Good day, ladies and gentlemen, and welcome to the second fiscal quarter earnings release call. [Operator Instructions] I'd now like to turn the conference over to your host, David Callen.

Thank you, Shannon, and good morning, everyone. I am David Callen, Ethan Allen's Vice President of Finance and Treasurer. Welcome to Ethan Allen's earnings conference call for our second fiscal quarter ended December 31, 2011. This call is being webcast live on www.ethanallen.com where you also find our press release which contains supporting details including reconciliations of non-GAAP information referred to in the release and on this call. Our comments today will include forward-looking statements that are subject to risks, which may cause the actual results to be materially different than expected when making those statements. Please refer to our filings with the SEC for a complete 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 more details about our ongoing business initiatives before opening up the telephone lines for questions. With that, here is Farooq Kathwari.

Thank you, Dave, and welcome to our second quarter conference call. Our positive momentum continued through our second fiscal quarter ending December 31, 2011, with good overall results. Net sales increased 5.7% over very strong prior-year growth of 21%. Gross margins improved further to 53.6%, reflecting a higher mix of retail sales and continued strengthening of wholesale operations. Our operating income for the quarter, excluding net charges for special items which Dave will discuss in greater detail, increased 48.4% to $15.6 million or 8.5% of net sales. Adjusted net income per diluted share was $0.30 compared to $0.19 in the prior-year quarter, a 58% increase. Our retail backlogs increased by 9.4% compared to December 31, 2010. While we continue to improve the performance of our retail division, our operating margins were impacted by the continued clearance of current products on the floor of our design centers to make room for very aggressive and exciting new product introductions. We expect to change about 60% of our product offerings from September 2011 to June 2012. The new products will make us more relevant and reach a larger consumer base. The clearance activity during the quarter ended December 31, 2010, had a net impact of about 150 basis points to our retail operating margin. We have aggressive product introductions also through the next 2 quarters. And as I said, by June 30, we would have changed the projection of our design centers by about 60%. During the quarter, we purchased another $10 million of our bonds and finished the quarter with a healthy $92.8 million in cash and securities. We have reduced our net debt by $50.7 million over the last 12 months. Our retail written orders increased 10.3% during the second quarter, including comparable store growth of 6.7%. After Dave provides a more detailed financial overview, I will comment on our business initiatives enabling us to continue our growth in sales and profitability. Now to Dave.

Thank you, Farooq. Net sales for the quarter were $183.3 million, up 5.7% over the very strong growth of 21% in the prior-year second quarter. Our retail segment reported net sales of $143.1 million, an increase of 9.2% versus the prior-year quarter, and included comparable design center net sales growth of 6.5%. Written orders booked during the quarter by our retail division increased 10.3%, including 6.7% growth in comparable design center written orders. The company-operated retail group finished the quarter with 147 design centers, up from 143 at December 31 last year. Our wholesale segment net sales were $106.6 million, an increase of 5.8% over very strong growth of prior-year quarter when wholesale division sales grew 19.3%. Our consolidated gross margin for the quarter was 53.6%. This compares to the 51.8% in the prior-year quarter. Our retail segment made up 78.1% of our consolidated net sales for the quarter compared with 75.6% in the second quarter of fiscal 2011. The higher mix of retail business drives a higher consolidated gross margin rate, but also drives higher operating expenses as a percentage of consolidated net sales. During the quarter, we incurred special charges that led into $1.7 million but impacted our retail segment by $2.1 million, for a loss on a sale of real estate and restructuring true-ups. These were partially offset by a net gain in G&A of $400,000 in our wholesale segment primarily related to insurance proceeds. Excluding special items from both years our operating income for the quarter was $15.6 million up 48.4% on a 5.7% increase in net sales showing again the significant leverage opportunity we have. Our income tax rate this quarter was affected by the usage of certain deferred tax assets for which we had previously established reserves. As a result the reported tax rate…

Thank you, Dave. We have many initiatives underway to grow our sales and profitability, including focus in the following 5 areas. Continue to refine our marketing program. That's our products, our message, quality, style and value under the umbrella of being aspirational and attainable. We are ready to further expand as we have made major, major structural changes. We consolidated restructured and expanded our manufacturing and logistics operations. We completed the consolidation of U.S. upholstery manufacturing to our major site in Maiden, North Carolina, and expanded the Silao, Mexico, operations from a 35,000 square foot facility to 240,000 square foot state-of-the-art manufacturing operation. We consolidated our case goods to 3 U.S. locations in Orleans, Vermont, Beecher Falls, Vermont, and Pine Valley, North Carolina, and also made a successful conversion to custom manufacturing. For our Honduras plants, we have started to bring in equipment and qualified associates. We expect to start production in that facility within 6 months to provide added capacity to service our expected higher demand. Our excellent manufacturing plant in Passaic, New Jersey, is also ready for expanded production. And our logistics consolidated in Dublin, Virginia, and Atoka, Oklahoma, is also positioned for growth. We have strengthened our retail network and are positioned to grow in North America and internationally. We have retained and reenergized our experienced associates, acquired entrepreneurial and talented interior designers and promoted management associates. The design center network will also be ready to project an exciting attitude due to our major new product introductions. New products have been a major focus to strengthen the 5 lifestyles. As I said earlier, by June 2012, we will have changed our design center projection by over 60% in a 1-year time period. The expanded product program is enabling us to increase our customer base, both from a design and also an attainability point of view. Adding appropriate technology has been a major focus, in retail and in the marketing of enhanced website. Touchscreen technology and now our new introduction of the Ethan Allen tablet will enable us to develop a competitive advantage of combining personal service with technology. We have also been adding accessory technology to our manufacturing system. And our retail division has introduced the newer version of our retail information system. As we indicated in our news release, we remain optimistic to grow our sales and profitability due to the many initiatives and also the improving trends in consumer attitudes. We note that the consensus estimates of the analyst for quarter ending March 31, is an increase of 143% in diluted earnings per share of $0.17 from the previous third quarter year earnings. While a significant improvement in profitability, we remain cautiously optimistic in achieving this objective and I believe that the analysts will not and if they don't change these numbers they will not miss them. And with that, I would like to open for any questions or comments.

[Operator Instructions] Our first question comes from Brad Thomas with KeyBanc Capital Markets.

First of all, just to follow-up on your closing comments there Farooq, you were referencing I think the consensus number of $0.17. Could you just repeat the comments that you made. Did you say that that number was reasonable or one that seems too high. Just wanted to make sure I understood?

No, I said it was achievable and I also said that you folks are not going to miss it, if you don't make change these numbers too much.

It's too low, right now. Okay.

No, I said the $0.17 is achievable.

Is achievable?

Yes. What I was saying is, I was joking of course, Brad, for 20 years back and Budd Bugatch also made a comment. And 20 years back I said, we don't miss numbers, you folks miss numbers. So anyway, go ahead Brad. This was a joke, but Budd caught and he made yesterday in his reports.

I just wanted to make sure that was reasonable. In any case moving on, I was hoping you just talk a little bit more about some of the new products. The goal obviously is 60% by next June. How far along are you at this point and what's the response been like?

Brad, in September and October we introduced our Elegance Lifestyles. Response was good. And it's growing because that also takes few months in terms of getting it fully integrated at retail levels and working with consumers and our clients. In January, that's this month. We also launched again a part of our new product introductions and through our advertising, our direct mail magazines, are very important element of it. And we will introduce by stages, in February, in March, in April and May. By May, we would have completed the introduction of all the new products. And these are the products that we did show in our Danbury design center when we had our investor conference. While there we had introduced all those products but to implement in the retail we are doing it by stages. And then also, it sort of impacts this whole issue of clearance because it's a major undertaking. To introduce the products in January, as we just did we had to clear the products in December and in fact, November and December. Now to introduce products in February we have to clear the products in our inventories mostly at retail but also some at wholesale in January. And we'll be doing that every month until June. So new products are coming in, lot of activity going on. And by June we would have had these products in all our design centers and at by that time also cleared most of the floor samples in inventory that we have.

And Farooq, what's the normal change over on a typical year when you don't do things this significantly?

Maximum 10%. This is a massive undertaking in this last 1 year.

And can you just give us an update on advertising during the quarter and how much that was up versus last year? And what level of investment you made?

For the last quarter and for the last 6 months as I'd also indicated previously, our advertising are about the same as the previous year.

And would you expect that to continue in the back half of this year?

Yes. It is possible that with this there might be slight change, but substantially it'll remain the same.

You referenced a number of investments that you're making in some of the manufacturing facilities. Can you just give us an update on where you stand in terms of capacity utilization, how much you could increase sales at the current and what your capital plans are for the year?

We've had to balance our ability to grow the business by making sure that we have the capacity to service. It has to be in balance. And fortunately so far, it has been in balance. I talked about the fact that we had major consolidation of our manufacturing, case goods, upholstery, logistics. But good news is that our case goods is operating more efficiently which also does show on our wholesale margins. One of the reasons our wholesale margins are higher is because of the efficiencies of our manufacturing. All the changes that we've been making, they are now starting to get somewhat normalized. It also has meant that we have somewhat of a better capacity. At this stage, as I know, it's a moving target, but we are approximately at 80%, 82% capacity in our manufacturing. But we are bringing in Honduras; we are adding capacity in our U.S. manufacturing and also continuously adding capacity in our Mexico operations too, because that's also very, very critical. And in terms of capital expenditures, we had said previously $12 million to $15 million. And I would say at this stage, it could be around $15 million to $18 million in that range.

Our next question comes from Matthew Fassler with Goldman Sachs.

I guess my questions are focused on topline. Can you talk about the relationship between the September quarter's written sales and the delivered same-store sales in the December quarter? It looked like there was a somewhat higher written sales number than delivered sales. Was there anything odd about backlog or anything like that that would explain these gaps? Sometimes these gaps do pop up.

First of all, our second quarter is generally lower in written sales, because as you know, December is not a strong month for us. So really you are talking about other months, if you compare our other months, it's like comparing I think 2 1/2 months to 3 months. And that of course impacts because of the fact that December quarter or second quarter being lower in sales does have an impact on the delivered sales on the third quarter. Generally, our first quarter and the fourth quarter are the stronger quarters. And that's how it works. So in the second quarter, as you can see that we delivered based on the fact that we had an increase of 5.7% on top of a 20% increase in the previous year, was a meaningful increase this year. And I would think that the opportunity we have is to have a stronger written sales in this quarter, because we have January, February and March, that's an opportunity which would then reflect in higher delivered sales in the fourth quarter.

As I look at September, the written comp was I guess 11.4%. The delivered comp in December was 6.5%. So I guess it was a bit lower than the written number would reflect. Would you say that in the March quarter to the extent that you had written sales number in the mid to high-single digits that the delivered sales growth could be higher than that? A way to catch up? Is that sort of an implication?

We don't know because of the fact that today our lead times are relatively low. We ship pretty fast. So right now, it's a little bit early even in January, while as I said, the early indications are that people are somewhat more optimistic. Our traffic has increased. But Matt, the last 5 days of every month makes a big difference. Every March. And because of the fact that our lead times are faster, we do tend to ship faster during the quarter. So it will all really depend on whatever happens in January, February and March.

And I guess another question on the clearance activity that you discussed. It sounds like the transformation on the merchandize is going to be of great consequence. Was there any impact on velocity? Did the lower price points presumably associated with clearance materially are hurt the sales number? Did the movement of goods helped the sales number? How would you say it impacted other than on the margin side? Just looking at the topline, how would you say it impacted the sales?

It is sort of double-edged sword. We do sell products at clearance. What it does is it takes away selling regular product at a higher gross margin. And that's what happens with clearance. And so while the chances are that if we didn't have clearance, most probably we would have similar or even more sales, but we would have that at a higher margin.

And then finally, you just alluded to traffic being better. It'd be interesting just to sort of get your perspective on the last 6 months or so obviously. We entered the summer on a pretty good trajectory, there is a lot of headline risk, I guess popped up in July and August and may or may not have persisted. How do you think traffic trends evolve over the past 6 months or so?

The traffic trends in the first quarter had improved. In the second quarter, we could see that the consumers becoming nervous with all the political activity, all the foreign issues. We can see that. With all the issues that are taking place. But then in January and right now we see this month, traffic has increased, people are somewhat more optimistic. Yet on the other hand, Matt, through all this activity on the politics and the negative things that are taking place. We have to watch that also.

Our next question comes from Budd Bugatch with Raymond James.

One of my questions has to do with what was the impact if the additional clearance on gross margin. I don't know that I heard a number, maybe you did give it and I just missed it.

What I said was that on the retail division, it had about 150 basis point impact on our margins. When you take a look at it, we showed in the retail division about $500,000 loss. And after we reported a higher loss but as Dave mentioned, we had sold a vacant property in the retail division. And the loss of that property went into our expenses in the retail division. So once you take that out about a $2 million that we took out. We ended up with the net loss of $500,000. And I just said that our unusual impact of all this clearance that we are having which is very abnormal had approximately 1.5% gross margin or 150 basis points. And if you take that into consideration, we would have ended up with about a 1% operating margin in the retail division.

Secondly, just wanted to make sure I do have all the items. And we do have that loss, David you said there was an insurance gain in the wholesale. Is that right?

Right. We had had a fairly minor flood in our Beecher Falls operation, and we just recovered the proceeds and actually had a gain on that.

I thought I remember that. So that was the Beecher Falls issue. Farooq, you talked a bit about expansion and I know you were expanding some of the upholstery production capability in Honduras and you're talking about some of the other efficiencies and ability to expand. Is there expansion too of design centers happening? Do we have a cadence of that if you're planning some of that kind of expansion?

Yes, right now 300 design centers, 147 operated by the company retail division. Others are licensees. Maintaining what we have has been a very important part of our strategy. And in fact, not only maintaining, but even weeding out design centers that were just trading dollars. In fact in the last quarter, we also had 2 or 3 design centers that we closed. In fact, we wrote off some of the leasehold improvements and everything else for the leases we had. We terminated the lease earlier and were able to get out. But we did write off most probably close to $200,000 last quarter. Our focus has been really to realize more from existing and even to relocate. For instance, we just opened up a new design center in South Miami a couple of months back. Tomorrow, in fact, I'm going to the grand opening of a design center in Indianapolis. It's in the town center over there. We opened a new design center in Seattle, Washington. We are now in the process of looking to open up design centers selectively in the United States, because here really there is not just more design centers, making sure they are in the right places and that we realize more potential from them. And that's what we're doing. Overseas has been somewhat more of a focus. We are in the process of expanding in Canada. As you know, we're already there. Arne Borrey has joined us as our International VP. So I've been traveling with him to Europe, to India, to Canada. Our objective is to expand in Montreal. So as we go in the next 6 months, you're going to see us open somewhat more aggressively internationally. And China continues to grow.

So China at the end of last quarter I think had 61 design centers. How many are there now?

67.

So Richard has grown by 6 more. And you have 153 non-company-owned design centers. Is that correct now?

We have 147 company and the rest non-company.

So you get to 300.

Yes, 299.

And I know we'll get the breakout of that in the Q, I guess?

Right, yes.

Finally, you talked about having all the new products in place by June of '12. What percentage is done already? How many of the new patterns and new SKUs are already in the stores or were in the stores by the end of the December, and what's left to do?

Between what we introduced in September-October and what we just introduced in January, I would say it's approximately 40%. 60% is still to go .

So we have that same kind of clearance issue that's going to hit the last 2 quarters of this fiscal year?

That's right. Keep in mind that we have been able to overall increase our margins substantially which has been good. And you can imagine that without all this activity going on, our margins would have been even better.

I understand you sir very well. You've done an excellent job of leading the company through this transition.

We've got a great, great team, as you know, really in retail, in manufacturing, in operations. And as you also know, they're very, very experienced. Our folks have been around with me for at least, most of them, for 20 years plus. These changes we're making are amazing. The amount of change is so major that if we didn't have the experienced group of people that we do, it would be chaos. It's already pretty hectic. It'll be chaos.

Our next question comes from Todd Schwartzman with Sidoti & Company.

You talked about the gross margin through citing the higher mix of retail sales, and that's certainly a continuation of what you saw in first quarter and also the strengthening wholesale operations. Could you maybe expound a little bit more as far as the reasons for that sharp improvement? Especially, I'm interested in hearing about the 70 basis point sequential expansion from Q1 despite slightly lower sales.

There are 2 major areas, Todd, that impacted us. One is the composition of retail to total sales. That has a major impact. It was about 78%. And that is a major impact. The second is improvement in the gross margins in our U.S. manufacturing, especially in our case goods division. Those are 2 areas that contributed to this change in gross margins from 51.8% to 53.6% in our second quarter.

And what the 52.9% to 53.6% from first quarter to second quarter this year? That's pretty impressive right there.

But same thing, mix between retail and total and continued improvement in our U.S. manufacturing despite the fact, we still have been gearing up Mexico. We have been absorbing those costs. We are now gearing up on Honduras, while the little bit of that cost might have been the special cost and most of it were absorbing. But we've got to get those going. And we are not going to able to have the capacities to grow as until we also continue to grow our manufacturing. Now Todd, as you know we're taking the difficult route. We could just have everything made by others. But 70% we make ourselves. And that is by itself on one hand, it gives us a lot of cost but I think in longer run it gives us an ability to maintain our quality, maintain more control about our future.

Also I heard your comments about the traffic trends for the quarter in the January and that's certainly helpful. But is there anything else going on in any of the metrics that you're looking at that contributed to your citing the improving trends in consumer attitudes. Where is that most evident if not traffic?

While there are number of factors, one I think is there is certainly for what we hear as you know, I mean, I get weekly report from every design center around North America, every week. Talking about trends, there is more optimism, People are somewhat tired of not fixing their homes. While there is some improvement in new homes but the fact just people are spending more time in their homes and improving them. So that's one factor. Other is that in December, we don't have a lot of traffic. People don't involve with buying toys and gifts and everything else. So they end up coming more in January, this year we saw little bit more than we saw last year.

Finally on CapEx, you spent $8 million in the quarter, I think it was Q2.

Yes.

The implication backing into the back half is spent of $3.5 million to $6.5 million fully for the second half of the year. Is that a reasonable target you think?

Because of this, our major expenditure was the purchase of the Honduras plant in this last second quarter. And now as we go forward, while we continue to invest and we're bringing up Honduras, I would think that, as I said, anyway between $15 million to $17 million or $18 million is what we'll end up spending at the maximum.

Our next question comes from Joe Havard with Hilliard Lyons.

The store count if I got it right, dealer-owned went from 148 to 152 sequentially. You added a store net. The growth in the dealer I suppose, Farooq, was all international. You've got a couple of years, or better more under your belt now? What did those stores, the international stores, maybe particularly China, what is there topline performance look like relative to other internationals relative to U.S.?

China, of course has shown the most growth, domestically obviously compared to domestic and even other international. Because of the number of stores that they have opened up and locations that they have, I don't have the exact numbers in front of me. But I would say that just given an approximate I think they have been growing in the last year, they had showed it about 20% to 25%.

On a total dollar base Farooq again just approximate, are they typically going to be half the total revs that would be driven by a typical domestic store? Or is it totally different type of number?

As you know, it's the business that is wholesale and the sense that it affects our wholesale business domestically, of course it's greatly impacted because of our being in the retail business. So all our business international other than Canada is through licensees and it reflects on our wholesale business.

What I'm getting at it on a per store basis, the dealer bucket, it looks like it's slightly deteriorating trend line. I'm just wondering if that's a function of the more rapid growth of the international side and the fact that maybe the overseas store particularly maybe run a little bit less total volume.

I didn't understand Joel, the fact is this in the last 3 years we have had a consolidation in some of the domestic licensees. In some markets it was not worth maintaining it, just a few markets. And few others we took over from our retiring retailers as has been our custom in the last 15 years. And that's what we continue to do. We've got a strong group of our independent retailers in North America. And the ones who are operating are strong. They're investing in their businesses. At this stage, not many of them are opening up new design centers or new stores. And that is not also something that we recommend they do. We really want them to make sure that they remain healthy, they do well on what they have to realize more potential. And that's what we do in our retail division. At this stage, I don't have a tremendous interest in opening a lot of stores in North America. I want to make sure we double our business from what we have. And that's the opportunity we have, Joe.

You've also talked about the migration at least at the margin some of the domestic dealers to smaller footprints, in some cases replacing a traditional box with the more boutique format. I'm sorry I am drawing a blank on the name you use for it.

We call them design centers. You're talking of studios. But really what we've done, for instance, we just opened a design center in South Miami, which was a 15,000 square foot and now it's about 7,000 or 7,500 square feet. We just opened up one in Indianapolis that was I think 18,000 square foot and replaced by about 10. We just open one in Seattle that was also 15,000 and it was 9 or 10. So I think it's tremendously important for us to be in the right locations and somewhat smaller space, because today that brings us to the talent that we're acquiring. We are acquiring very talented interior designers, 90% of them who ran their own businesses. They are able to do a lot more with less. In fact, most of them they ran their own businesses, they didn't have much product. Secondly, technology is playing a very important role. Our website, our touch screens and now as we go into the next generation of the tablets that we're introducing, technology, personal service also relates to smaller floor space.

Our next question comes from Barry Vogel with Barry Vogel & Associates.

Farooq, I want to ask you a capital allocation question. I commend you for doing the no-brainers on your bonds. That truly is a no-brainer. And of course you haven't been buying many shares over the last few years and that's understandable. And you have raised your dividend. So going forward, in terms of your excess cash generation, your current balance sheet strength which is exceptional right now. What would you list as far as priority in capital allocation?

Well, I operate in an old-fashioned way. I say to my folks I need about a $100 million or close to that in cash and if you got extra money, first of course we got to make sure we've invested in our business, like we purchased Honduras. We in fact even purchased some popular design centers. Fortunately, Barry as you know in the last 15 years I went against the conventional wisdom. And we owned 40% of all our real-estate in our stores and we owned 100% of all our manufacturing distribution. This recession has given us an opportunity to show that it does work and we generate cash. If we didn't have it, the real-estate cost can kill you. So we will selectively, when it makes sense keep on purchasing real-estate if it makes sense. We're investing in technology. Our manufacturing is in pretty good shape. Now we got to make sure we get it operating at a higher level, especially Honduras, Mexico, our U.S. operations. And then as you rightly said, we pay about 5 3/8 on our bonds. Interestingly, considering that they are not investment-grade, they sell almost as an investment grade levels. So the market already gives us a rating anyway. So we are not able to buy them too much at a discount a little bit. But as you know, we've already purchased $50 million. So our capital location is going to selectively buy bonds. But still making sure we have enough cash for our business, for our expansion. Then also, we have increased our dividend last year and if it does make sense then with the Board of Directors we'll discuss about the possibility this year, again a small increase that will make sense to consider. And then if we have something left we'll see whether it will make sense to buy our shares back. And that to me is somewhat of a lower priority Barry. In the last 5,6,8 years we bought $500 million of stock.

I know. So basically what you're saying bond purchases would be number one, dividend increase is number 2 and number 3 might be share buybacks.

Yes, I would just slightly reverse that, as to number one is to invest in our business.

No, I know that. That's understood.

Right. Other than that exactly what you've just said.

And can you tell us a little bit about Honduras. That announcement that come out after your last quarter's conference call and I probably just put it in my file. So I don't have any color on that. What did you pay for that purchase?

Barry, we got a great deal for our fantastic facility. Now you can know that we spent so far. In our capital expenditures you'll see that also includes Honduras. And you can see it was overall not a lot of money we spent. But it's a 164,000 square foot facility on 18 acres. And it was a case goods plant. Based on what we spend and what we'll need it to get it going will cost us about anyway between $10 million and $12 million. Because we've got to bring in the high-tech equipment, approximately half of that we've already spent. The other half we'll spend in the next year or year and a half year, Barry.

And so what are you going to produce there, strictly case goods?

That's right. Initially we're going to be making chairs.

Chairs?

Right. Right now our chairs are made all over the world. We'll going to get them back under our own control.

And David, as far as the operating rates in the last quarter breaking down, case goods and the upholstery because I know you talked about it. In an answer to a question you said it was 80% to 82% combined. Can you break that down case goods and the upholstery operating rates?

Well, I would say the same because of the fact of the opportunities of capacities of growth we have in Mexico and Honduras.

So you think upholstery was only 80% to 82% in the quarter?

You're talking about?

The operating rates?

Yes, if you take into account the capacities, its additional capacities we have in Mexico.

Obviously, you're thinking domestically, excluding Mexico. And as far as you said your costs on the Mexican expansion are falling. Can you give us some color on that?

Sorry, you said our cost in?

You said that on your commentary that the cost of your Mexican expansion which was a significant expansion over the last few years are falling?

I don't know what I said but I think what perhaps you mean is that we've already spent most of that money in Mexico operations, into the capital expenditures, in buildings and everything else. Now we've done that. Now we are increasing production. We've got to in that respect continue to spend some money, but more for the money capital expenditures we've already spent.

And David, could you tell us what the D&A now is projected at for fiscal '12?

Around $20 million to $21 million, $22 million, maybe.

Our next question comes from Jeffery Matthews with Ram Partners.

You talked a lot about what you're doing manufacturing wise in your U.S. plants. And I know that's the bulk of your 2-thirds or so of your manufacturing. Could you talk about the relative competitive disadvantage to U.S. manufacturing in general it's been under over the last 5, 10 years? And how that maybe has changed to your advantage?

Yes, it's a very important issue. If you take a look at upholstery manufacturing, it gives us a very great competitive advantage relative to offshore because of the custom nature of our business. And also because of the fact that while labor costs are obviously very, very high in the United States compared to offshore countries, we have been able to develop a fair amount of technology that we've brought into the United States and then complemented with a very high labor operation which is cutting and sewing, which we've taken to Mexico. So when we combine that, that gives us a good competitive operation in terms of relative to cost when we really compare it to overseas. On wood products. Case good is a different story. In case goods, 3 or 4 years back or 5 years back when everybody started going overseas, it was very evident that the cost of doing business in the United States in building case goods was such high that people went overseas. We decided that while we will also go overseas in those areas which were tremendously labor-intensive, we'd maintain our manufacturing. Because first we are located in areas which has a great history of crafts people. One you close, you lose crafts people. Second, we are in one of the greatest forests, Appalachian mountains, as one of the greatest resource of hardwoods left in the world, which is growing and not going down. Third, we have been continuously investing in our plants over the last 20, 25 years. That gives us a good head start. But yet, when we started 3,4 years back, the competitive disadvantage was almost 20% to 25% in terms of the gross margin of cost of making overseas and then making it here. Now with customization, that gives us a competitive advantage, because it's very hard to develop custom manufacturing overseas. That's like kitchen cabinets and all of that stuff is made more domestically. Second is the fact that we have been continuing in narrowing down that difference. But still, the difference in gross margin if you just look at it is approximately still 15% between what we make here and what's made overseas. So we have decided that in the short term, we will take that lower margin, but keeping in mind our overall margins are still relatively healthy compared to others. But longer term, it gives us a competitive advantage, because once we give it up, there is an issue like, for instance, we are now shipping 60% of the product we sell in China from the U.S. In fact, as quite interesting, we have an operation in Passaic, New Jersey, which makes our accessories and lamps. Right now, we're making thousands of lamps for China. 5 years back, it would have been a joke to say that we'll be making lamps in United States for China. So things are changing, and we are glad that we have that capacity to manufacture in United States.

Our next question comes from Joe Feldman with Telsey Advisory Group.

I know you touched on it before, but it seemed like the consumer being a little more optimistic in January, I guess what was it that gave you that impression? I guess were you seeing that the size of what people were buying or the quality of what they're buying trading up, anything to back that up a little more?

Yes, Joe, keep in mind it's only 3 weeks or so in January. But if somebody were to ask me what the trends have been this month, because for us January is an important month, having said that in December, we don't do a lot of business. What we have seen with the reports we're getting from our design centers. I mentioned also that we are very, very close to our design centers. I personally get a report from every design center manager every week. We have conference calls. We get information. And what we're seeing is first we have higher traffic numbers. We know that. So second more important is the attitude is somewhat better. How much it's going to translate into business, I think that we're going to see as we end January and then we go into February.

If I recall, at your Investor Day we talked about having some more entry price point products as well for consumers. And I guess I was wondering if you're seeing any difference in the mix? Also, is the margin any different on entry price product? I would assume not, but just kind of curious.

Joe, one thing is of course you know that we make one level of quality of products. In our upholstery or sofas, it doesn't matter whether it's $1,500 or $3,000, the internal construction, external construction is exactly the same. It is a fabric that one uses, the option one puts in. Same thing in our wood products; we have one level of quality. Now what we've been able to do is to develop products with high level of quality. For instance, in upholstery, the fabric is still very good, but at less expensive rates, because you can go for great fabric from selling it at $1,500 to selling it at $4,000. So we have been marketing and you're going to see a lot more projecting the attainability of Ethan Allen within our current programs without changing our quality. So you're going to see a lot more of that in our marketing as we move forward. Not completely right away, but in the next coming months, you're going to see more of that.

With regard to operating the costs and the expense side of things, I mean you guys have continued to do a good job there and you got leverage even with slightly less sales and what some of us had modeled. Is there more to go there? Can you keep driving those costs down and controlling? How do you do it?

Right now, we're benefiting from the leverage. As you know, Joe, when things in 2009 go the other way, being a vertically integrated company, everything is impacted from saw mills to case, upholstery, manufacturing, logistics. But on the other hand, when we start going up, we are able to benefit, and we're also benefiting from all the major consolidations that we did in our manufacturing, that we did in our logistics, that we also have done in regions and are still doing, because as I said, 4,5 years back you could put 2 stores pretty close by and get away with it. Not anymore; today you've got to make sure that they are in the right place, and that affects our operating expenses. I think from an operating expenses point to view, most of it is behind us. And we have gotten a tremendous amount of leverage. Now as we go forward, we're going to have somewhat of a more normalized increase in our earnings relative to increase in sales, not 50%, 60% or 80%. I think we've benefited from that. I mean I think we should hopefully have healthy increases. But I think 70%, 80% increases are somewhat normal. And you know, folks also take a look at the model we gave previously of the various scenarios. Interestingly, we are pretty close to it even today.

I'm showing no further questions at this time.

Well, thank you very much. Good to have all on the call. With that, I look forward to continue our conversions. Any questions, please give a call today.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.