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

Budd Bugatch - Raymond James Jeremy Hamblin - Dougherty & Company John Baugh - Stifel Nicolaus & Company Cristina Fernandez - Telsey Advisory Group Justin Bergner - Gabelli & Co..

Good afternoon, and welcome to the Ethan Allen 2017 Fiscal Year and Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session.

[Operator Instructions] It is now my pleasure to introduce your host, Corey Whitely, Executive Vice President, Administration and CFO. Thank you. You may begin..

Thank you. Good afternoon and welcome to Ethan Allen's conference call for our fiscal year and fourth quarter ended June 30, 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.

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 for participating in our earnings conference call. We discussed our preliminary financial information for quarter and year ended June 30, 2017 at our Investor Conference on July 19th.

Our financial results in 2017 were impacted due to number of factors, a strong previous year comparison, political and economic uncertainty and our planned objective to reduce discounts. Also as we stated in our press release, in fiscal 2017, we completed many initiatives and also launched new initiatives.

As we enter 2018, we are well positioned to grow with refreshed and relevant product offerings, a strong North American manufacturing, a repositioned retail network and efficient and service oriented logistic structure.

We have also during fiscal 2017 made investments in technology, increased advertising and expanded market channels including collaboration with Disney and Amazon.

During the fourth quarter, our written orders in April decreased 7.1% and then progressively increased by 7% in May and 6.9% in June, resulting in a 1.9% increase for the quarter compared to the same period in the prior year. So far in July, written orders have continued a strong positive trend and we remain cautiously optimistic.

After Corey provides a brief financial overview, I will go over our business initiatives and then open for questions and comments.

Corey?.

Thank you, Farooq. For the fourth quarter of fiscal 2017, our results reflect the comparison against the very strong performance in the prior year period. Our consolidated net sales of $194.9 million for the quarter compared to $205.7 million in the prior year.

Wholesale net sales were $114.3 million; in the prior year wholesale sales included strong shipments of new products, which has not occurred in the current year quarter. Retail net sales for the quarter were $153.2 million.

The cadence for written orders during the quarter reflected a weaker April and then a strong May and strong June ending the quarter up 1.9%. We ended the fiscal year with consolidated net sales of $763.4 million. Wholesale net sales were $453.3 million, retail net sales of $603.7 million decreased by 3.6% in total and by 4.8% on a comp store basis.

Retail written orders for the year were essentially flat decreasing 0.6% in total and by 2.6% on a comp store basis. International sales were 10% of consolidated sales in the current fiscal year compared to 9.2% in the prior year reflecting an increase in sales to China.

The mix of retail segment net sales to consolidated net sales for the fiscal year was 79.1% compared to 78.9% in the prior year. Improved manufacturing efficiencies and reduced clearance activity helped drive our strong adjusted gross margin of 55.8% for the fiscal year and 55.7% for the fourth quarter.

Our adjusted operating expenses for the quarter were $89.8 million, compared to $90.6 million in the prior year. Variable cost decreased relative to sales, which were offset with increased advertising expense, which increased 27.5% for the quarter and 16.5% for the fiscal year.

For the quarter our adjusted operating margin was 9.5% and adjusted net income of $0.42 per share compared to $0.57 in the prior year quarter, when it had increased 33%. Adjusted EBITDA for the quarter was 12.1% of sales and 11.1% for the fiscal year. Our effective tax rate for the fiscal year was 36.5%.

We have a strong balance sheet, at June 30, 2017 our total debt was $14.3 million down $27.5 million for the prior year end and our total cash and securities totaled $65 million. Customer deposits were $63 million. During the quarter we paid out dividends of $5.3 million and paid out $20 million in dividends for the full fiscal year.

We repurchased 250,000 shares for $6.9 million during the quarter. Inventory of $149.5 million decreased $12.8 million from the prior year end. With that I will turn it back over to Farooq..

Thank you, Corey. As we mentioned in our investor meeting, we are celebrating our 85 year and for 85 years Ethan Allen has established a president of quality through our crafts people provided service to our retail network and talented associates in all areas of a vertically integrated enterprise.

During fiscal 2017 we enhanced our competitive advantages of being a desired and known brand. We increased production capacity in our North American manufacturing, where 75% of our furniture products are made. We strengthened our entrepreneurial interior designer teams of 1,500 in North America and now over 500 are participating in live chat.

During fiscal 2017 we have absorbed the major new product introduction in fiscal 2015 and fiscal 2016 and our next new product launch is slated for fall of this year. We continued to reposition our retail network of 300 design centers of which 200 are in North America.

Of the 200 locations 72% have been relocated in the last 15 years with 24% within past five years. In fiscal 2017, we operated new design centers in Cranston, Rhode Island, Rockville, Maryland; Manhattan the Flatiron area, San Francisco and Indianapolis, Indiana and also several internationally were opened.

Last week we opened a new design center in the bucket area of Atlanta and in September plan to open in Downtown Chicago. During the year we launched the Ethan Allen Disney collection, which is now on an annual basis doing about $10 million in retail and growing.

In July 2017 we launched in China and plan to launch in several other countries in fiscal 2018 that is a Disney -- Ethan Allen Disney collection. We were one of the awardees of the U.S. State Department contract and expect to receive and ship products starting in fiscal 2018.

Earlier this month we launched a collaboration with Amazon, with an Ethan Allen design studio, which reflects our website the purchase experience for our products will be similar to our website and our retail network will secure deliver and receive compensation as our e-commerce business does.

During fiscal 2017 we accelerated our marketing, which included direct mail, strong digital and social and also accelerated national television. As we stated our advertising spend in the fourth quarter was $11.7 million or 6% of sales versus $9.2 million or 4.5% of sales, a 27% increase.

For the full year we spent 5.2% of sales versus 4.3% of sales in the previous year. We have accelerated our technology initiatives including a 360 degree product visualization 3D room plans and 3D augmented reality. As I stated we are well positioned for growth and look forward to an exciting 2018. With that we will open for questions or comments.

Dutch?.

[Operator Instructions] Your first question comes from the line of Budd Bugatch from Raymond James. Please go ahead. .

Hello Farooq. I guess the question -- couple of questions I have. One related to advertising, you said at the Analyst Day that you are evaluating the TV advertising and its effectiveness and I see the amount of advertising expense going up which a better proponent of.

Can you talk about if any of that evaluation has been completed and what do you think you will spend or how do we think about advertising this year?.

Yes, Budd. Good to have you on the call and good to have you here at our investor meeting. Budd, as I stated we are evaluating. We did have a strong national television presence up to this fourth quarter. We are -- we don’t have a strong -- we don't have a national television program in this first quarter.

It is summer, so not the best time to be on national television. However, we are considering utilizing television in August on somewhat more on a local basis. Then we are also looking at right now, we are at this time studying going back to national television in the fall.

So at this stage we are evaluating it and the chances are that we will have national television in the fall as well..

Okay. And your next question comes from the line of Brad Thomas with KeyBanc..

Yes, hello Brad. .

Hi this is Sumeet [ph] on the line for Brad. Good afternoon Farooq and Corey and thanks for taking my questions. On the state department contract, are you seeing any sales traction thus far, or do you have line of sight for when that might start to materialize.

And also are these orders quick-ship or custom and does that impact whether or not we might be seeing any of these deliveries for the contract business in the first quarter?.

We have received orders and they’re somewhat indirectly due to the state department contract. We did receive orders because of the fact that we placed our products on the GSA list. And because of that we received reasonable amount of orders, but the state department orders on the contract have just started coming in in the last two weeks.

So I think that we will have about I would say at least $2 million $3 million worth of shipments this quarter. And then after that we will see, and these are not necessarily directly because of this contract, this is because of the fact that our products were available to be purchased by the government and they did, which is also good.

But the state department I think most of it is going to be started being received in the -- in our second quarter the government fiscal year ends September 30th. And then the shipments will start after that..

Okay, thank you. And then with the new product launch that you have planned for the fall.

Is there an opportunity to potentially ship some of the square footage from Disney towards the new launch or is that more of just a refresh of other product on the floor?.

Well as you know, when we introduced Disney we did give it a tremendous amount of attention, because we wanted people to know we have it. Part of that as we move forward will be integrated the Disney for product line, which right now, is as you most probably know has been -- it has its own space.

But as we go forward, it will be somewhat integrated with the rest of our design centers so some more space will become available for our new products. .

And so if I understood that correctly then it's there may be slightly less square footage attributed directly to Disney?.

Yes, that's possible. Not yet, but it is possible, but the fact is that we still will have a very strong presence of Disney in all our design centers..

Okay, great. And the last question for me is it looks like your promotional activity picked up over the 4th of July weekend.

And I'm curious if you can provide any additional details on your planned promotional cadence for the first quarter in total?.

As you know we did have a special event in the first few days of July. And we will continue having our offerings. And as we move forward, in addition to our offerings that we have on a monthly basis, we always considered there is something special we have to do. We have not finalized that as yet, but that is always under consideration..

Thank you. .

All right. .

And your next question comes from the line of Jeremy Hamblin with Dougherty & Company..

Yes, hello Jeremy.

Hi, good evening Farooq and thanks for taking the questions. I wanted to follow-up and just ask a follow-up on your comment about part some of the reasons why you had a little tougher results or lower reported results and one of the reasons you gave was the strong results from last year.

And as I look back at fiscal 2016, total sales growth was like 5.25%, which is very solid.

But as I think about the organic growth of this company moving forward, is there may be a range that you would think about in terms of is this kind of 2% to 3% grower on a typical basis and that something might 5% growth on an annual basis is more of an outlier.

Or is there a broader range of potential sales growth?.

No I would say that Jeremy is got -- it is broader and I think that when you take a look at it you are right that to this last this quarter our sales were down in the previous year they were up 6.3% on a consolidated basis.

And when you take a look at our -- what we are going to be comparing with this first quarter our sales were up about 1.5% even though our written was up. And I am not talking of this first this fiscal first quarter of this fiscal year, last year our written were up approximately in the retail division about 8% and wholesale was up about 6%.

And so we had a strong written in the first quarter, our delivery was up only 1.5%. I would say that it is a broader range and I would say that again this is just a perspective that I am giving that I would say anywhere from 2% to 10% should be the range that we should be using..

2% to 10%, okay. And in terms of the key drivers this year from your perspective you have got -- you have the State Department contract, you have the Amazon partnership which is new and just launched.

And then you do have it sounds like there is some product launches planned for the fall, I am sure you know more about what might be launched over the winter and next spring.

In terms of relative impact, how should we be thinking about which of these programs is most likely to have the most significant impact is it the State Department, is it Amazon, is it the new products?.

No I would say that the biggest impact for us is within our own control that’s our retail division. Our retail division is provides most of the business and that we have 148 locations, we have 1,500 interior designers, we have developed a strong network that is really to me one of the strongest assets we have and the opportunities for us to grow.

In this fiscal year it did not because again comparisons and other factors came into being, but I believe that our biggest opportunity is number one the growth to our retail division. Second is the growth to our wholesale whether it’s internationally or North America. Third is through some of these special collaborations, whether it’s U.S.

government or also as you know our involvement contract. And then we also have the opportunity of doing more business with even you said Disney or even Amazon I mean we don’t know we expect that to do well, but the drivers are going to be areas that’s not within our own control right now..

Understood.

And then one additional question as a follow-up from last week’s event, you mentioned discounting from competitors as pretty severe I think over the last six months, really probably over the last year and that you win your customers off of those discounts and I think you said there is an opportunity to mix them in a bit more maybe in fiscal '18 versus '17.

What are you seeing from your competitors in terms of their discounting? Are you starting to see it pullback at all? And does that provide you a better opportunity to have more effective promotions, when you target them because competitors maybe aren’t discounting as much.

How would you characterize it?.

Jeremy, I don't see any change in our competitors, if anything people are becoming more discount oriented. Last week, I saw in the New York Times some big store saying Black Friday is in July, 60%, 70% off, I mean that's what people are talking about as sales.

So for us to have 15% off, 20% off it can only be done because the credibility of our brand and because of the fact that we start with a credible price. We don't increase them just to raise and to lower them. If we go to 50% 60% off we will have nothing left. So we start with a credible pricing, and we're going to continue with that.

And for us, the messages you're going to see us get across is why Ethan Allen is not only a known brand it's a desired brand because of our quality, because of our values and because of the service we provide. That's going to be the focus of our but that will continue to be the focus of our advertising.

In fact, we're going to accelerate that, and not fall into the trap of increasing our discounts. .

Got it, thanks Farooq. And good luck this year..

All right Jeremy. Thanks. .

And your next question comes from the line of John Baugh with Stifel. Go ahead. .

Hello, John. .

Hello, Farooq. Thanks for taking my questions. And sorry I couldn’t be at your actual event but I was on the webcast..

John we missed you I've been seeing you for only 25 years..

I know I missed a year. I'm independently boxed, what can I say? The -- normally when you run a promotion in the month, it stack to the end of the month. So when we ask you how is the quarter started on the first month you are always able to say well, we run our promotion at the end. So we don’t know because all orders coming at the end of the month.

Was that different with the July 4th promotion, and therefore I guess the question simply is do you really know how July came in at this point? And are you willing to give us any kind of numeric direction rather than it was quite strong..

John it's a good question. This time and we said it, we would not have said that July is so far strong because of the fact that in July, for 4 days we ran a very special celebration of our 85th year event. It also coordinated with the Prime Day of Amazon so we coordinated all of that Disney too. And it ended with a very strong 4 days.

However, having said this, our end of the month is still strong and this is now coming this week that will determine to a great degree how the overall month will end. But comparing this period up to now to July of last period it is strong because of the event of those 4 days..

Okay, thank you. And then I'm curious on Amazon, how are you and or we going to understand the pluses and minuses of that relationship. And then I guess I 'm getting at things like cannibalization versus truly incremental sales.

I mean, what kind of -- what are you looking for internally and what if anything will you share with us externally about Amazon going forward? Thank you..

Well John it's a little bit early to understand how -- where it will end up. We have started in the right matter. We have established an Ethan Allen design of course in collaboration with them a design studio on Amazon, which reflects as I said, our website.

We also going to have the ability which we are starting actually this week of having live chat of our designers through this website. We are servicing the products, we are through our network. And so we look upon it as number one, as an opportunity to reach more people that's a main thing. And now we will see how many people we reach.

And there will be somewhat more often acceleration of visibility of our website right now. We just want to make sure it’s working right, lot of work has gone through it. It is projecting well. But starting the next few weeks, they will accelerate and we will also have do some advertising to make our designs studio known.

And main objectives is to expand our reach to a very large base of customer that Amazon gets.

How much of that will then go and buy through the Amazon? How much of them will come directly to Ethan Allen we don’t know, but it’s alright, we look upon it at this stage as incremental business and we look upon at the fact that this partnership with Amazon is important.

I think, it will benefit us and it should benefit them also, but it’s too early to tell. So, we are not attributing at this stage, counting a lot of this business coming in, we don’t know..

And Farooq I apologize if you commented about this before, I missed it if you did, but if you commented on any margin implications of Amazon, I assume you are paying them some sort of a fee maybe it will help them with the ad spend maybe not. I would presume it would be less as they have already got all the customers.

And then of course not paying sales commission assume you control the pricing, all the wholesale pricing on there. But anything you’ve given out or could share margin structure..

Well the margin structure is keep in mind that we do obviously will compensate Amazon, keep in mind that the product that we are selling is at our retail prices. And though there is a margin, but wholesale and retail.

So, small portion will go them, but rest will come to us and we will do is we will share portion of that with our retail network because they will be doing the work of logistics, servicing and even providing some interior design help. So, it works well.

Now, as you initially said if all of this business is cannibalization then obviously it is going to lower margin, but we don’t think so. We believe a lot of it’s going to be incremental business so that we have the opportunity of sharing the margins and doing reasonably well..

Thank you and good luck..

All right, John..

And you do have a follow-up question from Budd Bugatch with Raymond James..

All right, Budd..

Well I don’t think we got the answer for the planned advertising for the year? That was the question that I had, if you’ve given it, since I missed it..

No, no I’ve basically said that we’re going to do it by quarter-by-quarter, now just to give you a perspective Budd this last -- in fiscal 2017, our advertising spent was 5.2% of our total sales versus 4.3% in fiscal 2016. So, that is what created also this spending, I’m looking at advertising expenses for fiscal yes right.

For fiscal 2017 it was 5.2% of sales, interestingly the total dollar amount was what is this $39.7 million, it’s too small to read. And the previous year in 2016, we spent $34.1 million. So, we spent 5.2%.

I would say Budd that for purposes of your, you need to see, how much we’re going to spend, but I would say you can use your judgment between 5% and 5.5% for the whole year that will give you sort of an understanding of how much we might spend..

Okay.

And I guess my other question is what are you seeing in the way of cost and any thoughts of -- any need for a price increase or have you taken a price increase?.

We are taking a price increase on selected products, actually effective August 1st. So, now it is small, it was most probably it will may have average about 3% or less. And it will reflect to a great degree increase in compensation, medical costs.

And then of course having said that we see when we give some discounts how much of that is loss so it’s all of this price increase is fine, but the net-net is what’s important. And the net-net as you know is a challenge always.

So keep that in mind the price increases are there, but really what matters is how much of that really is maintained and how much is given away when we give discounts..

I am aware of that. Thank you very much for that information and good luck on the balance of the quarter..

Alright, Budd thanks..

And your next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please go ahead. .

Yes, hello Cristina..

Hi, good afternoon. I wanted to ask about the mix of wholesale versus retail here in fiscal year 2018.

How should we think about that given the initiative you have like Amazon and Department of State would benefit more wholesale or will retail also see a lift from those?.

Well, it’s a good question. There are two elements to it. First is the retail as I said when the question was asked about our opportunities and I said we have an opportunity to build our retail business.

In fiscal ‘17 our retail division had net sales above $604 million that is an opportunity for us and of course was down from the previous year by $626 million. So our objective is to grow our retail business because we have a strong network out there.

Wholesale also has an opportunity of growth in fact wholesale because of all this business we are talking about, the State Department, our international contract will go into wholesale, but overall Cristina I would think that our objective is to grow both, we have an opportunity of growing both wholesale and retail..

Thank you. And then as a follow-up, looking the order intake in May and June and July so far, which has been a lot better than when you saw earlier in the year.

Do you think the consumer is feeling better or you attribute that mostly to the promotional events picking up?.

I think it’s combination of both, I think that we did feel right after the elections or around that time people’s concern especially in the coastal areas where we have a strong presence in the West Coast, East Coast, I think to some degree we see that Manhattan still had issue interestingly, but we see for instance even Long Island is doing extremely well.

So it is picking up, so I believe that consumer attitudes are better and after a while listening to all this crazy news people gets -- people now -- people are starting not to listen to it. And I don’t listen to it too much, but anyway I think lot of people are not listening to it, which is important.

So I think it is that impact and also discounting is still taking place that is not abating..

Thank you. .

Okay, thank you Cristina..

[Operator Instructions] The next question comes from the line of Justin Bergner with Gabelli..

Yes, hi Justin..

Hi, Farooq, hi, Corey.

First question relates to just Amazon and recapping maybe some of the comments you delivered at your investor event, could you highlight what is different about your relationship with Amazon versus the relationship that other furniture retailers that might choose to sell through their website have just what features are unique to the Ethan Allen, Amazon relationship?.

Well Justin I am sure that there are lot of different variations depending upon who one talks to. So I cannot say about -- can’t give any examples of how others operate, what I think is important for our relationship is this that we don’t sell our products to the general markets. So we only sell our products through Ethan Allen, so our own network.

So our products are available only through Ethan Allen network, like for instance if we were to sell our product to some large furniture store department stores that would be a different that’s why it creates some complications.

So our products are sold directly by us and the products that are being sold through the -- keep in mind, we are the seller of record, Amazon is acting as an agent. So when they sale the product they sale it at the price at our stated prices. And we then deliver their products, we service their profits.

And that is a big difference and the big opportunity so that because as you know delivering furniture is not an easy thing. Our competitive advantage is that we have a national logistics network, which delivers wide cloud service across the country and that's what we are using with through the sales in Amazon..

Okay. And the chat feature, I mean, is that going to be unique to Ethan Allen or will in the future we find other retailers that are starting directly having that chat feature as well..

Well at this stage it is somewhat unique to us, but I can't speak. We don't have any exclusivity bringing even to the Amazon. The chances are most probably others will do. But again in our case it is being done with our 1,500 interior designers.

In fact we just started today 50 of them to start working on it, and we will then get more people to chat on the Amazon site..

Okay, great. And then switching to another business opportunity, on the State Department side, I guess maybe I'm a little bit confused as to why you're not going to start shipping until next year. I mean is this sort of setback or delay that's facing you and other participants in the program or is it something that's uniquely affecting Ethan Allen. .

No, no it is to everybody. What the State Department did was after they awarded the contracts they then went through an entirely different process of what's called a Fed bid process. So if there is a multiple source like this is.

So participants have given their products and offerings and they have sort of classified all of them in by numbers, and they spend a lot of time allocating those numbers. And those numbers are to be used like for instance if they want a traditional bed as traditional bed which has been approved by all these folks has a certain number.

And that number when they order a bed they order that number and that bid is send to all the four participants. And then you bid on it, and that bid it's almost like eBay and the bid keeps on you keep on having to keep on changing it based on how far you want to go in winning the bid. And it’s a crazy system.

But that's what it is and that's what took them a lot of time, but now it's operating and the bids are out and we are bidding and winning..

Okay, that's a good perspective. And then I guess the third I want to address is international side of the business. I think Corey said it was a little bit over 10% of sales this year. I'm not sure I got the exact number there. But why can't this international business sort of grow to be a much larger part of Ethan Allen's business than it is today.

I mean clearly you have a brand that has global recognition even if one kind of considers that a lot of the international sales are wholesale and retail value is still just a small fraction of what it would be in the U.S.

Sort of can Ethan Allen take international to next level and what's needed to do that?.

It is, it sort of is growing and look it's now this as what Corey said was 10% of our total sales versus 9.2% in the previous year. So it is increasing, and I believe it has an opportunity of increasing, but Justin it's our business model is a model based on service.

Lot of the furniture's sold internationally let's say in Germany for instance and other European countries sold as a commodity. And so you really have to compete only on price and that is not our business.

So our business model has been that's why we are expanding we are just opening for instance an Ethan Allen design center in Cambodia, we just opened in Taiwan, we are opening one in Indonesia. So that is our model and I believe it will continue to grow. .

Okay.

Are there partnerships and are other sort of relationships that can kind of accelerate the international opportunity or you sort of continuing with the model you have?.

At this stage the model we have where we have great partners for licensees but we’re not partners..

Okay, thank you and best of luck for rest of the quarter and year..

Alright, Justin thanks..

And there are no further questions in queue..

All right, well, thanks very much. If there is any more questions and comments. Please let us know. Thanks very much..

This does conclude today’s presentation. You may now disconnect..