Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Ethan Allen Interiors Inc. (NYSE:ETH)

Q3 2010 Earnings Call

October 28, 2010 11:00 am ET

Executives

David Callen - VP Finance and Treasury

Farooq Kathwari - Chairman, President, CEO

Analysts

Barry Vogel - Barry Vogel & Associates

Joel Havard - Hilliard

Chad Bolen - Raymond James

Brad Thomas - KeyBanc Capital Market

Mark-Andre - Goldman Sachs

John Baugh - Stifel Nicolaus

Todd Schwartzman - Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to Ethan Allen’s earnings release conference call. (Operator's Instructions) I would now like to introduce your host for today's program, Mr. David Callen. You may begin.

David Callen

Thank you Mimi. Good morning and welcome to the investor and analyst call for the quarter ended September 30, 2010 for Ethan Allen Interiors, Inc. I am David Callen the Vice President of Finance and Treasury for Ethan Allen. After I read a few administrate notes, Mr. Farooq Kathwari, our Chairman, President and CEO will provide opening remarks. I will then review financial highlights for the quarter and Farooq will close with a detailed review of business initiatives of the company before taking questions.

Please note that our earnings release and prepared remarks make reference to non-GAAP information which excludes the effects of restructuring, impairments, transition charges and unusual income and tax impacts in the reported periods. A reconciliation of this non-GAAP information to the most directly comparable GAAP measure was provided with the tables attached to the press release which is also available on the company's website. Please also note that comments from this call should be considered in conjunction with the company's reports filed with the SEC including discussions of risks. Any forward-looking statements, discussions of future expectations, trends or objectives are subject to various assumptions, risks and uncertainties. Actual events or results could differ materially from these forward-looking statements and the company assumes no obligation to update or revise these statements.

Now to Farooq Kathwari for his opening remarks.

Farooq Kathwari

Thank you David. I will provide a brief overview of the highlights of the quarter ended September 30, 2010. And as compared to the previous year quarter end of September 30, 2009 after my brief comments Dave will give you information on our financial performance and then I will give a detailed business overview. For the quarter ended September 30, 2010 our sales increased 21% to 164.8 million, retail division sales increased 17.3% with comparable sales increasing 26.4%. The reported gross margin were at 50% compared to 42.8% and adjusted gross margin at special charges this year at 50.4% versus 49.1% prior year.

Operating income was 6.3 million that is 3.8% of sales versus last year quarter reported loss of 16.1 million and adjusted loss of 6.8 million. This quarter had strong wholesale margins of 11.1% as reported and as adjusted at 11.7%. Retail division while substantially reducing losses from previous year quarter had a negative operating margin of 3.4%. Our objective is to write and deliver more in the retail division which will have a very positive impact on overall margins and profitability.

Written retail division was down 2.4% while comparable was up 3.5%. And as reported by us, impacted by timing of the end of savings event, this year ended October 18, last year September 30. Also consumer sentiment was guarded especially to this very negative election campaigns taking place. Taking into account the closing of savings event on October 18 instead of September 30 we estimate the written business for retail division would have enough positive 5% instead of a negative 2.4%.

Inventory decreased 6.2 million from last year quarter and increased 4.5 million from 6/30/2010. Mostly sold inventory at retail division and some increase in raw material and working process. Backlogs remain healthy with increase of production and lowered rate of incoming orders have a better balance between backlog and service at 70% of product custom made in our US plants. Liquidity remains strong with cash and equivalent of 90.7 million and have also been cautiously purchasing our shares and bonds in the open market. We continue to strengthen our enterprise and I will give an overview after Dave provides financial information.

David Callen

Thank you, Farooq. Net sales for the quarter were $164.8 million, up 21% from the prior year quarter and bucked the historical trend by being up sequentially from the $163.3 million in the fourth quarter of the fiscal year ended June 30. Our retail segment reported net delivered sales of $121 million, up 17.3% versus the prior year quarter in comparable design center, net sales increased 26.4% due to a change in year-over-year timing of promotions our retail written orders decreased 2.4% while comparable design center written orders grew 3.5% versus the prior year quarter.

Wholesale net delivered sales were $107.6 million, up 32.3% compared with the prior year quarter. Part of the wholesale increase was products shipped to our retail division that at the end of the quarter was awaiting delivery to clients’ homes. Consolidated gross margin for the quarter improved to 50% compared to 42.8% in the prior year quarter. As expected we had lowered transition cost for ramping up production of our plans during the quarter totaling $679,000 or about $1.50 per diluted shares. The prior year gross margin was impacted by $8.5 million or $0.18 which included accelerated depreciation on overhead transition cost for the actions taken to consolidate our manufacturing footprint. Excluding these types of costs for both periods our gross margin would have been 50.4% this year compared with 49.1% in the prior year first quarter. It is also worth noting that our current year gross margin was affected by a lower mix of company operated retail sales of 73.4% than the prior year of 75.7%. Transition costs next quarter are expected to be approximately $300,000 to $500,000.

Operating expenses during the quarter were $76.8 million excluding $225,000 or $0.05 of restructuring charges for lease termination true-ups. As Farooq mentioned previously our operating expenses include increased investment in advertising during the quarter. As a percent of net sales operating expenses, ex-restructuring were 46.6% compared to 54% last year. Our net income for the quarter was $3.8 million or $0.13 per diluted shares compared to a net loss of $13.6 million or $0.47 in the prior year quarter.

The current quarter includes non-recurring other income of $1.5 million or $0.03 per share. Adjusting for special items from both periods results in diluted earnings per share of $0.11 this year compared with a loss per diluted shares of $0.20 last year in the first quarter. We are cautiously and opportunistically repurchasing our outstanding stock end bonds. During the quarter we paid out $5.4 million for stock repurchases and paid $2.3 million for bond repurchases made below par. We also added $4.5 million in inventory largely to service orders already on the books as well as spent $1.5 million on CapEx and paid $1.4 million to dividends to our shareholders.

We ended the quarter with a healthy $90.7 million in total cash and securities. Another $3 million in below par bond repurchases were made in early October after the quarter ended. We continue to make strides with their business initiatives to be poised for growth and are pleased with the financial health of the business. Not to Farooq for detailed comments on the business initiatives.

Farooq Kathwari

Thank you David. In these challenging times the only option we have is to continue to take steps to positively differentiate our enterprise and take market share. We continue to focus on our strategic priorities. Our in-house network of interior design professionals is a major competitive advantage. During the quarter we continue to add very qualified interior design professionals. During the last six months we've added 119 experienced and talented interior designers which included 69 during the quarter ended September 30. The net increase during the last six months was 44 and we also continue the process of registering interior designers either through resignations or not meeting our newer standards.

We have continued with extensive training and orientation programs for the new associates and also associates who are working in our design centers. The interior design affiliate or the idea program also continues to grow and currently we have over 1600 associates in this program. We launched the strong making and advertising program this past quarter. This included new television commercial for national television and a very forceful direct male magazine. The message is while conveying the inspirational aspects of our offerings or also getting the message across that Ethan Allen represents good quality, stylish products, free professional interior design services, free local delivery and also special savings for a limited time from our everyday best prices.

During the quarter the company retail division increased advertising primarily through direct mail by spending $2.2 million over what was spent in the previous year quarter. During the quarter our direct mail magazine and oversized postcards were mailed to over 5 million households. While this was a major increase in spending we believe it made sense to get our new advertising program to a larger consumer base as we continue with our objective of gaining market share especially as consumer confidence improves.

During the quarter we introduced and shipped new products for design centers. The focus of the new products was to take advantage of our conversion to custom manufacturing in the United States. In case goods we introduced new dining room furniture custom allows us to offer a wide variety of design elements and configurations of a common platform. We also introduced new products and home office and media. In upholstery we added to our selections both in upholstery frames and fabrics.

In accessories we introduced a number of new products, including customer art work program which provides our interior designers and clients to develop custom framing options. In soft goods we added a collection of bed coverings and custom draperies. We are pleased that despite one of the most difficult periods we have been able to maintain a strong network of design centers. As of September 30, 2010 we had 281 design centers, 143 operated by the company retail division and 138 by our independent licensees. At 9/30/2009 we had 289 design centers. During this recession we have consolidated a number of design centers in the retail division which were trading dollars and we have also opened a few new ones.

As the economy improves we are ready to open additional design centers in North America and also internationally. We also made progress in our consolidation and repositioning of our manufacturing and logistics network. About 70% of our products are made in the US plants. From a year back of depressed production our domestic case goods have doubled their production at Maiden, North Carolina where we consolidated our US manufacturing operations in upholstery have increased production by over 40%.

We are also positioned well in our wholesale and retail logistics network. As we mentioned during our last conference call, we have invested in technology both at retail and wholesale parts of our business. The new touch screens are being received at our design centers at this time and by end of November we will be fully functional. Finally as we commented on our earnings press release that while faced with uncertain economic times we are cautiously optimistic to continue to show improvements compared to prior year both in sales and earnings.

At this stage we have a backlog which will enable us to maintain our production levels and also provide acceptable levels of service to our clients. As 70% of our sales are custom products made in our North America facilities and managing our growth is important to providing good service. The great recession has given us an opportunity to accelerate the process of reinvention and with the strong network of design centers stylish and quality products special values from our everyday best prices, experienced network of interior designers and utilizing technology as a competitive advantage we are well positioned to grow our business especially as consumer confidence improves.

With that I would like to open it up for any questions or comments. Mimi are you there

Question-and-Answer Session

Operator

(Operator Instructions) our first question comes from Barry Vogel of Barry Vogel Associates. Your line is open.

Barry Vogel - Barry Vogel & Associates

I have a couple of questions on operating rates and margins. If you look at the fourth quarter from similar sales as the first quarter, about 164 million, your operating margin in the fourth quarter of last fiscal year was 5.8%. And this quarter after these adjustments are taken into consideration it was only 3.8%. So could you tell me, that's a big difference in margin on similar revenues, could you tell me why that happened?

Farooq Kathwari

Barry its 5.6% in the fourth quarter but as we mentioned on the call we invested more in advertising in this quarter. So our expenses were a little bit higher as a percent of net sales and also our gross margin rate was just a tad bit lower. The adjusted rate at the end of fourth quarter was 50.5% versus 50.4% in the first quarter. That's reflective of the mix of the dimension on the call as well that our retail business may have slightly less of our total consolidated net sales than in the previous quarter.

David Callen

Yeah Barry in addition to the fact we are also now starting to invest and build our business. I mentioned the fact that we increase our advertising by over $2 million, not only from last year but also increase it substantially from the fourth quarter. We've also started to increase as I said adding new associates. Now we are getting ourselves ready for the future because whether it's 4% or 5% is not an acceptable level of operating margins. They are good for the time being, but we have to now gear up so that we are able to realize greater potential in sales and operating margins.

Barry Vogel - Barry Vogel & Associates

And one other question relates to the operating rate and downtime, could you give us the operating rate, this is US now, the upholstery operations in the first quarter and the case goods operations and if there was any down time in the quarter can you tell us what the down time might have been?

Farooq Kathwari

Well in this first quarter there is no down time, in fact we have gone the other way, we have had to work substantial over time both in our upholstery operations and our case goods operation because the backlogs and the ways of business that we got in our fourth quarter while it was great, but we also have to service it because as I mentioned being in the custom business we also will having to make sure that we have reasonable service positions. So, in both case goods and upholstery in our first quarter had high over time and no down time.

Barry Vogel - Barry Vogel & Associates

Does that mean you operated at 100% capacity in those US facilities?

Farooq Kathwari

We I would not use over 100% is of course, we cannot have any down time, we can always increase production capacities by hiring more people, by getting into second shifts. But from a perspective of the fact that we are operating today based on the number of people that we have as I said, we operated in this first quarter at a higher level of over time than you would like to do in this second quarter as of course the sales are somewhat lower we are now balancing between the incoming orders and our backlog and the business we expect to be somewhat more efficient.

Barry Vogel - Barry Vogel & Associates

So does that mean that if business improves you're going to handle in the US your current products that you have to keeping the same facilities without adding a plant, that you would just add more workers to increase your revenue?

Farooq Kathwari

That’s right now Barry keep in mind, at the same time that we have been converting to custom we have also been, we have doubled our case goods production in the United States in the last 12 months which does not come with out a lot of inefficiencies, and we are taking all those inefficiencies in addition to new people, in addition new product same thing with upholstery. The good news is that as I said we have doubled our case good production our US plants our maiden operations is operating at 40% more capacity and which is great news but it also has a number of inefficiencies built in with that kind of an increase in production right now the good news is that we have a much better position in terms of efficiencies both in our case good and in upholstery, on top of it in case goods we did complete change in the structure of our production from making big runs to making custom that was one of the major challenges that also had an impact on our efficiencies but the good news is that we still have some issues as we go forward in terms of conversion to custom but lot of that is behind us,.

Operator

Thank you, our next question comes from Joel Havard of Hilliard. your line is open.

Joel Havard - Hilliard

A couple of more prosaic questions here. Farooq, I wonder if you could or if Dave's got the numbers handy give us the wider range of comps that you guys have shared in the past, sort of the top line comp delivered versus I believe in the press release you referenced sort of a comp written and a total written. But you've shared a couple of other things like wholesale trends, etcetera, in the past.

Farooq Kathwari

Well I think we have given you I think most of the information we have given in the past, that is in this fourth quarter as we said was in the retail division, you are talking about delivered sales.

Joel Havard - Hilliard

Comp delivered, that's right, Farooq.

Farooq Kathwari

On the retail division we had total delivery of 17.3% and the comp store delivery was 26.4% in the wholesale we delivered 32.3% in the first quarter of this fiscal year.

Joel Havard - Hilliard

Okay. And Farooq, could you run through the store metrics, your comment on the total number and then the break out between? And specifically what sort of, quote, consolidation was going on? I'm interested in seeing where that shift is. The background to that question would be any news of further development of some of the smaller formats. I know that's something you all have been toying with and I'm wondering how that's progressing

Farooq Kathwari

Yes Joel as I mentioned you know we have went from 289 to 281 as a total count, most of the decline did take place in the company operated design centers where number of design centers which we felt were trading dollars especially in this recession and in this environment, it made sense when the leaders came that we got out of them. So we consolidated a few of those into design centers where we already had in the markets and that for instance just to give you a prospective in Milwaukee we have three sort of neighborhood design centers and we opened up one flagship design centers which is I think a long term want to do more business than the three.

Similarly, in many markets like that Manhattan itself we have driven from 3 to 1, Long Island is right now we are consolidating a design center which is only 10 – 15 minutes from a major flagship design center. So that was the major the fill that same of our independents closed but the good news is that throughout this very very major recession, we have been able to maintain our design centers. Through this period also Joe we opened up smaller design centers to see how they work, how they operate from anywhere from 4000 square feet to 9000 square feet. That is continuing and we have been working very hard in making sure that these new design centers in the smaller format also take advantage of the new technology, touch screen technology, our new website all of those are important and we are also developing plans to open up these smaller format design centers in many many markets across the country and also of course our growth internationally is taking place to.

I think as the economy improves, we are poised to open up more smaller format design centers

Joel Havard - Hilliard

Farooq, the test so far with the smaller footprint, that's the 4,000 to 9,000 feet would be half, 25% to 50% the size of a full-line store, I guess. Are you getting the square footage performance with the market dollars per household penetration that you were looking for out of this?

Farooq Kathwari

Absolutely in fact you know like Valley, we used to have I think 16,000 – 17,000 square foot design center we open up a 9,000 square foot slightly lese than 9, it is of course without taken to account the recession but it is doing about the same business that a larger design center was doing, because of two additional factors, one our focus on carrying very qualified interior designers, the interior designers that I mentioned that we have hired and also that of by itself is also an investment in this time, as they are very qualified people this recession has given us an opportunity to get interior designers who are running their own businesses, but with this recession they are having a tough time and they are coming to us. So we have been last couple of weeks back with 75 of them go through an orientation program here, so great, good interior designers and then technology. Website is good but we are going to make it better, the touch screens are coming up and other technologies ate making it possible for us to operate from a smaller design studios or centers and that is what the future is going to be.

Joel Havard - Hilliard

Thanks for that color. And just sorry to berate this, but just so I understand, what was the specific dealer versus company store count at quarter end?

Farooq Kathwari

143 was company and 138 was dealer. Last year the company was a little bit higher than the number of 143, so maintain more or less the dealer stores similar to last year.

Joel Havard - Hilliard

Well in fact I guess you're actually starting to see some net dealer positives there on a sequential basis, I guess.

Farooq Kathwari

Yeah because if you take a look at it the prior year, first quarter we had 155 company and 134 dealers and this year later we have 143 company and 138 dealers.

Operator

Thank you, our next question comes from Chad Bolen of Raymond James, your line is open.

Chad Bolen - Raymond James

Farooq, you shared with us that if you make the adjustment for the timing of the promotional calendar that the total written business was up 5% versus the reported down 2.4%. So if I make that same adjustment do that suggest that the comp written business was up about 11% versus a plus 3.5%?

Farooq Kathwari

Dave will do those numbers because the count may be different because of the fact that, well its possible yeah I think its able to be pretty close right, yeah, Dave will look at it. But I think you are right it will be pretty close to that.

Chad Bolen - Raymond James

Okay. And if I remember correctly the current promotional event that you have runs from October 22 through the end of November. How does that compare with what you were doing in the prior year second quarter? And do you anticipate any meaningful year-over-year impact to the comps because of timing next quarter?

Farooq Kathwari

Well all our programs this year are stronger in terms of the focus of adverting and even savings. This year we are going to end up one in end of November and then we going to also have a sort of period in December, it would be some what similar to what we had last year, this in the second quarter.

Chad Bolen - Raymond James

Okay. And Farooq, you mentioned that you had shipped some wholesale orders to retail that were still awaiting delivery. Could you talk a little bit about what the consolidated backlog looked like at the end of September versus say how it looked at the end of June? What was it up, flat, maybe down a little bit? And what does that imply for delivered sales next quarter?

Farooq Kathwari

The backlogs are lower at the end of the first quarter because of the fact of this for two reasons one is we had high deliveries with a 21% consolidated increase in sales and 17% in our company design centers, so we did eat into that backlog which is good for us because our backlogs, we need backlogs but we need to make sure those backlogs are backlogs that we can deliver in a reasonable time period. We had actually because of the fact we were gearing our production our backlogs were creating somewhat of a service issue, now they are in balance, they are lower than what they were in at September, I mean the June 30. However, the issue really is as we go forward maintaining a backlog that will enable us to keep our manufacturing which is now producing basically based to keep them busy, so far for the next couple of months we see them remaining busy.

Chad Bolen - Raymond James

Okay. And I guess as I look ahead historically the December quarters delivered sales have been higher seasonally than September. But is it reasonable to think that because you had such a strong September for deliveries that we see an actual decline sequentially in Q2 versus Q1?

Farooq Kathwari

Its possible lat as you can see last year we delivered $143 million in our second quarter this year we delivered $164 million in our the first quarter as compared to $136 million in the last year first quarter. So I think that obviously our business will depend also the business we are go to get in the next few weeks. But I would think that you know there is an opportunity of doing some what particularly similar or close to what we did in the first quarter.

Chad Bolen - Raymond James

Okay. And looking at your inventories it looks very clean. And it did take up a little bit sequentially. But inventories declined year-over-year despite a pretty significant increase in sales. Is that a sustainable level? Should we expect some more modest increases? Or just how do we think about inventories for the rest of the year?

Farooq Kathwari

You know during the year as we converted in to custom, our finished good inventory in our case because of our domestic manufacturing went down. As we are now we are done with that. Now our inventories are where we need to be may be perhaps little bit lower than they should be based on the fact that we need to make sure that we are able to that service our business. I do know as we go forward I would say that our inventories will more or less remain at the levels we have right now.

Operator

Thank you, our next question comes from Brad Thomas from KeyBanc Capital Markets.

Brad Thomas - KeyBanc Capital Market

First of all, I just wanted to thank you for the commentary around the sales and with the timing of the promotional events. If we kind of back some of that stuff out, could you just give us a little sense for what it felt like sort of the underlying consumer spending trends were during the last several months and into October?

Farooq Kathwari

Well if that has been reported certainly there has been consumer is becoming some what cautious in the last few months and I obtain that part of that is due to the effect of this you know very very negative campaigning that is taking place, people do get concerned out good news for us is that our traffic has increased and the traffic that has increased has been even more qualified people coming in they are working on project but what we are seeing is somewhat more of a reluctance of people closing at this time and I would hope with the end of next week when this major negative advertising of this election is over there is an opportunity to start improving consumer confidence and all these folks are working on projects would be in a better position to close and that’s what we are seeing right now.

Brad Thomas - KeyBanc Capital Market

Okay. And then just wanted to follow up on advertising expense and the new ad campaign. You guys showed off some of the materials at the investor day in September. I thought the commercials looked great. You mentioned today that I think a majority of it was spent on direct mail and now I've seen the commercials. Could you just talk a little bit more about what you did during the quarter and what we should expect during the December quarter?

Farooq Kathwari

In the first quarter we did spend at the company retail division $2.2 million more in direct mail, we maintained our spending in national television, both the direct mail and the national television projected our new advertising campaigns with well received. So in this second quarter our advertising spending as compared to the first quarter will be somewhat lower will be higher than the second quarter of last year, because last year of course as you know we were all just gearing down. Our objective is not to send out over 5 million direct mails that we did in the first quarter because part of that 5 million also was for the closing that took place in October 18, so we had some what of a lower advertising expenditures than we did in the first quarter.

Brad Thomas - KeyBanc Capital Market

Okay. And I think you had said in the past it was going to be about a 35% increase in advertising dollars? Does that correspond with the 2.2 million? Or did you come in above or below that 35% level?

Farooq Kathwari

That 35% was increased for our retail division and that’s what I have mentioned and we spent for the retail division 35% more and advertising that we did in the first quarter of ’10.

Brad Thomas - KeyBanc Capital Market

Okay. And then Farooq, we've talked in the past about how it's consumer backdrop where shoppers really need to see value and obviously you're making efforts to offer those special savings. Could you just talk a little more about the level of promotions that you're offering right now, and any potential that you might change that one way or the other in the coming quarters?

Farooq Kathwari

Right now we are offering two savings options to or consumers and one is that you can save 9% on your total purchase and get an auctional 9 month interest free financing or the second option is which is something very very unique we have never done it we are offering a 36 month interest free financing to our clients we just started last week and I think this a very very strong offering and we have continued to have strong savings offering from our everyday best prices and our own associates and the clients see the value of it and we will continue to offer savings for the foreseeable future because of you know the kind of an economic environment we have there.

Operator

(Operator Instructions). Our next question comes from Matthew Fassler of Goldman Sachs. Your line is open

Mark-Andre - Goldman Sachs

Hi. Actually this is Mark-Andre filling in for Matt. How are you? I had a questions on gross margin, just going back to the margin. Looking at the year-over-year change, excluding the one-time item it's better than it was on the face of it, but just wondering if you could talk to the slowing in terms of your view of progression given that the compares are pretty similar over the past three-quarters you've seen like more than 300 bps increase, than about 200 bps and now about 1.3% increase in the gross. If you could just talk to those drivers because we would have expected maybe a little bit higher increase given full utilization this quarter. That’ll be great. And then if you could talk to commodity inflation impact on margins since we are hearing about that at this time. That’ll be great. Thank you very much.

Farooq Kathwari

Alright on the gross margins last year in our first quarter our adjusted gross margin was 49.1% reported was I think about 42. Now this year our adjusted gross margin is 50.4% for the [restrictive] percent now our gross margins you know is a very healthy gross margin in our industry however the number of factors that we got to keep in mind. First is that our gross margin is impacted by the our retail sales of the company retail division to total sales. The higher those are to the total we have the opportunity of having the higher gross margin but that recovery also careful that does not lean higher operating income. So that’s one factor and in this quarter our total retail sales to total sales were lower than they were in the first quarter of last year I think Dave just mentioned gave the numbers was what 73 versus 75?

David Callen

That’s right

Farooq Kathwari

And second factor is this you mentioned which is very important on the manufacturing. While in our manufacturing, we are making progress, but at the same time we are continuing to gear up and I think as we go forward we have the opportunities of continued benefit. Our domestic case goods manufacturing has gone from basically flat gross margins to now operating globally 15 and 20%, but still not where it needs to be. And third factor in our gross margins is this whole issue of the benefit that we are getting in that of training all these new people as that gets stable we have an opportunity and finally I mentioned earlier we have ran into very high overtime so that lead to service our clients. We are getting a lot of businesses great, but it also ends up costing us more and that’ what happened in the first quarter. And second one on inflation, I think that from our perspective it was flat and there were certain areas that went up, our fuel costs have gone up because of the increase in the gas prices, our lumber prices have some what stable. Our energy in our plants is down but on a volume basis but on a actual basis our energy cost have tended to go up. So I think that from a case goods point of view it has been some what flat and in an upholstery we have had an increase of most probably between the foam and plywood has increased by about 6% so I would think that on a consolidated basis, the impact on our gross margin was between 0.50% to 1%.

Matthew Fassler - Goldman Sachs

If I could just one follow up on, going forward. How should we think about the trajectory of the gross margin? Should we expect it to keep on the current trend on a year-over-year basis? Or given everything you're seeing and everything you just talked about?

Farooq Kathwari

Yes I think that operating between 50% to 51% in the next few quarters is something that is reasonable.

Operator

(Operator Instructions) our next question comes from John Baugh with Stifel Nicolaus. Your line is now open.

John Baugh - Stifel Nicolaus

Just a couple things. First you put out that matrix which was very helpful. Obviously in a very difficult sales environment still. And I'm curious, hopefully we won't remain here forever, but given the fact that we are here now and you're running these sales events and the increasing advertising, should we think as some of those contribution margins that were laid out in that matrix being in line with all that you are doing right now, or perhaps a little bit optimistic with where you have to be to generate sales?

Farooq Kathwari

John I think those metrics, if you follow the metrics you’ll see that we are in line. And I think that they are very realistic

John Baugh - Stifel Nicolaus

Okay. And then on the Q-2 shipments or deliveries that we need to model, you've implied that if you adjusted for the timing your sales events your orders would have been up more like 5%. If we assume for the moment that Q2 deliveries match Q1, that's up 14% year-over-year. And I'm struggling to get there with a 5% order up. Your current sales event would end I guess at the end of November which only a portion of that which shiped in the December quarter. And you shipped a fair bit of wholesale right at the end of the September quarter. So struggling, I guess, to get up 14% or anywhere close to that given those factors. Am I missing something? Are you seeing something with your incoming orders on the first three weeks here that are very strong? Help me. Thank you.

Farooq Kathwari

The backlogs we have as of end of the first quarter as we move forward should be about $10 million lower and that’s what you are missing.

John Baugh - Stifel Nicolaus

So the backlog at the end of September relative to the end of June was $10 million lower?

Farooq Kathwari

No what I am just saying is that our backlogs at the end of September gives us an opportunity to shift $10 million more than the business that we are potentially going to receive this quarter that’s the number that you are missing.

John Baugh - Stifel Nicolaus

Okay. So you've freed up productive capacity so that if orders come in you can fill them.

Farooq Kathwari

Or/and also we will shift from the back log that we already have in this quarter. Keep also in mind this is towards the end of October any business that we get in the next 2-3 weeks we can ship that most or at least half of that we can ship it in this quarter

Operator

(Operator Instructions) I am showing a question from Todd Schwartzman of Sidoti & Company. Your line is open

Todd Schwartzman - Sidoti & Company

Are you promoting the 36-month no interest option in your TV commercials?

Farooq Kathwari

We are in fact you go to the end of the tagline it says the 2 options, the 9% with a 9 month financing or the 36 months. We are also promoting it in our direct mail.

Todd Schwartzman - Sidoti & Company

Great. And is there a level of volume at which you maybe start thinking about adding a second shift at your domestic plants?

Farooq Kathwari

We still have the opportunity of increasing production at the first year by hiring more people. Second shifts are very expensive proportion Todd and especially we are one of those few companies manufacturing in United States against all odds and we will try as much as possible to first manage our production domestically in one shift and we are doing that, we are increasing our capacities both in upholstery and in case goods and that will be our first focus for the next three to six months and then we have an opportunity of going to second shift.

Todd Schwartzman - Sidoti & Company

Back when imports and case goods were less pervasive than they are now, what did it take for you to require a second shift? At what levels were you going to a second or even a third shift at that point?

Farooq Kathwari

If you keep in mind that in our case goods approximately 60% of the products is made in United States custom one at a time and 40% is still outsourced from overseas. So we always have that balance, we always have that opportunity of balancing our future needs, either domestically or overseas, so we have left that flexibility. All our upholstery is made domestically with a cut and sow operations in Mexico which we have been expanding in the last two years.

Todd Schwartzman - Sidoti & Company

Okay. Looking at the selling expense for the quarter, how much can be attributed to previously-accrued commissions.

Farooq Kathwari

None. Right David?

David Callen

We match up our the commission expense with the delivery of the product, so there is not a incremental hit in the quarter.

Todd Schwartzman - Sidoti & Company

Last quarter, last conference call I thought you guys said that there was a little bit of a lag potentially.

David Callen

Well last quarter you recall that we had just converted back to a commission base pay

Farooq Kathwari

Nine months back in the February of this year.

David Callen

But the previous quarter and the fourth quarter we had a one time benefit when we put it up on the balance sheet so we had a prepaid commission plan that we recognized in the fourth quarter, so that our incremental benefit to our P&L in the fourth quarter that will be highlighted in the fourth quarter call. Now its on an ongoing run rate the commission expense that is reflected in the P&L is the roll off of that commission that had been paid out on the written business from the previous period as that product it gets delivered. Do you understand?

Todd Schwartzman - Sidoti & Company

Got it. Farooq, you talked about the ramp in the designers, how it looks, looks like you've actually accelerated hiring in Q1 sequentially from fourth quarter. Is there a number looking out over the rest of this fiscal year that you'd be happy with in terms of a total of designers?

Farooq Kathwari

Todd, yesterday I approved as you know I approve every new professional joining approved I think 23 yesterday. We are looking at design centers across the country and in number of them last year we reduced it in some cases more then we should based upon what was taking place. So we are now putting people back up. One of reasons our retail division profitability is not where it should be with the fact also that in some of our design centers we don’t have the adequate number of designers working there so we are putting them back up. We'll continue to do that and we are also keeping in veil the traffic coming in because we also take a look at that as we are increasing traffic we need to have people over designers to be able to work with them and design centers where traffic is increasing, where we exceed a need for people that’s where we are putting them in right across the country and I would say that every quarter I think that we would be adding 50 to 60 designers in the retail division.

Todd Schwartzman - Sidoti & Company

In recent months or maybe just looking at first quarter, can you talk about the productivity of the top 20% - 25% of your designers versus the company's consolidated delivered sales?

Farooq Kathwari

May be David you want to take a look at it and perhaps talk to Todd, about it. You know Todd our business even though it has increased in the last nine months, our delivered business is increased in the nine months I am just looking at may be about 25% but still keep in mind we are down, we are still down about 20 to 25% from where we were in 2008.

Our designers, the top designers that you have mentioned I am just giving you some rough numbers Dave can work on it, over this last year their productivity, their sales have also gone down anywhere between 20 and 30% and our objective is to bring it back up.

Todd Schwartzman - Sidoti & Company

Okay. Fair enough. Last question. The number of shares repurchased for that $5.4 million?

Farooq Kathwari

Dave. We paid I think around $13 but Dave will give you the numbers.

David Callen

About in total Todd there were 182.6 thousand in fiscal 2010 commitments. And then 204.3 thousand in fiscal 2011.

Farooq Kathwari

And we paid $13.65 for those 204,000 shares Todd.

Operator

(Operators instructions). Okay I am showing no further questions in the queue at this time.

Farooq Kathwari

Alright, well thanks very much and if there is any further questions please let us know and please give a call to Dave Callen. Thanks very much.

Operator

Thank you, ladies and gentlemen this concludes the conference for today. You may all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ethan Allen Interiors CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts