Good day, ladies and gentlemen. And welcome to the Ethan Allen Fiscal 2016 Second Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions]. Now, I would like to introduce your host for today's conference, Mr. Corey Whitely, Executive Vice President, Administration and CFO. Please begin.

Thank you, Andrew, and good afternoon everyone. Welcome to Ethan Allen's earnings conference call for our second quarter and first half ended December 31, 2015. This call is being recorded and web cast live on ethanallen.com, where you will also find our press release, which contains supporting details, including reconciliations of non-GAAP information referred to in the release and on this call. As a reminder, our comments today will include forward-looking statements that are subject to risks and uncertainties, which could cause actual results to differ materially. Please refer to our SEC filings for a complete review of those risks. The Company assumes no obligation to update or revise any forward-looking matters discussed during this call. Also joining the call today is John Bedford, our Vice President, Corporate Controller. After our Chairman and CEO, Farooq Kathwari, provides his opening remarks, I will follow with details on the financial results. Farooq will then provide further updates on our ongoing business initiatives before opening up the telephone lines for questions. With that, here is Farooq Kathwari.

Thank you, Corey, and thank you for participating in our conference call to review quarter ended December 31, 2015. We are pleased with our results. Our written orders in our retail division increased by 15.3%. Delivered sales increased 5.3%, resulting in a gross margin of 55.9% compared to 53.8%, an increase of 210 basis points. Operating earnings adjusted for gain from sale of real estate was $25.3 million, a 35.1% increase. Adjusted EPS of $0.55 compared to $0.37, an increase of 48.6%. During the quarter, we utilized $12.2 million to repurchase our shares, paid dividend of $0.14 per share, an increase of 16.7% from the previous year quarter and a 40% increase over 2013 same quarter. As we mentioned in our press release, we are pleased that our many initiatives and operating leverage of our vertically integrated enterprise have resulted in increased sales and substantial increase in profitability. During the quarter, our focus was in implementing our new offerings in the retail network and in manufacturing, continued selling offload samples and discontinued inventory using our various marketing mediums, especially the digital platform to drive qualified clients to our network of 200 design centers in North America. Once there, they interact with some of our 1,500 in-house interior design associates resulting in stronger written orders and building a client relationship. We are also pleased that we have this week also announced two initiatives. Work on both started about a year back. We are particularly pleased to announce that we are developing a new line of Disney inspired products for the home with a focus on children and younger consumers. We expect to start consumer marketing this fall. Our program with Army and Air Force Exchange Service announced today is expected to go live by February 1, 2016, and reflects the combination of utilizing digital selling and service by our retail network. After Corey gives more details on our financial results, I will provide our current business initiatives.

Thank you, Farooq. Our financial results reflect that our many initiatives are making an impact, and we continue to benefit from the operating leverage of our vertical integration. Second quarter fiscal 2016 consolidated net sales of $207.5 million, increased 5.3% compared to the second quarter of fiscal 2015. The first half 2016 consolidated net sales were $397.9 million, an increase of 2.6% compared to $387.8 million in the first half of fiscal 2015. The strong consolidated gross margin of 55.9% for the second quarter of fiscal 2016 improved 210 basis points from 53.8% the prior year second quarter; primarily benefiting from improved efficiencies in our manufacturing and a higher mix of retail sales to consolidated sales that offset the impact of clearance sales and promotions on retail gross margins. The retail segment net sales for the second quarter were 79.4% of consolidated net sales. That compared to 77.7% during the fiscal 2015 second quarter. The first half 2016 gross margin of 55.5% improved 109 basis points compared to 54.4% in the prior year first half. Consolidated operating income for the second quarter was $26.5 million, with an operating margin of 12.8%, that compared to $17.7 million in the prior year second quarter, with an operating margin of 9%. The 2016 year-to-date operating income was $47.4 million with an operating margin of 11.9%; that compared to operating income of $38.1 million, with an operating margin of 9.8% in the prior year-to-date period. Consolidated adjusted operating income for the second quarter was $25.3 million, with an adjusted operating margin of 12.2% that compared to $18.7 million in the prior year second quarter, with an adjusted operating margin of 9.5%. Adjusted operating expenses in the second quarter increased $3.4 million over the prior year second quarter, primarily due to variable expenses. As a…

All right. Thank you, Corey. I am pleased to provide now a brief overview of our various initiatives. In our offerings, we continue to implement the major transition, phase two and three were marketed from June 2015, and have shown good results. Phase four products consists of three attitudes [ph] named Brooklyn, Santa Monica, and Buckhead, will be introduced to our retail next month at our Retail Conference. Consumer marketing will start in spring, through summer of 2016. At this stage, our objective is to have a consumer launch of the Ethan Allen Disney program in fall of 2016. We continue to strengthen our retail network with talented associates, renovation of existing design centers and relocating and opening new design centers. Since March 2015, design centers were open in Chattanooga, Tennessee; Wichita, Kansas, Pittsburgh, Pennsylvania; Toledo, Ohio; Philadelphia, Pennsylvania; and in Hanover, Germany. Last week, opened a new design center in San Francisco, and under construction are in Columbia, Maryland; Cranston, Rhode Island; Hyannis, Massachusetts; Rockville, Maryland; Savannah, Georgia; and the second location in Downtown Manhattan. Combining technology and personal service is an important initiative. As mentioned earlier, during the quarter, we used digital mediums to drive qualified customers to our design centers to interact with our 1,500 in-house interior design associates in over 200 North American design centers. We continue to develop a strong omni-channel platform. This morning, we announced our partnership with Army and Air Force Exchange Service. This association will allow army and air force personnel to order Ethan Allen products online, via a special web site, developed by the Army and Air Force Exchange Service, by Ethan Allen. The products will be delivered by our retail logistics network. During the quarter, we also continued aggressive marketing with direct mail, national television, print and social media. In March, we are launching an important initiative of custom quick ship upholstery. We have taken selected sofa and chair frames, and in limited fabrics and leathers, and objective is to deliver the custom quick ship upholstery in less than 30 days to our customers in North America. We believe this has a good opportunity of expanding our sales and also reaching more consumers. On the issue of strengthening our capital structure; as you know, we were considering raising about $250 million in debt last quarter. Due to market uncertainties and disruption in the capital markets, we decided it was prudent not to proceed. We will wait for better opportunities to proceed. We will continue to generate healthy cash and utilize some for investment in our enterprise, to repurchase our shares and pay cash dividends. We will continue to strengthen our vertically integrated structure. We have announced having two new upholstery plants in North America and continue to invest in technology. With that, we are very happy to open for any questions or comments. Andrew?

[Operator Instructions]. Our first question or comment comes from the line of Jessica Mace. Your line is now open.

Hi there.

Good afternoon and nice quarter. My first question is about your comment with regard to accelerating sales growth in fiscal 2017. I was wondering if you can tell us if there are any other disruptions you expect throughout the rest of this fiscal year or any reason sales wouldn't continue to grow at the rate of this quarter?

We have, as I mentioned, many initiatives in place, and we have this quarter grown sales and profitability and -- despite a number of disruptions that are associated with the introduction of new products, selling of the floor samples, and some inventory. So I would think that at this stage, unless there are external factors beyond our control, I would see that there is opportunity to continue to grow our business.

All right. And then my second question is about your inventory levels, still growing a little bit slower than sales. I was wondering where you think that will end at the end of this fiscal year?

That's a good question, Jessica. At this time, we have about $157 million, we increased by $5 million. I would say that, most probably, maximum another $5 million or so increase possibly, and that will be due to the fact that we are taking an aggressive position of getting some more of our products in stock. And as I just mentioned, we are launching this custom quick ship, which involves having more fabrics and more cut and sew products available for immediate shipment. So it's possible that we could increase by $5 million.

All right. And then just finally, with maybe some higher inventory levels, what kind of investment advertising will you be comfortable making in the back half of this year into the first half of fiscal 2017?

This quarter, we spent about -- our advertising this quarter was flat, because as we had mentioned that in our first quarter, we had spent more money and we had mentioned that our September -- month of September, we had a major amount of distribution of a direct mail, which resulted in the first half -- which increased our advertising at that quarter. So I think that, as we move forward, there will be an increase in advertising. But as a percentage to sale, I would think they will remain somewhat consistent with what we have done in the past.

Great. Thank you so much for taking the questions.

All right. Thank you.

And our next question or comment comes from the line of Jeremy Hamblin. Your line is now open.

Hello Jeremy.

Hi. Good evening. Thanks for taking my questions. I just wanted to add my congratulations on the really strong results. I wanted to ask about -- you clearly had a little bit different promotional cadence in October-November where you ran the -- I think maybe some of the most aggressive promotions in the company's history, and that obviously yielded strong traffic gains. Wanted to see if I could understand the latest promotion, there is two items, 25% off, which is also pretty aggressive, is the intent behind that to try and grow the average ticket size, and how are customers responding to that particular promotion?

Yes Jeremy. In October and November, that 30% savings on one item, and as I mentioned previously, practically all the advertising was done digitally. Some print, but most were digitally because of the fact that our direct mails had already been mailed; created an opportunity of bringing customers in, interacting with our designers, and obviously we had some good business in those months, but it also helped us create an opportunity of continued business with them. About 24% of our product was sold at that 30% savings and the -- while the rest was sold at our current offerings, whichever -- –whatever the savings were at that time. Now in December, as we also had mentioned that we decided to start the January event from December 26, rather than end it in December, because we had already taken a lot of business in October and November, and we felt that January is a big month for us. And we have a strong program in January, and these two items for the saving of 25% is helping us generate interest, and obviously the last week which is this week and the next 4-5 days will determine the strength of this whole initiative because 30% -- 40% of the business does come in the last 4-5 days of the month. So we will see how we end up.

And do you expect the average ticket size to potentially grow, as you are going -- if you have got 25% -- roughly a quarter of your product being sold at these discount rates. If you are getting two items, my assumption is people buying two items, the average ticket on that sale is going to be a little bit higher. Are you starting to see that on the kind of early returns from that promotion?

So far, the last quarter -- Jeremy, we have seen that our average ticket has somewhat remained consistent at about $1,800, it has not changed.

Okay. Let me move on then to your gross margins; and obviously, I think that -- it was really impressive. Some of that was related to the higher percent of business being retail sales versus wholesale. Are these sustainable gross margins up in these -- almost 56 range? Is this something where we should be thinking, if you continue to see mid-single digit sales growth you can sustain gross margins up at these levels?

Well, we have already sort of shown that it is feasible, despite the fact that we still have the impact of clearance sales. We had -- while our manufacturing did a great job in improving their margins, but they still have been under a lot of stress with all the new products that are going through the manufacturing. It is an opportunity, but again, there are a lot of factors that one has to keep in mind that we have to take a look at market conditions. We have to take a look at promotional activity, we have to take a look at how much promotions we have to do, how much of discounting we have to do as we move forward. We have the opportunity, but again, we always have to keep in mind, the overall economic conditions, market conditions, which dictate how much of discounting we do.

Corey, wanted to see if I could just ask a quick follow-up on that. I know last year in Q2, you spoke to some operational inefficiencies, because of all the new product introduction. Could you give me a breakout of how much the improvement in operational production and efficiencies helped gross margins on a year-over-year basis? Was it 50 basis points, 100 basis points, do you have that figure?

I don't have that figure, Jeremy. I will tell you that last year in the second quarter was just the start of our roll-out of phase one and getting ready for phase two at the same time. So that had a little -- and the clearance, the very first wave of clearance. So together, those had a much bigger impact than this time around, where we are at the tail end of that.

And also Jeremy, you know there are a lot of moving parts. You got to remember, we have got accents. Most of our accents are products that come from overseas with higher margins. Some of our cases come from oversees. So there are a lot of moving parts, that impact our gross margins. It's not just our U.S. manufacturing. So I think that there are lot of moving parts, its not an east way to describe it.

Thank you and best of luck for continued success.

All right Jeremy. Thanks very much.

All right. And our next question or comment comes from the line of John Baugh. Your line is now open.

Hey John, how are you?

I am fine. Congratulations on a very strong quarter. I was wondering, sort of following on the gross margin or sale event. So just to be clear, the 30% and the 25% you're running now, are those on top of underlying sales across some percentage of the lineup as well, or not?

No John. These are from our everyday best prices.

Okay. And could you talk about -- well wanted a little more clarity about China. It sounded like it was weak, and then any update on the government [indiscernible].

Yes John. China, there are a couple of factors. Corey mentioned that we had lower shipments to China, which is a reflection of two things. One is, that last year, our second quarter, they were building inventory. So we did ship them some inventory products. And the second is, there has been somewhat of a slowdown. So the combination of the two. If I had to give just a rough estimate, I would say our slowdown in China was 70% due to the timing of the inventory, and 30% due to the fact that the business in China has been slower. As far as the State Department contract is -- unfortunately I don't know why they are taking so much of time. They had, last month, in December, had come back to all the number of people who had made the bids to rebid, because there were some legal issues that they had. So we all had to rebid, and they have now said, that any day they will make the decision. So we are waiting for that John.

Well, nothing the government does so far is [indiscernible]. Just a last follow-up, do you see any benefits on input costs at this time?

Not really John. As you know, we have about over 70% of the furniture products made in our North American plants. We are -- I would say that, if there is some benefit, it has mostly been for the energy related. We do see the -- maybe a 7% difference in terms of -- for the lower energy costs across the board so far. Other than that, I think there has been some stability, certainly our labor costs are going up, based upon annual increases. But across the board, as far as lumber, materials, it's pretty consistent; it’s the labor, that to some degree will have to give increases to our people, and we give increases based on merit.

And just finally, your orders were also good in the quarter. I know the direct mail, I guess it was September, along with the 30% offer, it seems it really drove orders. It seems like things have slowed a little in December, January, in terms of the general economy. Would that be reflected in your order pattern as well, but really has nothing to do with the economy, just timing of your advertising and promoting? Any additional color there would be helpful. Thank you.

All right, John. In December, we had very strong October-November. But by design, as I mentioned earlier, we decided that we would take our -- some of the December business into January. So far, its holding up. But as I said in the last few days that do matter, we had some slight disruption in the Eastern United States in the last weekend, which as you know, Saturdays and Sundays are big days. But we have one more week to go. So by the end of this month, we will know.

All right. Good luck. Thank you.

Thanks John.

[Operator Instructions]. Our next question or comment comes from the line of Kristine Koerber. Your line is now open.

Hello Kristine.

Hello. Good afternoon. A couple of questions; first, can you just -- as far as the quick ship goes, the quick ship initiative; is that going to be across all upholstery products, or there are certain number of SKUs that you are targeting, as far as the 30-day shipment?

Kristine, we have taken some of our, you might say better selling, very limited number of sofas, but available in the whole array from chairs to sectionals, so they are -- and limited number of fabrics and limited number of leathers. And with the combination of our operations in Mexico, and importantly, our ability to make them in our operations in North Carolina, in Maiden, North Carolina, our objective is to -- there is a soft launching in February, and a market launch in March. But it’s a limited number in frames and fabrics.

Okay. And then, with regards to the Disney partnerships, can you be a little more specific on the timing of the product launch and the number of SKUs that you are targeting? And how big is your children's business now, and as far as the marketing of the Disney products, is that going to be a joint marketing effort?

It’s a little bit too early to give a lot of details. We are very-very pleased with this association. It started about a year back, discussions with them, and it is going to involve developing products for our children, and also some limited products for their parents. So the objective is to get children and their parents, who in most cases, happen to be millenials; and objective would be to launch into the retail network this summer and market launch in the fall of this year.

Okay. Looking at your children's business, how big of a business is that for you now?

It is relatively small, and we do have some business, but this really gives us an opportunity of launching it and then we are discussing it with Disney, the collaboration of launching it through our channels and their channels. So we are in the process of doing that right now.

Okay. And then just lastly, you mentioned in the press release and also on the call that digital has helped drive -- is helping to drive your business. Can you just give us a little more color and how we should think about advertising going forward, especially since digital is a less expensive means of advertising. Can we see a shift to more digital and -- I guess as we look back at the 76 page catalog that you launched, I mean, did you -- what are your thoughts on that, did you get the return on investment on that print advertising?

Well, certainly our direct mail is a very important part of our marketing initiative. Overall in print, one has to always look at it from -- as you said, from the return perspective. We have to have a mix of advertising. For us we believe, direct mail is important, not only to reaching our customer client base, but also to prospects. But it has to be supplemented with other mediums, and today, digital mediums are important. So we have a very strong, you might say, email blasts [ph]. We also have digital advertising, which you are going to see us continue to increase, and then I think that with our collaborations with Disney, and in fact, we also announced our launch of our first, you might say, a marketplace with Army and Air Force Exchange which is going to be launched February 1st, that's next week; in which Army, Air Force personnel, active as well as retired, would be able to go on this special web site which we have developed in coordination with Army and Air Force Exchange. They will be able to buy our products on this special web site, and they will be serviced and delivered by our retail network. So we are going to combine this, you might really say, the omni-channel at its best way. That's kind of a situation we are looking at, what other opportunities we have; where we combine the digital as well as our physical presence.

Will the omni Air Force launch -- the special web site, will they be entitled to a discount -- special discount?

Not the customer. The customer is going to pay the same price as any of our customers do, but the cost of the government -- the special thing is, they don't pay any sales taxes. That is the benefit the army personnel get. And we are treating the exchanges as one of our retailers. It's not different than a business that is done online, on our omni-channel, where two retailers share the margins; the one that sells and the one who delivers. So we are exactly treating them as a retailer.

Got it. Online sales, what were online sales through the quarter? I know it’s a relatively small piece of your business, but you are trying to grow online business?

It is growing. Still small. But I think the initiatives we are talking about will make it grow, and I think -- no question about it. But most important is really -- the great advantage is, of our 1,500 interior designers, is to bring them in; because we brought people in through our digital mediums, when we did this 30% in October end, November, we said you cannot buy it online, you got to come in, and we had a 33% increase in October, a strong increase in November. And they had to come in, because then, they were able to interact with our customers, and then it becomes a longer term client relationship. But we got to do both.

All right. Great. Thanks so much.

Thanks very much.

And our next question or comment comes from the line of Cristina Fernandez. Your line is now open.

Hello Cristina.

Thank you. Congratulations on a strong quarter. Going back to your comment about the strong traffic that the 30% offer brought, how much of the activities on October and November, how much was with new customers versus existing customers that had purchased with you before?

We are in the process of really making a whole determination of that, and as soon as that information is available, we will see whether it makes sense to give it out. But perhaps we will give it out later.

Okay. And then, would you be able to quantify for us, how much of the clearance and promotion activity in the quarter, how much of that impacts the gross margin?

It's hard to do that, but I would say that this will continue -- that if you take a look at, for instance, Corey, we give the gross margin on retail? No we don't. Okay, I mean overall, it did reduce our gross margin at retail, but we substantially increased our operating margin at retail, because of increase in -- we had about a 7.5% increase in sales at retail, resulted in a substantial increase in operating margin, despite somewhat of a lower gross margin, which we don't disclose. That's what Corey tells me. But overall, I think that opportunity for us to increasing --as we move forward, is to improve our margins. But for the next few quarters, our gross margins would be under pressure, as they have been, but our vertically integrated structure is such, that with an increase in sale, lot of it flows down.

Certainly Cristina, that gross margin wasn't impacted as much in clearance this quarter, as it was in the prior year quarter.

And can you comment on the performance of accents versus furniture in the quarter, do you see any noticeable differences in sales growth?

Corey, if you can do that?

Yeah, it was about the same as a percent of sales this year versus prior year.

While Corey is checking, John, what's the number, 17% or what?

It was -- our retail accents this year were 22%, which is the same as last year at 22%.

And one last one, you put out a press release earlier this week about the expanded capacity in North Carolina, [indiscernible] facility. Can you talk about what the new capabilities or technologies that you will have as a result of this expansion?

Yes in North Carolina, we are in the process of converting one of our distribution centers, which we are not using. We used to have 7 distribution centers, and now we have two major ones, one in Dublin, Virginia and the second one in Tulsa, Oklahoma, [indiscernible] with seven of them. So this is being converted into a part of our upholstery operations, where it’s a state-of-the-art R&D which we have just put into place, and we are going to make this also our central fabric and cutting, and give an opportunity for our two other plants to establish more cutting lines and be ready for more business. So that's subjective of that [ph].

Thank you.

Thank you.

Our next question or comment comes from the line of Justin Bergner. Your line is now open.

Hello Justin.

Good afternoon Farooq. Congratulations on the quarter.

Thank you.

My first question relates to this discounting 30% of one item. When you sort of aggregate the additional sales that this promotion brought in, did you actually find that the average level of discount declined versus prior quarters, because of the additional sales of full priced items that this discount drove?

No. It was about flat.

Okay. So that would be on a year-on-year or sequential basis?

Yeah, both.

Okay. That's interesting. Secondly, on your international sales, can you remind us how large China is, and if there were any other meaningful headwinds outside of China that drove the decline in international sales year-on-year, Corey?

The China sales were the biggest headwinds. There was some impact of the change of the dollar and the economies in other regions as well. Also acting [ph] international is our two retail operations that we had in Belgium. We wound those down this year, so they weren't compared to the [indiscernible] until last year. So that also impacted it as well. The [indiscernible] is on individual retailers. That I don't have available at this point.

Okay, great. Thank you. And one more if I may, you had mentioned that retail composition of sales being up I think to 79.4% versus 77.7% year-on-year. How should I think about the impact on company-wide gross margin, operating margin? Is that a tailwind and how should I sort of think about the magnitude of the tailwind?

Typically we are running closer to around 78% for retail mix, and I would say that looking ahead to the next half, that that would probably be a more normalized rate for us. The 79.4% is fairly high from where we have been. So I think 78% is more of an average that you can look forward to.

Okay, great. Thank you. And just in closing, Farooq, not to bring up any bad memories, but you did go to the proxy process this quarter. Were there any costs associated with that, that were material in your December quarter earnings?

I don't know, what are you talking about? What proxy contest? I had forgotten it, because we have been spending time on more important things. The good news is this, that we decided that we would not get a lot of advises. So our costs were less than a penny, so that's why we have not reported it as a special item.

Thank you. Best of luck on the rest of the year.

Thanks very much.

And I am showing no further questions or comments.

All right. Well thanks very much. It's good. I am real pleased with the progress that we have made and of course, objective is to continue with this and we have got a lot of good initiatives in place. If you have any questions, comments, please let us know. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.