Corey Whitely - CFO, Treasurer & Executive VP-Administration Farooq Kathwari - Chairman, President and CEO.

Jessica Mace - Instinet Bobby Griffin - Raymond James Brad Thomas - KeyBanc Jeremy Hamblin - Dougherty & Company John Baugh - Stifel Cristina Fernandez - Telsey Advisory Group Justin Bergner - Gabelli & Company.

Good day, ladies and gentlemen, and welcome to the Ethan Allen Analyst Conference Call. Now I will introduce your host for today's conference, Mr. Corey Whitely, Executive Vice President, Administration and CFO. Please begin..

Thank you, Lativ. Good afternoon, and welcome to Ethan Allen's analyst conference call for our fiscal second quarter ended December 31, 2016. This conference call is being recorded and webcast live on, ethanallen.com.

There you will also find our press release which contains supporting details, including reconciliations of non-GAAP information referred to in the release and on this call. As a reminder our comments today will include forward-looking statements that are subject to risks and uncertainties which could cause actual results to differ materially.

Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. After our Chairman and CEO, Farooq Kathwari, provides his opening remarks, I will follow with some details on the financial results.

Farooq will then provide further updates on our ongoing business initiatives before opening up the telephone lines for questions. With that, here is Farooq Kathwari..

Thank you, Corey. And thank you all for participating in our earnings call. As we stated in the press release, we did well considering very tough comparisons and the challenging retail environment. After Corey provides a brief overview to the financial statements, I will discuss in greater detail our initiatives to grow our sales and profitability.

Corey?.

Thank you, Farooq. For the second quarter of fiscal 2017 our results were fairly strong compared against the exceptional performance in the prior year and the backdrop of a challenging retail environment during the quarter. Our total retail written orders declined 3.6% compared to last year's 15.3% increase.

The prior-year quarter started out with a record 34% of written sales growth in October making it our strongest October in our history. This year the cadence with the quarter was similar starting with another strong October written, that almost reached the prior-year record level and lengthened our second highest October.

November started out very weak and then strengthened in the latter half of the month but overall it ended with written down to last year. December had improved momentum and with stronger written than prior year. Our year-to-date total written sales were 2.1% ahead of prior year.

Our consolidated net sales of $194.7 million for the quarter compared to 207.5 million in the prior year. Retail net sales were $156.3 million and wholesale net sales were $113.7 million. Wholesale was impacted by lower retail sales and higher promotional discounts.

International sales were 8.5% of consolidated sales in both the current and the prior period quarter and we did see a good increase in our sales to China. The mix of retail segment sales to consolidated net sales for the quarter was 80.3% compared to 79.4% in the prior year. This change in mix helps us to maintain a strong 55.5% gross margin.

We expect the gross margin will continue to run close to this level for the second half. Our adjusted operating expenses were $91 million compared to $90.8 million in the prior-year quarter and that's excluding the prior year gain on the sale of real estate.

We mentioned several discrete items impacting operating expense this quarter including the impact of new design centers. As we leave older legacy properties, we are opening leased locations that incur startup costs. At December 31, 2016 there were 14 new locations compared to seven new locations at the prior-year quarter end.

Of the 14 new locations, 13 are new since January 2016 including two that are in current preopening expenses while we're fitting them out. Locations operating less than 15 months or acquired locations operating less than 12 months are considered new.

Increased advertising also impacted expenses and we expect to see higher advertising costs continue into the second half as we ramp our marketing. Renovation cost at retail associated with the Ethan Allen Disney launch were incurred in the second quarter and we are now mostly complete with our renovations.

Our adjusted operating margin was 8.8% and adjusted net income of $0.39 per share compared to $0.55 in the prior year quarter. We maintained strong adjusted EBITDA at 11.4% of sales. Our effective tax rate was 36.9% for the quarter and slightly ahead of our 36.5% structural rate that we expect will lease out for the fiscal year.

We have a healthy balance sheet at December 31. Our total debt at quarter end was $40.3 million. Our total cash and securities totaled $64.5 million, and our customer deposits were $55.3 million. During the quarter we paid out dividends of $4.7 million and increased our dividend per share by 21.4% compared to the prior-year quarter.

Our capital expenditures for the quarter were $3.8 million and we expect $23 million to $24 million in capital expenditures for the full fiscal year. Inventory of $160.4 million decreased by $1.9 million from the prior year end.

We expect our inventory now to increase modestly during the second half as we expand our in stock programs further our quick delivery initiative. With that, I’ll turn it back over to Farooq..

Thank you, Corey. During the last few years we have taken many steps to position us for growth. We believe in today's ever-changing environment creating a positive customer experience is a differentiating factor between excellence and mediocrity.

Our initiatives include developed a strong product offering which has diversity of style, is fashionable and livable. The new offerings expand our reach to more consumers. The new products are resonating well with existing and new customers. Continued our focus on excellence and quality across all of our product offerings.

Made major enhancements to our sourcing especially our own operations in North America. We have expanded our capacities in order to service new business including the U.S. States Department contract. We have started to build in stock inventory of our North American wood products as against making the product when orders were received.

This would help in faster delivery, improve manufacturing efficiencies and also expand capacity. About 75% of our products are made in North America with majority in our U.S. facilities. We have also added more products to our custom, quick ship upholstery program. Our interior design network is stronger.

We have relocated and renovated many of the 300 design centers in North America and internationally. We have gone from a stall to a interior design center with smaller square footage qualified interior designers and technology to have them interact with clients. We’re continuing the process of relocating design centers.

We have many under development including two new key markets out Downtown Chicago and Buckhead area of Atlanta. Technology has enhanced our efficiencies and manufacturing, logistics, retail and other areas. Most importantly we are empowering our interior design associates to interact with clients in design centers and online.

By end December 2016, about 175 locations in North America had received the Ethan Allen Disney program.

The program has been well received by our Associates and from this month of January we are increasing our marketing which includes reaching 4.5 million households by direct mail, advertising and communications through digital mediums, and in late February as next month, far to the program will also be sold through the Disney.com website.

In June 2016, we take the Ethan Allen Disney program to China where over 30 locations will have this special offering. With the various initiatives in place, we are now ready to invest in marketing to help increase sales. Starting from this third quarter we plan to substantially increase our advertising by about 20% from the previous year.

We expect to further increase as we move forward. Our plans are to expand our reach via traditional and digital mediums.

Starting in February that’s next month, we plan to launch a major national television campaign, increase potentially in digital and social mediums, our focus is to get across the many attributes of our brand, and depend less on discounting. We believe discounting will continue to lose its impact.

We remain cautiously optimistic and have to take into account as we said in the press release that last quarter - in the previous year had an 89% increase in our earnings per share. With this, pleased to open for any questions or comments. Lativ, we are ready..

[Operator Instructions] Our first question comes from the line of Jessica Mace of Instinet. Your line is open..

Hi, good afternoon. My first question is just on the overall environment.

You mentioned a challenging retail environment, and I know there were some moving pieces in your results, given the difficult compare, but I was wondering if you could just give us a little update on consumer behavior in your category?.

I think that certainly in many, many markets and in fact, nationality also, the elections did have an impact on consumer's attitude.

And we saw that people were somewhat cautious, they were waiting, and it's somewhat better but I think it's little bit too early because we have seen as you know still fair amount of movements with people marching and all kinds of things which does create some issues.

So I think that we saw that last quarter somewhat it's too early but I would hope that things would settle down and people will start paying more attention to the home and that we'll move on..

All right. And then, if you could talk about your renovated stores for a minute.

If there is maybe any color you could give on if you see a comp differential on the stores that have been renovated versus those that still haven't?.

Jessica I mean, they are higher but I don't have the statistics, I’ll see – we can see if we can get any information on that. The ones that have been renovated really have created an entirely different attitude. It is taking as I said in my notes from a store to an interior design studio.

We as you know we have taken our interior designers to the - almost in the middle of the front of our design centers, we've got a lot of technology and you can see the difference both in terms of attitude of our associates, the customers and certainly they are performing well.

The other thing that we've done in all our new locations is smaller in size. We have many that are 7,000, 8,000 as compared to 15,000 or 18,000 square feet. In many of these, the amount of business we are doing is about the same as the larger locations, so they are much more productive..

All right. Great. And then, lastly, just a clarification. I think you said that you expected the gross margin in the back half to be roughly in line with the performance this quarter. Typically, it looks like, in the fourth quarter, you usually have a little bit of a higher gross margin rate.

Is there something - and I understanding your characterization right, or is there anything we should think about when it comes to Q4? Thanks very much for taking the questions..

Jessica in last year, our third quarter we had 55.5% gross margin which was the same as what we have had that in the second quarter. Last year in the fourth quarter we had 56.3%, I mean they are always in range..

All right, thank you very much..

Thank you. Our next question comes from Budd Bugatch of Raymond James. Your line is open..

Good afternoon, Farooq and Corey. This is Bobby filling in for Bud. Thank you for the detail on the call and I appreciate you taking my question..

All right Bobby, I have got to talk to Budd also. All right, go ahead..

Just real quickly, can you or Corey maybe provide an update on the government State Department contract and kind of how the timing of that contract is progressing now that you guys have been awarded part of the bid?.

Bobby, yes we have been but unfortunately the government looks very, very slowly, they have still not completed all the information we need but having said this we have started receiving orders. And but I would think that they have got to give numbering to all these items, we are all ready but they have not completed their numbering.

This is really unfortunate the way they operate but despite that we have started to get some orders but I would think that it looks like to me that the orders will really start coming in, in the fourth quarter of this year and most of the time the government, most of the orders do come from June to September when the government the year end..

Okay. And the starting orders that are starting to trickle in, that started here in Q3.

There wasn't any orders in Q2, correct?.

That's right, no. And we just started getting our first orders now..

Okay. I appreciate that detail.

And, Corey, is there anything that we should keep in mind about last year's third quarter, given the difficult delivery comparison, promotional cadence or something that could be different this year to help us modeling?.

I think that if you look at for this year, we have a strong marketing program that spoke to and will have to see how it falls within the quarter as to whether the beginning of the quarter or the end of the quarter is the stronger part and they all have a little bit of an impact on the delivered count number..

I think Bobby also as I said last year our advertising expenses on the third quarter was 4.5% of our sales. Keep in mind in this quarter that just ended we had approximately 4% of advertising. So as I said we will increase about 20%, last year we spend $8.7 million so we’re going to increase that by about at least 20% in our third quarter. .

Okay.

And then, lastly for me, on last year's third quarter, was that still the timeframe that you guys were working through some of the backlog a little as you improved the efficiencies and the factories and stuff, so there was a little benefit in the delivered comp, or was that pretty much done by then?.

We're delivering products much, much faster so our backlogs are lower. So, really our third quarter and fourth quarter will depend to great degree about the business that we’ll get in this quarter because we are now delivering faster. As I also said, we are now starting January, this month we have started to get all of the U.S.

made wood products case goods into stock. In fact if you able to received our direct mail that I’m sure Corey I have sent it to you, all the product that are shown over there are now in stock. We never had that before. So, that could help us but I think that - the good news is that if you get orders, we are better able to service them in that quarter..

Okay. I appreciate all the detail. Best of luck moving in the next quarter. Thank you..

Thank you. Our next question comes from Brad Thomas of KeyBanc. Your question please..

Thank you. Good afternoon Farooq. Good afternoon Corey.

Wanted to first ask about Disney, and I know it is still on the early side, but as you look at the initial interest and orders, any sense for maybe how additive this could be in the upcoming year? Are we talking about maybe a low single digit tailwind, and is that additive on a net basis, or is that maybe canceled out by some of the floor space that it took away from other product? How are you thinking about the initial lift that you might get from Disney?.

Yes, Brad it’s a little bit early. As I said we have a lot of excitement, we have invested - we’re doing it well it has been not extremely well. If you have been able to visit any of our design centers where it is place you will see that we are projecting it well.

The product is a great design, great quality and that we will see what happened but I would think that most probably I mean minimum I'm thinking about as I’ve said also in our investor meeting that we will be thinking at least about at least on the retail side getting a minimum of $20 million and then we’re also looking much, much more than that based on what we’ll be selling through our network as well as the disney.com..

Great. And then, I want to follow up just on the outlook for your fiscal third quarter and maybe if you could just give us little comments - commentary on how you think of it seasonally. When I look back over the last four or five years, the Company historically does lower revenue in its fiscal third quarter than it does in the second quarter.

And the earnings typically clock in about 50% lower than what you do in the second quarter.

Any reason that that seasonality would be greatly different as we do our best to model this upcoming quarter?.

No, Brad it will be because generally our written orders in the second quarter again - the low front because December being the low month that reflects into the deliveries into the third quarter so, I think the third quarter from modeling perspective is similar to what we did in the past. Right Corey….

Great. Thank you so much and we are definitely excited about what you are doing on the merchandising front and look forward to you getting past some of these tough comparisons..

Thank you. Our next question comes from Jeremy Hamblin of Dougherty & Company. Your line is open..

Hi Farooq good evening. Actually want to just follow up on that last question to make sure I understood the comment in context.

So you are saying that the step down from Q2 to Q3, this seasonal adjustment that you typically would see - you are expecting something similar this year, or you are saying that you expect Q3 to be similar to what you said - what you had on delivered sales last year?.

It also depends a number of factors obviously our backlog at the end of our second quarter was lower because our overall sales were lower.

Now on the other hand we are in the, we are today able to deliver products faster so, it will depend a great degree Jeremy on what we do in January and what we do in February so the facts that we had lower sales last year, lower backlogs could what we do this quarter could help us in maintaining the sales but that will depend upon what we do in January and February..

How much was backlog down year-over-year at the end of Q2?.

Yes, the backlog Jeremy it was, it’s down single digits again the backlog isn’t as an indicator looking at the cadence of how to deliver sales within a flow, it's really how strong the start we have in the beginning of the quarter and how best then they deliver out into the quarter?.

And Jeremy this last, this one week is going to really make a determination as you know we do a lot of business at the end of the month. So, yes that was lower but again this is lower because we are delivering products faster and if our business is good this month we will be able to make it up this is little bit earlier right now..

Well, let me ask a little bit different question. So really, if you look at the first half of the year, the thing that jumps out is really your wholesale segment.

Your wholesale segment was down 10% in Q2, down 7.5% overall for the first half of the year, which, I think, to me, was a surprise given the Disney launch and given that you indicated 175 locations in North America had received product. So I would have thought that - I know you had very strong programs that were launching last year.

I don't think, though, that we had any really indication that we would see that type of downside in your wholesale segment. You still have some very tough comparisons. You actually had a very strong second half of the year in your wholesale segment. I mean, wholesale was up, I think, almost 7% in the second half of last year.

How should I be thinking about that? I mean, is your wholesale segment in good shape in terms of looking at the back half of the year, or is that another uphill battle that we are fighting beyond what we are seeing on the retail segment?.

As I said first of all on the Disney you know the amount of products that was being shift to each of these locations is relatively small. So while we did ship to all these locations at the wholesale level it is not versus the locations I know 515 and most of them have been 500 or 1,000 square feet. So this is some positive on the wholesale but not.

And also you got keep in mind that - on the consolidated basis anything we shipped on the 175 or 140 we’re our company retail division so that we eliminate because until we sell it to the customer that one really just goes inventory.

I think going into this quarter we have tough comparisons we have as I said our EPS is an 89% increase that we got to look at. But keeping that in mind you know overall as I said last year when you take a look at Jeremy our gross margin at 55.5, you know within reason we could do our advertising expense is going to go up as I said by 20% or so.

So now that might have an impact on our - this quarter on our profitability depending on how much more we are able to receive in business and deliver. Last year operating margin was 8.2% - adjusted operating margin was 8.2% which is within reach.

So really what might happen is what you got to take it into account is our marketing, are we’re going to get the benefit of that marketing this quarter, are we going to get the benefit of it next quarter that I think that’s only factor that I think you got to keep in mind..

Well, it sounds like you are seeing some delays here on the State Department contract versus where you would have thought six months ago. And I think it also sounds like Disney maybe is just, at least a time to see delivered sales on that, is a little bit further out than had been planned.

So given the increase, the ramp in spending, which calculates, I think, about $2 million a quarter, shouldn't we just be assuming that really this is pushed out into Q4?.

It’s possible as I said that you know the business we do January and February minimum has much more of an impact then what we initially may sell in Disney.

So really it is a bit too early but all the things you have said I think - will be taken in account that as I said also we are cautiously optimistic because of the fact that we're cautious and what could happen this quarter.

Our numbers overall last year were good but not tremendously high so these are something that we could meet but we got to take a look at what business we get this month and early next month.

Because as I said our operating margins were 8.2% adjusted operating margin and this third quarter we just had an operating margin of 8.8% and obviously we’re comparing to 12.2%.

So I mean the operating margins that we had last and third quarter are relatively achievable but as I said where I think you got keep mind is this extract marketing that we’re going to be spending and how much of that benefit we’ll get this quarter or next quarter.

But the good news is we’re spending it because as you know we believe now we’re ready to do it. I didn’t want to spend the money last year because we were not ready in our offerings.

We were not our design centers were not where I wanted them to be our manufacturing was not - we have expanded our manufacturing now we have also gone into making stock because you know getting business and then not delivering it is not good option. We’re in a much better position today that’s why we are increasing our marketing..

Yes. I agree with that.

Just following up in terms of the spend and when you are planning to spend those additional marketing dollars, how much of that is targeted January versus February versus March? And then, just also, how quickly when you do spend that money historically have you seen that translate to orders? Is it kind of an immediate impact? Is it a 30-day lag? 60-day lag? Any color you can share on that would be much appreciated..

Yes, most this money we’ll be spending will be in February and March. We are starting a national television campaign starting around the 10th, 12th of February. We will go into February and we’ll go into March. Same time we are also doubling our digital advertising.

Now we will see hopefully we’ll get the benefit - some of it towards the end of February, some in March. Then the next question will be how much of that will be able to deliver this quarter. Those are the factors you got to keep in mind.

We feel comfortable in spending the money even if it means it has an impact on our earnings but it’s good for us to do that, get it going build the business and we’re going to be much more aggressive because we feel that we have lots of these initiatives are in place now..

Okay. And just the other part of my question where, historically, when you spend that money is the average kind of timeframe or time horizon to yield the benefits of the delivered sales on that.

Is it six to eight weeks? Is it -- ?.

I would say yes, I would say that most of this benefit could come towards the end of February, it could come in March and the delivery would be sometimes in April..

Okay great understood. I’ll hop out of the queue but thanks so much for taking my questions..

Thank you. Our next question comes from John Baugh of Stifel. Your question please..

Hi good evening Farooq good evening Corey. Just a couple of things, quickly. One, I picked up on your comment about promotions perhaps being emphasized less, and obviously advertising is going to be emphasized.

So I was curious, could you speak maybe strategically to why you are doing that? Is your research telling you could drive better traffic that way, or what data or why are you making that change? Question number one on that.

And question number two on that, if you could maybe walk us through what the March and June quarter promotions were a year ago and roughly what you intend to do this year? Thank you. .

Yes John that’s really a very, very important question and a tough question which is the impact of discounting with all – we listen to what is taking place in the industry in the retail environment.

And as you know lot of folks are discounting these discount 30%, 40% now they’re giving 50% and 60% and they’re all – and from the feedback we get it is not working yet everybody on the drug so we got to keep on giving more drugs.

Now we believe that and also research has shown and all of studies have shown that – a positive customer experience is more important than just this discounting. So customer experience means the great offering, great service and of course good values.

So we’re going – our marketing is going to convey those about our offerings, about our quality, about our services and then of course we have 1,500 interior designers that provide that service if you didn’t have it then I think the only thing we’ll have to do is keep on increasing discounting.

I believe that discounting overall you can see that those who are doing it across the retail not just our industry they’re suffering they’re not making an impact. So we believe that we have an opportunity to reverse it not going to be easy John because this tough not an easy decision.

And – this is tough decision and to convey our differentiations to the consumer through our advertising will be what our advertising is going to do.

It is going to talk about our quality, our great quality and then also show the prices and we’re going to show our prices the way we have them now without big discounts or with the smaller discounts that we have and we will also show and talk about our personal services that we have.

And we will also talk about the fact that today consumers can interact with our designers online or in our design centers every week we are qualifying more of interior designers to be able to do live chat 275 so follow-on to last week more are going to come.

So we are going to get the message across that I would say in a strong manner that why we’ve got to increase our spending.

If we don’t do this thing in a meaningful way the message is not going to be heard but like everything else there is risk because people are used to discounting we are going to go against it and on a plan basis we’re going to reduce our discounting John..

Okay. If I am not mistaken, you were doing a fairly aggressive discount during the December quarter.

Does that stop as soon as the month of January here, or what is the plan as to when you implement this?.

John, when you say aggressive it's relative, we are aggressive is that we used to give two items that once in a while we give that 30% of two items or one two items at 22% off or most of it was 10% or 15%. When you look around everybody's talking of 50% to 70% off.

Our values, our discounting is meaningful to our customers, but new people who don't know us that they doesn't mean much, because they used to 50%, 60%. So to answer your question what we are going to do is we will on a gradual basis we'll reduce the discounting as we increase our marketing.

We are now going to do it at one-time that will not be wise..

Yes. Great. Well, I applaud the thinking, and certainly I hope it works. My last question is on digital marketing. I think you said you were going to double that. I was curious whether the cost of digital marketing, click for click, or wherever you measure it, has increased.

And I am really, I guess, getting at the online players that have come into the furniture space.

Are they running up search engine costs, or what are you seeing on digital marketing costs?.

Corey, what you'll say?.

Overall, they are fairly stable. Page search are the most volatile, but because there are so many different areas that you can search and when you want to advocate search that is still makes a very, very affordable as very targeted.

And then on the ad networks that we are finding isn’t stable and we are actually by increasing our buys we are getting better rates because the increased volume..

Overall, John we are going to double our spend on digital, which will include utilizing many channels, including we have done a deal with Disney Interactive and they will be using, some of our funds are also going to be used to advertise through their mediums especially on the Ethan Allen Disney program I think starting end of this month and next month..

Okay. And I guess I lied. I had one final question, and it was on real estate. And your comment about some of these stores being half the size at Ortonville.

Is there a cadence to the leases expiring, or are there owned stores that you might consider getting out of? I am just trying to get a sense for how quickly you could change the retail footprint to a smaller store size?.

John, it's a continuing process we are in number of markets. For instance right here in Connecticut, we have a design centre in Norwalk and just to give perspective this has happened many parts of country. These are all established about 20 to 25 years back. We had neighborhood store are okay.

We’ve got one major design center in Stamford, one in Danbury, one in Milford. We came to conclusion we don’t need Norwalk. These three can take care of it, so designers went to the - are gone into the other three I think we are going to be able to take that business. So one is rationalization, we have been doing that.

Second is as leases come up relocations into a smaller. And they are going to get smaller and smaller because of some other technologies that we have today is extremely important. We just opened in the last year or so 7000, 6000, 8000, five years back we would have a thought to they are not going to work.

And so as the leases come up and they are coming up and as long as we open new one like for instance the one in Atlanta, I mean in Chicago, it's about 8000, 9000 square feet. Two years back we would have 15,000.

And as we move forward that will come in 6000 feet is even okay because today with technology and lot of great personal service of our interior designers that's our differentiation because we are not long ways of furniture business, we really are in the business of interior design, providing the services that's what differentiate us. .

Great. Thank you. Good luck..

Thank you. Our next question comes from Cristina Fernandez of Telsey Advisory Group. Your question please..

Hi, good afternoon. A couple of questions. The first one, I wanted to ask about online - sort of your online strategy.

How was online this quarter with regards to what traffic and conversion and any updates since the Analyst Day on your strategy there?.

Cristina, the good news is that is increasing substantially in terms of traffic, in terms of sales but from a small base.

Corey, this quarter it end up with how much?.

High double digits..

High double digits, so you are not giving the numbers. I mean it's continuing to grow and we are going to see a lot more because also not only is just through just pure e-commerce, but more importantly now our interior designers are doing live chat. And all that business is going for e-commerce.

And as Corey as you know when we started e-commerce we used to make sure that the credit of this will go to our retail network and our designers too, because we really want them to get involved in it.

In fact including our work with Disney.com, we have agreed that customers coming over there will be directed to our designers and design so that they can provide them the design service and that is a good accommodation..

Thank you. And then, my second question. I wanted to ask about the quick ship of programs. You talked about extending the program.

Can you give us a sense of how many SKUs you have on the programs now versus a couple of months ago or kind of what magnitude of increase is it going to be?.

Well, there are two elements that one is of course custom quick-ship upholstery, which we launched about I think a year or so back and has done well, we have added, we are continuously adding one or two pieces to that - to that sellers and those are added in about at eight or 10 different fabrics not a lot of fabrics.

And what we do is for those fabrics are cut and sewn and ready to go when order comes in. And on average we are delivering orders in North America in about 15 days with the receipt of order. Now on our case goods, we had two part of case goods, one was all our imports and other is what we made in our North American facilities.

Our imports were in stock, well our North American products were in - parts were in stock not the full part. So we decided starting January we are marketing it. We started a production of it in December that we will start putting our best seller North American products in stock and we are doing it.

And overall it hasn’t increased any as you know our inventories went down last quarter. Overall it may increase some but it is also reducing the parts that we have in our manufacturing whether keeping parts, now we are making, taking those and putting them into finished goods. It does number of things.

It's very important in terms of fast delivery but also it is going to increase our capacities because with the State Department contract and some other contacts we are working on contract. In contract business we want to be able to expand our capacities.

And by building this into stock it increases our capacities to take new business which will also - which will give us an opportunity to do that from our North American manufacturing..

And, last one, can you update us on the homeowners marketing program? You didn't mention it today as part of your marketing strategy, but what is the program, and are you getting any benefit from that yet?.

I am sorry, what?.

The homeowners marketing program with the real estate agents?.

Yes. It is okay. It's not - it's still infancy. We really have to still do a lot more work on that. And we have made some progress but to not as much I would to see, Christina..

Thank you..

[Operator Instructions] Our next comes from Justin Bergner of Gabelli & Company. Your line is open..

Hi Farooq, hi Corey. First question, just to sort of make sure I have the numbers right on the advertising. I guess your 10-K says you spend $31.5 million for advertising in the June 2016 fiscal year.

So should I take that number and increase it by 20% to get to your June 2017 fiscal year expected advertising?.

What I would do that - this stage what I would do - I would take the second half what we did in the third and the fourth quarter and then you can at this stage for your purposes you can increase by 20%..

And how much was the third and fourth quarter last year combined?.

Yes, I’ll tell you what they were all right, last year third quarter was $8.7 million, fourth quarter was $8.6 million. So John, what's that - that what $17.3 million? So we spent $17.3 million in advertising last year in the two quarters.

So Justin if you want for your purposes you can increase it by 20% approximately that's what our plan at this stage..

And then, that higher run rate will continue into the 2018 fiscal year or, I mean, granted, there might be some seasonality to it.

But is that -?.

Of course we are going to - we'll increase the spending as you know, our objective that this business should come in. If it doesn’t come in I'll reduce it but at this stage I think this is going to come in and that we'll be more aggressive. But we got to make sure that we have the flexibility of increasing it or reducing it as we go along.

But I think for purposes of this second half and for the next fiscal year if you take what we spent in 2017 which is a adjustment I talked about and you use approximately just to say for 2017, we would be spending 20% more that will be okay. It will be somewhat higher than what I am saying but it's okay too.

But I think at the end of the day we also have to see how the top line grows..

Okay. That's helpful. And then, just one other question.

The decision to have more case goods ready to ship at the store or near the store, is that being motivated by any sort of change in the competitive dynamic? Is that something that your competitors are doing and you feel the need to keep up?.

Justin, there are lot of factors. Certainly, people today want things faster, so certainly that's a competitive fact. The second is keep in mind that we use to make them for stock before those great recession hit us and we hit so badly, we got to save money in every possible way. So we – took all our U.S.

manufacturing and turned it into custom meaning that when the orders came in we would make the profit. It was good and it gave us lots of flexibility, but today we have an opportunity of making that product, finishing it at, be available for faster delivery.

And as I said it improves the operations, efficiencies, and also very importantly gives us an opportunity of having production which we believe we need for State Department and other programs..

Okay. Thank you for that perspective and good luck in the second half..

Thank you. And so there appear to be no further question at this time..

All right. Thanks very much Lativ. Thanks everybody. Any questions and comments please let us know. Thanks very much..

Thank you, sir. Thank you ladies and gentlemen. That does conclude your program. You may disconnect your lines at this time. Have a wonderful day..