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Q3 2013 Earnings Call Transcript

Published: 24 Apr 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Ethan Allen Third Quarter Earnings Release Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions following at that time. (Operator Instructions) Now, I’ll the turn the conference over to David Callen. Please begin.

[David Callen:]

Thank you, Tyron. Good morning everyone. I am David Callen, Ethan Allen's Vice President of Finance and Treasurer. Welcome to Ethan Allen's earnings conference call for our third fiscal quarter ended March 31, 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 that 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.

[Farooq Kathwari:]

Thank you, Dave. And thanks who all are participating in our third quarter call. Sales for the quarter were $168.1 million, a decrease of 4% from $175.9 million the prior year which has grown 8.0%. As you can understand, we are not happy with any decline in sales even though some external factors contributed to this first decline after we came out of the great recession. This week, we have eight members of our retail division management here in Danbury. I have invited them to join me for this conference call. In addition, we have the head of our operations, merchandising and advertising with me also. Our team understands the importance of growing the top line. Despite lower sales, our adjusted earnings per share were 50% higher than the third quarter last year. As we have mentioned in our press release, several factors impacted our sales including strong delivered and return sales in the third quarter of the previous two fiscal years, the impact of hurricane Sandy and the timing of Easter and Passover impacted both delivered and return sales. I understand some questions have been raised about the written in sales, I mean the amounts of the written sales that were impacted due to the timing of Easter and Passover. It is difficult to accurately determine the number. The best estimate we have is that our retail written was lower by about 2-3% and delivered by 1% to 2%. Our growth margin improved to 54.6% from 53.6%, during the quarter our retail division wrote 160 million while delivering 132 million, due to our constant process of becoming more efficient our retail division lowers its operating profit breakeven point. For the third quarter while delivering 132.1 million as compared to 131.4 million the prior year adjusted operating profits were improved by 7.3 million, this provides an important average as we increase the top line. Our adjusted operating expenses in the quarter were 80 million which is 6 million or 6.9% lower than the prior year. Structural changes in our retail divisions and continued focus on efficiencies in all other areas resulted in this reduction. Our total advertising expenses remained about the same as in the previous year. We also continued to focus on our balance sheet, having paid 19.6 million in dividends year to date versus 6 million in the prior year we increased our cash and securities to 117.3 million from 99.8 million in the prior year. Our inventories were 142 million reflecting a reduction of 13.7 million since June 30 2012. In our press release we mentioned the impact of sales from our licensee in China, they have reported continued increases of the retail sales of Ethan Allen products, however they had accumulated inventory, planned and unplanned in anticipation of higher sales and the opening of more locations. This quarter our wholesale sales to them reduced by 6 million and we expect about the same impact in our fourth quarter, we continue to work with them on several strong programs to grow the business and expect them to continue their orders and growth growing forward. We have many initiatives in place to help us grow our sales and to continue to grow profitably. I will discuss some of these initiatives after Dave provides a more detailed overview of our financials. Dave.

[Dave Callen:]

Thank you Farooq, our consolidated net sales for our third quarter were $168.1 million down 4.4% versus the prior year third quarter which had grown 8%. As discussed in our press release we were negatively affected during the quarter by several factors including prototype product shipments which were especially high during the third quarter last year, a reduction in shipments to our retailer in China who continues to perform well but have reduced their stocks which had accumulated in anticipation of higher growth and store count expansion. The timing of Easter and Passover holidays fell into the third quarter this year, versus in the fourth quarter last year and lower opening backlogs impacted by hurricane Sandy. Our retail segment net sales for the quarter were $132.1 million, up 0.5% over the prior year growth of 12.3%. Comparable designs center net sales also grew 0.5% this quarter. Written orders booked by our retail division during the quarter while $28 million higher than delivered sales in the quarter were 2.4% below the prior year written orders which had grown 11%. Comparable design center written orders were also down 2.4% versus the prior year. The company’s retail division operated 148 design centers at the end of the quarter versus 149 last year. Our Wholesale segment net sales of $108.1 million were down 10.7% from the prior year which had grown 16.3%. The prior year growth was doing par to higher than normal shipments of prototype products in support of our significant product overall. Our global retail network included 296 design centers at March 31, 2013; compared with 299 locations this time last year. Independent retailers operated 148 of these in the current year including 69 in China compared with 150 independently operated last year which also included 69 in China. Our consolidated gross margin for the quarter was 54.6%, up 100 basis points from 53.6% the prior year quarter. Our retail division made up 78.5% of our consolidated net sales for the quarter, compared with 74.7% for the third quarter of fiscal 2012. The higher mix of retail business helps the consolidated gross margin. We also benefited in consolidation by a stronger sell through of retail inventory. The impacts of lower volumes to our manufacturing operations were largely offset with operating efficiencies in our plants during the quarter including the leverage of our operations in Mexico and Honduras. Our adjusted operating expenses in the quarter were $80 million which is $6 million or 6.9% lower than the prior year. Structural changes in our retail operations and lower variable cost drove this reduction year-over-year. For the current quarter we excluded a $1.8 million or $0.04 per diluted share loss on the sale of vacant property and $1.3 million or $0.03 per diluted share of cost incurred as we invest in new international markets. In the prior year quarter, we excluded a 1.5 million or $0.01 per diluted share of cost incurred to establish a plant in Honduras. Please refer to our press release reconciliation tables showing the adjustments made to our results in both periods. Our adjusted operating income for the quarter was $11.8 million or 7% of net sales compared to $8.3million or 4.7% of net sales the prior year, an increase of 41.6%. Our normalized income tax rate for both the current year and the prior year was approximately 36.5%. The prior year income tax rate includes an income tax benefit of $23.9 million for the reversal of valuation reserves against certain deferred tax assets. Adjusted earnings per diluted share for the quarter increased 50% to $0.21 compared to $0.14 per diluted share the prior year. Consolidated net sales year-to-date increased 0.5% to $546.8 million. The retail division’s net sales year-to-date grew 4.2% to $433 million. Our wholesales segment year-to-date sales of $327.7 million were down 4.8% from the prior year which had grown 10.1% impart from higher than normal shipments of prototype products during our significant product overall last year. Consolidated gross margin year-to-date improved 150 basis points to 54.9% from 53.4% the prior year to-date. Adjusted operating income year-to-date was $51.3 or 9.4% of consolidated net sales, up 36.8% versus the $37.5 million or 6.9% of net sales the prior year to-date. Our adjusted net income year-to-date increased 44.6% to $28.5 million or $0.98 per diluted share from $19.7 million or $0.68 per diluted share the prior year to-date. We continue to manage our working capital effectively during the quarter. Our cash and securities at March 31, 2013 totaled $117.3 million. This was achieved while executing against our business initiatives, reinvesting in the business and paying a special $0.41 per share dividend last quarter. Our inventory balance of $142 million was essentially equal to the prior year and positions us well to service the business. Now, here is Farooq to discuss our many business initiatives.

[Farooq Kathwari:]

Thanks Dave. Our many focus remains to grow the top line. We are well positioned, our network of about 300 design centers including 200 of them in North America are in a stronger position to grow sales. We have strong management in place. We have relocated many of our design centers and closed several in the last two years due to consolidations within markets or due to underperformance. During the last nine months, we have relocated and opened new design centers in Las Vegas, Seattle and West Des Moines. Our independent relocated design centers in Louisiana and Shanghai, China. We are investing internationally both in company operated and in licensee locations. The new company locations are Montreal, Canada and Brussels, Belgium. After opening the first flagship design center in Brussels in December 2012, we are opening the second one in Antwerp later this week. We expect to resolve the opening expenses for another quarter at about the current levels and then expect them to be substantially reduced. Our international licensees are also growing with the second design center opening in Amman, Jordan and later this year our third design center in Korea. We have a new design center in Jeddah, Saudi Arabia opening in the summer and we also expect to open up a major licensee operated design center in Eastern Europe in September. And one of our domestic retailers recently open a new location in Destin, Florida and two of our locations in Huston were acquired by our independent licensee. We continue to expand our offerings to project Ethan Allen as a one stop resource of stylish quality and more retainable products. We continue to strengthen our staff of interior designing associates. We are attracting qualified and entrepreneurial associates, in addition we have developed a strong management team to grow the sales of our 150 locations and we also have a very strong licensee network in North America. We continue to invest in our advertising. In our current fourth quarter we have expanding our direct mail and national television advertising both are being well received. In May, we will continue the migration of our website from internal servers to a cloud environment which will provide greater flexibility both for our clients and for us. This fall, we’ve planned to further expand our reach to more consumers through our advertising mediums especially a stronger direct mail and digital presence. We continue to improve the efficiency of manufacturing and logistics, increased volume will further improve our profitability. Mexico operations are operating well and Honduras is rapidly being developed into highly efficient case goods facility we have a regional conference in June and we are, and where we will discuss launch of a very strong marketing campaign for this fall. Right now, for the conference we intend to have our annual investor conference on June 6th, right here in Danbury, Connecticut. With this I would like to open the lines for questions and comments.

[Operator:]

(Operator Instructions). Our first question is from Brad Thomas of KeyBanc.

[Brad Thomas:]

Wanted to just first start off asking a little bit more about China; David you provided some numbers around how big it is in terms of the store count but how big is China right now as a percentage of revenues?

[David Callen:]

Well, prior to this quarter, it had been; we disclosed our total international business which is about 6% of our consolidated net sales and China makes up the majority of that.

[Brad Thomas:]

And then, if you were to try to back out some of the excess inventory buys, are you still seeing a healthy underlying growth rate from maybe the written orders in those markets. What are you seeing that still gives you confidence in the outlook for China?

[David Callen:]

Yes and Brad in fact Dan Grove who is responsible for working with our licensee in China just got back and obviously we were also concerned about this facts and the interesting thing is that the Ethan Allen programs are showing still the largest growth they have somewhat slowed down overall I mean China has and in fact our licensee overall also has shown some slowdown but not in Ethan Allen so that is a very positive news and we believe that if that trend continues after the end of this next quarter, when they have used up the inventory we will get back to normal and hopefully continue to increase our business in China.

[Brad Thomas:]

And then maybe just one more in terms of the total company revenue obviously you have pressure from China as well as written orders in total that were negative this quarter. So as we think about the revenue outlook for your June quarter, do you think you can have a positive number there or do you think we may be seeing a decline again in sales in your fourth quarter?

[Farooq Kathwari:]

Well it’s little bit too early however if you take a look at our written business in the retail. We wrote 160 million and we delivered $132 million that’s a good indicator that we have an opportunity to deliver more in the fourth quarter. If you go back a little bit last year we regional division wrote 164.1 million which is 11% and if you go the year before that that was third quarter in the fiscal ’11 the retail division wrote 147.9 million which was 11.4%. So we’ve gone from 147.9 to writing 160 in a two year period, so it’s a pretty good growth and that’s give us an opportunity. Now, we have the opportunity of certainly doing what we did last year or more depending upon how our business ends up in April and May, and wholesale business of course is also impacted by our retail business, we’ll be negatively impacted as I said with our international licensee to some degree but overall I think we have an opportunity of doing what we did last year and good news is that today even with lower sales we have been able to have a higher EPS and higher operating earning with the leverage continues.

[Operator:]

Thank you and next question is from Matthew Fassler. Your line is open.

[Haley Goodman:]

Hi this is Haley Goodman on behalf of Math Fassler today. So gross margin was up more this quarter than last quarter, we’re wondering how we should think about the gross margin outlook and when should be year-over-year increases start to moderate? Thank you.

[Farooq Kathwari:]

If you take a look at also the gross margins and again as I was talking about our retail business and you go to our third quarter in fiscal ’11 gross margin of 51%. Last year third quarter went to 53.6% now they’re 54.6% and I would say that that’s about the range we should expect our gross margins to be.

[Haley Goodman:]

Thank you.

[Operator:]

Our next question is from Todd Schwartzman of Sidoti and Company. Your line is open.

[Todd Schwartzman:]

If you were to back out the effect of the prior year prototype product shipments, what would normalized sales be?

[Farooq Kathwari:]

Let’s go back to last year and if you take a look at last year, just this third quarter, we had a consolidated sale up $175.9 million. The retail division sales were $131.4 million and wholesales sales were $121 million, which was a 16.3% increase from the previous year up $104 million. So that 16.3% was the major increase that took last year and that was the wholesale impact and which it translates approximately to about $10 million dot.

[Todd Schwartzman:]

Being that in each of your mentions of the factors contributing to the shortfall for the lack of a better word, you sight that item as, the first I am assuming that you even in your prepared remarks today you have kind of given that same pecking order, are you assuming that is in descending order of importance of contribution. Is that correct?

[Farooq Kathwari:]

Say that again?

[Todd Schwartzman:]

The factors that you sight for the sales declines year-over-year in Q3, each mention either in writhing or in the call today, you start with the mention of the year ago prototype sales. So I am assuming that that was the largest and most important factor of the three or four that you have sighted. Is that accurate?

[Farooq Kathwari:]

I think that plus China, those two on the wholesale side were the important once. And on the retail side, it really which is impact was some degree on the timing of the holidays. But as you can see in our retail division we did increase the sales on delivered. And the written was somewhat impacted.

[Todd Schwartzman:]

Farooq, I know you mentioned that advertising for this third quarter was about flat, year-over-year. Can you put some numbers on a going forward basis, kind of like talking about the best way to approach, modeling, the marketing and advertising costs and in Q4 more importantly heading into fiscal year 14, may be talk about what your plans are there or what factors in particular we should keep in mind?

[Farooq Kathwari:]

What we have spent this quarter was approximately, our total net consolidated sales, we have spent about 5% of sales that represents our national advertising and our retail division advertising which was and when you look at the third quarter last year it was also about 5.1%. Previously it was 4.6%, 4.1% in that range. So I think at this stage for the next quarter at least it is going to remain at 5%. It is possible that when we go into the fall quarter, we may perhaps, looking at it, increase it because one of the reasons our third quarter historically is low in shipments is because in the second quarter in the month of November and especially in December, we sort of do very little business. Our objective is to change that paradigm this year. We are going to become much more aggressive in marketing total home products and that's why when you come to our conference here in June you're going to see us projecting our products and our offering and our communications and advertising so that we do a lot more business. That's our intent in the third quarter. I am sorry in our second quarter, I'm talking second quarter that is October, November and December, which historically has been somewhat lower in terms of written sales which ends up lowering our delivered in the third quarter. Our objective is to change that paradigm, that's why whole retail management is here. We're actually having some independent retailers coming in tomorrow, and then we have the June conference where our objective is to change paradigm, which would then Todd, potentially impact our advertising in our second quarter of our fiscal 14 this year. We'll let you know when you're over here at the conference keep that in mind, but at this stage based on the sales we've had, we ran about 4% this quarter and previously we've been running between close to 4%.

[Todd Schwartzman:]

I think it's at 5% this past quarter.

[Farooq Kathwari:]

I'm sorry 5% this quarter, we're 5% this quarter and we had 5.1% in last year third quarter also.

[Todd Schwartzman:]

So for fiscal year 14 are you sticking with that 5% as a good number to use or does it go higher from there.

[Farooq Kathwari:]

I think at this stage 5% should be a good number, if we have other changes we will let you know because I think 5% and hopefully which is our plan to have larger sales. It will give us more dollars to spend which is our objective.

[Todd Schwartzman:]

And in product categories can you speak a little bit about cased goods versus upholstery and maybe where, which product categories in particularly in cased goods you're seeing the strongest demand both in Q3 and in these last few weeks.

[Farooq Kathwari:]

In the last few years, especially after the recession, we have seen continuous growth in our upholstery programs. In our company, we grew up on case goods and that sort of a paradigm that we have. That’s our DNA, but we used to have 65% of our, 60% to 65% was case goods. Now it’s down between 30% and 35%. Upholstery has gone to 55% to 60%. So that trend continues. And you are going to see us focus on upholstery and also lot on accents, especially in our second quarter going into this fiscal ’14.

[Todd Schwartzman:]

Were upholstery sales up year-over-year in Q3?

[Farooq Kathwari:]

I don’t have the exact numbers yet, Dave will check into this, but tracing on past year (inaudible) we should have merchandizing? Yes, I think the answer is yes. I don’t have the exact numbers here, but they did go up.

[Todd Schwartzman:]

Okay and within case goods, is there any category, product category that are outperforming, or that’s starting to do better?

[Farooq Kathwari:]

That’s a good question. I think that at this stage we continue to see us a sort of, we do apart more or less equal business in what you might call the more and more casual lifestyles and the more classic. And both of them, I think, have shown growth, especially in the classic with the new introductions of products, like classic elegance products, as you know that we introduced last year that has been well received. And some of our other casual product lines are also doing well. So I would say at this stage, we have more or less about equal both in the classics and in the casual side, Todd.

[Todd Schwartzman:]

In terms of international, you have got a lot of moving parts there, a lot of plans; some of these markets have already been entered. Can you quantify the cost, both to be incurred in the near term and also on a going forward basis, start up and just maintaining these new operations overseas, what this does to the cost structure of the company?

[Farooq Kathwari:]

Our international, at this stage consists of Canada and now Belgium. Canada, we have been there for a long time, accepting, we went to Montreal last December and as you know going to Montreal was entirely a new, it is a very, very different entering there than entering Canada because everything we had to do had to also be done in French. We had to develop a new website, also translate it in French, all our communications. So we have done that and I think that by the next quarter or so that will be stabilized. And that is the extent of to some degree of our investments in Canada. There is a possibility that we will have some more business where we are doing very well in British Columbia we have a very strong design center there and it’s possible that we will add maybe one or two. In Europe, our objective is to only operate these two that we have now in Belgium. We also established a logistics network in Antwerp and these two are going to be, you might say our examples of flagships of in Europe and it was because of that we also had a very strong retailer in Eastern Europe who came in and the objective is in September or so to open up Ethan Allen operations there. Our objective in Europe and at this stage in many other countries have licensees open the design center. So, this is about a million dollars or so that we had additional expenses this quarter. It is possible, we will have that somewhat closer to next quarter, and then it will taper off, Todd, and hopefully turn into profits.

[Todd Schwartzman:]

And so on a full year basis, it will be less than $4 million incremental spend in Europe?

[Farooq Kathwari:]

Absolutely, much less than that, yes.

[Todd Schwartzman:]

Okay great what about traffic trends store, web, what can you tell us there?

[Farooq Kathwari:]

In April, we have seen better traffic. Now that traffic has to translate into business and that's why all my retail associates are here. And next it’s an amazing thing what happened in the last week of the month is when we get a lot of business, and that's what we are expecting. Certainly the positive trends in April have been higher traffic and now we need to convert that traffic into business. We have a strong advertising program in May also, which should give us an opportunity to increase traffic and business. So from the traffic perspective and the trends are positive, Todd

[Todd Schwartzman:]

The April traffic just to be clear, higher than last April or higher than this March?

[Farooq Kathwari:]

Higher than last April, and higher than March, both.

[Todd Schwartzman:]

In terms of the sales for the quarter, of that 4.4% decline in diluted sales. How does that shake out in terms of units versus price?

[Farooq Kathwari:]

Todd, Dave will give you the details. I mean I think that it’s hard but Dave you have anything? Dave has something on that. What is that? It’s you know, what he is showing, Todd, is that just about the percentage and the units are about the same. He’ll get back to you.

[Todd Schwartzman:]

That’s fine. And the last question the structural changes in your retail operation is that each of you eluded too earlier. Can you give us more color on that please?

[Farooq Kathwari:]

I’ll give you some broad perspectives, Todd. We have today 8 operating managers in our retail and running the whole company and they’re all here. Their objective in the last, for many years, but certainly in the last couple of years is to improve their operations by taking underperforming design centers out, consolidating them, taking a look at our overall structure of expenses and they have reduced expenses in some cases they have strengthened management by having less management but stronger management. They have worked in terms of reducing their expenses in all areas of the business but certainly in our service end of the business is a big one. When we’ve taken out some of these design centers that out of our system, it reduced our occupancy expenses. So we did reduce approximately $6 million. Approximately $6 million or so this year compared to last year was reduced, Todd, and a lot of it reflected all from the sectors from occupancy cost to less people in the retail because of the fact that some of, we’ve reduced and consolidated some of our design centers. And we are also making all our operations more efficient. So it’s a lot of things that we’ve done across the line that from our selling expenses to our, to some degree they also benefited with a little bit of a lower expense in advertising, some of higher on the wholesale side so that also contributed the retail doing better but overall as you know we’ve reduced our expenses by $6 million in the quarter on the consolidated basis.

[Todd Schwartzman:]

So a lot of these actions you are referring to pre-day calendar 2013 correct?

[Farooq Kathwari:]

Yes, I mean they are, it is a process, some of the actions, we took in 2011 calendar; I mean in fiscal 2011 fiscal 2012 we are getting benefits of that now. And that process continues.

[Operator:]

Your next question is from John Baugh of Stifel Nicolaus. Your line is open.

[John Baugh:]

Farooq, wondering when Sandy will help as opposed to hurt. Aare you seeing any orders picking up in those affected areas?

[Farooq Kathwari:]

Absolutely, especially our biggest increase this last quarter was Long Island. And Long Island, it was the biggest one than we have seen some smaller in some of the areas where we are in New Jersey and in Connecticut. But we are starting to see and what we did was, John, we did decide that if people come to us with the right kind of insurance papers and everything else that we would give them a special savings and that is helping us we had it up to March 31st we just extended to June 30th.

[John Baugh:]

And then on China, I recollect a shipment that you made somewhere in the past recently where they took it into their inventory, you held it for them or I can’t remember the details, can you refresh me on the amount and when that occurred?

[Farooq Kathwari:]

Dave, I think it was about two years back. Dave what was the month?

[David Callen:]

It was about seven million dollarish.

[Farooq Kathwari:]

John two years back about $7 million and I think that is all of that inventory is off right all of that is now out and we do not have it, it is all in China.

[John Baugh:]

Okay so that’s not an issue here when we are comparing these numbers both this quarter and the next quarter and you are 6 million down that is not comparative with this event?

[David Callen:]

Correct.

[Farooq Kathwari:]

That is right it is not.

[John Baugh:]

Any commentary on EA express? Has it worked has it not worked, will it get more emphasis, will it be deemphasized, or you are finding you are tracking any new customers, or is it impacting tickets? A lot of questions there, but any color?

[Farooq Kathwari:]

Yes I mean that is a good question we ourselves are looking that to see how do we manage it and make it more effective. It is having an impact certainly in our as you know our upholstered products are all custom made. And in the express program, we have stocks of leather and some of upholstery which is for immediate delivery. That’s where we’re seeing the largest benefit. In our case goods, we have taken some of our domestic made products and put it in stock for express delivery but all our important case goods in stock. So there we see some impact but not that greater impact. We will continue to focus on it and second thing that what’s happened is, John, that our deliveries of custom product timeframe has improved considerably that we’re not shipping close to the, Corey, what, how much percentage we ship in the 30 days?

[Corey Whitely:]

Almost 90.

[Farooq Kathwari:]

90%, John, is shipped within 30 days so this quick ship which is part of express is less of benefit when we can ship custom product as fast as we’re doing. Having said all of this and I hope that you come here to our June conference where we really are going to show even more attractively priced products in all categories specially accents. And then a strong marketing program to market them this fall which will then expand our reach to more people, younger people, and increase traffic into our design centers that’s what we’re working on now.

[John Baugh:]

Okay and my last question relates to your promotional activity. Your gross margins are good and so it doesn’t appear to me that you’re giving away product in terms of promoting that’s impacting your gross margin negatively, but I continue to see 15% off and 20% off on some of your promotions. So are these very selective promotions that are not impacting a large percentage of your line or how do I get my arms around the promotion amounts and magnitude in any impact on gross margin?

[Farooq Kathwari:]

All right, John, as you know, we had worked a very hard, you and I have been discussion this for what about 20-25 years?

[John Baugh:]

Don’t update me.

[Farooq Kathwari:]

Yes, right, I want to update me but I’m updating myself. You know when we went to this everyday best price, our objective was to offer everyday best prices. Great recession again people said, no not enough, you got to give some more savings. So we decided that we had to give savings, our designers had to talk to people and approximately for most of our products we said we got to give them a 10% savings, and which is what we did. Now the same time fortunately we have improved our operations and our manufacturing, we improved our operations at all levels and even than we were looking at our pricing in our new products, we have to take some of that into account the fact that we are going to give 10%. Now, in some products we are giving 15% to 20%. That is selective, where most of the products we are giving is about 10% and that 10% is accounted for by becoming more efficient and also that having in case of upholstery we are now getting much more of benefit of our Silao Mexico operation. With our Silao Mexico operation, our upholstery margins wouldn’t be what they are now, John.

[John Baugh:]

So, as a follow up to that Farooq, are you, when you are, let’s use the 10% off, is it half of the product line in the store that (inaudible) on that promotion, is it 40%, 60% is that up from where it was and then you are able to just offset that because you are more efficient on the manufacturing side?

[Farooq Kathwari:]

Yes, the 10% is approximately on our total program. We make it easy for our designers and customers. The 15% to 20% is on may be 10% of the product or 15% of product line at any given time, and then the efficiency is what has helped us.

[Operator:]

(Operator instructions). Our next question is from Cristina Fernandez of Telsey Advisory Group. Your line is open.

[Cristina Fernandez:]

I know it’s too early days but can you give us some feedback as to how, you know the fresh colors and the new products that’s targeted to the parents who are 4 to 12 year old, is being received?

[Farooq Kathwari:]

Yes, we have introduced two programs in the last few months. One of this was fresh colors which is for the younger, and then the next one was the impressions which actually we are marketing this month. They have been both well received. I mean the fresh colors and the impressions, the objective was to help us increase traffic especially of younger consumers and I am talking of 30 to 30 plus who also bring their children in. That we have seen and I think that is taking place and I believe we will continue to see us increase our traffic of this younger consumers. You know historically our consumer base has been 40 and up and 50 and up. But with the fresh colors objective was to reach younger consumers through their children and we have started to do that. And the other important benefit of this is that the fresh colors program and impressions is all made, almost all of it is made in our own facilities in North America. And it also has a special feature is customization because as you know we converted all our wood manufacturing to custom. Our upholstery was already there. So for instance in fresh colors we can give 15 different colors, and now we're shipping as you heard, 90% of that we're shipping in four weeks. So these are great competitive advantages, and as we move forward and we continue to advertise it, our objective is to continue to increase our traffic of younger people.

[Cristina Fernandez:]

And then last one, recently you've talked about the mix of accents moving to 25-30% of the assortment, what's the timing of that and what do you expect the mix of product to be by the end of the year assuming you're introducing some of these products for the holiday season?

[Farooq Kathwari:]

This is actually a very important initiative taking place right now. We have been developing products from all over the world and we're also developing an advertising program. So we have a much stronger presence in the holiday season this year. So we'll start launching it in September. And you will see some of those when you come to our conference here in June.

[Operator:]

Thank you sir, there are no further questions at this time.

[Farooq Kathwari:]

Well thanks very much, any questions, comments, please give us a call and thanks very much.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference this concludes the program, you may now disconnect, have a wonderful day.