Corey Whitely - CFO, EVP of Administration and Treasurer Farooq Kathwari - Chairman of the Board, CEO and President.

Robert Griffin - Raymond James Jeremy Hamblin - Dougherty & Company Bradley Thomas - KeyBanc Capital Markets Inc. John Baugh - Stifel, Nicolaus & Company Justin Bergner - G. Research, LLC Cristina Fernandez - Telsey Advisory Group.

Welcome to the Ethan Allen Fiscal 2017 Third Quarter Conference Call. [Operator Instructions]. As a reminder, today's program may be recorded. It is now my pleasure to introduce your host, Corey Whitely, Executive Vice President, Administration and CFO. Thank you. You may begin..

Thank you, Jonathan. Good afternoon and welcome to Ethan Allen's Conference Call for our Fiscal Third Quarter ended March 31, 2017.

This conference call is being recorded and webcast live on ethanallen.com where 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.

Also joining the call is our Vice President and Corporate Controller John Bedford. 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..

Yes. Thank you, Corey and thank you for participating in our review of the third quarter ending March 31. As we mentioned in our press release, we will discuss in greater detail the many initiatives to help us to grow sales and profitability. We will also discuss our third quarter results. I always believe, change or chaos equals opportunity.

We're well-positioned to take advantage of what one may say are disruptions in our industry as well in most industries. We will discuss the advantage of our unique vertically integrated structure combining with newer distribution channels.

After Corey's presentation, I will discuss in greater detail several factors that impacted our results, including very strong prior-year comparisons, when sales increased 10% and EPS increased 89%, that's for our third quarter; the uncertain political environment during the quarter, especially in January and February, resulting in customer cautiousness, despite a soaring stock market; our initiative during the quarter to manage expectation of higher discounting contributed to lowering out our written and delivered while improving gross margins.

Corey?.

Now thank you, Farooq. For the third quarter of fiscal 2017, our results reflect the comparison against the very strong performance in the prior-year period and the continuing choppy retail environment Farooq mentioned during the quarter. Our consolidated net sales of $180.5 million for the quarter compared to $190.6 million in the prior year.

Retail net sales of $141.9 million, while down 6.7% from the prior year, maintained most of the prior year's 17.5% increase over Q3 fiscal 2015. The cadence for written orders during the quarter reflected a weaker start with gradual improvement as the quarter progressed.

March reflected the strongest period with a modest increase over prior year and tracked to our increased television advertising and also partially benefited by the shift of Easter into April.

Overall, total written orders for retail were off 7.7% from the prior year quarter and comp written was off 10.9%, the differential affecting more new design centers operating this year compared to last year. We ended the quarter with 146 company-operated design centers compared to 141 in the prior year quarter.

In the national sales, we're 10.1% of consolidated sales in the current year quarter and that compared to 8.1% in the prior year period, reflecting an increase in sales to China. The mix of Retail segment net sales to consolidated net sales for the quarter was 78.6% compared to 79.8% in the prior year quarter.

Our strong adjusted gross margin at 56% benefited from improved manufacturing efficiencies and reduce clearance and promotional activity. Our adjusted operating expenses were $90.8 million compared to $90.2 million in the prior year, excluding the prior year gain on the sale of real estate.

We've mentioned in the press release several discrete items impacting operating income this quarter, including increasing our advertising spend by 21% or about $2 million and the impact of operating losses of new design centers which were about $400,000 additional losses this current year quarter compared to the prior year quarter.

As we leave older legacy properties, we're opening new lease locations that incur startup costs. These new design centers also have a ramp-up period before attaining profitability. Our adjusted operating margin was 5.7%, an adjusted net income of $0.23 per share compared to $0.34 per share in the prior year quarter increased 89%.

Adjusted EBITDA was 8.4% of sales. Our effective tax rate was 35.6% for the quarter and slightly below our 36.5% structural rate. We have a strong balance sheet. At March 31, 2017, our total debt was $30.1 million, down $17.5 million from the prior year quarter and our total cash and securities totaled $71 million, increasing by $14.4 million.

Customer deposits were $60.5 million. During the quarter, we paid out dividends of $5.3 million, an increase of 34.6% compared to the prior year quarter and we invested in capital expenditures of $3.9 million for the quarter. Inventory of $154.2 million decreased by $8.1 million from the prior year end, partially due to inventory write-down.

With that, I'll turn it back over to Farooq..

Thank you, Corey. As I had mentioned, our third quarter results were impacted by several factors, including very tough comparisons, uncertain political environment and our managing customer expectations of higher discounting.

One of the major contributing factor to our strong previous year second and third quarter results were due to our accelerating discounting during that period. The expectations within our interior design network and customers was that we will continue to increase discounting. Keep in mind, our policy has been to have credible everyday best prices.

And increased discounting impacts expectations, credibility and margins. As mentioned in our January 2017 earnings conference call, our objective was to moderate the discounting. This also contributed to lowering our written in January and February and in March.

And in March, as Corey said, we had an increase due to better consumer attitudes and the managing expectations on discounting. We believe, as we have lowered the discounting expectations, we're in a position to increase discounts at reasonable levels in our fourth quarter and also moving forward.

In our third quarter, despite lower sales at wholesale and retail, our adjusted gross margins increased to 56% from 55.5%. Now focusing on our growth opportunities. As I mentioned, we're very well-positioned to take advantage of the changing distribution channels and customer expectations.

Today, most enterprises have 2 choices, be disrupted or be a disruptor and an innovator. Our unique, vertically integrated structure developed over decades provides us an opportunity to take advantage of the new reality and the new channels.

Ethan Allen brand is known and desired and is sold and serviced through our 200 design centers and about 1,500 highly qualified in-house interior designers. We do not sell our products through other retailers. We continue to strengthen our interior design centers and teams.

During last 9 months, opened design centers in downtown, in the Flatiron area of Manhattan; in Virginia Beach, Virginia; Burlington, Vermont; Corte Madera area of San Francisco; and Indianapolis, Indiana. Under construction are 2 important design centers, Buckhead Area of Atlanta and Downtown Chicago.

Our other major competitive advantage is that 75% of our furniture is made in our North American plants, with a major focus on quality. We're implementing Quick-Ship programs. We have a strong custom Quick-Ship Upholstery Program which is delivered within 30 days in the U.S., the average being 15 days.

Starting January of this year, our policy has been to have most of our case goods and accent programs in stock positioned for Quick-Ship. We have, over the last 30 years, developed a strong white glove logistics network delivering at 1 price nationally. This is a major advantage, both from service and also reducing returns.

We have continually made investments in technology at all levels in our enterprise, with recent focus on digital mediums. During the last 3 years, we have repositioned 70% of our product offerings to reach a larger customer base. And finally, we entered 2 strategic collaborations that combines the strength of major iconic brands.

In January, we launched the Ethan Allen | Disney offerings and few weeks back, started offering the program on disneystore.com. The collaboration expands our reach, especially for children furnishings. As we also mentioned in our press release, we're also going to launch the Disney program with our partner in China this summer.

Two weeks back, we announced the collaboration with Amazon. This provides an opportunity to combine Ethan Allen quality and our vertically integrated structure with the vast customer base of Amazon. We expect to launch the Ethan Allen Design Studio on Amazon this summer.

The products will be sold by Ethan Allen and shipped by our white glove premiere In-Home Delivery operations. As we move forward, we will provide additional information. With that, we're ready for any questions or comments..

[Operator Instructions]. Our first question comes from the line of Budd Bugatch from Raymond James..

This is Bobby filling in for Budd. First, I want to talk about the written orders for the quarter.

I understand the quarter started out weaker in January and February and progressed a little bit and there's some moving parts around the clearance, the amount of discount you offered customer in clearance, but was there any other significant things for us to consider about why the written orders kind of decelerated sequentially at such a big pace? The prior year comparison at 5.5 was significantly easier than 2Q at 14.6, so I was just hoping for some more color on that moving part..

Yes. Always important, as I've said, certainly, our comparisons compared to last year where total retail prices increased, I'm talking about -- just on even delivered basis, increased 17.5%. Our total sales increased 10%. On the written sales, we had, last year, a total increase of 4.3% and a comp of 5.5%.

Now this year, in addition to an environment where people were not willing to make -- to buy in general, we also contributed to it. Timing is everything. I mean, hindsight is 20/20. This question of reducing or discounting which I mentioned, had a major impact.

We decided that, as you know, previous year, we had gone into giving some of our products off at 25%, some at 30% and over a period of time, what happens is that customers and your own associates want to have a higher discount. So we had to take a position.

Now as I said, if I have to make a decision today, perhaps with all that has took place and elections and everything else, I would have perhaps waited, but that also contributed to the fact that in January and February, our people felt that we're going to increase it, we're going to go back to the last level, both our customers and our designers.

As you know, our designers are pretty close to customers. But then they saw that, no, we meant what we're saying is that we're going to go back to reasonable discounting, they started getting back in March. And I think, as we move forward, their expectations are now much more reasonable..

So to help us understand, last year was 25% or 30% off, the 1 item.

What did you decrease it to this year? 20% or 15% to 20%, is that a reasonable range?.

Yes, most was 15% and some were 20%..

Okay.

And then, when March turned positive on a written basis, was that on a total written basis which factors in the 5 more design centers versus last year that was on a comp basis?.

Corey?.

Yes. We were positive on both written -- on both total and comp..

And is it safe to assume that, that type of trend continued in April?.

It's a little bit early because, as you know, the last few days make the difference. So I mean, overall, as I've said, as we move in this quarter from a written perspective, last year, we have not as strong comparisons than last year which is good last year, yes..

Okay. I thought I'd at least try to ask. And then, I guess, lastly for me, can you give us any update on, you mentioned Disney real briefly, but can you give us an update on maybe how it performed during the quarter? I realize it's early.

And maybe any type of update on the State Department contract?.

Yes, Bobby. The Disney is now starting to make some more impact, especially when we have launched it in the disneystore.com which is getting more awareness, but we still have to do a lot more work. And what we have done is, we're right now maintained also -- we have not promoted it as strongly as we planned to do.

But we wanted to make sure that it gets on to disneystore.com and they also had to do some work in making sure all the programs and everything are ready. This is still not completely ready. When they are ready, I think, by May, we're going to start doing a lot more stronger promotions that should help us get the Disney programs going.

And then, of course, the whole Disney program will also be on a collaboration with Amazon. That will help us, too..

And for the State Department contract?.

For the State Department contract, we've been getting some orders, but they have been so slow in the way they have been operating. We have actually -- we're -- we have made some progress regarding some orders, but I believe that most of the orders, we expect to get it in the fourth quarter..

Our next question comes from the line of Jeremy Hamblin from Dougherty & Company..

I want to just come back to the environment for a second and talk about the discounting. Obviously, you made some decisions, as you noted, at the end of 2015 and the beginning of 2016, that kind of drove your written orders. I think, really, that ended by February of 2016 according to my records here.

Can you -- just in terms of thinking about on a 2-year stack basis, I think, the comparisons for the March -- the month of March were actually quite a bit easier because you no longer had 2 items 25% off or 1 item 30% off.

Is that -- I mean, on a 2-year stack basis, Corey, has the trend improved here in March and April? Or were you still running negatively on that?.

No, I think, you're seeing, in the sales side, you're seeing sequential improvement to an acceleration on a 2-year basis and, I think, on a 3-year basis as well. The discounts a year ago, we started off in January last year, it was 2 items at 25% off. So we didn't have that level this year. Everything was 10% to 20%. So it was a pretty big difference.

And then, as we progressed through March, last year, we're up to 25% off on all of our modern casuals and we had 20% off on all of our dining and bed coverings and our introductory on the Quick-Ship at that time.

So it was a pretty strong promotional period last March compared to this March, where we still had kind of backed a little bit with the buy more, save more event which was also [indiscernible] the customers were more acclimated to what the discount program was and as were our designers and we have a good response, although the overall discount wasn't as high as where it was last year at March..

Jeremy, the issue really is that, unfortunately, as you know, this whole discounting is a disease. You keep on doing it, you've got to keep on doing more. So you've got -- and in our case, we don't have artificial regular prices so that we can give. Look, we're ready comparing with people who give 50%, 60%, 70% off everyday.

So when we even give 25%, 30%, the new people are somewhat dubious. And so they say, what is this 25%, when everybody else stays 60%, 70%? So that's the kind of an environment we have. But as I said, one of our biggest customers is our 1,500 interior designers.

When they believe that the fact is and they work -- and I don't blame them, they work very, very closely with their clients. Their clients are their clients. And if they believe, for their own credibility and for their clients, that we're going to somehow keep on increasing, then they themselves are not as aggressive as they should be.

But now that they knew in January and February and of course, I told them that we have to moderate it. It does not mean that we're not going to do discounting, but I think, Jeremy, our perspective is not only the question of margins, the question is that continued expectations that you're going to keep on discounting.

I think, the good news is, we have, to some degree, broken the cycle, we're going to have, as I already said, even despite lowering sales, we're a vertically integrated company. We have great margins when we have increasing sales and the multiplier works the other way, too. Despite that, we had an increase in gross margins.

We increased our gross margins both in the wholesale and the retail level, despite, but having said this, having lower sales is not good for our profitability.

So I think, I also said, if I had to do it again, I wouldn't have done it with this very sort of a difficult economic and political environment where people were somewhat concerned anyway in January and February. Anyway, we're out of it. The good news is we have an opportunity of getting back on track..

Right. I understand that logic. Let me ask a direct question then as it pertains to kind of the June quarter. So if I look at your written orders on a dollar basis and Corey, I appreciate the increased disclosure here in the release, it looks like your written orders on the Retail Division were down $12 million to $13 million versus last year.

With that backdrop, as I'm looking at the June quarter, it looks like, I should be thinking that your sales with written orders down 7.7% for the division, should we be assuming then that your total sales are going to be impacted in Q4 and that your sales are likely to be down in Q4 as well?.

I think that Corey will give you more numbers. But when I look at it, our Retail Division last year, written sales were down about 1% and the comp was about flat from the previous year.

So that -- so I don't know where -- those numbers, Corey will [indiscernible] but last year, on our Retail Division, our written orders were just about flat, on a comp basis was 0.6% lower. And on the delivered basis, they were up actually, 7.6%, with the comp increasing 9.4%. So that's what -- those were the numbers for last year, Jeremy..

For the fourth quarter..

For the fourth quarter, yes..

No. I guess, what I'm citing, I'm looking forward to this year's fourth quarter and saying -- and what you just said was that written orders were down 7.7%. So as I think about delivered sales for Q4, my thought is, well, that's a pretty big hole to start in to have a positive quarter on a delivered sales basis for the June quarter..

Yes, you're right. I think, this is a challenge for us because of the fact our backlogs are down, our written in the first quarter was down. That does have an impact on the fourth quarter, Jeremy..

Okay. And then, I want to just -- I want to come to one other question on the Amazon relationship because you mentioned on your prepared remarks that you don't sell through other retailers and Amazon is another retailer.

I know you don't want to give out kind of full disclosure on that, but in terms of thinking about the economics, Amazon is out there partnering with lots of other furniture sellers, mostly regional brands, to provide them national footprint opportunity.

But in thinking about the rationale for going with this relationship and selling through another retailer for the first time, how do you make sure that the Ethan Allen experience doesn't change? And secondly, should I assume that the economics are going to be a little worse from a margin perspective on that Amazon relationship because with most people who sell through Amazon, that's the case?.

Well, as we had also said in the press release, we will be selling the products. Amazon will be acting as an agent. What our advantage for the both brands is this, that Amazon -- our objective is to reach this vast consumer base that Amazon has.

And Amazon will enter the order, they'll get a certain commission for doing it, but we're their seller of record and we deliver the products and also have the opportunity and we're working on it, of having our interior designers interact with customers. So the experience is going to be similar to what they have right now on our e-commerce site..

And that's part of the branding of it as well, Jeremy. It will have a very much Ethan Allen look and feel for our products so that they do maintain our more luxury-branded image. And then, the good thing is we have a very strong white glove network that deliver it to our own service center structured with all of our 200....

The big difference is we're not selling to Amazon. Amazon is acting as an agent. We're selling the product ourselves to the customer..

So Amazon is taking a commission.

Are you also having to pay, let's say, a marketing cost to be on their website, though, in addition or just the commission?.

Well, I've got to tell you this, because a lot of this is confidential information, Jeremy, I think, it's good for them and it's good for us..

Our next question comes from the line of Brad Thomas from KeyBanc Capital..

Just a couple of quick clarifications here on the recent trends in this upcoming quarter. I know there's a little bit of noise created around the timing of promotions.

Just as you think about March and what you've seen thus far in April, do you feel like the environment is getting a little bit better as we get further removed from the noise around the election last year?.

It is. It's not completely nominal. But certainly, I've had an opportunity in the last few weeks of traveling to many, many cities and talking to our designers. In fact, I was talking to them about collaborations I want to shop them myself. And you can see that, especially in the coast.

When you take a look at it, many, many, many major cities on the West Coast and even in the East Coast were somewhat more turbulent. Slight, just somewhat more stable, not completely. Much, much, better than January and February..

Great.

And then, for your fiscal fourth quarter here, to make sure I heard you right, you do expect, what, about a similar cadence in promotional activity year-over-year? Is that what you're planning at this point?.

Well, what I was saying was this, that it is going to be somewhat higher than what we did in January and February because in January and February, we had to take it down lower compared to what we did the previous year, but it's going to be somewhat higher than January and February because that creates an excitement.

Yet overall, the discounting is lower..

Got you. And then, just if I could ask a couple of clarifications on Amazon.

What's the timing? When will we start to see that rolled out? And what percentage of your merchandise will be available through Amazon, if you can disclose this?.

What we have publicly said is, Brad, that this summer is we're going to have a launch. And then, we're, right now, working to see what the extent of the merchandise is going to be on our Design Studio over there.

But anyway, as I've also mentioned, we have been, to some degree, not only for Amazon, I mean, today, the new reality is, everybody wants faster delivery. So we have been working in the last 1.5 years to get our products and our manufacturing in such a situation that we're able to deliver fast.

Like for instance, our Quick-Ship Upholstery, we expanded that, but we introduced that about 1.5 years back. And we have -- so that we're able to, today, have that Quick-Ship customer upholstery delivered in an average of 15 days to a customer's home from an order.

Then our case -- our domestic case in North American case goods, I mean, the great frustration, as we said, that we're going to make them when we receive the orders. And now, it accumulate orders, normally 3 weeks or so or 4 weeks. But we said, no, now, we're going to put them in stock. So January, we've been starting to put them in stock.

It's good overall, not only because of this association. So we're going to be in a much better position to be able to deliver our products faster because 75% is in our own workshops in North America..

Great. And if I could squeeze in one last one on SG&A. Obviously, highlighting this quarter and this upcoming quarter where there's initial advertising spend. Obviously, you all have made some investments associated with Disney and the State Department.

As we think out to your upcoming fiscal year ahead of us here, is there an opportunity to maybe bring down SG&A a little bit as we lap some of these investments or are these at any level that's maybe more of a run rate for you here?.

Well, we're always looking back to see how do we operate more efficiently. My budgeting here always is base 0.

Having said this, we did -- keep in mind, in the last quarter, even though we increased our advertising, we reduced our other operating expenses by, what, $1.4 million?.

Yes. A little more than that..

So while increased our advertising -- so I think that from your perspective, I think, it is going to be similar to what we're doing now, Brad..

[Operator Instructions]. Our next question comes from the line of John Baugh from Stifel..

Quickly, a couple of things. One, I calculated the decremental margin around 50%, sales down $10 million, EBIT down about $5 million adjusted year-over-year.

Is that -- if we modeled revenue down for the June quarter, is that a similar margin we should assume or were there puts and takes in there that were unusual?.

I think that you are -- what you're assuming, John, if I understand correctly, is somewhat lower sales and that you're talking about the margins, correct?.

Yes, I mean, your sales fell $10 million year-over-year. In the March quarter, your EBIT fell about $5 million. So that's 50%. And if we model whatever we model similar, I don't know, $5 million or $10 million down, we'll see a 50% flow through negatively to EBIT..

If you look at it, John, EBIT this quarter, adjusted, was about $15.2 million which was down. So in Q4, it could be a little bit down from where it was last year. We'll then have to see actually how the quarter ends up..

But John, you're right. I think, as you know, our vertical integration works both ways. When we have -- a 5% increase in sales creates a big impact. 5% lower creates a negative impact. So I think, we may do somewhat better than what we did relatively in the third quarter, but if you were to assume lower sales, you would have a lower EBIT..

Yes. And keep in mind, last year, fourth quarter, our operating income was up 27%..

Sure.

Well, what was the inventory that was so bad that you said to give it to charity? Or was that a strategic decision to, I don't know, avoid discounting or clearance as well or was it just really old stuff that really wasn't worth anything and you had to give it to charity?.

I've been traveling a lot in the last few months. And what's happened is, a lot of this almost $3 million or so were rugs that were on floors of our design centers that were there for purposes of display.

And they -- many of them have been there for many, many years and our design centers were keeping them, they were not hired to sell them, but it also had an impact in 2 ways. It's had an impact of putting new products in and it also had an impact of keeping them there and they were trying to sell them. So it's better for us to give them as a donation.

That's what we're doing..

And then, I assume we won't see -- when we do start to see state government orders, that won't show up in the store order number correctly?.

No, that will not be. That will be part of our wholesale business..

And you referenced you'll start to see orders in Q4, did you mean December or the June quarter?.

John, just one second, Corey?.

Yes, so on the State Department orders, they won't show in any of our comparable sale numbers..

Yes, that's right..

But they do show up in the retail..

They'll show as retail..

Okay. So it'll be in retail. Okay.

And did you mean, Farooq, when you start to see orders from that business, December quarter or the June quarter?.

No, you mean you're talking about for the State Department?.

Yes..

I think, we'll start getting orders in the June quarter..

Okay.

And just a point of clarification, so with discounting, if I heard you right, we're trying to get a little bit off the drug, we maybe went a little bit too hard in the March quarter, so we're going back on the drug a little bit, but not as much as we discounted in the prior year June quarter, is that -- do I understand that correct?.

I will tell you, John, I'm a mountain climber, I would not say drugs. When you climb too high, you get water in your lungs? Then you come down, stabilize, so that you can go back again. That's what we did..

Okay.

But do I have it right that the discounting in the June quarter will be up from the March quarter but lower than the June quarter in the prior year?.

Yes, that is our -- that's the plan..

Okay.

And will the plan -- as you think about discounting and that sounds like that's more like a 15% to 20% range, is that your hope that you could sort of maintain that level going forward or is that just going to be a fluid thing that will change depending on how business goes?.

John, we have to be flexible and we have to see. It's as you know, it's not an easy thing.

I could have kept the discounting and I could have increased it, the chances are we could have done more written business, but then the question is what do you do the next quarter? So you really -- this is an issue that one has to -- not easy to do this, to discipline yourself. So we would -- I mean, we have to.

So the expectation is that you've got to give some discounts. But I think, even if we, at the end of the day, have an impact of increasing our margins by 1% or 2%, that's a big impact..

Our next question comes from the line of Justin Bergner from Gabelli..

On the discounting, do you regret the discounts that you enacted 1 year or plus ago in the sort of 25% to 30% range? I mean, do you think that some of the traffic that it brought in is new traffic that is sticking with you? How do you sort of judge that decision in hindsight?.

I think that it was a good decision. It gave us business, brought some new people. And the question really is, how do you continue to keep on doing more? That's what the issue is. So it really is, as I said, as I was just joking with John, that is we climbed too fast, we've got to come down, then we can go back up.

The problem is, in the businesses that don't come down and keep on going, it's like you die or you just have no margins left.

So I think that -- as I've said, hindsight is 20/20, perhaps, with all -- when we made the decision last fall to do this in this quarter, we were not thinking that amount of a disruption that would be political disruption that would be causing. If I had to do it again, I would have made it in the quarter.

But anyway, we're through with it and we're back into giving discount, if we have to, but they're lower than before and we have also managed expectations of our customers and especially our own people..

Okay.

The second question I had is, Easter, did Easter add to your comp in the quarter and did it add materially to your comp in the quarter?.

It had some impact, but not -- we don't have -- our projects are such -- of course, Easter last year fell -- was in March. And this year, we had it right here 2 weeks back. It does have some impact. But for us, it's not tremendously critical because people do come back the next day or a few days later..

Okay.

And then, with respect to the Disney partnership, what's left to do at this point to get that to sort of full potential in terms of it being accessible everywhere in every place?.

It needs more marketing. And it needs, whether we like it or not, we've got to do somewhat more like promotions. I'm not saying we're going to reduce it, but in this one, we're waiting because we've got a lot of systems and others. Us and Disney, we're working.

In May and June, we'll do somewhat more promotions to see -- more marketing to see that we sell, especially the furniture part of the product line. And also, interestingly, in addition to the United States, I think, we were looking forward to a stronger introduction in China.

And also, keep in mind, our relationship with Disney also has involved contract business. We've just -- we're finally completing 1,000-room contract that we received in Grand California and in Los Angeles. So we're also starting getting some other contract business from Disney in Orlando and other places. So we're going to build that business as well..

Okay. But it's in all the stores and it's all the products are on the websites now, there's nothing left to do in terms of....

But [indiscernible] we just got to market it, just get the benefit of it and to really increase business. So right now, that's where we're. We're completely in the right position. We just have some more technology work to do between us and disneystore.com which I think they'll be completing next month. And then, we'll be more aggressive..

Okay.

And then, just lastly, did you mention the connection between the Disney partnership and the Amazon partnership in some facet?.

No. The only thing is this, that all the Disney products will also be on our Design Studio at Amazon..

Our next question comes from the line of Cristina Fernandez from Telsey Advisory Group..

I wanted to ask about the television marketing that just started in February.

How has the customer responded to that? Are you seeing any increase in traffic, whether it's online or in the store when the ads run?.

Well, Cristina, we've had a positive reaction. That's what we doubled it in this April, May and June. We did launched it in April -- I'm sorry, in February.

Again, as we've been talking about, not the best time to launch it, this winter was not a good time but we received very good reaction from our customers, also from our own designers, although due to all the economic factors, political factors and also our decision to reduce discounting, that resulted in lower traffic in the first quarter.

But we feel strongly about it. So we have -- going to double our television advertising in April, May and June..

And then, I know it's still early, but as you think about fiscal year '18, how are you thinking marketing, you increased it a lot almost 20% this year. Do you think you need to increase it more? A new run rate that's sustainable and good for your business..

You see, in '18, we will be taking a look at the impact that we're having in our collaborations. What does that do in terms of bringing people, we have an opportunity of raising millions and millions of people who could come to us. I'm talking with our 2 collaborations. We're taking a look at overall economic environment, hopefully, is more stable.

So -- and we're also looking at continuously what are the mediums to utilize. Until last year, we had a very, very major advertising in direct mail. So this year, we decided to somewhat reduce it and increase it in national television. And we also doubled our digital advertising.

Because today, 70%, 80% of the folks who come to our design centers first go to our digital mediums, our mobile or to our website. So we want to bring more people into our digital mediums. So at this stage, I would think that we would most probably maintain.

I'm just thinking out loud right now, maintain about what we have done this year, at the rate we're going now..

And then, my last question, going back to the Disney collection.

Are there plans to expand your product assortment to perhaps include other Disney characters or at this point, the goal for this year is really just expanding the reach through the Disney store and Amazon?.

We have been working. Our teams have been working and one of the most logical thing is the princesses. So we've been working on that whole program. But I think, of course, we're going to hold it until we get everything going. Maybe in the next 6 to 9 months, we will add other characters to the program..

[Operator Instructions]. Our next question comes from the line of Jeremy Hamblin from Dougherty & Company..

I want to ask a follow-up about Disney. And I think, it's been something we've been excited about the potential. I think the product looks good. But Farooq, as I hear you talk about it, we're 6 months into the launch at this point and it feels like there's a lot of loose ends that had not -- maybe have not been tied up.

Would -- did the launch maybe happened prematurely? Because it feels like there was parts of this collaboration that just were not complete maybe by the time you guys formally launched in November. Do you -- should that have been pushed back? Or -- and that's part 1 to my question and then I have a follow-up related..

On the first one, no, it is -- when we introduced it in Disney -- I mean, in November, it was basically more getting the word out that we're doing it. Our design centers at that stage have not received the product. We had it in a few design centers.

We launched it in terms of letting the public know that we're getting into it, we rang the opening bell of the New York Stock Exchange, all those things. But it was in January when most of our design centers were -- had the product line.

So it is really a little over 3 months that we've had this product line and we have also -- because keep in mind, we had to do a -- we established small Ethan Allen and Disney homes in almost 175 locations. And I'm sure you visited some of them. And so it's been basically 3.5 months.

And then, we were waiting to get it on the disneystore.com and that needed some programming, but we knew that from the beginning that, that would be a second stage. So that, they've done that, they've launched it, a couple of weeks or so back only. And then, I think, by next month, they will also have princesses.

They also have integrated a -- right on their site, a customer can go from their site to our site and have a live chat with our designers. We just instituted that, too. And by, I think, by next month or so, they will also incorporate some other changes which will help us be able to then go somewhat more aggressive marketing.

We have maintained somewhat of a low-key on this, Jeremy..

Okay. maybe I had a different impression about how much of the collection was launching when we did the meeting in New York for analysts last fall. So that might have been my misunderstanding.

In regards to the collection though and what has launched to this point, just in terms of what product has worked better than others, are you seeing the product resonate more for kind of the adult avid Disney collector or towards the toddler and infant product or let's call it the adolescent and teen product?.

Jeremy, this is a good question, a good observation.

What -- in fact, if you take a look at our advertising and you'll see it in May and even some we've done even now, we're now incorporating some iconic items with the Disney characters in our Ethan Allen designs because, I mean, it was basically all as Disney products with Ethan Allen and Disney products.

But now, we're finding out that people are buying our chests, our chair or a desk and incorporating it with their regular homes rather than buying everything Disney. So you're going to see that more and more.

And that's what we have learned, that you're right, that this is not just for children, but it is also a lot of avid Disney collectors are buying it. And they're using it as part of their regular deco. And our advertising is going to reflect that much more and you'll see that in May, actually. You'll see that in May..

I'm not showing any further questions in the queue at this time..

All right, Jonathan. Well, thanks very much. Any questions, comments, please let us know. Thanks very much..

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..