased disclosure here in the release, it looks like your written orders on the Retail Division were down $12 million to $13 million versus last year. With that backdrop, as I'm looking at the June quarter, it looks like I should be thinking that your sales, with written orders down 7.7% for the division, should we be assuming then that your total sales are going to be impacted in Q4 and that your sales are likely to be down in Q4 as well?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [20]

--------------------------------------------------------------------------------

I think that Corey will give you more numbers. But when I look at it, our Retail Division last year, written sales were down about 1% and the comp was about flat from the previous year. So that -- so I don't know where -- those numbers, Corey will confirm them but last year, on our Retail Division, our written orders were just about flat. On a comp basis it was 0.6% lower. And on the delivered basis, they were up actually, 7.6%, with the comp increasing 9.4%. So that's what -- those were the numbers for last year, Jeremy.

--------------------------------------------------------------------------------

Corey Whitely, Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer [21]

--------------------------------------------------------------------------------

For the fourth quarter.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [22]

--------------------------------------------------------------------------------

For the fourth quarter, yes.

--------------------------------------------------------------------------------

Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [23]

--------------------------------------------------------------------------------

No. I guess, what I'm citing, I'm looking forward to this year's fourth quarter and saying -- and what you just said was that written orders were down 7.7%. So as I think about delivered sales for Q4, my thought is, well, that's a pretty big hole to start in to have a positive quarter on a delivered sales basis for the June quarter.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [24]

--------------------------------------------------------------------------------

Yes, you're right. I think this is a challenge for us because of the fact our backlogs are down, our written in the first quarter was down. That does have an impact on the fourth quarter, Jeremy.

--------------------------------------------------------------------------------

Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [25]

--------------------------------------------------------------------------------

Okay. And then, I want to just -- I want to come to one other question on the Amazon relationship because you mentioned in your prepared remarks that you don't sell through other retailers, and Amazon is another retailer. I know you don't want to give out kind of full disclosure on that, but in terms of thinking about the economics, Amazon is out there partnering with lots of other furniture sellers, mostly regional brands, to provide them national footprint opportunity. But in thinking about the rationale for going with this relationship and selling through another retailer for the first time, how do you make sure that the Ethan Allen experience doesn't change? And secondly, should I assume that the economics are going to be a little worse from a margin perspective on that Amazon relationship, because with most people who sell through Amazon that's the case?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [26]

--------------------------------------------------------------------------------

Well, as we had also said in the press release, we will be selling the products. Amazon will be acting as an agent. What our advantage for the both brands is this, that Amazon -- our objective is to reach this vast consumer base that Amazon has. And Amazon will enter the order, they'll get a certain commission for doing it, but we are the seller of record and we deliver the products and also have the opportunity, and we are working on it, of having our interior designers interact with customers. So the experience is going to be similar to what we have right now on our e-commerce site.

--------------------------------------------------------------------------------

Corey Whitely, Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer [27]

--------------------------------------------------------------------------------

And that's part of the branding of it as well, Jeremy. It will have very much an Ethan Allen look and feel for our products so that they do maintain our more luxury-branded image. And then, the good thing is we have a very strong white-glove network that can deliver it through our own service center structure with all of our 200 North American design centers.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [28]

--------------------------------------------------------------------------------

The big difference is we're not selling to Amazon. Amazon is acting as an agent. We are selling the product ourselves to the customer.

--------------------------------------------------------------------------------

Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [29]

--------------------------------------------------------------------------------

So Amazon is taking a commission. Are you also having to pay, let's say, a marketing cost to be on their website, though, in addition, or just the commission?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [30]

--------------------------------------------------------------------------------

Well, I've got to tell you this, because a lot of this is confidential information, Jeremy. I think it's good for them and it's good for us.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Our next question comes from the line of Brad Thomas from KeyBanc Capital.

--------------------------------------------------------------------------------

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [32]

--------------------------------------------------------------------------------

Just a couple of quick clarifications here on the recent trends and this upcoming quarter. I know there's a little bit of noise created around the timing of promotions. Just as you think about March and what you've seen thus far in April, do you feel like the environment is getting a little bit better as we get further removed from the noise around the election last year?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [33]

--------------------------------------------------------------------------------

It is. It's not completely normal. But certainly, I've had an opportunity in the last few weeks of traveling to many, many cities and talking to our designers. In fact, I was talking to them about our collaborations, I wanted to talk to them myself. And you can see that, especially in the coasts. When you take a look at it, many, many, many major cities on the West Coast and even in the East Coast were somewhat more turbulent. Slight, just somewhat more stable, not completely. Much, much, better than January and February.

--------------------------------------------------------------------------------

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [34]

--------------------------------------------------------------------------------

Great. And then, for your fiscal fourth quarter here, to make sure I heard you right, you do expect, what, about a similar cadence in promotional activity year-over-year? Is that what you're planning at this point?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [35]

--------------------------------------------------------------------------------

Well, what I was saying was this, that it is going to be somewhat higher than what we did in January and February because in January and February, we had to take it down lower compared to what we did the previous year, but it's going to be somewhat higher than January and February because that creates an excitement. Yet overall, the discounting is lower.

--------------------------------------------------------------------------------

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [36]

--------------------------------------------------------------------------------

Got you. And then, just if I could ask a couple of clarifications on Amazon. What's the timing? When will we start to see that rolled out? And what percentage of your merchandise will be available through Amazon, if you can disclose this?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [37]

--------------------------------------------------------------------------------

What we have publicly said is, Brad, that this summer is we're going to have a launch. And then, we are, right now, working to see what the extent of the merchandise is going to be on our design studio over there. But anyway, as I've also mentioned, we have been, to some degree, not only for Amazon -- I mean, today, the new reality is, everybody wants faster delivery. So we have been working in the last one and a half years to get our products and our manufacturing in such a situation that we're able to deliver fast. Like for instance, our Quick-Ship Upholstery, we expanded that, but we introduced that about 1.5 years back. And we have -- so that we are able to, today, have that Quick-Ship customer upholstery delivered in an average of 15 days to a customer's home from an order. Then our case -- our domestic case in North American case goods, when the Great Recession hit, we said that we are going to make them when we receive the orders. In other words, we accumulate orders, normally 3 weeks or so, 4 weeks. But we said, no, now, we're going to put them in stock. So January, we've been starting to put them in stock. It's good overall, not only because of this association. So we are going to be in a much better position to be able to deliver our products faster because 75% is in our own workshops in North America.

--------------------------------------------------------------------------------

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [38]

--------------------------------------------------------------------------------

Great. And if I could squeeze in one last one on SG&A. Obviously, highlighting this quarter and this upcoming quarter where there's some [ additional ] advertising spend. Obviously, you all have made some investments associated with Disney and the State Department. As we think out to your upcoming fiscal year ahead of us here, is there an opportunity to maybe bring down SG&A a little bit as we lap some of these investments, or are these at any level that's maybe more of a run rate for you here?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [39]

--------------------------------------------------------------------------------

Well, we're always looking back to see how do we operate more efficiently. My budgeting here always is base 0. Having said this, we did -- keep in mind, in the last quarter, even though we increased our advertising, we reduced our other operating expenses by, what, $1.4 million?

--------------------------------------------------------------------------------

Corey Whitely, Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer [40]

--------------------------------------------------------------------------------

Yes. A little more than that.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [41]

--------------------------------------------------------------------------------

So while we increased our advertising. So I think that from your perspective, I think it is going to be similar to what we're doing now, Brad.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of John Baugh from Stifel.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [43]

--------------------------------------------------------------------------------

Quickly, a couple of things. One, I calculated the decremental margin around 50%, sales down $10 million, EBIT down about $5 million adjusted year-over-year. Is that -- if we modeled revenue down for the June quarter, is that a similar margin we should assume, or were there puts and takes in there that were unusual?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [44]

--------------------------------------------------------------------------------

I think that you are -- what you're assuming, John, if I understand correctly, is somewhat lower sales, and that you're talking about the margins, correct?

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [45]

--------------------------------------------------------------------------------

Yes, I mean, your sales fell $10 million year-over-year. In the March quarter, your EBIT fell about $5 million. So that's 50%. And if we model whatever we model similar, I don't know, $5 million or $10 million down, will we see a 50% flow through negatively to EBIT?

--------------------------------------------------------------------------------

Corey Whitely, Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer [46]

--------------------------------------------------------------------------------

If you look at it, John, EBITA this quarter, adjusted, was about $15.2 million, which was down. So in Q4, it could be a little bit down from where it was last year. We'll have to see actually how the quarter ends up.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [47]

--------------------------------------------------------------------------------

But John, you're right. I think, as you know, our vertical integration works both ways. When we have -- a 5% increase in sales creates a big impact. 5% lower creates a negative impact. So I think we may do somewhat better than what we did relatively in the third quarter, but if you were to assume lower sales, you would have a lower EBIT.

--------------------------------------------------------------------------------

Corey Whitely, Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer [48]

--------------------------------------------------------------------------------

Yes. And keep in mind, last year, fourth quarter, our operating income was up 27%.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [49]

--------------------------------------------------------------------------------

Sure. Well, what was the inventory that was so bad that you said to give it to charity? Or was that a strategic decision to, I don't know, avoid discounting or clearance as well, or was it just really old stuff that really wasn't worth anything and you had to give it to charity?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [50]

--------------------------------------------------------------------------------

I've been traveling a lot in the last few months. And what's happened is, a lot of this almost $3 million or so were rugs that were on floors of our design centers that were there for purposes of display. And they -- many of them have been there for many, many years, and our design centers were keeping them, they were not hard to sell them, but it also had an impact in 2 ways. It's had an impact of putting new products in and it also had an impact of keeping them there and they were trying to sell them. So it's better for us to give them as a donation. That's what we're doing.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [51]

--------------------------------------------------------------------------------

And then, I assume we won't see -- when we do start to see state government orders, that won't show up in the store order number, correctly?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [52]

--------------------------------------------------------------------------------

No, that will not be. That will be part of our Wholesale business.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [53]

--------------------------------------------------------------------------------

And you referenced you'll start to see orders in Q4. Did you mean December or the June quarter?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [54]

--------------------------------------------------------------------------------

John, just one second, Corey?

--------------------------------------------------------------------------------

Corey Whitely, Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer [55]

--------------------------------------------------------------------------------

Yes, so on the State Department orders, they won't show in any of our comparable sale numbers.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [56]

--------------------------------------------------------------------------------

Yes, that's right.

--------------------------------------------------------------------------------

Corey Whitely, Ethan Allen Interiors Inc. - CFO, EVP of Administration and Treasurer [57]

--------------------------------------------------------------------------------

But they do show up in the Retail.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [58]

--------------------------------------------------------------------------------

They'll show as Retail.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [59]

--------------------------------------------------------------------------------

Okay. So it'll be in Retail. Okay. And did you mean, Farooq, when you start to see orders from that business, December quarter or the June quarter?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [60]

--------------------------------------------------------------------------------

No, you mean you're talking about for the State Department?

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [61]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [62]

--------------------------------------------------------------------------------

I think, we'll start getting orders in the June quarter.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [63]

--------------------------------------------------------------------------------

Okay. And just a point of clarification. So with discounting, if I heard you right, we're trying to get a little bit off the drug, we maybe went a little bit too hard in the March quarter, so we're going back on the drug a little bit, but not as much as we discounted in the prior year June quarter, is that -- do I understand that correct?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [64]

--------------------------------------------------------------------------------

I will tell you, John, I'm a mountain climber, I would not say drugs. When you climb too high, you get water in your lungs? Then you come down, stabilize, so that you can go back again. That's what we did.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [65]

--------------------------------------------------------------------------------

Okay. So -- but do I have it right that the discounting in the June quarter will be up from the March quarter but lower than the June quarter in the prior year?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [66]

--------------------------------------------------------------------------------

Yes, that is our -- that's the plan.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [67]

--------------------------------------------------------------------------------

Okay. And will the plan -- as you think about discounting, and that sounds like that's more like a 15% to 20% range, is that your hope that you could sort of maintain that level going forward or is that just going to be a fluid thing that will change depending on how business goes?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [68]

--------------------------------------------------------------------------------

John, we have to be flexible and we have to see. It's as you know, it's not an easy thing. I could have kept the discounting and I could have increased it, the chances are we could have done more written business, but then the question is what do you do the next quarter? So you really -- this is an issue that one has to -- not easy to do this, to discipline yourself. So we would -- I mean, we have to. So the expectation is that you've got to give some discounts. But I think, even if we, at the end of the day, have an impact of increasing our margins by 1% or 2%, that's a big impact.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

Our next question comes from the line of Justin Bergner from Gabelli.

--------------------------------------------------------------------------------

Justin Laurence Bergner, G. Research, LLC - VP and Research Analyst [70]

--------------------------------------------------------------------------------

On the discounting, do you regret the discounts that you enacted 1 year or plus ago in the sort of 25% to 30% range? I mean, do you think that some of the traffic that it brought in is new traffic that is sticking with you? How do you sort of judge that decision in hindsight?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [71]

--------------------------------------------------------------------------------

I think that it was a good decision. It gave us business, brought some new people. And the question really is, how do you continue to keep on doing more? That's what the issue is. So it really is, as I said, as I was just joking with John, that is we climbed too fast, we've got to come down, then we can go back up. The problem is, in the businesses that don't come down and keep on going, it's like you die or you just have no margins left. So I think that -- as I've said, hindsight is 20/20, perhaps, with all -- when we made the decision last fall to do this in this quarter, we were not thinking that amount of a disruption that would be -- political disruption that would be causing. If I had to do it again, I would have made it another quarter. But anyway, we're through with it and we are back into giving discounts, if we have to, but they're lower than before and we have also managed expectations of our customers, and especially our own people.

--------------------------------------------------------------------------------

Justin Laurence Bergner, G. Research, LLC - VP and Research Analyst [72]

--------------------------------------------------------------------------------

Okay. The second question I had is Easter. Did Easter add to your comp in the quarter and did it add materially to your comp in the quarter?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [73]

--------------------------------------------------------------------------------

It had some impact, but not -- we don't have -- our projects are such -- of course, Easter last year fell -- was in March. And this year, we had it right here 2 weeks back. It does have some impact. But for us, it's not tremendously critical because people do come back the next day or a few days later.

--------------------------------------------------------------------------------

Justin Laurence Bergner, G. Research, LLC - VP and Research Analyst [74]

--------------------------------------------------------------------------------

Okay. And then, with respect to the Disney partnership, what's left to do at this point to get that to sort of full potential in terms of it being accessible everywhere in every place?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [75]

--------------------------------------------------------------------------------

It needs more marketing. And it needs -- whether we like it or not, we've got to do somewhat more promotions. on one hand I'm saying we're going to reduce it, but in this one, we are waiting because we've got a lot of systems and others. Us and Disney, we're working. In May and June, we'll do somewhat more promotions to see -- more marketing to see that we sell, especially the furniture part of the product line. And also, interestingly, in addition to the United States, I think, we are looking forward to a stronger introduction in China. And also, keep in mind, our relationship with Disney also has involved contract business. We've just -- we're finally completing a 1,000-room contract that we received in Grand Californian in Los Angeles. So we are also starting getting some other contract business from Disney in Orlando and other places. So we're going to build that business as well.

--------------------------------------------------------------------------------

Justin Laurence Bergner, G. Research, LLC - VP and Research Analyst [76]

--------------------------------------------------------------------------------

Okay. But it's in all the stores and it's -- all the products are on the websites now, there's nothing left to do in terms of...

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [77]

--------------------------------------------------------------------------------

But, Justin, you're right, we just got to market it, just get the benefit of it and to really increase business. So right now, that's where we are. We are completely in the right position. We just have some more technology work to do between us and disneystore.com, which I think they'll be completing next month. And then, we'll be more aggressive.

--------------------------------------------------------------------------------

Justin Laurence Bergner, G. Research, LLC - VP and Research Analyst [78]

--------------------------------------------------------------------------------

Okay. And then, just lastly, did you mention a connection between the Disney partnership and the Amazon partnership in some facet?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [79]

--------------------------------------------------------------------------------

No. The only thing is this, that all the Disney products will also be on our design studio at Amazon.

--------------------------------------------------------------------------------

Operator [80]

--------------------------------------------------------------------------------

Our next question comes from the line of Cristina Fernandez from Telsey Advisory Group.

--------------------------------------------------------------------------------

Cristina Fernandez, Telsey Advisory Group LLC - Director and Senior Research Analyst [81]

--------------------------------------------------------------------------------

I wanted to ask about the television marketing that you started in February. How has the customer responded to that? Are you seeing any increase in traffic, whether it's online or in the store, when the ads run?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [82]

--------------------------------------------------------------------------------

Well, Cristina, we've had a positive reaction. That's why we doubled it in this April, May and June. We did launch it in April -- I'm sorry, in February. Again, as we've been talking about, not the best time to launch it. This winter was not a good time, but we received very good reaction from our customers, also from our own designers, although due to all the economic factors, political factors and also our decision to reduce discounting, that resulted in lower traffic in the first quarter. But we feel strongly about it. So we have -- are going to double our television advertising in April, May and June.

--------------------------------------------------------------------------------

Cristina Fernandez, Telsey Advisory Group LLC - Director and Senior Research Analyst [83]

--------------------------------------------------------------------------------

And then I know it's still early, but as you think about fiscal year '18, how are you thinking on marketing? You increased it a lot, almost 20% this year. Do you think you need to increase it more? Are we at a new run rate that's sustainable and good for your business?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [84]

--------------------------------------------------------------------------------

You see, in '18, we will be taking a look at the impact that we are having in our collaborations. What does that do in terms of bringing people? We have an opportunity of reaching millions and millions of people who could come to us. I'm talking with our 2 collaborations. We are taking a look at -- the overall economic environment, hopefully, is more stable. So -- and we are also looking at continuously what are the mediums to utilize. Until last year, we had a very, very major advertising in direct mail. So this year, we decided to somewhat reduce it and increase it in national television. And we also doubled our digital advertising. Because today, 70%, 80% of the folks who come to our design centers first go to our digital mediums, our mobile, or to our website. So we want to bring more people into our digital mediums. So at this stage, I would think that we would most probably maintain -- I'm just thinking out loud right now, maintain about what we have done this year, at the rate we are going now.

--------------------------------------------------------------------------------

Cristina Fernandez, Telsey Advisory Group LLC - Director and Senior Research Analyst [85]

--------------------------------------------------------------------------------

And then, my last question, going back to the Disney collection. Are there plans to expand your product assortment to perhaps include other Disney characters, or at this point, the goal for this year is really just expanding the reach through the Disney store and Amazon?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [86]

--------------------------------------------------------------------------------

We have been working. Our teams have been working, and one of the most logical thing is the princesses. So we've been working on that whole program. But I think, of course, we're not going to hold it until we get everything going. Maybe in the next 6 to 9 months, we will add other characters to the program.

--------------------------------------------------------------------------------

Operator [87]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Jeremy Hamblin from Dougherty & Company.

--------------------------------------------------------------------------------

Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [88]

--------------------------------------------------------------------------------

I want to ask a follow-up about Disney. And I think it's been something we've been excited about the potential. I think the product looks good. But Farooq, as I hear you talk about it, we're 6 months into the launch at this point, and it feels like there's a lot of loose ends that had not -- maybe have not been tied up. Would -- did the launch maybe happen prematurely? Because it feels like there was parts of this collaboration that just were not complete maybe by the time you guys formally launched in November. Do you -- should that have been pushed back? Or -- and that's part 1 to my question, and then I have a follow-up related.

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [89]

--------------------------------------------------------------------------------

On the first one, no, it is -- when we introduced it in Disney -- I mean, in November, it was basically more getting the word out that we are doing it. Our design centers at that stage had not received the product. We had it in a few design centers. We launched it in terms of letting the public know that we are getting into it, we rang the opening bell of the New York Stock Exchange, all those things. But it was in January when most of our design centers were -- had the product line. So it is really a little over 3 months that we've had this product line, and we have also -- because keep in mind, we had to do a -- we established small Ethan Allen | Disney homes in almost 200 -- 175 locations. And I'm sure you visited some of them. And so it's been basically three and a half months. And then, we were waiting to get it on the disneystore.com, and that needed some programming, but we knew right from the beginning that, that would be a second stage. So that, they've done that, they've launched it, a couple of weeks or so back only. And then, I think, by next month, they will also have for instance they also have integrated a -- right on their site, a customer can go from their site to our site and have a live chat with our designers. We just instituted that, too. And by, I think, by next month or so, they will also incorporate some other changes, which will help us be able to then go somewhat more aggressive marketing. We have maintained somewhat of a low-key on this, Jeremy.

--------------------------------------------------------------------------------

Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [90]

--------------------------------------------------------------------------------

Okay. I guess, I -- maybe I had a different impression about how much of the collection was launching when we did the meeting in New York for analysts last fall. So that might have been my misunderstanding. In regards to the collection though, and what has launched to this point, just in terms of what product has worked better than others, are you seeing the product resonate more for kind of the adult avid Disney collector, or towards the toddler and infant product, or let's call it the adolescent and teen product?

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [91]

--------------------------------------------------------------------------------

Jeremy, this is a good question, a good observation. What -- in fact, if you take a look at our advertising, and you'll see it in May, and even some we've done even now, we are now incorporating some iconic items with the Disney characters in our Ethan Allen designs because when we introduced it, it was basically all as Disney products with Ethan Allen | Disney products. But now, we are finding out that people are buying our -- a chest, our chair or a desk and incorporating it with their regular homes rather than buying everything Disney. So you're going to see that more and more. And that's what we have learned, that you're right, that this is not just for children, but it is also a lot of avid Disney collectors are buying it. And they're using it as part of their regular decor. And our advertising is going to reflect that much more, and we'll start that in May, actually. You'll see that in May.

--------------------------------------------------------------------------------

Operator [92]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

M. Farooq Kathwari, Ethan Allen Interiors Inc. - Chairman of the Board, CEO and President [93]

--------------------------------------------------------------------------------

All right, Jonathan. Well, thanks very much. Any questions, comments, please let us know. Thanks very much.

--------------------------------------------------------------------------------

Operator [94]

--------------------------------------------------------------------------------

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