Ethan Allen Interiors Inc. (ETD) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ethan Allen Earnings Release Conference Call. Now I will introduce your host for today's conference, Mr. Corey Whitely, Executive Vice President, Administration and CFO. Please begin. Corey Whitely - CFO, Treasurer & Executive VP-Administration: Thank you, Jonathan. Good afternoon, and welcome to Ethan Allen's earnings conference call for our fourth quarter and fiscal year ended June 30, 2016. This 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. These 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. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Thank you, Corey. We are pleased that we are reporting a strong fourth quarter and fiscal year ended June 30, 2016. For the fourth quarter sales increased 6.3%; gross margin of 56.3%, a 144 basis point increase; adjusted operating income of $25.2 million or 12.3% of sales compared to 10.3% in the previous year, an increase of 27%; adjusted EPS of $0.57, an increase of 32.6%. For the 12 months, our sales increased 5.2% to $794.2 million, with adjusted EPS increasing 36.2% to $1.92. We also maintained strong balance sheet. As we reported in the press release, our many initiatives in the last few years of repositioning our product offerings, strengthening our interior design network, creating desire and action through our various marketing initiatives, benefiting from our technology enhancements and improvement to our manufacturing, logistics and sourcing has resulted in our strong performance. We remain cautiously optimistic due to the launch of many initiatives, including the launch of Ethan Allen Disney program in the latter part of our second quarter. I will discuss our initiatives in greater detail after Corey provides more detailed financial information. Corey? Corey Whitely - CFO, Treasurer & Executive VP-Administration: Thank you, Farooq. For the fourth quarter of fiscal 2016, we continued our growth with consolidated net sales of $205.7 million, a year-over-year 6.3% increase for the quarter. For the full fiscal year, net sales increased 5.2% to $794.2 million. During the fourth quarter of fiscal 2016, consolidated adjusted operating margins increased to 12.3% from 10.3%, and adjusted net income increased to $0.57 from $0.43 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 fourth quarters of fiscal 2016 and 2015, net sales increased 7.6% in our Retail segment, and 9.6% in our Wholesale segment. These increases reflect that our new products are being well received and our marketing (3:53) initiatives continue to generate consumer interest. The mix of Retail segment (4:01 – 4:06) was 79.5% compared to 78.5%. (4:10) This change in mix helped drive the strong consolidated gross margin to 56.3% from 54.9% (4:17) in the prior year fourth quarter. During the fourth quarter of fiscal 2016, the Retail segment also had improved gross margins due to product mix and less clearance sales. The company's comparative written orders for the fourth quarter held even to the prior year fourth quarter, which had increased 10.4%. Last year, the price increase accelerated ordering (4:38) activity into the fourth quarter 2015. This year a price increase is effective in early August. This timing also affected our retail order backlog, which was (4:53) 2016, than a year ago. As we have mentioned, our faster delivery times, primarily a result of our stronger inventory position, improved manufacturing efficiency and the Custom Quick Ship program, along with the timing of (5:08) other factors caused the backlog to (5:10) not necessarily indicative of sales performance (5:13). International net sales as a percent of consolidated net sales were 8.4% for the fourth quarter of fiscal 2016, versus 10.1% for the comparable prior year period, primarily due to a decrease in wholesale shipments to China. Adjusted operating expenses for the fourth quarter of fiscal 2016 increased $4.2 million, versus the prior year quarter, most of which were variable costs that increased due to increased sales. Our adjusted operating income was $25.2 million, 12.3% of net sales for the fourth quarter, an increase of 27% from the $19.8 million in the prior year fourth quarter. Our press release provides details of the non-GAAP adjustments. Our effective income tax rate was 35.6% for fiscal 2016. That compared to 34.5% for fiscal 2015. We benefited by the resolution of certain income tax matters, and will continue to use 36.5% as our enterprise effective tax rate for fiscal 2017 planning purposes. Moving to the balance sheet, we ended the year with a strengthened balance sheet, while also focusing on shareholder returns throughout the fiscal year. For the fiscal year, we reduced our debt by $34.4 million, which further reduced our interest expense. We have maintained our borrowing capacity and at June 30, 2016, we had $89.8 million of availability on our revolver. Our total cash and securities at June 30, 2016, totaled $60.5 million and debt totaled $41.8 million compared to $76.2 million at the prior year end. We also had $61 million in customer deposits as compared to $68 million in the prior year quarter. For the fiscal year, we've repurchased 700,000 shares during the second quarter and third quarters this fiscal year for $19.3 million. And we paid out $16.6 million in dividends, an increase of 24.7% than the prior year period. Inventory of $162.3 million increased as planned by $10.4 million from the prior year end, as we prepare for upcoming new product launches and to support our new Customer Quick Ship program. We expect our inventory to stay about the same at this level for fiscal 2017. Capital expenditures, including acquisitions this year, totaled $23.1 million with depreciation of $19.4 million. And we expect capital expenditures of $25 million, with depreciation of $20 million for fiscal 2017. So with that I'll pass it back over to Farooq. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Thank you, Corey. We have continued to create a competitive advantage by focusing on implementing most effective initiatives of excellence in customer experience. These include strengthening our interior design network of about 1,500 interior designers and 300 design centers. Our interior designers provide as little or as much service to our clients, and now we continue to empower our interior designers with technology to interact with their clients. We also continue to reposition and relocate our interior design centers. During fiscal 2016, we opened design centers in Wichita, Kansas; Pittsburgh, Pennsylvania; Toledo, Ohio; Philadelphia, Pennsylvania; Hesse, Germany; seven in China; Dublin, there's an area in San Francisco; Columbia, Maryland; Cranston, Rhode Island; Rockville, Maryland; Hyannis, Massachusetts and Savannah, Georgia. Scheduled to open in fiscal 2017 is our flagship design center in Flatiron District of lower Manhattan, opening next Friday. And also under construction are several design centers including two in Germany and one in Taiwan. We have been adding new product offerings on a planned basis. Last 12 months introduced Capitol Hill, formerly called it Georgetown. Sonoma, Buckhead was introduced, Santa Monica this month, (9:53) and Brooklyn product line is going to be introduced in August (9:57). We also had a positive impact from the introduction of our Quick Ship upholstery programs, and very importantly in August, we are introducing the Brooklyn offering. In November, we plan to introduce a collection of about 500 products consisting of furniture, sofas, bedding, accessories for the Ethan Allen Disney Magical Home program. Another major competitive advantage in providing good customer experience is strengthening our premier home delivery, where we deliver at one national price our products to customers' home in white-glove service. For our marketing focuses on conveying in an effective manner (10:53) from experience. These include monthly direct mails, print, TV, and increasingly greater focus on digital mediums. About 70% of our furniture products are manufactured in our North American workshops, 80% of our furniture products are custom and delivered within four weeks to six weeks, while 20% of our furniture products are – and over 60% of our non-furniture products are available for immediate delivery. We continue to add technology (11:29)... Corey Whitely - CFO, Treasurer & Executive VP-Administration: Jonathan? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Jonathan, are you there?

Yes, I am here. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Can we – everybody can hear it?

Yes, there was some – you were fading out for a moment there, but you sound good now. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: I see. I don't know what the problem is. It's not coming here. Could we check with – anybody else in here has a problem hearing it? Because my office tells me they were not hearing it.

You're back. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Okay. I'm back. Well, the question is, Jonathan, did we lose any part?

It's more like you just lost part of a word here and there. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. I don't know why, because I've been speaking clearly, so and loudly, so I do not know – Okay. Okay. Anyways, when we open for questions I want to see if there's an issue. All right, so going back to what I was discussing, I was talking about 70% of our furniture products are manufactured in our North American workshops, 80% of our furniture products are custom and delivered within four weeks to six weeks, while 20% of our furniture products and over 60% of our non-furniture products are available for immediate delivery. We continue to also add technology to the craftspeople in our workshops. We're also pleased that environmental stewardship, sustainability, health/safety and increasingly social responsibility are an important focus. And finally, combining technology and personal service is one of the major differentiators of great customer experience and we are adding technology to create dynamic omnichannel environment. With that, I will prepare to open for any questions or comments.

Our first question comes from the line of Budd Bugatch from Raymond James. Your question, please? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. Hello, Budd. Bobby Griffin - Raymond James & Associates, Inc.: Good afternoon, Farooq and Corey. This is Bobby actually filling in for Budd. Congrats on another excellent operational quarter. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. Thanks, Bobby. Bobby Griffin - Raymond James & Associates, Inc.: A couple questions from me. Farooq, can you just update us on the phase four new product offering progress? How much is out on the retail floors? How much is left to be implemented? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: On the phase four is – the last part of that is going to be introduced next week in – which is the Brooklyn product line, and that is already getting into our floors right now. Bobby Griffin - Raymond James & Associates, Inc.: Okay. Then after the Brooklyn product line, phase four is then complete? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yes. It is complete and then after that our next major program is the Ethan Allen Disney, which will get on to our floors in mid-November. Bobby Griffin - Raymond James & Associates, Inc.: Okay. Perfect. Thank you. And then is there any update on the government contract that we've talked about before in the past? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: They tell us every week, every day, so we're waiting. Bobby Griffin - Raymond James & Associates, Inc.: Still waiting. All right. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. Bobby Griffin - Raymond James & Associates, Inc.: I appreciate it. And then lastly from me, can you or Corey maybe comment on what you expect for store activity this year? Adding to the company the owned design centers or independent, and kind of how you expect that to flow during the year? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yes. Our focus continues to be on relocations. And in fact, as you know, those major, major changes that I referred to, and end of the day, they were – net change was relatively small. But the qualitative change is a major one because we are moving them into the right places. And also keep in mind all these changes, all these design centers that we've moved do create also disruption in terms of even an impact on earnings. We don't show these separately, but when we have to close a design center, move it, then it really – it does have an impact on our earnings, our profitability, for that period of time. But we have been doing it for some time, and we continue to do it. That's why we do not separate it. I would say that we would have approximately anywhere between 5 and 10 new design centers, and again, many of them will be relocations. Some will be new. Bobby Griffin - Raymond James & Associates, Inc.: Okay, thank you. Best of luck moving forward. I appreciate you guys answering my questions. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Okay, thank you.

Thank you. Our next question comes from the line of John Baugh from Stifel. Your question, please. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. Hi, John. John Baugh - Stifel, Nicolaus & Co., Inc.: Hello. How are you doing, Farooq? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Thanks, John. John Baugh - Stifel, Nicolaus & Co., Inc.: Good, yeah. Just so you know, the first part of the call was pretty broken up. So, a few things. Any way you could parse out what you thought orders might have done, written, excluding the timing of the price increase? And then, could you tell us what you're going to do in August with pricing? Will it be similar to last year? How does it differ? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yes, John, I think just keeping perspective, Corey did mention it, that in the last year, in the fourth quarter, our orders were up, on a comp basis, they were up about 10.4%. This quarter because of the price increase – a major factor. But then in the first quarter of last year, our orders were down 9.8% -- I'm sorry, they were down... Corey Whitely - CFO, Treasurer & Executive VP-Administration: 9.8%. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: 9.8%, yes, so you can see the difference in the timing. Our price increase is approximately similar to last year, ranging anywhere between 3% to 4% at retail, between 3% and 5% at retail, John. John Baugh - Stifel, Nicolaus & Co., Inc.: Okay, thank you. And I'm wondering if you could comment, your incremental margin, if I did the math right, in the fourth quarter, was above 40%? If I did it for the entire fiscal year, it was closer to 20%. Of course, you had a sluggish first half of revenues. So I was wondering if you could comment about how you feel about incremental margins going into fiscal 2017 and give us some puts and takes on that? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: John, with the increases that we are talking about that we have had, you've got to keep in mind we've got a pretty major base to work from. So we already have increased our margins. Gross margins are pretty strong. When you take a look at our gross margin of operating at 56.3%, as compared to 54.9%. They're pretty high margins. And secondly, if you took a look at our operating margins of 12.3% this quarter versus 10.3%, they're high. So it's hard to predict, but I think if you're able to maintain these high margins, it would be pretty good. John Baugh - Stifel, Nicolaus & Co., Inc.: I'm not sure you answered the question, Farooq, but I'll try to put that into the calculator as my dear friend Budd would say. I think you've commented China has been slow two quarters in a row, if I'm not mistaken, and I think last quarter you said it was just timing. Any thoughts there? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: There are two elements to it. One is slowing our shipments, and other is really they're slowing down theirs. I think we've had an impact in the last two quarters of their having had inventories which they're using. From what we hear, their business has sort of held up, especially our business has held up at the retail side. Our business has been somewhat down on our shipment side, because like everybody else, they are taking down inventories. Having said this, I think that they are starting to build the inventories back, because I think like everybody else they went a little bit too far. So I think that there's a difference between our shipments and the business in China. Certainly there has been pressure over there, but interestingly, their business at retail has held up. John Baugh - Stifel, Nicolaus & Co., Inc.: Great. Thank you. And then my last one, maybe you could comment on a little more granularity around what's the current promotion schedule look like for the September quarter? I think you've moved somewhat away from monthlies. What's the percent off? What are you running? And how does it maybe compare to what you did last year? Thank you. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: John, at this stage, it would be somewhat comparable to what we did last year and what we have done this last quarter. John Baugh - Stifel, Nicolaus & Co., Inc.: Great. Thank you. Good luck. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Thanks, John.

Thank you. Our next question comes from the line of Jessica Mace from Nomura. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yes, hello, Jessica.

Hi. Good afternoon, and congrats on a nice quarter. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Thanks.

My first question is if you wouldn't mind repeating the backlog number. That was one I missed during the prepared remarks. But as a follow-up, I did hear you say that there were some dynamics that caused some volatility in the backlog figure, and wondering if there's any other place you would point to, to help us look at the trends of the business exiting the quarter? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Corey has given that information. Corey, go ahead. Corey Whitely - CFO, Treasurer & Executive VP-Administration: Yes. The backlog was down 13.1% on June 30, 2016. So my comment then was that really the backlog is a little bit not necessarily an indicator of future sales because there are so many variables that go into it such as the timing of the price increase last year versus this year, and then we're just much more efficient in our shipping today with our custom quick ship, the level of our in-stock programs and then our improving efficiencies in our manufacturing with our shortened lead times. Today that's an advantage that we're leveraging, is the ability to deliver faster, and that's a good competitive advantage for us. So the backlogs will fluctuate as you've seen, so there is not a strong trending for those.

Understood. Thank you. And then I was wondering if you could comment on how some of the product introductions that are nearly 18 months, almost two years old now, how those are contributing to the top line strength that we've seen? And kind of what you expect as we go through Phase 4 and some of those earlier periods that are a little bit further away? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yes, Jessica. If you take a look since about the last year is that when we started introducing the round for these five major offerings. It was about the summer of last year when we introduced what we called now Capitol Hill that was Georgetown previously. Sonoma which we called Euro last year. We changed the name to Sonoma, which was introduced in the fall of last year, and then and actually really was mostly selling – starting to sell in the winter and spring of this year. And then from June, we have been introducing these three new attitudes. They all are contributing because they now represent most of the space in our floors and our design centers. We've also continued to be – I mean, we've had good results, but consider the fact that we're also going through a disruption of selling products off, clearing the floors. We'll still continue to some degree as we move forward, but all these new products are making a difference, and they are actually contributing to the substantial increase in our sales.

Got it. And then just following on to your comments about, in previous quarters, clearing the floor to make some room. Is the lower clearance activity in the retail margin this quarter. Was that up against somewhat of an easy compare? Or is there anything done about the overall promotional environment in the quarter? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: No. Relative to last year it's about similar. And again, it'll continue that further for this year, too, because again, we're still continuing to sell that clearance. And then with Ethan Allen and Disney coming in this November, we got to make some more room. So we'll continue it this fiscal year also.

All right. Thank you so much for taking the questions. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: All right. Thank you.

Thank you. Our next question comes from the line of Jeremy Hamblin from Dougherty & Co. Your question, please. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Hello, Jeremy. Jeremy Hamblin - Dougherty & Co. LLC: Hey, good afternoon, congrats on a great quarter, and really, a terrific year, especially in a fairly tough environment. I wanted to just follow up on the question around clearance. Think about how we should be looking at near-term, given all the product turnover. So, first half of fiscal 2017, what type of impact should we see on the clearance activity? Whether you're expecting it to be elevated through the first half of the year? Is that going to have a negative impact on your gross margins? And your gross margins really have trended towards a higher level, and I know that's reflective somewhat of the sales gains. But in terms of how we should be thinking about gross margins moving forward, historically, you've talked about a kind of 55% level. And you've really kind of cleared through that now, closer to a 56% level. Can you just provide us with some color on that? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Jeremy, it will vary from quarter to quarter. But I think if you stop between – last year we had – in the first quarter, we had 55%, now it's 56.3%. I think it's going to vary between the two, in that range. So, it's hard to – at this stage, I think, if we're maintaining between 55% and 56%, I think that'll be a good margin. Jeremy Hamblin - Dougherty & Co. LLC: I agree, but just in terms of thinking about the nearer-term, where you might have a little more visibility given the product turnover and the new introductions coming in August, and then obviously you'll have to make a little more room I think in the back half of the year for the Disney product. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. Jeremy Hamblin - Dougherty & Co. LLC: Should we be thinking that clearance activity would be higher in the first half of the year versus the second half? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah, I think that's a fair assumption, yes. That is because we'll continue with still the products that we have been clearing, all of that is not cleared up. And secondly, with the Ethan Allen Disney coming up, so I think there'll be more in the first half, Jeremy. You're right. Jeremy Hamblin - Dougherty & Co. LLC: Okay. Terrific. And then in regards to the Disney launch, I think it looks like the launch was planned for mid-second quarter, is how it's termed in here. So, it looks like maybe a November launch. Is that a little later than you had been anticipating? I thought from the day in February that we were looking for it maybe a little bit earlier than that? And then the second part of that question is just, can you provide any more color in terms of impact that you think it will have? Is this something that's going to kind of replace the entire kind of children's selection that you currently have, which I know is fairly limited? Any sense of how much of your showroom floor space it will take up? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yes. On the question of timing, yes, we were initially thinking of – our objective was somewhere about October. And now we are thinking of – now, we are planning for mid-November because the logistics of getting everything in is a major, major undertaking. And on top of it, which is a great thing to do, that every resource that we are using with Ethan Allen Disney has to go through a very extensive social responsibility testing by independent people, which is great because but that's a good thing about it. So we've had I think 70 different reviews done in the last few months. So that's taking a little bit of time. And the next reason is that Mickey Mouse's birthday is November 18. So we thought that's a good day to – a good time to launch it with his birthday. Jeremy Hamblin - Dougherty & Co. LLC: I like it. One last one, quick for Corey, advertising expense, Corey, was that up/down in Q4? And then how should we be thinking about that moving forward? Corey Whitely - CFO, Treasurer & Executive VP-Administration: Yeah. It was up in Q4. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: $1.1 million? Corey Whitely - CFO, Treasurer & Executive VP-Administration: Right, right, $1.1 million, and certainly looking ahead, we have some aggressive plans. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. I think that last first quarter last year we had somewhat lower expenses of advertising. I'm looking at it here. We had approximately only – close to 4%, slightly under 4%, almost 3.5% of sales, $6.6 million. This year we're going to increase it and most probably it will be closer to between 4.5% to 5%. Jeremy Hamblin - Dougherty & Co. LLC: 4.5% to 5% in Q1. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. 4.5% might be more realistic. Yeah. Jeremy Hamblin - Dougherty & Co. LLC: Great. Thanks for taking my questions, guys. Keep up the great work. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. Thanks, Jeremy.

Thank you. Our next question comes from the line of Cristine Fernández from Telsey Advisory Group. Your question, please. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. Hello, Christine. Cristina Fernández - Telsey Advisory Group LLC: Hi. Good afternoon. Just following up on the prior question. The 4.5%, is that for the full year? Or just for the first quarter? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: For the first quarter. Cristina Fernández - Telsey Advisory Group LLC: Okay. And then for the full year, should we be thinking about a similar range? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. I would say so at this stage. This could change, depending upon on how we see but at this stage 4.5% is a good number. Cristina Fernández - Telsey Advisory Group LLC: Okay. And then I believe the marketing program with the real estate agents that you had commented at the Analyst Day earlier this year is just getting started. Can you talk about what progress you're making on that and when could we start seeing some benefit? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yes. It's with the Realogy company which has a fair amount of real estate brokers. It's just too early. It is getting good comments, but it just started just a few weeks back, but I believe that it is a very – I would say a program that brings in people and the realtors. So I would say that by next quarter we'll be able to give you somewhat of a better indication about how it is really doing. Cristina Fernández - Telsey Advisory Group LLC: Thank you. And last quarter, you had commented that you were seeing traffic up I believe in the 5% to 10% range. Did those trends continue this last quarter? And if you look at your customer base, are you still seeing new customers coming to your store? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: The fact is that I would say that I don't have the numbers of traffic in front of me, but if I have to just use my judgment based on what I see, I think the traffic was probably flat. So – because traffic overall, as you know, in retail across the board has gone down, not just us, but I'm talking about everybody else. But what we do see is this, that people who are coming in are more qualified, because in the past, people used to come in to do window shopping in the design centers, our stores. Today they can do all of that on mobile or on the web. And that's what they're doing. So I think that we need – we are getting – more people getting onto our website. There's no question about it. Mobile has gone up. And what we're now doing is this, more and more we are empowering our interior designers to interact with their clients with technology. So combining technology and personal service is one of the very important thoughts of creating a great customer experience and taking people who may just be perhaps only interested in window shopping, but converting them into a client. That's where our focus is, and you're going to see more of that. Cristina Fernández - Telsey Advisory Group LLC: And the last question, since you commented on mobile. How are trends online in your e-commerce website? You made a lot of improvement. Are you seeing penetration rise in that channel? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: It's increasing both in terms of sales. They're up close to 40%, 50% from a small base. And we're going to continue to increase it. I'm glad to see it's about 40%, 50%, and our traffic has increased, and we're going to be even more aggressive. But not only of selling products online, but also having them interact with our interior designers. Cristina Fernández - Telsey Advisory Group LLC: Thank you and good luck this quarter. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. Thank you.

Thank you. Our next question comes from the line of Justin Bergner from Gabelli & Company. Your question, please. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah. Hi there. Justin Laurence Bergner - Gabelli & Company: Hi, Farooq. Hi, Corey. Most of my questions have been taken, but I will ask the following. Is there anything you can comment on in terms of initial success of the Georgetown product line that I guess was rolled out about a month ago? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: You don't mean Georgetown. Are you talking about Santa Monica? Justin Laurence Bergner - Gabelli & Company: Santa Monica, I'm sorry. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Yeah, yeah. We just started Santa Monica, which is in July this month and before that in June we had Buckhead. Justin Laurence Bergner - Gabelli & Company: Oh, Buckhead, that was what I was thinking of. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Buckhead is well received. They've both being well received. They're great style, they're relaxed and this is what lots of folks are looking for. They're looking for stylish products, which are great quality and then which is what we have, but also relaxed. And I think that lifestyle is important and these product lines of course they mix well with each other. So when we talk about Buckhead that works well with also Santa Monica. And it's been well received and Santa Monica has been well received, too. And it's interesting. It depends on what part of the country. Santa Monica has a major coastal feeling, so it is doing well and obviously those folks who are interested in a coastal attitude, while Buckhead is somewhat more you might say, and of course as the name implies, it is the south, with color with more soft touches. But they intermix and they work together well. And Brooklyn is, of course, slightly different, which we are introducing next month and I'm sure you're going to get our direct mail magazine, beautifully done, you're going to like it. And it really represents Brooklyn, because I got my start in Brooklyn when I was going to NYU. So I was living in Brooklyn, but it was a different Brooklyn those days, you know. Justin Laurence Bergner - Gabelli & Company: Okay. Thanks for that early sort of read. With respect to the wholesale margin, I don't mean to sort of pick on it but was there anything that limited leverage on the wholesale operating margin this quarter year-on-year? M. Farooq Kathwari - Chairman, President & Chief Executive Officer: No, and that's a good question. There are two factors. One was the fact that while our overall margins are very, very good, our manufacturing, domestic manufacturing, especially wood manufacturing, case goods, had to contend with lots and lots of new products. So learning curve of new products is always about a year or so, that had an impact. And secondly, there was a little bit of a difference in terms of taking a higher – some lower margin at wholesale and which benefited the retail, but those are the two factors. Justin Laurence Bergner - Gabelli & Company: Okay. Thanks. And then finally, what were the proceeds from the sale of the store or the sale of the real estate? Corey Whitely - CFO, Treasurer & Executive VP-Administration: Yeah, the gain on the real estate was about $595,000. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: And the total proceeds? As you know, we've been continuously selling these properties on a planned basis. Corey Whitely - CFO, Treasurer & Executive VP-Administration: Yeah. I don't recall what the exact amount was on the net proceeds, Justin. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: Would you let him know? Corey Whitely - CFO, Treasurer & Executive VP-Administration: I'll let you know. Justin Laurence Bergner - Gabelli & Company: Okay. Thanks so much.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks. M. Farooq Kathwari - Chairman, President & Chief Executive Officer: All right. Thanks very much. And if you have any further questions or comments, please let us know. Thanks very much.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.