Good day, ladies and gentlemen, and welcome to Earnings Release Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, David Callen. Sir, you may begin.

Thank you, Shannon. Good morning. I'm David Callen, Ethan Allen's Vice President of Finance and Treasurer. Welcome to Ethan Allen's earnings conference call for our fiscal quarter ended September 30, 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 details on our financial results. Farooq will then provide more details about our ongoing business initiatives before opening up the telephone lines for questions. With that, here's Farooq Kathwari.

Yes, thank you, Dave. I'm pleased to provide a brief overview, and as Dave said, followed by him with more detailed financial information, and after that I will discuss our initiatives in greater detail and open for questions and comments. As we reported, we had a good quarter. Our gross margins improved to 55.6% from 52.9% and our adjusted operated income was $19.6 million, a 43.9% increase from previous year. Our adjusted diluted net income per share was $0.38 compared to $0.25, an increase of 52%. Also important was that our Retail division had an adjusted operating income of 1.8%. Our sales increased by 1.4% over a 12.2% growth in the previous year. The previous year benefited from shipment of floor inventory, especially to our independent regional network. As you know, we eliminate any wholesale sales for the company retail division undersold to the consumers. During the last 18 months, we undertook a massive repositioning of our product lines impacting efficiencies at all levels of our vertically integrated structure. We are pleased that having substantially completed this transition we see benefits in our gross and operating margins. We also continued to take steps to manage our operating expenses. We maintained cash and equivalent of $100 million. Our inventories increased by $2.2 million since June 30, 2012 and $17 million since 9/30/2011. Almost all of the increase is at the wholesale finished goods inventory reflecting increases due to the Ethan Allen Express to have a better service position on imported case goods and accessories especially due to concerns of a potential dock strike on September 30, which now could potentially take place by end of this year. We expect our inventories to come down by the end of December 2012, our second fiscal quarter. We continue to make major progress in our initiatives to have relevant product, strengthen our interior design network, increase traffic through our aggressive advertising campaign, invest in technology at retail and manufacturing and further refine on manufacturing and logistics. After Dave, I will discuss our initiatives in greater detail. Dave?

Thank you, Farooq. Net sales for the quarter were $187.4 million, up 1.4% over the prior year first quarter when sales grew 12.2%. Our Retail segment reported net sales of $149.1 million, an increase of 5.6% versus the prior year quarter, including comparable design center net sales growth of 5%. This was on top of strong prior year net sales growth by our retail division of 16.7%, including 14.9% comparable design center growth. Our retail division written orders during the first quarter increased 9.1% over strong 13.2% growth during the prior year's first quarter. Comparable design center written orders grew 8.2%. The company's retail division ended the quarter with a 149 design centers, a net increase of 3 over this time last year. At September 30, 2012, our independent retailers operated 153 design centers, a net increase of 6 in the same time a year ago. This includes our retailer in China who operates 73 design centers, a net increase of 12 versus last year. Our Wholesale segment net sales for the quarter were $101.4 million, compared with $116.4 million the prior year quarter. The prior year's wholesale net sales included the shipment of new Elegance products for the floor displays in advance of the first phase of our product overhaul last year, which launched in September. Our consolidated gross margin for the first quarter was 55.6%, up 270 basis points from 52.9% the prior year quarter. Our retail division's net sales made up 79.5% of our consolidated net sales this quarter, up from 76.3% the prior year. This mix along with operating improvements across our business along with favorable pricing and products mix grew the higher gross margin in the quarter. Our operating expenses were well controlled. Excluding a $1.6 million loss on the sale of vacant real estate…

Thanks, Dave. As we mentioned in our press release, our competitive advantage arises from providing products of finest craftsmanship with excellent price points, offering complimentary design services by about 2,000 interior design professionals working in our regional division and our dedicated Ethan Allen licensees, giving free local delivery, enhancing our technology in all aspects of our business and manufacturing about 70% of our products in our North American facilities. Executing against all of these elements helps us achieve our mission of luxury made affordable. You will see the tag line in our advertising and communications. Some of the key updates on our initiatives are in our offerings we had substantially completed by June 2012 introduction of new products to our designing centers. Most of the costs associated with this transmission were also absorbed during this period. In July and August, we introduced the Ethan Allen Express program. The objective of this program was to increase our attainability. To us attainability meant getting message across that products of our quality and offering complimentary personal service of design and home delivery have excellent price points. The other objective was to deliver faster. We are getting this message across increasing traffic, especially among younger demographics. The interesting fact is that while we are selling our in-stock Express product, most consumers, even first time buyers prefer our custom made offerings as our timeframe for custom is also excellent. As you know, almost all of our U.S. manufacturing case goods and upholstery has been converted to custom during the last 30 months. This month we launched our newest offerings called American Colors. We launched it to the consumers. This program is substantially from existing products now offered in many new colors. While it is early, the program is being well received. We also introduced to…

[Operator Instructions] Our first question is from Budd Bugatch of Raymond James.

Particularly on retail, talk to me or talk to us about what the retail profitability looks like going forward. It is nice to see that I think it is from the first quarter since fourth quarter of '08 for the first operating profit of retail. So give us a feel for what you see going forward?

Well, Budd, you are right. It is very gratifying to see that we are starting to move the other direction, although the retail always as you know contributed to the consolidated margins in a major way all along this period, but good to see the operating margins. As you can see when we delivered $149 million in the retail division we were able to operate it about 2% operating margin. We do more, we have leverage. We do less, it goes the other way. So I think at this stage, I believe we have the opportunity as long as the economy remains as reasonably stable of doing about $150 million plus of business a quarter.

Okay. Also talk a little bit more about the international opportunities. And are there any other continents, which you are looking right now?

We are, as you know, we are very fortunate. We have done well certainly with China, with our partners there who we also recognized last week along with about I think 40 of our Ethan Allen licensees, who have been with us 30 plus years, 30 to 60 years. It was great to have them all there. We are starting obviously, Canada, Montreal is important because once we go to Montreal everything has to be changed in French, which is what we are doing. And now to Brussels we are also -- the Brussels is going to give us a gateway to Europe. We have also established a logistics in Antwerp and we have also gotten on board a Managing Director for Europe. He has joined us along with Arne Borrey, who you met, who is the Vice President of International. And the objective is to now start expanding in Europe in somewhat of a manner that makes sense, meaning we have our own operation, our own logistics. We are also expanding in the Middle East. In February, we are going to open through licensee, a very good licensee, our first in Saudi Arabia in Jeddah. As you know, we are already in the Dubai, and Kuwait and Amman. And in fact in Amman, Jordan interestingly they’re opening the second Ethan Allen design center, it's under construction. Then after that, we are just in the process of completing a joint venture in India and we will start -- our objective is to enter India next year.

Okay. And to just to make sure, I understand that the Brussels store is that company owned, right?

It is, yes.

How about Montreal, it that also?

It is, yes.

Okay. All right. And the other ones, that will be licensees or joint ventures?

Well, in Saudi Arabia it is licensee. In India, our objective is for a joint venture, operate 1 or 2 or 3 ourselves and then license the rest and that's the objective in Europe also.

Okay. And then no issue in India with the FDI?

Yeah, that’s what we were waiting for. We were for 8 years -- I know India quite well and so we have lots of very, very interesting parties who wanted to work with us, but we want to have control and we didn’t want to do it until this FDI was passed and now they have passed it.

Okay. And my last question is, I think what you had said a 100 stores in China, is that, I thought by the end of this year, but?

Yes, approximately, that's the intention. As you know, they've done a great job in the [indiscernible]. And they're growing well.

Our next question is from Brad Thomas of KeyBanc Capital Markets.

I want to just ask a little bit about the written orders. We have had kind of an interesting trend over the last 3 quarters, up 8% in your third quarter, up just a little under 1% last quarter and then up again 8% this quarter. As you step back and kind of look at the trends, maybe you can help us understand a little bit more on what caused that volatility and what your level of confidence is in the current run rate that we're seeing right now?

This quarter we steadily increased our -- first month that is July was somewhat flat. August we started an increase and September we did -- it went up quite a bit in September to come to the total of 9.1% increase and 8.2% in our comps written. It's hard to really pin down the reason. As you can take a look at it, you mentioned that our -- in the last quarter we were up 2.3%. You also have to keep in mind, what we're comparing with. Our third quarter, we were up 11% and the second quarter we're up 10.3%. So when you take a look at the fiscal year and we'll go by the years. In fiscal year ended '12, 6/30/12, we were up 8.9%. The previous year we were up 7.7%. So on an annual basis 7% to 8% or so, we have been maintaining so far. Going forward, it's an open question, but we are positioned well, advertising is strong. We've got very strong interior designers, while the economy remains somewhat of a concern.

Yes, got you. And then just following upon Budd's question about the retail profitability, I mean, a very nice improvement from the first quarter last year in the retail segment. Was there anything that you did beyond just improvement in the revenues in terms of maybe, were there any store closures of underperforming stores or anything in terms of a lease rate? Anything else that really helped the profitability beyond revenue?

I think one of the main thing was that we increased our gross margins because our gross margins were impacted at the retail by the liquidations of all these floor samples. So gross margins at retail is what -- was the major contribution. And the second is our focus on managing our operating expenses.

And then we talked about this over the last several quarters, but as we move forward through this fiscal year and we anniversary the promotions that you did last year, would you expect things to play out in a similar way where we continue to see nice improvements in gross margins and will you anniversary similar promotions that you did last year?

Well, the gross margins are impacted -- being a vertically integrated company our gross margins are impacted how our manufacturing backlogs are. Our gross margins impacted also our retail network. So if our business holds up, which is what we expect, then I think the kind of gross margins you see are possible. Also keep in mind, our gross margins in addition to our efficiencies, in addition to the impact in the retail gross margins are also benefiting to some degree with the higher proportion of retail to total business. We got to also keep that in mind. Although that was in this time somewhat of a smaller impact more so the impact was improvement in gross margins first at the retail level and then second at the wholesale level.

our next question is from John Baugh of Stifel Nicolaus.

Could we talk about those gross margins? You mentioned price and mix. Wonder if you could clarify the price number roughly? And then on the mix, I've been thinking that perhaps if Ethan Allen Express was starting to take hold we see -- and I understand that with the higher retail your gross margins go up on the weighting, I get that. But in terms of the product mix, Ethan Allen Express I would think everything equal, would be a lower ticket in the lower margin and yet you're seeing a mix improvement. And you referenced that it's increasing traffic but people still want to do custom. So I'm kind of curious about that dynamic?

Yes, John, that really is. Yes, we are operating somewhat of a lower margin on the Express on the wholesale side while the opportunity at the retail is about the same. So the retail margins are more of the same across the board. We take a hit at the wholesale side. But on the other hand, the good news is that most people they come in who are interested in fast deliveries well some buy right to it, others say, well, how long does it take to get it. We are now shipping within 4 to 5 weeks, customer upholstery and case goods. End of the day, when they come in and work also with our designers -- and having interior designers makes a big difference, if we did not have that the chances are we would be selling a lot what we show. And other factor is that we have also been using this opportunity of financing. We maybe giving an option, for instance -- some this last month we gave an option of -- or this month we gave an option of 10% off or a 48 months interest free promotion or financing. And more and more people are starting to use the 48 months. That also not at this stage is material, as we get material, we will let you know. The cost of the financing goes into our selling expenses not to our gross margin. So to the some degree a little bit gross margin has possibly impacted when we sell most through financing. Not material right now, but I have told Dave to keep a watch on it, watch it and if it gets a little dear let everybody know.

Okay. So help me with Express. Has it been out long enough to truly measure what is your service position? So if I walk in and I am liking it 5 skus, can I get all 5 of those skus delivered within 2 weeks in 90 plus percent of the cases, just help me a little bit where that program is?

90 plus percent you are going to get it within 2 weeks -- that the products is in stock and in fact, we made more stocks than we are selling which is of course equal out. But at this stage, it has been shipped within 2 days after receiving an order.

Well, great. And then, help me with China. Can we talk a little bit about the store count? How is that influencing sales, profits, inventory and any financials on the influence of China on the overall numbers?

Very positive. They are placing the orders from our stock or for custom. In fact, anything they by in case goods and 60% what we sell in China, Ethan Allen Program the ship from our North American facilities, mostly U.S. So when they placed an order we make it whether it's a upholstery or whether it is case goods it gets into line as it will, as it does, as anybody else orders it. Any of retailer or anywhere in the world who orders it today it gets in line and into our backlog and we ship it. So it's very positive.

Well, what is their typical sales per store versus a U.S. store?

John, there it ranges from 5,000 square foot stores to 50,000 square foot. So it’s hard to really give any generalization of what they do there.

So I assume its lower?

Well, I don’t know really. It’s a good question. I’ll try to find out some information, but it varies across the board based on -- because there’s such a variety of stores that they have and locations that they have and sizes they have, but it’s a good question I’ll try to get some answers if I can for next quarter.

Okay. My last question is simply the media or ad spend going forward. Is there a plan to keep it in dollars flat or percentage of revenue flat, any help there?

John, at this stage more or less it is going to remain percentage flat and which means it’s possibly will increase some in dollars, however, we’ll continue to look at more creative ways of spending our money and this is what we did this quarter. We thought we’re going to spend 15% more this past quarter, I mean, this quarter just ended but we didn't. We were able to use it more efficiently. And that’s what we are continuously looking at how do we make it more efficient, so I don’t see us at this stage spending a lot more. On the other hand if we you see the opportunities that we are ready, we can get more traffic which increases more business then you’re going to see it increase but as a percentage of sales. So percentage is important as you mentioned.

Our next question is from Barry Vogel of Barry Vogel Associates.

Considering you did a phenomenal job in gross margins at 55.6% and considering that you’re giving us a hint that retail continues a relatively decent portion of mix, retail should be profitable which obviously would be very helpful for gross margins, I’m curious why didn’t you buy any shares, considering you’re doing so well fundamentally. And the outlook for housing is better, the economy is healing, you’ve come through very difficult times, you’re much better shaped than most of your competitors. Was there any reason you didn’t buy any shares, because I know they were selling in a low 20s at some point?

At this stage, Barry, I was focused on business. I was focused on making sure we do all those things right. When the opportunity is right, we’ll buy the shares but that was not my focus at this time. And also like I said I want to keep at least $100 million in the bank.

Oh, you have a $100 million pillow as well?

Yes, that's for the time being -- keep in mind half of that is customer deposits. And as I've said all along I take that seriously. I want to keep that money. I want to make sure that we don't jeopardize our customers and their deposits.

Okay. And David, could you tell us what capital expenditures look like this year including any expenditures for acquisitions of stores, et cetera?

Yes, we're still committed to about a $20 million total CapEx for the year.

Our next question from Todd Schwartzman of Sidoti & Company.

What's the capacity utilizations for the quarter for?

Todd, as you know based on -- we've got a lot of facilities. We got lot of opportunities of doubling the business. But of course we'll have to put in more people in all of that. At this time we say about close to 80%. And that number doesn’t change, Todd.

Okay. So the gross margin was up by 270 basis points from a year ago.

Yes.

You went through some of the -- all of the factors, the mix, pricing, manufacturing efficiency. Of that 270, can you put some numbers to it maybe allocating in basis points. How much you attribute to each of those factors?

I'll give you a very, very rough and David I don't have those numbers. But I'll give you my gut feeling, about 70% due to improvement at retail gross margin, 30% at wholesale. Don't hold me to it, but those are approximate numbers. I think we're pretty close.

Okay. Going back my model dates back to 2001. There's obviously, the company is dramatically changed from a decade ago, but how far back do you have to go to see a 55.5% gross margin?

This is a record. We never had 55.5% gross margin.

All right, okay. On the traffic, particularly you could say in the younger consumers, not just what Express may be bringing in, but just overall. Can you quantify what you're seeing and maybe specify what age group you're defining that, under 40, under 35? Maybe just kind of, some sense of what the delta was there in traffic amongst the newer consumers that you're trying to court?

Todd, this is a little bit too early. As you see, it's only a couple of months. But that initial reaction is that we are starting to also attract newer demographics in the ages of 30 and up. As you know, during the recession we intentionally said that our advertising would focus on the higher demographics both in income and age. And that worked, but now we are expanding it in our direct mail, in our advertising, we just started this last quarter and invested -- started investing over a fair amount of money in digital advertising, search engines which of course are very, very important for that age. So we will -- we are attracting now 30s and up. And then, keep in mind this new program that is going to introduce in January, February of next year called Fresh Colors. That continues with this American Colors theme that is Color but this is product with smaller in scale to be used by young, I am talking of children from 4, 5 years and up. But also by adults because it's smaller in scale with lot of color. That also will give us an opportunity to get and to market to younger people in the 30s with young children and that's good for the children, as well as the parents. So that continues -- that will continue our marketing and exposure to reach a younger population.

So unlike American Colors are you saying that the Fresh Colors will be largely new products?

Absolutely, yes.

100% new products?

I do not know 100%, but at least I think 80%.

Okay. So how are you -- if they're for use by young kids as well as adults, how are you -- will you have but one marketing campaign or will you have different messages depending on the ultimate targeted end user? How you are going to market it, the line?

Initially, we will market it to 2 age groups, 2 younger age groups from 6 to 11 and 12 to 16. That is our television advertising and other mediums are being dealt for that purpose. Then, the use of that will be -- the use of the products for adults will be that you might say the second stage. Yes, of course, we will show the application of that in many of our communications to our interior design network, so they are able to understand and utilize it. But initially, it will be you might say 3, 4to 16 then, we will expand it to others.

Okay. In the first quarter in the year your ad spending, did you -- I realize that the total was relatively flat you mentioned. Was there a change in mix? Did you cut back specifically on TV during the election season and are you doing so now? Does that revert to a more normal mix as you get past this current quarter?

Yes, we did increase substantially our direct mail during the month of July and August and we did not run television on July and August. We have gone back to television in October, this month and we will substantially go back in television right after the election is over and hopefully all that money being spent is finished. So our television campaign this quarter is going to start substantially from November 7. And in the first quarter, you are right. We did got it back and have spent more money on direct mail, which by the way was absorbed more by the retail division than the wholesale. Despite that, the retail division had a good profitability.

Okay. And lastly, can you give me an update on the Honduras plant?

Yes, Honduras plant is -- we acquired it last December, by April we were starting to receive chair parts and assemble them and which we have continued and we have now over 100 associates. And now we have put in there a state-of-the-art finishing facilities, because all this colors and that we have. Honduras as well as Mexico is completely focused on developing custom product, it's 5 or 6 days away from the U.S. from our distribution centers. Our objective is that by early January, February it will be equipped completely to make more products, even case goods. And right now, we are just making chairs, but by our third quarter will be producing more products there. We are absorbing some overheads, some costs, and as you have noticed we have not shown them separately, but we are now absorbing them and going forward. So although we are still absorbing more costs at this stage than the amount of volume that has been spent. But we are making great progress there and especially a tremendous amount of progress in Mexico.

our next question comes from Matt McNeal [ph] of Goldman Sachs.

The company has motioned over the summer that sales were particularly event or mailer driven with substantial volumes coming during the very last few days of the month. Has this pattern abated somewhat, and are you able to balance the volumes out in a little bit more of a normal fashion through the month at this point?

No, not really. It is amazing how people wait till the last minute. 30% of the business is done in the last week of the month because people -- well, there is also reason for it. The first couple of weeks, 3 weeks, our interior designers work with clients. Our business is not people coming in and buying it as commodity, so then they could have bought it. Our people work with them, they make house calls. They work on projects. And it takes them a couple of weeks to work on projects. And by the end of the week, by end of the month they're ready to close. And we've seen that continue.

And could you provide an update on how October looks? I think last call you spoke about July trends. How does October look from sales standpoint relative to August and September?

It's still very, very early. Although hopefully people are back to their homes, back working, there's still some more distraction with all election campaign going on. And as I also said to your first question, we will know October by the last week of October.

Sure. And my last question, just could you provide a quantification on the impact to inventory investment from Ethan Allen Express?

I think is approximately close to $6 million, $7 million as a total investment of inventory and express.

[Operator Instructions). I'm showing no further questions at this time

All right, Shannon. Thanks very much and thank you for being on this call. Any questions please let us know. Thanks very much.

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