FINAL TRANSCRIPT
Conference Call Transcript
ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
Event Date/Time: Oct. 23. 2006 / 11:00AM ET
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Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
CORPORATE PARTICIPANTS
Farooq Kathwari
Ethan Allen Interiors Inc. - Chairman and CEO
Jeff Hoyt
Ethan Allen Interiors Inc. - VP Finance
CONFERENCE CALL PARTICIPANTS
Todd Scholl
Raymond James & Associates - Analyst
Joel Havard
BB&T Capital Markets - Analyst
Laura Champine
Morgan Keegan & Co., Inc. - Analyst
Ivy Zelman
Credit Suisse - Analyst
Susan Maklari
UBS - Analyst
Todd Schwartzman
Sidoti & Company - Analyst
John Baugh
Stifel Nicolaus - Analyst
PRESENTATION
Operator
Good day, ladies and gentlemen, and welcome to the Ethan Allen quarterly earnings release call. At this time all participants are in the listenonly mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (OPERATOR INSTRUCTIONS). I
would now like to turn the conference over to your host today, Mr. Farooq Kathwari, Chairman of Ethan Allen. Please begin.
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Yes, thank you and good morning. I am Farooq Kathwari, Chairman and CEO of Ethan Allen. I am joined today by Jeff Hoyt, our Vice President
of Finance.
Today we are reporting the results for the three months ended September 30, 2006. Please note that in the earnings release issued earlier today
and in the course of my prepared remarks, reference is made to certain non-GAAP information which excludes aspects of restructuring and
impairment charges recorded during the current and prior-year periods. Reconciliation of this non-GAAP information to the most directly
comparable GAAP measure is available on our website.
As I stated in our press release this morning, our operating earnings ex-restructuring amounted to 11.6% of sales despite a weak retail
environment for home furnishings and the challenging prior-year comparisons, which together resulted in a 3.4% decline in sales. During the
quarter we generated $37 million in operating cash, utilizing $22 million for capital expenditures and acquisitions. Our inventories declined $9.6
million from June 2006 and $12.1 million from September 2005.
In our press release we reiterated our previous statements that in September we saw positive trends. In October so far, it is difficult to compare, as
last year we had a special financing offer for two weeks in October, and this year we decided not to use it. We plan to provide further updates in
the coming weeks.
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Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
Overall, while impacted by the weak retail environment in home furnishings, we remain confident that our repositioning in the last several years
will continue to provide an opportunity to weather these weaknesses better than most companies in our industry.
I will shortly provide you more detail about our financial results for the quarter. Today I want to first comment on the positioning or repositioning
of Ethan Allen at a time when major structural changes have and are taking place in both the retailing and sourcing. While quarterly earnings
analysis is important, in the not-too-long-term, the determining factor for growth and profitability will depend on how well our businesses are
positioned to take advantage of the changing environment.
During the last five to seven years, major changes have taken place both in the sourcing and the retailing of furniture and home furnishings in the
U.S. To provide you a perspective, in the year 2000 we had 20 manufacturing facilities in the U.S., and they were operating at about full capacity.
We were also outsourcing to domestic manufacturers.
In less than six years, we have consolidated 12 manufacturing facilities in the U.S., two of them being consolidated right now, and have
developed a more balanced sourcing of about 60% U.S. and 40% Offshore. By the end of the fiscal year we expect to have about 50% domestic
sourcing. We are pleased at the repositioning of our sourcing so far.
During the same period, furniture retailing in the U.S. has changed from smaller regional enterprises, family-operated retail, to an increasingly
mass marketing and bigger-box formats. At Ethan Allen, we have repositioned our retail network by focusing on service and interior design, and
balancing between a strong, company-operated retail network and a stronger base of independent dedicated retailers.
During the last several years, many of the independent retailers who were not in a position to reposition retired, and the Company took over the
stores and on a planned basis, relocated many of the stores to prime locations. During the quarter we opened four new design centers, and during
the next nine months we expect to open 11 to 14 new design centers, mostly relocations.
We have 166 independents and 141 company-owned design centers as of September 30, 2006. Most importantly, in this age of extremes in
retailing, our focus on style, quality solutions and service gives us a special focus and an opportunity to differentiate and continue our growth.
Our business has dramatically changed from furniture retailing to an interior design business.
This focus required us to have a structure of credibility, everyday best price, a vertically integrated structure from concept to delivery to
consumers on a national basis and, most importantly, investing and developing professional interior design associates, who today number over
3,000 with an additional 400 plus project managers.
This transformation has resulted in changing the name of our stores to interior design centers or design centers for short, and also involved a fresh
look at the way our design centers should be designed to best serve our clients. Those of you who attended our investor conference last month
saw that change in our Danbury design center. We are finalizing the plans of launching nationally and expect to do that from the beginning of
calendar 2007.
During the last few years we have redesigned over 80% of our product lines to reflect superior style, quality, details and value. During our annual
convention last month we introduced two new programs with modern designs while maintaining the classic perspective. These two new
programs, named Modern Glamour and Horizon Studio, will start shipping to the design centers by early December.
Creating the right structure has enabled us to reduce the delivery time to our clients while we have added more design centers for the Company
Operating Division and also increased overseas sourcing. We have also been able to reduce inventories and leadtimes to manufacture while
maintaining strong profitability.
On the marketing side, we have substantially strengthened our direct-mail magazine and have added more resources to our national television
program and plan to continue to be on national television every other week for the next twelve months, except for the month of December.
We believe the repositioning of Ethan Allen in the last five to seven years has been extremely important to our continued growth and provides us
a competitive advantage in these tumultuous times in the furniture and home furnishings region.
Now I will briefly comment on the financial results for the quarter ended September 30, 2006. Sales for the quarter were $242.8 million at 3.4%
decline. Retail division sales increased 4.8% to $166 million with comparable sales declining 1.7%. Last year, for quarter ended September 30,
2005, our sales had increased 9.1% with comparable retail sales increasing 8.8%.
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Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
Our wholesale sales declined 12.8%, partly due to timing of shipping of floor samples and also due to the weaker retailing environment I
mentioned earlier. Last year we introduced American Gothic's in July 2005, and we shipped most of our retail network floor samples in the
quarter ending September 30, 2005.
For quarter ending September 30, 2006, our retail written sales increased 0.6%, and comparable retail written sales decreased 5.9%, a better
indication of what has transpired during the quarter. For the quarter gross margin increased to 52% from 50.4% a year ago.
The net increase of over 200 basis points is due to greater proportion, proportionate share of retail to total sales, efficiencies within both retail and
wholesale operations, benefit of about 0.5% to the margin from business interruption insurance recoveries of approximately $1 million for
hurricane losses sustained in Florida.
Negatives on gross margin were lower wholesale shipments and foam cost increases, which affected gross margin by about 0.7%. Our operating
earnings margin ex-restructure at 11.6% of sales compared to 12.9%. Margin was impacted by lower sales and higher distribution and health
costs. The wholesale operating margin ex-restructuring was 16.3%, and retail operating margin at 1.7%.
Earnings per share excluding restructuring costs amounted to $0.53 compared to $0.57 a year ago. Our financial position remained strong. We
generated $36.9 million in operating cash, utilized $17 million to repurchase 470,000 shares, average cost $35. $22 million was also spent on
capital expenditures and acquisitions, and $6 million was to pay dividends. We recently increased to $0.20 quarterly from $0.18.
At this stage I would like to open for questions.
Q-AND-A.
Operator
(OPERATOR INSTRUCTIONS). Todd Scholl, Raymond James.
Todd Scholl - Raymond James & Associates - Analyst
My question was basically with regard to -- we know that traffic is down; we've kind of seen that across the board. Can you talk a little bit -- if
you're seeing it regionally or are you seeing it basically just across the board as well?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Yes, I have been reading the reports were there has been a mention that perhaps there have been some declines in sales, Florida or the Northeast.
We have not seen that at our level. I think the comment was also made that perhaps at the starter levels of home furnishings, where most of the
gains were recorded, I believe, in the last few years, due to this major increase in what you might call starter homes, which have not been
reduced.
So because of that, I think it's possible that at that level there has been more of an impact regionally. We do not see it. What we do see is that
there are differences; it's mostly due to our own positioning or not having the strengths in markets.
Todd Scholl - Raymond James & Associates - Analyst
As kind of a follow-up, how about your conversion ratio? Are you seeing that impacted by the weakness in retail? Or are you maintaining a
relatively high conversion ratio on the traffic that is in your stores?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
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Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
Our conversion ratio actually has increased, because we have had a decline in traffic in the last year or so. So the conversion has gone up, and
although people are somewhat hesitant, they're taking a longer time. But overall our conversion rates are higher.
Todd Scholl - Raymond James & Associates - Analyst
Just two other quick questions. Are you still planning on opening 16 stores? I got on the call a little late, I don't know if you mentioned that or
not. But previously you had said that you were going to open about 16 stores in 2007.
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Yes, that is correct.
Todd Scholl - Raymond James & Associates - Analyst
Can you tell me haw many shares outstanding did you have at the end of this previous quarter?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Jeff?
Jeff Hoyt - Ethan Allen Interiors Inc. - VP Finance
I don't have the number right in front of me. If you want to follow up with Peg or I after, we can provide that.
Operator
Joel Havard, BB&T Capital Markets.
Joel Havard - BB&T Capital Markets - Analyst
Farooq, within the CapEx/acquisition bucket, could you differentiate between core CapEx, particularly as it would relate to how you are
realigning a couple of these operations, and the acquisition opportunity that may have occurred in the quarter?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
I'm sorry. Can you just, again, repeat it? I missed that.
Joel Havard - BB&T Capital Markets - Analyst
Yes, trying to get a sense of -- I think you said $22 million in the quarter between CapEx and acquisitions. How much was CapEx, particularly
related to the plant realignment, and how much was store acquisition? Where were they, et cetera?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
I will tell you approximately, most of our -- about close to $15 million was spent on new design centers or new store development. We spent
approximately $3 million on our wholesale side, which was mostly relating to distribution and information systems. About $6 million was spent
in acquisitions, and most of that was -- we also acquired a real estate property.
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Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
Joel Havard - BB&T Capital Markets - Analyst
Where were the stores?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
The two stores were in Indiana.
Joel Havard - BB&T Capital Markets - Analyst
I know you wouldn't want to predict how many more of your dealers are easing their way out as you guys take over territory, but would you
mind trying?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
No, I think easing is the right word.
Joel Havard - BB&T Capital Markets - Analyst
The pace of the last couple years -- I know we've seen some spikes and then occasionally it's difficult to predict, but if we sort of blend what
we've seen maybe the last two, three years, is that a pace you think is sustainable?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
It's hard to say. As I mentioned in my comments that in the last few years we've had an opportunity of having many of our independent retailers,
who were ready to retire, over a period of time retired. Now we have a very strong base of independent retailers, and I would think most of them
are interested in growing. They are growing. They are relocating their design centers where it makes sense, adding to their structure. From time to
time we will have some more join us. But it is hard to predict.
Joel Havard - BB&T Capital Markets - Analyst
Separately, sort of on the storefront, too, we understand there's a couple of examples of a smaller footprint. I don't know if it's called the Studio
or something like that. Could you go into where that is and where you think it could go?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Yes. We called it the Style Design Center. They are, right now, I believe, about four of them. Three are operated by independent retailers, and
one is operated by the Company. So far the results have been good. All of them have done as expected and some better than as expected. Our
objective would be to continue to grow those in markets where we feel that a larger design center is not optimum or possible at this stage.
So we will have some more coming up, but at this stage our main focus still is the relocations in major markets where our design centers give us a
great opportunity when we relocate them to prime locations, and we still have many more to go.
Joel Havard - BB&T Capital Markets - Analyst
And lastly, you talked about the national TV campaign this year or, I guess, going a year forward from here. How would the dollars sort of
compare or maybe the dollars and hours, if you would, versus sort of look 12 months back?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
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Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
I don't have the numbers, but I will give you a sense. We have increased, in the past six to nine months, substantially. Again, I'm just giving you
just an estimate in the range of between 20 and 30% increase in our funding for national television. However, we have also been able to take out
some of the resources we were spending in print media and also in direct-mail. As you know, we used to send out direct-mail six times a year.
Now we are sending it out four times a year. [That's] more important. They have a much stronger presence, and also we have reduced some of the
print and put more of the money in national television. So overall I don't see you're going to see much of a difference in advertising spending, but
a shift has changed.
Joel Havard - BB&T Capital Markets - Analyst
I seem to recall that one of the issues that had you shifting out of TV into print -- going back, I guess, almost two years of sort of fighting the
election cycle. As we get this one behind us, do you have a sense of how much more bang for the buck the store system gets out of TV versus
print? I know the data timeframe is still relatively recent.
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
I am skeptical about overall advertising because you never know how much is working. But I tell you this. Print has been declining nationally,
where we are now spending more resources in direct-mail, in television and also we have launched an e-mail program. So I think that's where our
resources are going to be spent.
Operator
Laura Champine, Morgan Keenan.
Laura Champine - Morgan Keegan & Co., Inc. - Analyst
Could you talk a little bit more about the disparity between growth at retail and the declines at wholesale? Does that reflect that the franchisees'
comp is down more than 2%, or are there some other things I should be thinking about there?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
I think the wholesale shipments reflect a number of factors. It reflects timing of shipments, shipping of our new product programs. As I
mentioned in the call, that was an important factor. It also reflected the overall decline, as we said and our comp sales were down approximately
6% or so. I would guess that most probably, overall, independent retailers also declined approximately at that level, if that's your question.
Laura Champine - Morgan Keegan & Co., Inc. - Analyst
So it would have been, without the timing differences, perhaps wholesale down more mid-single digit?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Yes, approximately.
Operator
Ivy Zelman, Credit Suisse.
Ivy Zelman - Credit Suisse - Analyst
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Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
Farooq, you've always been pretty helpful in guiding us on the big picture. Before, you know, we look at oil prices coming down and the
consumer confidence looks like it's picked back up again. Generally speaking, what's your thought on the weakness that you saw at retail? Was it
due to gas prices, or is it more than that? What's your outlook on the economy going forward?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Yes, as I said, there are two factors. One is, of course, the macro factor that you mentioned. Then, of course, very importantly, our own internal
repositionings. Those are two very, very important factors.
On the macro, in the last -- for us, in the last four or five months, we did see somewhat of a consumer softening attitude. I think that was a
reflection of the decline in consumer confidence that we saw taking place throughout this year. We saw it more impacting us, I think, in the last -perhaps from May-June onwards, although we see that right from January, December-January, that consumer confidence was declining.
Having said this, and also at the same time, the stock market had declined. Our demographics was impacted by that. We also have seen the
decline in -- I think the housing prices has also impacted our consumer base. If you think of it, there was a great euphoria where people were
buying homes they didn't need so that they could flip it. They had to use a lot of their home equity. As we saw in the last six months, that
euphoria was somewhat down, people's ability to think that they -- and in some cases, people are stuck with homes.
I think all of that had effect and has had effect in impacting consumer confidence and the spending on home furnishings. Now, having said this, I
think in the last few weeks or so you do see positive trends. You see the stock market is very high, which it does impact the consumer confidence
of our demographics. The oil prices have gone lower, which is important both for the consumers as well as for us. Because, as you know, we
deliver our products at one cost nationally. We are starting to see a decline in that. We've started to see a decline in freight rates coming from
overseas.
I think that at this stage it appears to me that from a macro point of view, while there are a lot of uncertainties of the war, the elections and all
that, there seem to be more positive trends than we saw three or four or five months back.
Then, of course, secondly, it also depends how one is positioned in this very changing retail environment. And at Ethan Allen I mentioned that
our focus has been to differentiate and to take advantage of this change so that we become a solutions and a service-based organization. That
transformation is what we have been working on in the last five or six years.
Ivy Zelman - Credit Suisse - Analyst
In one of your comments regarding the macrotrends, realizing the home equity withdrawal and the housing acceleration in home prices was a big
benefit to the consumer who's purchasing furniture. Now that those trends have reversed and they don't appear to be getting better -- in fact, some
could say it's getting worse -- would you be more cautious with that backdrop that '07 is going to be any better than '06 was in terms of a full year
on the outlook?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
It's hard to say. We are only three months into this year, and our visibility is somewhat less. All the things you said are very important factors.
We have to take a look at those, and we are relatively doing well and, I think, will continue to do well. But those factors you mentioned or
something that one has to keep -- we have to keep in mind as we do our plans and as you also do your thinking. So one has to take into
consideration of all of those, even though I think at Ethan Allen we have a better chance of weathering it but all those factors are there.
Ivy Zelman - Credit Suisse - Analyst
Getting more specific with respect to the quarter, can you tell us with respect to the collections, you mentioned the two new modern designs,
Horizon Studio and Modern -- what was the second one called?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
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Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
Modern Glamour.
Ivy Zelman - Credit Suisse - Analyst
Modern Glamour. You said they were forming in line with expectations or they're not shipping until next quarter?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Yes. We are going to ship them starting December [that's due right now]. (multiple speakers)
Ivy Zelman - Credit Suisse - Analyst
Can you tell us, in the quarter, which collections were your best performers and where the laggards were in the collections?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
You are asking me a lot of -Ivy Zelman - Credit Suisse - Analyst
I mean is there anything hot right now, really hot, that is doing well?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
I tell you that the interesting thing is this. Of course, I'm giving information, most probably, for our competition. But I don't know if they gave us
this information what I would do with it.
It's interesting that if you take a look -- our upholstery has done reasonably well. It has stayed well. Case goods has been more impacted than
upholstery. But in case goods we're still doing 60% of our business from domestically produced products, which is amazing. We have very strong
product lines from offshore, but our domestic product lines like the Maison, like the New Country, like the British Classics are continuing to do
well. On the offshore production, the Tango, the Townhouse and Tuscany, they also do well -- almost all about the same level of business.
Ivy Zelman - Credit Suisse - Analyst
Just keeping in mind that you're always reinventing yourself, 80% of your product has been redone over the last several years, is there collections
right now that are not strong sellers that were introduced in the last year or two that you may discontinue?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
We have been doing that continuously. Like for instance, what we have now also done is that we have now -- and our design center that I
mentioned in Danbury reflects a change in attitude, the way we project our product lines. We are now doing it by lifestyles rather than
collections.
What is happening is this, that in the lifestyle presentations we are in a better position of taking off items rather than collections. There's a much
more eclectic mix in our lifestyles. What it means is we are continuously taking out items and adding items to lifestyles, which gives us a much
better opportunity of doing it in a planned basis. That's what we will continue to do, and as we go forward it will be items rather than collections
that will be changed.
Ivy Zelman - Credit Suisse - Analyst
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Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
On that vein, then, with respect to items, which items or which lifestyle in general is the most popular today?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
About 50% of our business is being done in products that are classic, what I would say traditional but with a -- we call them, with a modern
perspective. Then we have also 50% of our business being done in what we call modern but with a classic perspective.
That is very important because what I'm getting at is this -- all our designs are classic, whether they are on the modern side or they're on the
traditional side. About half and half is being, for us, almost equally we are doing business on both sides.
Operator
Susan Maklari, UBS.
Susan Maklari - UBS - Analyst
Looking at your gross margin, it was very impressive this quarter despite the slowdown in sales. I know that we haven't even really gotten the
benefit of the last two plant closings that you've announced. As you look further out and you continue to drive efficiencies through your business,
where do you think the gross margin can get to?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
I think we have an opportunity of having it continue to grow because of two factors. One is that we have had a trend of having greater proportion
of retail to total business. Also, while we have attained some efficiencies in our wholesale side, we also had to bear a lot of costs like these
consolidations that we have continuously been doing. Ones we've just announced have an impact on impacting our margins at wholesale until we
are through with them, which will take us another six to nine months. So I think we have an opportunity of increasing real gross margin, which is
gross margin at retail by becoming more efficient and a gross margin at wholesale by being efficient.
We've got to be careful that our gross margins should not only be a reflective of the fact of a greater proportion of retail to total because we could
have greater, more gross margin but that will not be the real gross margin. It is a -- gross margin is when I'm happy of increasing at both sides, the
retail and the wholesale. We have opportunity of doing that.
Susan Maklari - UBS - Analyst
You currently own about 46% of your stores, and it's been around that kind of percentage for a while now. Do you think that that will change
longer term? Are you pretty happy with where you are?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Yes, we are happy because this 46% represents a little over 60% of the total business of our total sales. Also we have done a lot of work in terms
of strengthening our management, strengthening our design staff, relocating them to the right places. We still have a lot of work to do. So I'm
more interested in making this 46% worth more than just getting more.
But over a period of time I believe that we will get some more [for] retiring retailers and also, when we are ready, we will also spend more time
in going into newer markets like, for instance, the Style Studios, while they're important, they take a lot of our effort and time while we have the
greatest opportunity of doing more for what we have.
Operator
Todd Schwartzman, Sidoti & Company.
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Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
Todd Schwartzman - Sidoti & Company - Analyst
You mentioned earlier that you don't expect much in the way of additional total ad spending but rather a shifting mix towards television. What's
your ideal mix right now just for the next year between DM and TV, let's say?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Approximately 30-35% of our total advertising on television, then approximately another 40% or 50% on direct-mail and the rest on other things.
I'm giving you a lot of competitive information there.
Todd Schwartzman - Sidoti & Company - Analyst
On the DM side, in tracking the success of a new mailing, a recent mailing, to help you better target consumers with future mailings, do you guys
do that largely or exclusively in-house, the market research end of it? Or is that outsourced?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Well, we outsource the resources that enable us to do that. We don't do it. We do the analysis ourselves, but the companies that take the
information and do the analysis in terms of providing the software is an outside company. We constantly take a look at the returns that we are
getting from the mailings both in terms of total dollars and also traffic generated by our direct-mails.
Todd Schwartzman - Sidoti & Company - Analyst
Has the cost of your internal analysis incrementally changed very much over the past year?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
No, costs has not changed. What we have seen is that our direct-mail is becoming more effective. Returns are more, both in terms of sales
generated by those who receive the direct-mail and an increase in traffic.
Operator
(OPERATOR INSTRUCTIONS). John Baugh, Stifel Nicolaus.
John Baugh - Stifel Nicolaus - Analyst
A question about foam pricing versus the upholstery price increase you took. I think you said 70 basis point impacted the margins negatively.
Does that fully get recouped in this current quarter?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
We took a price increase, and I think that -- in the current quarter that we just had, no, we did not -- we did have some benefit. I would say that
we got about 30% of it back. As we go forward, we should be able to recoup, when we start getting the benefit of the full price increase and also
somewhat lower foam prices.
John Baugh - Stifel Nicolaus - Analyst
By current quarter I meant the December quarter.
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FINAL TRANSCRIPT
Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Oh, the December. I would say by the December quarter we should have the benefit of most of it, yes.
John Baugh - Stifel Nicolaus - Analyst
Have you quantified yet the cost to your independent dealers of the conversion to the design center? Relate that to changes you've made
historically in the stores. In other words, how big a commitment it is?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
As you know, John, you were there, you saw the changes we made in our Danbury design center -- very, very well-received by our retail
convention. In fact, just tonight we are starting our interior design conference, our annual design conference with approximately 250 of our top
designers coming in. We also run, every month, educational programs of our designers -- tremendously great reaction, and also by customers.
Our challenge has been to now develop ideas so that we can do it in an economical basis nationally. That's what we are working on right now. We
have done one more experiment in Garden City, Long Island; we are doing one more in Connecticut. It will enable us to then launch it, as I said,
about the beginning of next year with the cost anywhere between $100,000 to $150,000 to make it happen, which is about the similar kind of a
cost when we did the storefronts.
Operator
[John Maurer].
Unidentified Participant
(indiscernible) do you review the conference, $50 million to $60 million target may be upwards as much as $80 million, 20 -Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
We didn't hear the first part of it. You're talking about capital expenditures?
Unidentified Participant
Yes, yes. Just total for the year?
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
As I indicated, we spent $22 million, out of that $6 million [or so] were on acquisition side. We would spend -- I would say that anywhere
between $60 million and $80 million, depending upon how much we are able to proceed with this conversion into the design centers of our
network.
Unidentified Participant
And then secondly, you talked about the progression of business, September being obviously better, July and August. Just some kind of order of
magnitude? Was September just for -- allowed you guys to kind of carry the quarter relative to the first month being just really tough? Obviously,
as that [portends] going forward.
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FINAL TRANSCRIPT
Oct. 23. 2006 / 11:00AM ET, ETH - Q1 2007 Ethan Allen Interiors Inc. Earnings Conference Call
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
Yes, I mean if you were to give some value, September was -- I think that it was much, much better than July and August. I don't have the
numbers in terms of overall impact, but I would say that our decline in comp written sales was half in September.
Operator
I am showing no further questions at this time.
Farooq Kathwari - Ethan Allen Interiors Inc. - Chairman and CEO
All right. Well, thank you very much. Any questions, please let us know. And Peg Lupton is standing by. Thanks very much.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect.
Good day.
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