Good day, ladies and gentlemen, and welcome to your earnings release for the Third Fiscal Quarter Conference Call. [Operator Instructions] I would now like to turn this conference call to Mr. David Callen. You may begin sir.

Thank you, Kevin. Thank you and good morning. I am David Callen, Ethan Allen's Vice President of Finance and Treasurer. Welcome to Ethan Allen's earnings conference call for our fiscal quarter ended March 31, 2012. This call is being 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 our press 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.

Yes, thank you, Dave and thank you for participating in our third quarter call. With an 8% increase in sales, net income per share doubled, reflecting continued operating leverage from our vertically integrated structure. We had strong gross margins of 53.6% compared to 51% in previous year third quarter. The higher gross margin reflects higher percentage of retail sales to total sales and continued improvement in our operating efficiencies. While strong gross margins, they were negatively impacted by about 65 basis points or $1.2 million during the quarter due to sell-off of floor samples in the retail division to make room for major product introductions. This amount of $1.2 million is not treated as special item for our non-GAAP reporting. Our operating expenses for the quarter were $86.5 million compared to $78.3 million in the previous year quarter, an increase of $8.3 million. The increase is due to number of factors including investment in strengthening our retail management and interior design associates adding about $1.8 million to our operating expenses during the quarter. Please keep in mind during the quarter, we wrote, that is our booked orders were $164 million while shipments were $131 million. It would have not been possible to write $164 million without the strengthening of our management and interior design associates. During the quarter, we expensed $800,000 in getting the design centers ready for new products. Our advertising expenses increased by 23% during the quarter, much of which is for brand building in China coinciding with presentation by our interior design associates to media and others in 4 major Chinese cities. The 23% increase in advertising is on top of 36% increase in the previous year third quarter. Our expense has also increased by $500,000 relating to our new Honduras plants. Other costs were volume driven including our shipment and delivery charges, which are expensed to selling expenses. The Honduras expenses are the only expenses treated as special items for our non-GAAP reporting, while all other expenses and the gross margin impact are reflected in our earnings per share of $0.14. For our fourth quarter at this stage, we expect to also incur cost and expenses for new products to be about 70% of what we spent in the third quarter. While our inventories remained substantially unchanged from June 30, 2011, inventories increased from March 31 of the previous year mostly due to receipt by our retail division of sold orders pending delivery to customers. This also reflects intercompany eliminations between wholesale and retail. As stated earlier, the retail division wrote over $30 million more than shipments during the third quarter. After Dave provides an overview of our financial results, I will offer comment on our many initiatives including the launch of new Ethan Allen Express program. Dave?

Thank you, Farooq. Net sales for the quarter were $175.9 million, up 8% over the prior year third quarter. Our retail segment reported net sales of $131.4 million, an increase of 12.3% versus the prior year quarter and included comparable design center net sales growth of 9.4%. Written quarters booked during the quarter by our retail division increased 11% including 8.2% growth in comparable design centers written orders. The company operated retail group finished the quarter with 149 design centers up from 145 at March 31 last year. Our wholesale segment net sales were $121 million, an increase of 16.3% over the prior year quarter. Our consolidated gross margin for the quarter was 53.6%. This compares to the 51% the prior year quarter. The consolidated gross margin during the quarter is benefited by the higher mix of our retail to consolidated net sales and also from operational improvements and favorable product mix. Please keep in mind that the higher mix of retail also drives higher operating expenses as a percentage of consolidated net sales. Our operating expenses during the quarter included $0.5 million of costs to ready our Honduras plant for operation. These costs have been consistently treated this year as special items relative to our non-GAAP result. Operating expenses excluding special items in both years increased 10% to $86 million including a 22.7% increase in advertising during the quarter on top of the 36.2% increase in advertising investments during the third quarter last year. We also continue to invest in our retail division with additional designers and management to support growth in the business,4 more design centers than this time last year and we incurred $800,000 in incremental cost to get our design centers ready for new product. These investments enabled our retail division to write $30 million more…

Yes, thank you Dave. I would like to first mention that our quarterly dividend was raised to $0.09, a 29% increase. In our operations and marketing, our focus continues on our 5 priorities. The 60% change in new products by May has expanded our reach to more customers both in style and values. While this has been a major undertaking, our associates have accomplished this in a timely and efficient manner. As you may recall, we introduced our Elegance Lifestyle in the first and the second quarter of this fiscal year. And since January, we have been introducing new products every month. And by May of this year, we would have substantially introduced all the new products that we had first introduced to our retail network in the first quarter of this fiscal year. We have aggressively marketed the introduction of the new offerings with direct mail, national television, digital mediums, and wherever appropriate, with print. As I mentioned earlier, during the quarter, our advertising increased by 23% much of which was to help build our brand in China. The initiatives in the retail network include relocation of design centers to better locations. This fiscal year we have to-date opened up new design centers Indianapolis, Miami, and Seattle. In addition, 18 new locations were opened internationally. As of March 31, we had 149 design centers operated by the company regional division and 152 by our independent licensees. Our plan is to continue the process of repositioning our design centers. We continue the major focus of acquiring qualified and entrepreneurial interior designers. This fiscal year we have acquired 218 new interior design entrepreneurs. In addition, we have invested in strengthening the management in many areas, especially the company retail division. We have now added 19 districts design managers in the retail…

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

This is Bonanza Chalaban in place of Brad Thomas. I was wondering about your outlook for the next 3 to 6 months. How should we think about the next quarter with the new products being mostly rolled out? Is that going be a net positive as it ramps up or will the ongoing roll out sort of mute that impact?

You're talking of impact in sales or expenses or what?

Yes, I guess both.

Well, we have had, as we have stated, we have had a good increase in sales in somewhat of relatively still uncertain times. As I said, I am somewhat cautiously optimistic, because of all this many initiatives that we have in place, the initiatives of having greatly strengthened our management in the retail division, added a lot of professionals and I think the best we can do really is to be cautiously optimistic. I think that perhaps it maybe wrong to now come out with a statement like I did last time that we have the opportunity to meet at that time $0.17, and of course, everybody puts it in as if it says written in rock. We run a business we don’t do it on computer modeling. So, I think at this stage, the best for me is to really not give any, give too much of indications for the quarter excepting to say that we've got great programs in place. We have as I mentioned earlier that we will incur some cost with a continued introduction of these products, but they will - next quarter, they will be lower by about at least 30%. And then as you move forward, most of that will be out of our system. Our investments in the retail have helped us to write $30 million more and which gives us a good opportunity and a good starting point in our backlogs for this quarter, but the rest will depend upon how we end April, how we end May and June. It is a little bit early to tell other than the fact that you know we are positioned well.

Okay. And then your advertising plans moving forward are you guys plan to keep that hired to build the brand in China?

This was somewhat of special event where we spent a lot more money in one quarter normally we would spend that over 3 quarters, but we spent it because of the fact as I said we had one of our Senior Interior Designers was giving sessions and seminars in these 4 major cities, and were very successful. But we also felt that it was a right time for us to invest more in this quarter. But going forward, we would not be spending that in China every quarter.

Our next question comes from Todd Schwartzman with Sidoti.

I just want to make sure I have the numbers correct. The expected effect of the close outs in fourth quarter around $800,000 based on that 70% number that you threw out?

Well, we have impact on to a -- we have the impact on the gross margins and we have the impact on operating expenses and this last quarter and again, we didn't treated a special items, Todd as I mentioned, it was approximately $2 million. So, approximately 70% of that will be closed to $1.4 million or so.

Okay. And on the -- looking at fourth quarter and more importantly as you start to think about fiscal '13, what can you say about directionally or incrementally compensation expense with all of the recent hirers in the moving parts. I don't know what the net increases you talked about the addition of a bunch of designers, I don't know out there is, if that's a net number or if they replace some less performing people. But particularly from the managerial perspective what should we think about is incremental comp expense for next year?

Yes, Todd. First of all, of course which you know that the third quarter is somewhat always an unusual quarter for us because of the fact that this quarter, it is - we are pushing to deliver products because end of the second quarter, we have had great shipments while the written orders in the second quarter is somewhat lower, which does reflect what happens in the third quarter and this is happened historically. I think that the operating expense level in our management - in our retail is most probably now stabilized. You are not going to see more - what we have seen now is most probably, unless of course we add more design centers and also our business increases because keep in mind our operating expenses are also impacted by both the selling compensation based on what we write and also what we deliver because of that we do not put in our cost of goods. Our selling expenses both from the wholesale side and from our deliveries to the consumer's home is all part of selling expenses. So, when the selling expenses increased as they do, it also reflects the fact that we are doing more business. On top of it of course while the 30% increase in fuel cost, which we absorbed so, to get you to the point, I think that operating expenses that you see more or less I would say they are going to stabilize and our objective is not increased and unless we increased substantially a business.

And what about the fixed cost of managerial salaries into Q4 and again more importantly into next year?

We also are somewhat now stable. I think we have done what in the last as I mentioned in the last year or so, we added 19 district managers. Always promoted from within, we had to build this structure to be able to do the kind of business we are writing and the objective of course is a right more. Without creating - without making this investment, we would not been a position to do what we did in the third quarter and especially not been a position to do what we believe we should do it in fiscal '13. Our objective of course is to continue to grow our business. We are well-positioned. We've got great product programs. We're going to reach more people and one of the issues always was how to make Ethan Allen more attainable. And attainability to me means both having great values and also delivering faster and that's what our Ethan Allen Express is going to do and keep in mind the - as are all existing products we did not bring new products because within our product programs, we have lots and lots of products, which from a price point to view are at prices, which lots more people can afford. Our Ethan Allen Express program will highlight those products, will make them into packages, we are also offering great financing when we launch it in June.

Do you have a guesstimate, Farooq on the number of managers that were not with the company for the full quarter in Q3, but will be in the fourth quarter?

No, actually whatever we had in the third quarter, we are going to have in the fourth quarter.

Okay. On the Ethan Allen on your new express program, will there be a dedicated catalogue, a mini catalogue of sorts featuring these items?

It will be a 60 page catalogue, which is just being published right now. In June, it will be available. This will also have in design center signage given the dedicated space in fact in Manhattan and that's where we're going to have the conference most of our first floor in the Manhattan design center, which you know we will be dedicated to the Ethan Allen Express program and the objective is - to get the message across that Ethan Allen is attainable and also this program will involve. We're going to end up by investing some of the inventories and that you perhaps was see some of it in the fourth quarter. But on the other hand in the fourth quarter, we would have shipped out the profits that we would not able to ship out in the third quarter. It is a moving target to depending upon what happens in the fourth quarter, how much of business we get and how much of the inventory is still lying in the retail division. Our unsold inventory is in great control. So, I think that what we are going to see in the - with the Ethan Allen Express is cost of deliveries, great values, which is also going to have an addition to its own catalogue. It is also going to have its own - connection to its own website. It will also be having a special touch screen technology in our design centers. And by July, we would also be marketing it with a strong direct to mail message. In fact in June, we are increasing our direct to mail by 60%. It is a major investment. On the other hand, we have reduced the sizes so the cost in fact is now going to be major.

So, will there be a net incremental spend in terms of your total advertising expenditures and if not what is - what is being forgone at this point?

I think in the first quarter, we will be very close to what we spend in the fourth quarter of last year, that's our plan so far.

And what made the 60 page catalogue, from where you sit now Farooq, what is the plan frequency?

The -- in the 60 page catalogue is going to be at in design center catalogue that is not was going to be mailed out to consumers in July. We are going to mall out the consumers, a 28 page, which will include the Ethan Allen Express and also include our other program start. But the 60 page is more in design center and that will be given to clients when they come in. We're not going to mall that out.

Yes, that will be pretty heavy. So, why is the new target demo that you are striving for here, age and income?

Well, as I mentioned previously in this great recession, 3 years back, we decided that it will make sense for us to expand our reach to people with higher incomes and to some degree people with somewhat of a higher age groups and it worked. This is - it made a great impact, but we've got to now increase our exposure to people who are making in most markets may be $75,000 and up and with ages of about upper 30s and up.

Okay. On the Chinese advertising spent, I know you said that's moderates probably pretty sharply this quarter. But can you quantify the level of the increase in Q3?

It approximately was close to $1.5 million to $1.6 million.

$1.5 million to $1.6 million increased versus last year?

Yes, last year we didn't have any in this quarter.

Right, okay. great. Also for the quarter, what did you buyback in the way of bonds and stock?

We did not.

Nothing on either?

Buy for the whole year, we have, I think $12 million Dave, $10 million we have purchased fiscal year to-date and as you know we also decided this time to increase our dividends.

And the next question comes from Budd Bugatch with Raymond James.

Thank you very much for taking my question. And….

And also clarifying, but I think it was somewhat of a confusion I already announced this morning so I thought it would be good for me to just clarify some of the questions that were raised.

I think so and appreciate - the detail is always appreciated Farooq. I know sometimes you feel like you give too much. So, I am very pleased that you did. And I do understand that I believe I understand that of the $2 million of incremental expenses to product launch, $1.2 million really is cost of goods sold and about $800,000 is operating expenses, is that right, David, is that?

Yes, that’s right.

Okay, couple of questions. One, for next quarter, you talked about 70%, so about $1.4 million of additional expense, is that still cost, is that still - you still have merchandize to clear off the floors or to be realized?

That’s right. I think the proportion is going to be still above the same between what we spent. And but as you know what we, our policy is that when we spend money in redoing our design centers not only the construction cost, but also our - all our selling aids like soft goods and bedspreads and draperies, we expensed them.We don’t get them - we don’t put them into inventory or we do not capitalize.

I think that’s very appropriate. So, I have no issue with that at all.

That’s why you see these larger numbers. Otherwise as you know you've been in the retail business you capitalize them end of the day you don’t get much money when you sell these things.

Much money is probably an exaggeration. The Ethan Allen Express did you say how much, what percentage of inventory that is or how should we think about what’s the size of that program?

The size of that program we have taken about from 5 lifestyles, we have taken about 7 packages. Each package is like a living room, bedroom, dinning room, and approximately each one is priced about close to $8,000 retail and we’ll also have about 48 months financing. And so each one of those for full year period would be available in this financing as you know interest free will be under $200 for consumers is a great, great value. We would also have in addition to living room, bedroom, dining room we also will have an element of leather, both recliners and sofas, mattresses. And then we‘ll have of course accents would be lamps, pictures, mirrors, and approximately all of this, we really have do not know that the major impact is going to have. Our objective is to develop an inventory and then replenish it.

And so that the delivery time frame on Ethan Allen Express will be what matter of 2 to 3 weeks?

Well, I am saying to consumers we are going to say it faster. We are not going to say in stock, because that is, the intent is to be in stock, which means we will ship it out of our Dublin distribution center, the next day or third day. Then as you know depending on what part of the country it is and the delivery of the ones, it could be anywhere from one to 4 weeks depending upon the scheduling of the products the trucking that goes out to the various parts of the country, but it’s objective is to be in stock, but we will say that it is faster delivery and the objective is stock. But at this stage we are just projecting that we might invest about $4 million in inventory in this and then we will see how it goes. End of the day, we’ll replenish it, we might have less inventory, but we are launching it very, very strongly and we need to also back it up. About 70% of this product is going to be made in the U.S. and 30% overseas. The lead times on the overseas products is longer this time. Lead time in our domestic products is less, so the 70% helps.

Okay. And we’ll have to see how fast it is, with the explosion of written business and the explosion of backlog and customer deposits what’s the delivery time right now? What are you averaging on case goods and what are you averaging on upholstery right now?

90% of our case goods is custom. Now, keep in mind, its custom, most of the - 70% is custom, 30% is from of all our products from offshore. In our case goods, 90% of the products we are shipping in 5 weeks, and at this stage, 90% in upholstery is also custom product is being stepped in 9 weeks. I mean in 5 - less than 5 weeks from our plants and then you add anywhere from 2 to 3 weeks from - by the time which reaches the customer so, approximately 8 weeks or so is average time to for our customers to get a products. I believe our retail folks are most probably quoting anywhere from 8 to 10 weeks to be under the cautious side. But we are shipping so that our products are shipped from the plants, 90% within 5 weeks.

About the upper boundary, where you want, I mean, you don't want to get further and that’s starts to lose sales that is the bounds?

Well, keep in mind if you also reduce it too much, it also is not good, it's very hard to manage the production and manufacturing.

I know we've been through that.

Five weeks,6 weeks is good. If we do that and manage it on custom, but then on the Ethan Allen Express there will be faster deliveries. That’s why we're introducing that as well.

Okay. Just a couple of other housekeeping well, one other question, I’m confused a little bit your comments about the Chinese advertising confuses may a little bit. I thought the Chinese operation was owned by another and at the economics were basically the shipments to the Chinese partner. Are there other economics there that would cause you to spend the advertising there or was that part of an agreement that you had with Richard?

It was and we have decided of course it's up to us. But I think they are spending a lot of money, they are growing at a great pace, they have already 70 locations now. And we decided that in addition to what they are doing, we will also spend some money especially when it coincided with its interior design towards that we will conducting.

Okay. And in 7 years that’s up from 67 at the end of last quarter, is that correct?

That’s right, yes.

And of the 149 that are now, I think owned by the company. How many you opened couple this quarter or how many did you buy and how many of you opened Greenfield?

We purchased 2 this quarter. We have 2 retiring retailers. One in Indianapolis, the Kittle's, John Durkott retired for many, many years and John Durkott was really watching the Ethan Allen portion of it. And we had a great, great relationship and John is a wonderful, wonderful person. We have been - he has been operating Ethan Allen for I think about 35 years. And then we also had a retailer in Greenville, South Carolina who also retired after 30 years. And in that case, we also purchased their property, nice property. And we also had acquired in Orland Park in Chicago, a design center from again one of our very, very good retailers, Jim Morrison who was with Ethan Allen for about, I think over 45 years, who retired. We also brought their property and then we had also purchased, I think I might have mentioned the last time, a property in Boca Raton that is going to be replacing a design center that we lease right now and by end of June, we're going to move into that design center that we purchased. It's a great location.

So, the one in Chicago, you said you purchased 2, but you actually listed 3 different operating companies and one real - one piece of property, is that right away?

Dave, what is this?

Yes. So, we purchased 2 retail operations and one piece of property.

So, but Indianapolis, Greenville, and Chicago, those are 3.

Those are 3 design centers, that's right. The property is separate, but there is nothing to do with - that was the separate property we purchased, we just moved the existing design center there, yes.

All right. And just David if you could what do you now that you reversed the tax issue and taxable what you - what’s the proper operating tax rate model going forward?

Well, Budd, we continue to have some valuation reserves on our 8 deferred tax assets. So, it will continue to impact our reported tax rate. So, we will continue to adjust back to our normalized rate of about 36.5%.

36.5%, okay. Alright and as the state - as you bring states in and you have different issues, I would think you have - that would move around a little bit because of different state taxes right or no?

Yes, that’s correct. It's really primarily driven by the results of our retail operation.

Our next question comes from Matthew Fassler with Goldman Sachs.

A couple of questions if you could, just to clarify when you talk about the transition to 60% new products, that is essentially tied to the express program correct, as opposed to a broader overhaul of the mix?

You’re talking of the new products?

Correct.

No, the new products really, the express is a very separate and I’m glad you asked this question, because this is a very important issue, you know, the 60% product reflects all our existing product programs that are being replaced.

Okay. And as you think about the replacement, I mean it sounds like express will be a somatic discrete program that you are going to market. As you think about the turnover of your inventory more broadly and of your assortment, is that also a development that you intend to market with any kind of overlay?

Yes, just to clarify it, we changed - we have 5 Lifestyles under which our products are grouped under and 60% of those products and I am not talking about case goods, upholstery, accents. We redesigned in the last 2 years because with the great recession we said if today we had an opportunity having the best of the best what it would be. Normally, it's 10%, 15 % that’s what we change. Now, that reflects all across the board since September of last year, we have been introducing these new products, which means we’ve got to replace existing product lines in our design centers. It also meant if we have some inventories in the wholesale level to sell it off. It also meant tooling of our manufacturing, learning of, making of the new product, so it really has been a major, major undertaking.Now, as we did all of these, then from these 5 lifestyles, we then developed a product, a marketing program, which we called Ethan Allen Express, which represents items and products from these existing lifestyles, which are going to be marketed under the Ethan Allen, I mean Ethan Allen Express program. They are going to be almost like packages designed by our designers, design packages which have been designed specifically with the objective of getting the message across that Ethan Allen has excellent, excellent prices for those folks, especially reaching to a larger demographic base. And then also our objective is to have it in stock, so we have faster deliveries.

And what proportion of the aggregate inventory base or SKU count or range anyway you want to designate, it will be included in the express program for small numbers…

No, it's a very small number. It should be maybe less than 5%.

Got it. That’s very helpful. Another question you talked about the amount of written business that you get, which was obviously nicely and you gave us dollars written versus dollars shipped. As you and Dave think about the typical seasonality of your business and think about what you right in Q4 which is always a bigger quarter for you seasonally speaking in Q3, but as you think about the magnitude of written business relative to ship business, how do those numbers compare to the typical seasonal relationship?

Well, for instance, if you take a look at now in the new era after the great recession. For instance in the fiscal '10 third quarter, we wrote $147 million, then in the fiscal '11 third quarter, we wrote $162 million, and in the fiscal third quarter of fiscal '12, where we are now we wrote $176 million. So, you can see the progression and an increase, so we are going in the right direction.

With that in mind, I know you are not looking to make specific financial prognostications and I sympathize with that. And I hate asking macro questions on the conference calls, but it actually seems like perhaps the right moment to do so. You speak about cautious optimism and the hangover from the recession all of which make a good deal of sense. I think since the last conference call we’ve probably had while some of the macro data has been mixed probably more independent constructive variables on the housing market than we probably had in any period in the past several years that did not include housing stimulus. And as you think about the typical trigger for signposts of underlying housing recovery that you typically see in your business, whether they relate to traffic, they relate to ticket, they relate to kind of products people are shopping for and how they go about it. What are the signposts that you look at telling you today?

Well, we look at obviously the macro numbers. And in fact one of my associates sends me all these analysis and estimates of what’s happening with some very, very reputed economists. And if I were to look at them every day, everyday which I get, I would go mad, crazy. So, I don’t look at them every day because I’ve got to plan 3, 6 months a year from now. Like I was mentioning yesterday to some of your associates that 3, 4 years back we decided to build a 240,000 square foot plant in Mexico. If we had not done it, we would not be able to deliver the products we have. So, I think from, while we look at the macro numbers I do take a look at, I do see is the trend of consumer confidence. And consumer confidence we look at not only the numbers that we get from the economists, we have 1500 professionals, we have 149 design centers. Every week, they give us a sense of what is taking place. And what is the - certainly, what we are seeing is there is better consumer confidence. There are projects sizes are increasing. Yet the amazing thing is that people are still waiting to the last minute to close. So, the last few days of a month make a big difference. We also see that consumer confidence is having improved that if we, there are some negative news of what’s happening in the Europe or in other areas, people hold up. Fortunately for us, they just hold up, they have not cancelled. So, overall I would say Matt that I use the word cautious again carefully, cautious and people ask somewhat more optimistic. People are moving forward. Yet, I think our market - our business is increasing, because we are taking market share. Without taking market share, it will be difficult. And our objective is to continue to take market share and to continue to invest because if we did not add this - the professionals and the retail division and added all the interior designers we have not, I cannot say, we are going to grow our business. Though all those investments are helping us to write the business we wrote in the third quarter and I believe it's hard to make, to increase these expenses. Matt, I mean, it’s not that easy for us to increase expenses. I watch every dollar. But on the other hand, I consider them as investment so I made a long, long talk, but I think I am somewhat very cautiously that we are optimistic, because we are making investments for the future in terms of products, in terms of advertising, and in terms of inventory.

[Operator Instructions]

All right, I believe there are no more questions.

Yes, I’m not showing any other questions.

Well, thank you very much for this call and for any questions and comments, please let us know and get in touch with us, Dave Callen is available and if you want to talk to me that’s fine too. So, take care.

Ladies and gentlemen, that concludes today’s presentation. You may now disconnect and have a wonderful day.