Good day, ladies and gentlemen, and welcome to the Ethan Allen Earnings Release Conference Call. Now I want to introduce your host for today's conference, Mr. Corey Whitely, Executive Vice President, Administration and CFO. Please begin.

Thank you, Valerie. Good afternoon, and welcome to Ethan Allen's earnings conference call for our third quarter ended March 31, 2016. This telephone call is being recorded and webcast live on ethanallen.com, where you will also find our press release which contains supporting details, including reconciliations of non-GAAP information referred to in the release and on this call. As a reminder, our comments today will include forward-looking statements that are subject to risks and uncertainties which could cause actual results to differ materially. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. After our Chairman and CEO, Farooq Kathwari, provides his opening remarks, I will follow with some details on the financial results. Farooq will then provide further updates on our ongoing business initiatives before opening up the telephone lines for questions. With that, here is Farooq Kathwari.

Thank you, Corey. We had a good quarter. Sales increased 10% to $190.6 million, with adjusted operating income increasing 35% and adjusted earnings per share increasing by 88.9%, reflecting stronger written in second quarter continued into the third quarter, with a very strong January 2016 written. Operating expense control, lower interest expense benefiting our net income and EPS; changes in strengthening of our interior design network; positive impact of new offerings; leverage of our vertically integrated structure to maximize the benefits of increased sales and manufacturing efficiencies to our bottom line. We are also pleased with continued strengthening of our balance sheet, increasing dividends paid by 12.7% during the third quarter and 20.7% during this fiscal year to date. We also purchased 300,000 shares for $7.1 million during the quarter and 700,000 shares this fiscal year for $19.3 million. After Corey gives a brief financial overview, I will provide further updates on our various initiatives. Corey?

Thanks, Farooq. In the third quarter of fiscal 2016, we continued our growth, with consolidated net sales of $190.6 million, a year-over-year quarterly 10% increase following a 5.3% increase in our second quarter of fiscal 2016. During the third quarter of fiscal 2016, consolidated adjusted operating margin increased to 8.2% from 5.8%, and adjusted net income increased to $0.34 from $0.18 per diluted share. We are pleased our many initiatives are making an impact, and we continue to benefit from the operating leverage of our vertical integration. Comparing the third quarters of fiscal 2016 and fiscal 2015, net sales increased 17.5% in our retail segment and 4.4% in our wholesale segment. Net sales during the third quarter of fiscal 2016 reflected our new products are being well received and our marketing initiatives continue to generate consumer interest. Net sales this quarter also benefited from a higher backlog as we entered the quarter. The milder winter this year than in 2015 and one extra day in February due to the leap year were partially offset by Easter being into the third quarter of fiscal 2016 compared to the fourth quarter of fiscal 2015. The mix of retail segment net sales to consolidated net sales for the third quarter of fiscal 2016 was 79.8%, compared to 74.7% in the prior-year quarter. This change in mix helped drive the strong consolidated gross margin to 55.5% from 54.3% in the prior-year third quarter. During the third quarter of fiscal 2016, our retail segment had slightly lower gross margins due to sales promotions, product mix and clearance sales, as well as some currency fluctuation in our international operations. The gross margin of our wholesale segment improved over the prior-year third quarter due to higher sales and improved efficiencies in our North American workshops. Written orders…

Yes, thank you, Corey. I apologize for my voice. As you may know, I'm also a part-time farmer. So I was working on my apple orchards, and there is a great, great hay fever season this year in the New York area. Our focus is to continue to enhance our major competitive advantages, which include acquisition and retention of quality talent who are passionate about their work. We are pleased with the continuous strengthening of our teams in various areas of our vertically integrated enterprise. These areas include merchandising, marketing, technology, manufacturing and retail. We are a leading interior design company, with more than 1,500 in-house interior design associates in North America. Our ability to adapt to changes in the marketplace also gives us a competitive advantage. Disruption creates opportunity. Today, every element of the business world is going through major disruption and provides an opportunity for us to differentiate our business. Our focus remains on adding technology to personal service in various areas, which include retail, manufacturing, marketing and logistics. Continuous improvement in our supply chain network. About 70% of our furniture is made in our North American workshops. And through our logistics, it is delivered at one cost nationally, followed with premier in-home delivery. We are pleased with our progress, which is reflected in improved operating margins. We are making our offerings more relevant for today's consumers. New products that were introduced summer and fall 2015 are being well-received and we plan to introduce new offerings: Buckhead, Santa Monica and Brooklyn in June, July and August. We are making excellent progress as we develop the major Ethan Allen Disney offerings which will be marketed in fall 2016. We continue to renovate and reposition our network of 300 design centers. During this current fiscal year, we have opened new locations in Wichita, Kansas; Toledo, Ohio; Pittsburgh, Pennsylvania; Dublin, that is San Francisco, California; Cranston, Rhode Island; Elkridge, which is Baltimore, Maryland, plus 14 additional locations, many involving relocations in China. Under construction are design centers in Virginia Beach, Virginia; Savannah, Georgia; Hyannis, Massachusetts; Rockville, Maryland; Indianapolis, Indiana; and our second important location in Manhattan. With this brief overview, we are now ready for any comments or questions. Valerie?

Thank you. [Operator Instructions] Our first question or comment comes from Budd Bugatch from Raymond James. Your line is open.

Hello, Budd. How are you?

Good morning, Farooq. Sorry to hear you're struggling with hay fever. I think I understand that.

Yes, I know. But you know what? It's a great, great weather, great season, so we're going to have great apples. But I was working about five hours in the field, and I shouldn't have done. But I feel good.

That's good. All right. Well, first question is I think that you had a strong backlog entering in this quarter, and customer deposits were up year-over-year entering into the third quarter. So my question, it really goes to customer deposits now flat. Could you characterize how the backlog looks heading into the fourth quarter versus last year?

Yes. The overall backlog is about close to at the retail is about a little over 3% lower than last year. It reflects two things. As I said in my comments that we had a strong written in our second quarter. In fact, a lot of it came in and also, then we had a strong written in January. So we were able to deliver it in our third-quarter. That's why our third quarter reflects an increase of 10% and our retail increased by 17%. So it also reflects the fact that, as we have improved and expanded our manufacturing, we are in a position to now deliver our backlogs faster. So going into this quarter, which is I'm referring to, is the fact that we do start with somewhat of a lower backlog. But we are in a better position to deliver products as business comes in. So this quarter will depend upon the business that we'll get in April and in May.

Got you. Secondly, Disney -- you talk about delivering that or getting that in fall of 2016. Any way to characterize what your expectations might be for volume in -- in the next fiscal year?

Well, Budd, as you know, we do not speculate. We have done well. Our business has grown. While on the other hand, as you know, we have to be cautious relating to what the markets are. But we are positioned well, so our objective is to continue to grow.

And what about any update on the government contract that's been hanging fire for a while?

Absolutely. Every week, they tell us its coming. This week, they said the same thing.

Okay. And finally for me, maybe talk about what your advertising spend was in the quarter and what your outlook is for the balance of the year and for fiscal 2017.

Yes. In the third quarter, we spent approximately $8.7 million as compared to about last -- the same quarter last year $9.4 million. Timing is an issue going into the fourth quarter. Last year, we spent only $7.5 million. So I think between the two quarters it will sort of continue to balance between 4.5% to 5%.

And next year, the same kind of spend rate?

Yes. But keep in mind, we spent 4.5% on a 10% increase in sales. So in terms of -- so it all is, you're looking at absolute numbers and you're also looking at percentages. So I think between 4.5%, 5% on hopefully larger volumes.

Okay. All right. Thank you. Good luck on the balance of the year and into next year.

All right, Budd. Thanks.

Thank you. Our next question comes from Jessica Mace from Nomura. Your line is open.

Yes. Hello. How are you?

Hi, Farooq. Good afternoon and nice results.

Thank you.

My first question is on the end of this product rollout in phase four. As you roll that out over the summer, what can we expect for the cadence of new product introductions going forward after this major product transformation has been completed?

As we have also explained previously, this introduction that we started about 1.5 years back has been major, major focus. And at this stage, when we are done with introducing the three new attitudes in June, July and August. So we've got a strong marketing going into those three months. Then, we come into the fall that is September/October, we will have an important launch that will be the Disney/Ethan Allen -- what I call the magical home products. As far as our regular programs are concerned, we would have a much, much smaller enhancements to our product lines. At this stage, we do not expect any longer, large introductions in the next 12 months or so.

Great, understood. And then, you had a couple of announcements about new store openings in a new concept format. And I was just wondering going forward how many of your new store openings or relocations will be in similar type formats. And even though they've only been open a short time, if you can tell us -- share any kind of feedback or learnings from those stores.

Yes, of course. The new stores, or design centers as we call them, have a number of characteristics. First is, they are generally almost all of them in what you might call lifestyle centers. We share with other important retailers, so that it gets us more qualified traffic. Second, they are smaller in size, less than 10,000 square feet. Third, we have opened a few -- in fact, we have just opened last week at a grand opening in San Francisco -- in Dublin/San Francisco. And then, about a couple of weeks back, we had one in Cranston, Rhode Island, with what I call the kitchen concept, which is having interior designers right in the middle of our design center, very, very well received both by our designers and by our clients. And we will be doing this, of course, opening in -- and we have a number of others opening up. Like, for instance, we are opening in Hyannis near the Boston market or in Rockwell. And also finally, of course, in September -- end of September in Manhattan -- the second one in Manhattan. They will all have this new concept, well-received by both consumers and by our designers.

Great. Thank you. And then, one final one on the operating expenses. It looks like you had some good control savings there. I was wondering in addition to leverage on higher sales, any other areas where you have really been able to achieve some cost cuts? Thanks very much.

Yes. We continue to watch our expenses well, considering the fact that we have been investing in new design centers, and keeping in view that all these new design centers have generally higher expense relative to sales, which we have been absorbing also. It is reflected in our operating earnings. We also continue to watch what we spend in our marketing. And our expenses that did go up, they were all directly related to the increase in sales. So overall, we are a vertically integrated company, so we have to watch our expenses even though -- as we continue to see some greater increase in the medical costs. And that is what we're absorbing as well. But overall, very, very good control by all of our teams at the various parts of the business.

Thank you.

All right. Thank you.

Thank you. One moment please. Our next question comes from Brad Thomas of KeyBanc. Your line is open.

Yes. Hello, Brad.

Yes. Hi, Farooq, hi, Corey, good afternoon. Congratulations on the MI. Congratulations as well on another nice quarter here. My first question was about the cadence of business. And I guess, as we are a few weeks into your next quarter where the written comparison does get a bit tougher up against the 10% comparison in last year's June quarter, how are you thinking about the outlook for growth and the likelihood that you'll be able to deliver another quarter of positive written comps after two strong ones here?

Yes, well, these are challenges. We do have very strong programs. We have a strong marketing program in April, which is this month, a very strong one in May. And then, in June, we will be introducing again a fairly strong marketing program of introducing Buckhead as our new program. We have -- also, there's one thing you've got to note that last year we did benefit in the month of June from a price increase that we took in early July. This year, that is not the case. We are considering that, but we are not going to take a price increase on July 1 as we did last year. But that is what -- that might have some impact on our written business towards the end of June. But overall, we feel comfortable. We are positive with all the initiatives that we have in place that we should -- we have an opportunity of continuing to increase our business.

Great, great. And Farooq, as you and the marketing team look at some of the new customers that are coming in and responding well to your new merchandise, what are you seeing? Are you starting to attract new customers? Are you seeing greater frequency from existing customers?

Yes, Brad, and that's a very important issue, a big challenge. This quarter, we also introduced the custom quick ship. This is an important program. This reflects our upholstery programs, selected product programs and selected fabrics where we are now delivering them within less than 30 days custom all across the United States. Well-received because not only is it faster delivery on custom, but we intentionally could offer them at very attractive pricing, which has attracted us not only our current customer base. But we are starting to see new customers, especially as you can -- especially younger people, the Millennials. So we are starting to make that impact. And I think that our new product program -- especially the Buckhead, Santa Monica and Brooklyn -- are more geared towards -- on our total customer base, but certainly towards what you might say the younger customers as even more so than we did in the last year. Because what we introduced last year were more of the classic product lines, whether what we call the Georgetown or the European classics. And then finally, of course, the Ethan Allen Disney has a great opportunity of getting us children and their parents.

Of course. And just lastly for me, Farooq, if you could give us an update on some of your international markets, specifically China and maybe what you've seen more recently out of Europe as well.

Yes. As Corey mentioned that while on the wholesale side we did have lower shipments because of the fact that they had placed some fairly large orders during the last year's this quarter. We do know -- we did get information that on the retail side, their business was up. Considering, of course, all the issues that one is hearing in China, they are holding up. We have spent a great deal of time with our Chinese partner in renovating and even helping them relocate some of their key design centers in places like Beijing and Shanghai. So, well-positioned in China. We have also continued to make progress in some of our design centers and in the Middle East. And we have also a stronger program in Germany, where they are small locations, but we expect seven or eight of them to be opened up in the next six or seven months. And also we are opening one in Taipei, a new one, and also in Mexico City. So, making progress. But, of course, our biggest, biggest opportunity still remains right here in North America.

Of course. All right. I'll take it easy on your voice. Thank you so much, Farooq.

No, my voice is -- it doesn't hurt me. It just is hoarse; that's all.

Okay. Thank you.

Thanks, Brad.

Thank you. Our next question comes from Jeremy Hamblin of Dougherty & Company. Your line is open.

Yes. Hello, Jeremy.

Hi. Good afternoon. Congratulations on the continued strong results. I wanted to ask you couple of questions on the real estate plans overall. You've had a little bit of a change in the makeup where you're growing your independently operated stores, but your company-owned locations have come down slightly over the last few quarters. I'm just wondering, when you talk about that long-term idea that you've got 40 or so markets that you feel are under-penetrated that you have an opportunity, how should I be thinking about the total store count for the company, which I think as it stands today is that 302 locations. Is that something where the 302 is going to become 315 or 325? And if that's the case, then how do we think about that make-up of 141 company-owned and 161 -- how will that make-up play out over the next few years?

Yes, Jeremy, good questions. Our retail network operator for the company is going through a number of changes. Two important ones are that we are in -- on one hand, we are consolidating. And on the other hand, we are opening new ones. For instance, with this last quarter we consolidated a design center in Colorado Springs. A few years back, we had opened up a major -- really a flagship design center in a place called Centennial, which is also in the metro Denver area. Now, because of the fact of our marketing today and our interior design focus, rather than a commodity selling, we believe that the Centennial can take and is out taking the business that was being done in Colorado Springs. In fact, we sold that for approximately $4 million. I think just closed about a week or so back. So on one hand, what's going on is the consolidation to take advantage of our important design centers because the costs of operating in, let's say, those two markets is not very efficient. We are talking our real estate costs, the management costs, people costs -- having one great design center is important. For instance, also recently we consolidated one in the Toronto market in an area called Burlington. We consolidated it because we have three other strong design centers that are starting to take that business. So that's the reason sometimes you'll see that our numbers are getting lower. But overall, it's important for us. So that's on one hand. On the other hand, we are going to go -- getting back into markets, which I mentioned earlier, 40 or 50 of them that we used to be there. Like, for instance, this last year we opened in Wichita, Kansas. We opened in Toledo. We are just in the process of building one in Savannah. All markets that we were not in and we're going to go back in. So when you take a look at our number is 302 now and our company design centers, while it's remained at the end of the period at 141, the fact is the composition is much better. So you're going to see the 141 being stronger. We're going to continue where it makes sense to consolidate and open new ones. But when we consolidate, the opportunity of taking business to existing ones is an important one. So that's what you are going to see. Yes, overall, from 302, it's going to go up. But the strength of our design center does not just reflect in the numbers.

Okay, great. And then, I just wanted to ask, too, you did a -- you've been doing a bunch of remodels. Corey or Farooq, can you just speak to the remodeling costs and the expense associated with that as we think about this here closing out fiscal 2016? Is that going to be up or down?

Well, Corey, you can talk, too, but I think our capital expenditures will more or less be similar to last year.

Not the CapEx, the expense associated with it.

Oh.

The expense was more last year because last year we were really repositioning all the floors.

Oh, I see.

Putting new flooring in, painting, lighting. So it's less this year on the remodeling. On the new locations, though, with the relocations, some of that does flow through to P&L before the design center is even open, and that's reflected just in our operating expenses.

So like a preopening cost?

Yes. Like -- okay, like we are just opening one in Manhattan. And our retail division, management was a bit surprised even though we have a free rent for, I don't know, six or seven months. But they started seeing hitting it hit right away. And Manhattan costs, as you know, it's pretty high. So we are already expensing it. And we are expensing in a number of these relocations. The new ones, we do expense them like three or four or five that we are going in. We don't -- we are not showing them separately because, Jeremy, we did it last year, too. So we don't want to show these numbers separately because it is an ongoing process.

Okay, great. And I wanted to follow up on the State Department contract, which I know has been out there forever. And you're probably frustrated. But in terms of the magnitude of that contract, which I understand has grown a little bit in size because it's been delayed in its release. Can you give us a sense of how large the total contract is? My understanding is that we're looking at probably multiple vendors that would participate in that. But can you give us a sense for if you do participate in that contract of how large it potentially could be?

It's hard to say. But based on the past history, you're talking about on an annual basis up about $40 million, $50 million. And so now it depends how many folks they give it to.

Okay. And if it's over 50 million, then wouldn't they split that among two suppliers?

That's right. They will do it at least two.

Okay, terrific. And one last question if I could sneak in on ecommerce. You didn't talk a lot about that, but you have been improving your digital marketing. And it sounds like you're getting traction with a younger demographic between the quick-ship options, which launched in March and ecommerce. But could you comment at all on what you're seeing? Are you getting better return on investment in ecommerce?

Jeremy, our ecommerce is up substantially, but from a very small base. So we are still just getting started. What we are doing, what we are seeing is that -- and as you can see, some of our advertising like, for instance, right now, this month we say that you can come in, you can start something beautiful. Come into a design center and get 25% savings on two items. Not on ecommerce, they've got to come to the design center. Now, this is an intentional marketing thing that we have done to bring people into our design centers because when they interact with our designers, who also make home calls, we have larger business and a client rather than a transaction. Having said this, you are going to see us also improve our ecommerce. For instance, we had, again, from a very small base a reasonably strong sales on the custom quick ship because it's easier to buy, and it's limited fabrics, fast delivery. And I would say that we are right now in the process of again are taking our Web site to the next level. And perhaps Corey, you just started on this. You may want to tell them what we are doing.

Yes. We are right in the process of upgrading our Web site to the new site genesis, which will be the latest features that the demandware platform offers. It's a nice uplift. And that will also be the basis for our Ethan Allen Disney home line, which will be the separate site that will be a different look, different experience, much more geared for the magic of Disney. And we are very excited to get that launching this fall to coincide with the launch of the new product programs.

Terrific. With a strong balance sheet, are you thinking about the -- any further enhancements to your share repurchase activity? And potentially any use of that associated with that, Farooq?

Well, as you know, we are -- we continue to use our capital well. We have increased our dividends. We have also continued to buy about $20 million of our stock. Last year, we were thinking of raising debt but the markets were not good. We'll keep an eye open for that. But I think our objective is to make sure that we continue to strategically buy our -- as we move forward. So you're going to see us to continue to look at buying our shares as we have been doing. Now, keep in mind, we have bought over 41% of our company back.

Right. Congratulations. Best of luck.

Thanks very much.

Thank you. Our next question comes from John Baugh of Stifel Nicolas. Your line is open.

Thank you. Farooq, congrats on your City of Hope recognition, by the way. That was terrific.

Yes. It was a great event for them. They raised a fair amount of money there, John.

Good for you. I wanted to ask on the faster deliveries, I assume that happened before. You launched the quick-ship program. So is this something that's permanent and going to get even better with the quick ship program? And could you maybe update us on what now a typical lag time from order to shipment is going to be?

John, there are different elements of our business. The quick ship in upholstery is, at this stage, limited to a limited number of trains and fabrics. And we are shipping from our -- the final product is made in our Maiden plants. We've got three upholstery plants there. And I think on an average they are shipping in less than 10 days custom products. So that's very important. Then on the other hand, as you know, it's almost still 70% of our business is custom. Even this custom quick ship is custom. So, we have reduced the timeframe, even considering the fact that our manufacturing has to cope with a lot of new products. We have taken a certain amount of our case goods and made them quick-ship, especially the ones that come from offshore. So at this stage, most, I would say close to 80%, of our product is shipped within four to six weeks, the custom product from our North American manufacturing.

Okay, that's helpful. Four to six weeks for custom, which is 80% from the U.S. Okay. And then could you -- I heard you say 25% off in the context of ecommerce. Maybe you could just update us on what the April promotion is and maybe any insights into what you're going to do in May and June. You mentioned the new product launch in June perhaps. You've got something planned there as well?

Well, in April, we took about, I would say, 40%, 50% -- is under 50% of our products, which we called iconics, our great products. And we said that they -- those -- that product line will be able to have a savings of up to 20%. Then in addition to that in April, we offered a family -- one customer the opportunity to buy two of these iconics at a savings of 25%. That's the main offering. We, of course, have other offerings, like we do have a good financing programs. Now, I cannot tell you what we're going to do in May. But in May, we'll have a strong program. And then in June, we will be introducing with the Buckhead in somewhat of a more prominent way. And you'll see that as we go into -- we want to make sure people see the difference. It's a beautiful product line, well-designed, very well-received. And I think you saw it, too, when you were here. And it's finally getting into our design centers. And in June, we'll be marketing it. So that's a strong program right through the fall of this year.

Great. And then, I know the month isn't over yet -- April. And of course, stacked your promotions to the end of the month or at least that's when business is closed. But you did move Easter from April of last year into March. So, just curious, that the orders bounce around. I understand that stuff like January was very strong and I guess February and March less so. But is there any read from your seat as to what you see the consumer doing, favorably or not? Thanks, Farooq.

Yes, John. What you are seeing is you are right. In March, we were impacted by Easter in the last week of the month. That -- those customers decided to wait, and for lots of reasons. And, of course, we also have the spring break at that time. In April, we have had a much higher traffic. People are working hard, but in the next five days will determine as unfortunately or fortunately, it ends up the five days, we get about 40% of the business. So in the next five days, 30% to 40% of the business is done in the last four or five days. It looks promising. But until we get it, I cannot tell you that it is here.

Understand. Thank you for taking my questions.

All right, John.

Thank you. Our next question come from Justin Bergner from Gabelli & Company. Your line is open.

Yes. Hello, Justin.

Hi, good afternoon, Farooq. Good afternoon, Corey. Very nice sales growth you put up this quarter. I wanted to ask similar questions to what I asked last quarter. In regards to your promotions and aggregating those promotions across your total promotions for the company, sort of including clearance, how did the level -- average level of discounting compare to the year ago quarter, in this March quarter just completed?

That's a good question, Justin. I think that -- Corey, you may want to take a look at it. But all I know, our discounting this quarter is higher than the quarter last year. And on the other hand -- in addition to that, Justin, we still are clearing a lot of products from our floors because all these new products coming in that have come in the last six months, we have to sell still a lot of products. So while our gross margins overall were positive, they increased. And as Corey said, part of it was the fact, higher proportion of retail to total business, better gross margins and efficiencies in our manufacturing. On the other hand, our retail had lower gross margins because of this clearance of products. That's going to continue. And so you're going to see us have lower margins on clearance but higher margins on efficiencies of manufacturing and logistics.

Got it. That's helpful. With respect to the sales increase at retail, how did that divide out between traffic and ticket?

I don't have all of the tickets. More or less as an average ticket of about close to $1,800, stayed about even. Traffic actually was higher between 5% and 10% higher. So it really was realizing more from the people who came in.

I see. Excellent. Just one quick question to wrap up, which is the gain on sale in this quarter, which store -- real estate sale did that relate to?

Yes, it was about a $500,000 gain on the sale.

In Pittsburgh.

In Pittsburgh.

In Pittsburgh, yes. And, again, we closed sort of an old freestanding location and then opened up the one I just referred to, which is in a lifestyle center, a leased property.

Got it. Thanks so much for taking my questions.

All right, Justin.

[Operator Instructions] One moment, please. I'm showing no further questions or comments at this time.

All right, Valerie. Thank you. And thank you to everybody on the call. And any questions and comments, please let us know. Thanks very much.