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Ethan Allen Interiors Inc. (NYSE:ETH)

F4Q2013 Earnings Conference Call

July 25, 2013 11:00 am ET

Executives

M. Farooq Kathwari - Chairman & CEO

David Callen - VP, Finance & Treasurer

Analysts

Brad Thomas - KeyBanc Capital Markets

Halley Goodman - Goldman Sachs

Todd Schwartzman - Sidoti & Company

Jeremy Hamblin - Dougherty

TJ McConville - Raymond James

Cristina Fernandez - Telsey Advisory Group

Operator

Good day, ladies and gentlemen, and welcome to the Ethan Allen Q4 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

Now, I’d like to turn the conference call over to Mr. David Callen. You may begin sir.

David Callen

Thank you, Kevin. Good morning. I am David Callen, Ethan Allen's Vice President of Finance and Treasurer. Welcome to Ethan Allen's earnings conference call for our fourth fiscal quarter ended June 30, 2013. This call is being webcast live on ethanallen.com, where you'll also find our Press Release which contains supporting details including reconciliations of non-GAAP information referred to in the release and on this call.

Our comments today will include forward-looking statements that are subject to risks which may cause the actual results to be materially different than expected when making those statements. Please refer to our filings with the SEC for a complete overview 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 details on the financial results. Farooq will then provide more details about our ongoing business initiatives before opening up the telephone lines for questions.

With that, here is Farooq Kathwari.

M. Farooq Kathwari

Thank you, Dave. And thank you for participating in our conference call to discuss our fourth quarter and fiscal year ended June 30, 2013. We had excellent earnings. Results for the fourth quarter and the fiscal year ended June 30. We could have done even better on increase of our top-line. That is our next opportunity.

As I indicated, in our press release that both of our written and delivered sales were somewhat impacted by several factors including significant reduction of clearance from prior periods lower international shipments to our international licensee and importantly for the written in the fourth quarter by timing of a price increase.

Fiscal 2012, we had a price increase effective July 2013 resulting in larger written in June 2012. This year our price increase ranging from 2% to 7% will be effective August 2, thereby taking written business to July instead of June. We are already seeing the positive impact in July.

While Dave will give more details the impact of this in the fourth quarter, the written was that instead of a decline of 1.9%, we estimate a positive increase of 2.1%. On the delivery side, eliminating the impact of clearance and lower international sales would have resulted in about 3% increase and delivered for the fourth quarter. However, as I said, our main focus is increase the top-line which I will spend time and discussing after Dave gives the brief overview of our financial results. Dave?

David Callen

Thank you, Farooq.

Consolidated net sales during our fourth quarter were $182.3 million, 1.7% lower than the prior year quarter. As expected and as discussed during our third quarter call, our net sales were impacted by lower shipments to an international retailer as they reduced their inventory and by 30% lower clearance sales to our retail division.

You recall that clearance sales impact both our delivered net sales and our written quarters. Our retail segment, net sales for the quarter were $145.3 million up 1.1% including comparable design center net sales growth of 2.5%. And the 30% decline in clearance sales noted earlier.

Our retail divisions written quarter’s book during the quarter were 1.9% below the prior year and included comp store orders that were 0.9% below the prior year. Again, a written order growth was negatively effected by the 30% decline in clearance sales compared to the prior year fourth quarter.

The 147 design centers operated by the company’s retail division at the end of the quarter were equal to the count at the end of the prior year. Our wholesale segment net sales of $106.7 million were down from - down 5.4% from our prior year. This includes the impact of the lower shipments to our international retailer.

Our global retail network included 295 design centers at June 30, 2013, compared with 298 locations at the end of last year. Independent retailers operated 148 of these including 68 in China. This compares with 151 independently operated designed centers last year. Our consolidated gross margin for the quarter improved slightly to 54% from 53.9% in the fourth quarter last year.

Our retail division made up 79.7% of our consolidated net sales for the quarter compared with 77.6% of the prior year which helps the consolidated gross margin. This was partially offset by a $0.4 million lower year-over-year benefit in consolidation from the sell through retail inventory. We continue to see operational improvement in our wholesale business including leverage of our operations in Mexico and Honduras.

Our adjusted operating expenses for the quarter were $80.9 million. This year-over-year reduction of $4.8 million or 5.6% demonstrated again our focus on disciplined business initiative. The current year excludes $1 million or $0.02 per diluted share incurred primarily for our international expansion.

Please refer to our press release reconciliation tables, showing the adjustments made to our results for all periods. Our adjusted operating income for the quarter was $17.5 million or 9.6% of net sales compared to $14.2 million or 7.7% of net sales the prior year, an increase of 22.7%. This includes an improvement of $5.2 million in the adjusted operating profit of our retail division on the 1.1% increase in net sales.

During the four quarter, we bought $24 million of our bonds which mature October of 2015. Costs related to that transaction totaled $1.9 million and are included in our other income line. We’ve treated this one-off cost as a special item adjusted from our results. Our normalized income tax rate for both the current year and prior year was approximately 36.5%. Adjusted earnings per diluted share for the quarter increased 26% to $0.34 per diluted share from $0.27 the prior year.

Consolidated net sales for the full fiscal year were $729.1 million essentially even with the prior year. The retail division’s full year net sales grew 3.4% to $578.3 million. Our wholesale segment’s full year sales, net sales were $434.4 million, down 4.9% from the prior year which had grown 8% in part from higher than normal shipments of prototype products during our significant product overhaul last year.

Consolidated gross margin for the fiscal year improved 110 basis points to 54.6% from 53.5% the prior year. Adjusted operating income was $68.8 million or 9.4% of consolidated net sales, up 32.9% versus the $51.8 million or 7.1% of net sales during fiscal 2012. This includes an improvement of $24.1 million and the adjusted operating profit of our retail division on their 3.4% increase in net sales. Our adjusted net income in fiscal 2013 increased 39.6% to $38.4 million or $1.31 per diluted share from the $27.5 million or $0.94 per diluted share earned the prior year.

Now, a few comments on our balance sheet and liquidity. As I mentioned earlier, we bought $24 million of our bonds during the fourth quarter, bringing our outstanding balance down to $129.4 million. Even with this transaction and having paid $22 million in dividend and $19 million for capital assets during the year, our cash and securities at June 30, 2013 totaled $103.6 million. We reduced our inventories $18.5 million or 11.9% this year, ending with the balance of $137.3 million. Our balance sheet is healthy and we’re well positioned to aggressively pursue our business initiatives.

Here is Farooq to discuss those initiatives further.

M. Farooq Kathwari

Yes, thank you, Dave. I wanted to give a very, very brief overall financials before when I spoke earlier but let me again reiterate even though Dave has given most of the financial -- I mean all of the financial information that just a highlight that for the fourth quarter given our adjusted net income increased by 26%, our operating income by 23%, our gross margin remained strong at 54% and importantly the company retail division adjusted operating profit increased to $4.2 million from a loss of $1 million. And as Dave said, we’re pleased that we purchased $24 million of the bonds and also then ended up at June 30 with $104 million of cash.

Now, for the fiscal year also, we made a lot of progress. From a financial perspective, our adjusted net income grew 39%, our operating profits by 33%, our gross margin increased 110 basis points to 54.6%. Now, the retail division adjusted operating profit increased to $14.5 million a positive change of $24.1 million from the previous year. And as Dave also mentioned, we increased the cash dividends to stockholders by 176% to $22 million and also we’ve managed our inventories quite well.

Now, during fiscal 2013, we had many initiatives to position our growth including the strengthening the company retail division. During the year, we further strengthened management, closed two design center that were fading dollars, relocated several to new locations and we are starting to see positive results and we expect them to continue.

Technology has been an important focus during the year. This included migrating our website to a cloud environment, enhancing our retail and manufacturing systems and a stronger focus on use of digital mediums for marketing. Recently, we have also enhanced the Express program with strong digital marketing.

In our Manufacturing and Logistics, during the year, we made continued progress in improving the efficiency of our North American Manufacturing and Logistics. We are continuing to invest in the new -- our newest facility in Honduras. During the year, we invested in our international expansions. We expect during fiscal 2014 to substantially reduce the cost of the international expansion.

During fiscal 2013, company opened new design centers in Brussels, (inaudible) and Montreal. At this time, we have number of new design centers under construction by our licensees including in Amman, Jordan, in Korea, there is a third one there, the third in Philippines, a new one in Bucharest, Romania and recently a new design center that in June was opened in Jeddah, Saudi Arabia.

Finally, during fiscal 2013, we concentrated on developing programs to help us reposition our brands to reach a larger consumer base, both Baby Boomers and Gen Xers. Many of you saw the projection of our Danbury design center in June at our Investor Conference. As you saw the Danbury design center projects the new eclectic attitude in design, products and signage. We’ve migrated our focus from a furniture store to a stylist home design center reaching a large consumer base.

Our object now is to complete the transformation by end of September, of about 200 design centers in North America and many locations in other countries for this projection. We plan to start a major marketing campaign in the fall to launch the program. As I’ve indicated, we expect to spend about a little lower 5% on advertising efforts on an annual basis on the average of about 4% to 4.2% we’ve been spending so far.

With that, I’m happy to open it up for any questions or comments.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brad Thomas with KeyBanc Capital Markets.

Brad Thomas - KeyBanc Capital Markets

Thanks. Good morning Farooq and good morning David.

M. Farooq Kathwari

Good morning, Brad.

Brad Thomas - KeyBanc Capital Markets

First, want to just talk a little bit about the current pace of business; you called out the timing of the price increase as one item that should have helped the July sales in this fiscal first quarter. First, I would just want to ask have you moved to whether -- the written orders are now positive?

M. Farooq Kathwari

Yes. They are very strong in July so far, Brad and as I’d indicated, we took the June business to July and so far, they are trending very, very positive and we expected that to take place.

Brad Thomas - KeyBanc Capital Markets

Great. And then with respect to the shipment to China, do you feel like those partners are at the right inventory levels now and have you started to resume growth in shipments to China?

M. Farooq Kathwari

Yes. What we expect is, keep in mind as I said the last time and also now, they have continued to grow in sales. So, they were getting out of the excess inventory and they are substantially out. They are now starting to place new orders and in this first quarter, we expect still about a 20% lower shipment than we did in the previous year not 70% or 80% that we had in the last two quarters.

Brad Thomas - KeyBanc Capital Markets

Okay, great. And then maybe just lastly as a big picture item, when you look back at your fiscal 2013 as a whole, sales were about flat for the year but to your point Farooq, the company had very strong growth in EBITDA and earnings, as we look forward here to this coming year, what’s the right contribution margin or closer margin to think of. Are there still opportunities to improve profitability even if the sales don’t pick up or I mean do we really need to see sales to get an increase in profit?

M. Farooq Kathwari

But as you can see, we’ve made a great progress in our retail division. And I actually spent a lot of time in that, we got a strong, strong management, we’ve made many, many improvements and we saw $24 million positive contribution during the year. And that is really still, we have a lot of opportunity there.

Now, I’m talking about even with relatively small increase of sales but Brad, we need to increase sales and that’s where our focus is and we got a very, very strong marketing initiatives in place starting actually in September when we launched these new initiatives. So to answer your questions, I think we will go into get even -- relative small sales, our retail division has the opportunity to continue to improve. But, really at this stage, we need to grow the top-line even if in the mid-single digits that has that I think it will make it also significant impact both at the wholesale level and the retail level.

Brad Thomas - KeyBanc

Great. I will turn it over to others. But, thanks so much.

M. Farooq Kathwari

Thank you, Brad.

Operator

Your next question comes from Matt Fassler with Goldman Sachs.

M. Farooq Kathwari

Hello, Matt. Good morning.

Halley Goodman - Goldman Sachs

Hi, good morning. This is actually Halley Goodman on behalf of Matt Fassler.

M. Farooq Kathwari

Hi, Halley. Good morning.

Halley Goodman - Goldman Sachs

Good morning. So the first question relates to the delta between written and same-store sales last quarter and delivered the same-store sales this quarter and we are wondering what sort of better trends and delivered sales this quarter?

M. Farooq Kathwari

You are talking about the fourth quarter or the first quarter of this year.

Halley Goodman - Goldman Sachs

So, the written same-store sales trends in three 3Q compared to the delivered trends in 4Q?

M. Farooq Kathwari

Go ahead, Dave. I’m taking a look at it too.

David Callen

Well, it has to partly Halley because of the numerical value, you are looking at percentages. So the comp store decline in the third quarter was 2.4% and you are comparing that to the growth rate in comp store of 2.5% positive in the fourth quarter, correct?

Halley Goodman - Goldman Sachs

Correct.

David Callen

Okay. So part of that is, the numerical value the total dollars of sales, the written orders in dollar terms is greater in the third quarter than the shipment dollars in the fourth quarter. And that does play so the percentage is - look a little funny when you make that comparison. But, it’s difficult to make that kind of correlation that you are trying to close.

Halley Goodman - Goldman Sachs

Great. Thank you. And our next question relates to inventory. What was the main driver of the large year-over-year decline in inventory and what are you plans for inventory for the next year?

M. Farooq Kathwari

That’s a good question. I mean, our inventories declined substantially and it declined actually in all areas both from a raw materials to work in process and also some finished products. I believe that as we move into this New Year, they are going to somewhat increase that’s our expectation from $135 million maybe four, five million dollars is what we are thinking about right now, especially with the launch of these accessory programs that we are going to launch this fall.

Halley Goodman - Goldman Sachs

And was that in additional inventory mainly come from those Accents and accessories versus furniture?

M. Farooq Kathwari

I would say that 70% or so would be - 70% or so would be in the accessories and the rest in furniture.

Halley Goodman - Goldman Sachs

Thank you very much.

M. Farooq Kathwari

Thanks very much.

Operator

Our next question comes from Todd Schwartzman with Sidoti & Company.

M. Farooq Kathwari

Hey, Todd good morning.

Todd Schwartzman - Sidoti & Company

Hi, Farooq. Hi, Dave. Couple of things, when do the international cost start to moderate a bit and maybe if you could quantify on the full fiscal year basis, what you expect as far as the change in international related spending?

M. Farooq Kathwari

Yes, I think that, at this stage, our best top projection is that we spent about a $ 1 million this last quarter. I think that most probably it will be reduced by at least 50% or so in our first quarter and then will be reduced by -- then will go down -- then be about 20%-25% in the second quarter and in the first six months, our objective would be, this should be out of our system.

Todd Schwartzman - Sidoti & Company

Okay. And I heard what you said about the marketing advertising cost as percentage of sales going to 5 from roughly 4 to 4.2 in recent times. How much of that is not new eclecticism related? Is that really the biggest piece or there are a lot of other parts there to speak of?

M. Farooq Kathwari

Lot of it is going to be our expansion in reaching more consumers and the direct mail is a very important part of that. We have very, very strong program of direct mail starting in September, in October and November and also we’re looking at December. So, direct mail is going to be the main part. And of course the new eclecticism really represents all our programs. So, this increase basically means that we’re reaching a larger consumer base, well Baby Boomers and Gen Xers especially in our direct mail.

Todd Schwartzman - Sidoti & Company

Got it. And in the fourth quarter what did you see by product category in the way of written and delivered business?

M. Farooq Kathwari

Well, interestingly, that as you all know case goods is always, it’s been a challenge and we of course started a few years back as being very strong case goods company. That still has shown declines even though the decline has moderated. Our upholstery was somewhat didn’t grow but didn’t go down. And our access to (somebody) went down too and I think that that is where the opportunity is where all these new products that we have introduced. It’s going to help us, bring that business up. So, I would say case goods then hold Accents and upholstery was stable or slightly up.

Todd Schwartzman - Sidoti & Company

Although surprising to hear that Accents were down, you’ve made it, I think not that there wasn’t a focus previously but I think in recent months, you seemingly made it bubble a bit more of a focus, can you speak to traffic trends or anything else that you think might be playing into that?

M. Farooq Kathwari

Yes, the traffic was. The traffic was somewhat down for us. And that’s why we’ve looked at our advertising from bay zero, we’re looking at the mediums we are using and we’ve already starting to see positive trends in July of course it also reflects a change in the -- in our prices. But, I think it, our advertising mediums and the message is also being changed to reflect to get more traffic into our design centers, our traffic was not what we wanted it to be.

Todd Schwartzman - Sidoti & Company

Do you guys have any numbers internally regarding the cash run rates of Accents versus an Accent bought standalone without the associated furniture purchase?

M. Farooq Kathwari

A good question. I mean we do have it, but I don't have it. And at this stage, I’m just giving you, my sense of what we do. I would say at this stage about 85% of our business and Accents is done when we do a furniture and 15% is standalone.

Todd Schwartzman - Sidoti & Company

Is that something that you’re looking - essentially change for competitive reasons?

M. Farooq Kathwari

Absolutely, I think that when you came to Danbury, you saw the focus of creating shops, create layering of our products, bringing in a lot of Accents even price points we have changed. So, there maybe a lot of focus and then we also have a very strong focus of delivering it pretty fast.

So, our logistics is also gearing up. So, that we will be able to ship it the next day -- the next day shipments of all the Accents that we purchase. So, we have a very major focus this fall to order about getting into business and in fact as I said this fall, we want to really be an important factor in this whole issue of Accents which in the past really the November, December period for us has been something with almost out of the market, not this year.

Todd Schwartzman - Sidoti & Company

Okay. What are you seeing as far as commodity cost currently?

M. Farooq Kathwari

Well, so far has been stable where so far but there are some concerns on the plywood costs, hardwood, plywood that we use in our frames, in our upholstery, it’s having a lot of challenges there. So, we’re looking at it very carefully. We’re looking at a lot of different resources and even though for the year, our fuel costs somewhat stable but recently we’re started seeing major increases in fuel costs and as you know we delivered our products at one cost nationally. So, we bear the cost not the retailer and approximately 25% to 30% of our fuel cost is represented by surcharges.

So, fuel is something and the cost of delivering is an important factor that we’re watching very carefully and that’s a concern.

Todd Schwartzman - Sidoti & Company

And finally, CapEx for the year for 2014?

M. Farooq Kathwari

Our objective at this stage really is to keep it close to our D&A $19 million both.

Todd Schwartzman - Sidoti and Company

Great. Thank you very much.

M. Farooq Kathwari

Thanks Todd.

Operator

Our next question comes from Jeremy Hamblin with Dougherty.

M. Farooq Kathwari

Yes. Hi, good morning.

Jeremy Hamblin - Dougherty

Hi, guys good morning.

M. Farooq Kathwari

Yes, good morning.

Jeremy Hamblin - Dougherty

I wanted to just see if I could clarify something on the China impact, I think you indicated that you expected in this quarter the impact to be about $6 million or so in revenues?

M. Farooq Kathwari

Yes, Dave, that’s right?

David Callen

Yes. That’s what we have indicated in the third quarter with the impact and expected something similar in the fourth quarter.

Jeremy Hamblin - Dougherty

And so, then can we kind of infer from what you said that in the September quarter it’s kind of between $1 million and $2 million?

M. Farooq Kathwari

Yes, closer to $2 million. Yes, you got your numbers right.

Jeremy Hamblin - Dougherty

Okay. Then I wanted to just ask you about kind of the fresh colors line and see if you guys are getting, what kind of response you are getting from that line of products and whether or not you are getting the marketing support you need in it, is there anything that you kind of share on that front?

M. Farooq Kathwari

As you know the fresh colors objective really was to reach a younger consumer base Gen Xers through their children. So the fresh colors is basically a kids. So we have given it a lot of emphasis. It has increased. But I think, as you know it was ready towards the end of the fiscal year we introduced it. You are going to see a lot more impact of that as we go forward and because of the fact that’s very much tight to reaching the Gen Xers which is our objective.

Right now our business about 75%, 80% is Baby Boomers and 20%, 25% is Gen Xers. Our objective in this next year is to take to 60:40.

Jeremy Hamblin - Dougherty

Okay. And then in terms of the pricing, it sounds like 2% to 7% impact on pricing this year and that has the ability to move around your that is kind of the cadence of your delivered sales. I think we can -- can we assume then that sales -- delivered sales were better in the first half of the Q4 of the June quarter based on what you have said about June?

M. Farooq Kathwari

I am sorry, say that again.

Jeremy Hamblin - Dougherty

I am just saying in the first quarter, can we assume based on what you said about June results being impacted from last year’s price increases that were in July, so presumably June was the weakest month of the quarter for delivered sales?

M. Farooq Kathwari

Well, I was really talking about regional sales, the regional sales are were the one that were impacted, of course we don’t deliver that right away. So whatever we write in June are going to -- were going to be delivered anywhere in this first quarter of fiscal 2014. So our written sales were lower, our deliver sales reflected our business in the previous periods.

Jeremy Hamblin - Dougherty

Okay. Was there any color you can share that on the cadence of the quarter?

M. Farooq Kathwari

You talking of the quarter ended?

Jeremy Hamblin - Dougherty

Correct.

M. Farooq Kathwari

I think that -- I am just trying to note. Dave take a look at it to see the impact, obviously our June quarter was impacted because of the fact of this price increase last year, the June became -- the month of June, as well as, the June quarter was very positively impacted because of the anticipation of price increase. So this year we didn’t have that, so because of that the June was lower, but I think from a retail perspective, I think it was somewhat flat.

Jeremy Hamblin - Dougherty

Okay. Then last question, just in terms of how we can think about company owned and independently owned units for fiscal 2014, any color you can share there?

M. Farooq Kathwari

At this stage, I think it’s more or less going to be stable. We are looking at -- our biggest focus really is improving what we had and similarly with our independence they are doing the same thing too realize more. We have -- as we have indicated even in these various models we give, I very strongly believe that we have the opportunity of at least going to a $1 billion or doubling our business without adding a lot of new locations although, we will do that.

So I would expect approximately 200 or so designed centers in North America, internationally, we will add some more, but the 200 are continuously being re-examined, relocated, we have number of them going on right now that we will relocate to better trading areas as we move forward.

Jeremy Hamblin - Dougherty

Thank you.

M. Farooq Kathwari

Thanks very much.

Operator

Our next question comes from Budd Bugatch with Raymond James.

M. Farooq Kathwari

Hi, Budd. Good morning.

TJ McConville - Raymond James

Good morning Farooq and David. It’s actually TJ filling in for Budd. Thanks for taking the question. Most of mine have been answered but Farooq, I was interested in your commentary about targeting the Gen X versus Baby Boom and the incremental ad expense. So talk to us a little bit about the spending patterns of those two buckets, maybe what you think the impact of that transition does to your average ticket?

And then if you are going to spend about a 1% more of sales on advertising, what is the incremental going to go the new zip codes or how much of that that you are willing to sort test the markets in areas maybe where you haven’t been before?

M. Farooq Kathwari

Yes. I think you have a good question about the impact on an average ticket. I think our average ticket is going to go down because of the fact our focus on selling Accents and especially in this period, which is good, which means that we are going to bring in more traffic and we would expect this fall for them to buy a lot of our Accents and not necessarily buy them in conjunction we are buying furniture. So we will see, but I would expect it to come down and in a positive way.

As far as advertising is concerned, our focus really is, many people in our industry are doing to target our advertising especially through a number of mediums, certainly digital is important, but directed mail is very important where we can really target based on age, based on income, based on demographics and that’s what we intend to do and substantially increased our region direct mail starting in September.

TJ McConville - Raymond James

Okay, that’s very helpful. And lastly for me, the $24 million debt paid down during that quarter, any expectations for future pay downs, or anything we should be looking for this year, I know you feel comfortable with the capital structure, but any color you can add there would be helpful?

M. Farooq Kathwari

Yes, as you know according to the terms of our these bonds, we don’t, we cannot solicit when somebody comes to us and offers us some reasonable terms then we think of buying them and that’s what happened. And if others come in, we will be happy to consider buying our bonds, because on a plan basis, I don’t want to have any debt for the time being.

TJ McConville - Raymond James

That’s a very nice call to have Farooq. Thank you for the color and best of luck going on fiscal 2014.

M. Farooq Kathwari

All right, thanks.

Operator

And next question comes from Cristina Fernandez with Telsey Advisory.

M. Farooq Kathwari

Yes, hello Cristina.

Cristina Fernandez - Telsey Advisory Group

Hi, good morning. So I wanted to ask on the gross margin, it was up a little bit this quarter (inaudible) than it’s been. You have very strong gross margin gains in 2010. I mean are we getting to a point where our gross margin is -- expansion is just harder to achieve. So I guess I just wanted to get your sense of gross margin going forward and then also - the home Accents rollout here in the next two quarters have a negative impact on the gross margin, I see clear inventory to make room for those new merchandise?

M. Farooq Kathwari

No, I think its an very important issue. At this stage I would think that we -- for the time being, I never anything the way it is. But I think it is harder now to increase our gross margin from the 54 or so percent that we have.

Now on the -- we are going to have a gain -- we are starting actually next month in August with clearance events with clear for the new products that are going to come in because in our my system, I don’t want products coming in on and something goes out. So we are having a fairly significant marketing efforts in the month of August and partly in September to sell all our products because as you know in the - as you saw in the Danbury design center that we changed the projection even of the current products that we have in color, in feel, in texture, whether its upholstery or case goods even though they are not new products. But for the design centers they are new.

So on a wholesale side our plants are going to be very, very busy but it does have and it is going to have an impact on inventory in term -- and margin. So I would say that its possible that our margins maybe somewhat impacted not much as we go into our -- this August/September period, but on the other hand we expect to sell a lot of these products

Cristina Fernandez - Telsey Advisory Group

Okay. That’s very helpful. And then just lastly on the (consideration) environment, I mean, are you seeing any significant changes, it seems to me that the last quarter was more promotional not just for you but for the industry would you agree with that assessment?

M. Farooq Kathwari

Absolutely, and in fact even though we have taken a price increase, we have also slightly as you have must have noticed increased some of our promotional activity so that also has an impact on this gross margin you talked about while we are taking a price increase yet on the other hand, we have to give a greater savings to consumers which we are doing. And what we have seen of course in the industry as the major one. There is hardly some of the people in the competition are giving away 30% to 50 % to 70% everyday?

Cristina Fernandez - Telsey Advisory Group

Well, thank you and good luck in this next quarter.

M. Farooq Kathwari

Thank you.

Operator

Our next question comes from Todd Schwartzman with Sidoti & Company.

M. Farooq Kathwari

Yes. Hello Todd?

Todd Schwartzman - Sidoti & Company

Hi, I just have one more thing, what was EPS for this past quarter has been if international operations were excluded?

M. Farooq Kathwari

Dave --EPS, we have already said $1.

David Callen

We just talked about it the net sales impact of the lower shipment but we don’t really quantify that the EPS impact would have been if they had been flat.

Todd Schwartzman - Sidoti & Company

Okay.

M. Farooq Kathwari

Are you saying, is this the two sense that impact of the international -- are you talking of sales, are you talking about P&L?

Todd Schwartzman - Sidoti & Company

Yes. P&L, just remove the operations just kind of looking at the core North America or even better U.S. business, what was the bottom line?

M. Farooq Kathwari

$0.02 different.

Todd Schwartzman - Sidoti & Company

Okay. Thanks.

M. Farooq Kathwari

Yes.

Operator

(Operator Instructions)

M. Farooq Kathwari

All right. Looks like no more questions so thanks very much. Any questions, comments please let us know. And thanks very much.

Operator

Ladies and gentlemen, this does concludes today’s presentation. You may now disconnect. And have a wonderful day.

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