Q1 2024 Ethan Allen Interiors Inc Earnings Call

Good afternoon, and welcome to the Ethan Allen fiscal 'twenty 'twenty four first quarter analyst.

Conference call if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded it is now my pleasure to introduce your host Matt Mcnulty Senior Vice President Chief Financial Officer, and Treasurer. Thank you you may begin.

Thank you Doug good afternoon, and thank you for joining us today to discuss the Ethan Allen fiscal 'twenty 'twenty four our first quarter results with me today is through kept Laurie our chairman President and CEO, Mr Caf, where I will open and close our prepared remarks, well I will speak to our financial performance midway through after our prepared remarks, we will then.

And the call for your questions before we begin I'd like to remind the audience that this call is being recorded and webcast live under the news and events tab on the Investor Relations page of our website.

There you'll find a copy of our press release, which contains reconciliations of non-GAAP financial measures referred to on this call and in this press release.

A replay of today's call will also be made available on our Investor Relations website. Our comments. Today may include forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially.

The most significant risk factors that could affect our future results are described in our annual report on Form 10-K, 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 with that I am pleased to now turn the call over to Mr category.

Oh, Thank you Matt and.

And good to have you joined our call to review our first.

Fiscal 'twenty 'twenty, four result, and other initiatives.

Okay.

As we reported we maintained strong operating margins gross margin of 61, 1% and operating margin up 12.1%. Despite a decline of delivered sales of 23, 6%.

Our sales were impacted due to salt due to softening of the economy and the impact of a major flood in our modern manufacturing operations.

We are positioned well.

We have continued to strengthen our vertically integrated enterprise.

We have also continued to maintain a strong cash balance.

During the quarter, we distributed 36 cents of regular and 50 cents of special dividend.

And we also yesterday announced.

Our regular dividend of 36 cents. In addition to these two.

After Matt's provides a brief overview of our financial results I will discuss our various initiatives in in growing.

And growing our business by positioning us as an interior design destination.

Strengthening our talent marketing manufacturing logistics and have a unique retail network, providing interior design service increasingly combined with technology Matt.

Thank you Mr Sat Fi as a reminder, we present our financial results on both a GAAP and non-GAAP basis, non-GAAP results exclude restructuring initiatives impairment unusual or infrequently occurring events, such as the Vermont flood and other corporate action. We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business.

Our financial results in the just completed first quarter are highlighted by strong margin sales being impacted by July flooding at Vermont case, good plant positive operating cash flow the payment of a special cash dividend and a robust balance sheet. Despite operating in a softening economy, our operations produced positive finance.

Our results, which I will now discuss.

Our consolidated net sales totaled $163 9 million a decrease of 23, 6% due to lower delivered unit volume from softening order demand reduced manufacturing production from lower backlog, a strong comparable prior year and the impact from the Vermont flooding, which resulted in a temporary work stoppage and lowered.

Sales by approximately $15 million in the quarter. Our Orleans plant has since resumed operations and we expect to recover from the delayed shipments during the upcoming second and third quarters.

In the first quarter a year ago that are near record pace as we worked through a historically high backlog leading to a difficult comparison.

From a demand perspective, we are back to more normal conditions down from the high demand we experienced during the height of the pandemic.

Sales segment written orders decreased 15, 6% compared to last year, while retail segment written orders were down 13.2%. We ended the quarter with wholesale backlog of $75 4 million down 28, 6% from a year ago, but up 1.4 million since June 32023, due to the timing of contract business.

Orders combined with production levels being impacted by the Vermont plus.

The number of weeks of backlog as of September 32023 went down compared to last year with notable improvement seen within upholstery and home access.

Our wholesale backlog is approaching pre pandemic levels as our teams are managing the business to service our customers.

Consolidated gross margin was 61, 1%, our 10th consecutive quarter that consolidated gross margin exceeded 58% when compared to last year. Our consolidated gross margin was up 70 basis points due to favorable product mix lower input costs and investments in technology and reduced head count partially offset by lower.

Delivered unit volume and a change in sales mix.

Retail sales were 81, 5% of consolidated sale down 80 down from 85, 6% last year as we delivered out more wholesale backlog, including a greater percentage of contract business.

Adjusted operating margin was 12, 1% down from 17, 6% last year, primarily from lower sales. These costs were partially offset by gross margin expansion lower head count and the company's ability to maintain a disciplined approach to cost savings and expense control, our SG&A expenses decreased $12 seven per.

Ascent and equaled 49% of sales up from 42, 9% last year from fixed cost deleveraging.

As previously stated in July 2023 our wood furniture manufacturing operations located in Orleans, Vermont.

Sustained damage from flooding in addition to losses related to inventory and state of the art manufacturing equipment.

Adding also resulted in a temporary work stoppage for many associates in a disruption and delay of shipments the gross financial loss incurred from the disposal of inventory inoperable machinery equipment from water damage, the Saudi cleanup and restoration amounted to $3 6 million and after insurance proceeds of $1 million and a grant from the state of Vermont.

A $500000 the net amount of the pre tax loss was $2 $1 million and was reported within restructuring and other charges and is excluded from our adjusted earnings.

Adjusted EPS was <unk> 63.

Compared with $1.11 last year for historical context, our adjusted diluted EPS for the three months ended September 32019 was 35 cents.

Our effective tax rate was 25, 6%, which is comparable to 25, 3% a year ago.

Now turning to our liquidity and capital resources.

We ended the quarter with a strong balance sheet, including cash and investments of $163 2 million and no outstanding debt, we generated $16 $7 million of cash from operating activities during the quarter, which was driven by strong profit our inventory level decreased $18 million from a year ago as we restore our operating inventory level.

To more historical norms as backlog decreases.

We continued our practice of returning capital to shareholders in the form of cash dividend in August our board declared a special cash dividend of 50 cents per share. In addition to our regular quarterly cash dividend of 36 cents per share both of which were paid on August 31st we have now paid a special dividend in each of the past three years also as just announced yesterday.

Our board declared a regular quarterly cash dividend of 36 cents per share, which will be paid on November <unk>.

In summary, our vertically integrated business was able to produce a double digit operating margins during a period marked by industry wide softer demand and a temporary work stoppage at our Vermont plant that led to lower sale, we generated $16 7 million in positive cash flow and protected our margins through disciplined investment and a strong expense management.

We will continue to carefully manage our expense structure with that I will now turn the call back over to Mr. Kessler.

Well thanks, Matt.

Okay.

As you know we have had our interior design focus for decades.

However, the recent focus.

I'll, let initial due under the umbrella of interior design destination takes our business to an entirely different level.

This includes the following impacts.

[noise] repositioning of the in the interior of our design centers with strong and consistent programs across the entire network.

We launched this concept in our Danbury design Center in April of this year and have recently started launching in our design centers across North America and internationally.

Recently, we had ribbon cuttings in 16 locations just to give you a perspective, including.

Including having this enhanced projection in Manhattan, New York in Albany in New York in Cordova, Tennessee last all New Hampshire, Marlton, New Jersey than gas to Pennsylvania Garden City Long Island, and Westchester, New York, Mount Pleasant, South Carolina Green Bay, Wisconsin, We speak the city, Georgia Knoxville tend.

See Princeton, New Jersey and to talk with long Island. This week actually this now we are in the process.

Grand openings in Kennesaw, Georgia, and Atlanta, Southern San Francisco, California, Oklahoma City.

The hallmark of Birmingham, Alabama, our objective is to continue implementing this in our 174 design center locations in North America. Next next 30 days 67 are scheduled at December 27, and by the end of December 114, all the design centers have good.

Have been repositioned with this there's the products and the attitude.

They need a initiative has many benefits, including consistent projections across North America.

Continued strengthening of our interior design associates.

Consistent marketing across North America.

Jason and motivated interior designers and clients.

Listing consistency and offering across North America helps improve service and gross and operating margins.

Oh for the amazing focus of consumers in their homes during the Covid pandemic, we see consumers have spent more time and focus in other areas such as travel.

We expect to see that that moderate and more focus on home, although not at the levels. We saw during the Covid period.

We continue to see a reduction of costs such as in raw materials energy and transportation.

While we have developed very strong new products during the last two to three years, we decided to hold off introducing during the Covid period.

We have now started introducing new products and we'll continue to do so.

In the next 12 months.

During the last three years, despite high demand, we continue to strengthen and streamline our operations, including.

Strengthening our interior design teams in our design centers today.

Today, we have about 30% less interior design professionals, who are about to do the same business.

In fact from 2019, our total hedge cost head count in the.

Company is less like 21%.

By using technology.

And whether it is in our manufacturing whether you sit out retail, especially in retail.

Logistics has helped us make our interior designers more proficient.

And as they say is a game changer.

Okay.

We are strengthening our talent and unfortunate recent beckman bankruptcies, all furniture retailers has brought us also new and experienced talent.

All the manufacturing also has continued to benefit from strong teams and use of technology keep in mind that 75% of all our products are made in our north American operations and 75% of the products are made costumes when we receive the order.

So we are in a good position and I know that we are we have some challenges because of the economy and but we are positioned well there'd be a stronger both in terms of people in terms of.

Offerings, and no facilities and with that I'd like to open it up for any questions and comments.

Operator: Good afternoon, and welcome to the Ethan Allen Fiscal 2024 First Quarter Analyst Conference Call. If anyone wants to require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded.

Yeah.

Thank you.

Ladies and gentlemen, we are now ready to take your questions if you'd like to ask a question you May press star one on your telephone keypad.

Matthew McNulty: It is now my pleasure to introduce your host, Matt McNulty, Senior Vice President, Chief Financial Officer, and Treasurer. Thank you, you may begin. Thank you, Doug.

Confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

Matthew McNulty: Good afternoon, and thank you for joining us today to discuss Ethan Allen's Fiscal 2024 First Quarter Results.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Matthew McNulty: With me today is Rube Kepwari, our chairman, president, and CEO. Mr. Kepwari will open and close our prepared remarks while I will speak to our financial performance midway through. After our prepared remarks, we will then open the call for your questions. Before we begin, I'd like to remind the audience that this call is being recorded in webcast live under the news and events tab on the investor relations page of our website.

Our first question comes from the line of Budd <unk> with water power Research. Please proceed with your question.

Good afternoon Farooq.

It's Budd is Budd good catch them, but we've got you have been covering us.

Since I've been 15 years old so how are you Budd.

Matthew McNulty: There you will find a copy of our press release which contains recommendations of non-gast financial measures referred to on this call and in this press release. A replay of today's call will also be made available on our investor relations website. Our comments today may include forward-looking statements that are subject to risk and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our annual report on form 10K. Please refer to our SEC filing for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call.

I, probably since I was 15 two.

Thank you.

Oh hi.

Congratulations on the on the margin performance in.

What is it that could be interest very very challenging environment and I do have a I do have a few questions and I'm trying to just project forward as you.

As you look at the at the volume.

And going forward.

You noted that your deposits were down about 29% year over year.

Uh huh.

Customer deposits that would be at retail so I'm thinking of you and you did a pretty good job of well less Oh, you were less down in orders for the retail would be worried actual net sales. So I suspect it for the second quarter retail sales will be down year over year, but probably somewhat lower than.

Rube Kepwari: With that, I am pleased to now turn the call over to Mr. Kepwari. Thank you, Matt.

Rube Kepwari: And good to have you join our call to review our first fiscal 2020 for results and our initiatives. As we reported, we maintained strong operating margins, gross margin of 61.1% and operating margin of 12.1% despite a decline of delivered sales of 23.6%. Our sales are impacted due to soft due to softening of the economy and the impact of a major flood in our Vermont manufacturing operations. We are positioned well. We have continued to strengthen our vertically integrated enterprise.

What we were so even though the first quarter was lower than that.

The 'twenty, that's sort of a 24%.

27% for retail pardon me.

Yeah, it's a little bit early.

Budd, but I think that your comments are a good comments in the sense that while we have reduced our backlogs to towards.

Great degree, but still you know keep in mind as I said.

Our backlog, there's no doubt and then because because it is down because we delivered the down by about 27, 27%.

Rube Kepwari: We have also continued to maintain a strong cash balance. During the quarter, we distributed 36 cents of regular and 50 cents of special dividend. And we also yesterday announced regular dividend of 36 cents in addition to these two.

And I'm, a 28% of our wholesale 27% of that region. So we generate a lot of backlog, we still have reasonably good backlog. We are still backlog is when you go back to pre COVID-19 than for instance, our backlog is still about 20% higher than it was in 2019, So we have a decent backlog.

Matthew McNulty: After Matt provides a brief overview of our financial results, I will discuss our various initiatives in growing and growing our business by positioning us as an interior design destination. Strengthening our talent, marketing, manufacturing, logistics, and our unique retail network providing interior design service increasingly combined with technology. Matt, thank you, Mr. Tafori. As a reminder, we present our financial results on both a gap and non-gap basis. Non-gap results exclude restructuring initiatives, impairments, unusual or infrequently occurring events such as the Vermont flood and other corporate actions.

Not as what we had last year, but that backlog still gives us an opportunity to continue to ship products and we had also expecting hopefully.

I hope, it's not a message, but we are expecting that our consumers attitudes as I mentioned I'll go into somewhat go back into a home. After the line in the last three or four months. We've spent a tremendous amount of time travel in other areas.

Oh, Hi, I understand that and you did note that the retail orders were down 13% year over year and I'll ask the obligatory how does that proceed during the quarter was those comparisons looked like as the quarter progressed.

Matthew McNulty: We believe the non-gap presentation better reflects underlying operating trends and performance of the business. Our financial results in the just completed first quarter are highlighted by strong margins, sales being impacted by July's flooding at a Vermont case goods plant, positive operating cash flow, the payment of a special cash dividend and a robust balance sheet. Despite operating in a softening economy, our operations produce positive financial results which I will now discuss. Our consolidated net sales total of 163.9 million, a decrease of 23.6 percent due to lower delivered unit volume from softening order demand, reduced manufacturing production from lower backlogs, a strong comparable prior year, and the impacts on the Vermont flooding, which resulted in a temporary work stoppage and lower net sales by approximately $15 million in the quarter.

Oh, you're talking about this last are the first quarter.

Yes, Sir yeah.

13%, which goes into our quarterly flow trends. It was about consistently are more or less the same.

Okay and for me to just one thing on the on the margin performance, which is notable that 61%.

Can you kind of give us I know you don't disclose that but give us a flavor of how that girl retail versus wholesale and I know you had the issue with the and the orange plants. So.

I'm, just curious as to how about how long she.

Matt do we have do we give those margins or what our royalty not breakout gross margins on our retail and wholesale perspective than we do on our operating margin.

You know, but generally I would say this that.

Matthew McNulty: Our Orleans plan has since resumed operations and we expect to recover from the delayed shipment during the upcoming second and third quarters. Sales in this first quarter a year ago that a near record pace as we work through historically high backlogs leading to a difficult comparison. From a demand perspective, we are back through more normal conditions, down from the high demand we experienced during the high to the pandemic. Whole sales segment written orders decreased 15.6 percent compared to last year, while retail segment written orders were down 13.2 percent.

If you take out this question of what happened in Orleans, but again what happens in Orleans was considered as extraordinary.

I think that on a on a basis of.

Our operations women being consistent Bolton.

Our wholesale margins in the retail margins.

Okay and last for me on the inventory.

I think what was it about 11% year over year.

Matthew McNulty: We ended the quarter with wholesale backlog of 75.4 million, down 28.6 percent from a year ago, but up 1.4 million since June 30, 2023 due to the timing of contract business orders combined with production levels being impacted by the Vermont flood. The number of weeks of backlog as of September 30, 2023 was down compared to last year, with notable improvements seen within a poultry and home access. Our wholesale backlog is approaching pre-pandemic levels as our teams are managing the business to service our customers.

How does that compare retail again retail versus wholesale.

It's approximately let me just see.

Imagine that information inventories down 11% from last year no. He says inventories down it would be more.

More down on the wholesale side.

Versus the retail side as Mr. Castro I pointed out we do have a new product that's coming out on the slot floor of our design centers. So the retail inventory was a little bit higher compared to a year ago versus the big the bigger decrease was at wholesale yeah about 11% or so done but.

Matthew McNulty: Consolidated gross margin was 61.1 percent, our 10th consecutive quarter that consolidated gross margin exceeded 58 percent. When compared to last year, our consolidated gross margin was up 70 basis points due to favorable product mix, lower input cost, investments in technology, and reduced headcount. Partially offset by lower delivered unit volume and a change in sales mix. Retail sales were 81.5 percent of consolidated sales down 85.6 percent last year as we delivered out more wholesale backlogs, including a greater percentage of contract business.

Okay.

Thank you and good luck for the balance of this year to next.

Thanks, Thanks Budd.

Our next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please proceed with your question.

Hello, Peter.

Hi, good afternoon, I'll cover can match.

Wanted to ask about the SG&A.

G&A expenses.

Matthew McNulty: Adjusted operating margin was 12.1 percent, down from 17.6 percent last year, primarily from lower sales. These costs were partially offset by gross margin expansion, lower headcount and the company's ability to maintain a discipline approach to cost savings and expense control. Our SGNA expenses decreased 12.7 percent and equal 49 percent of sales, up from 42.9 percent last year from fixed cost due leveraging. As previously stated, in July 2023, our wood furniture manufacturing operations located in Orleans for a month sustained damage from flooding.

In the quarter I know that declined 13%, but obviously significant deleverage on on the sales decline. So what I guess, what I wanted to know was there anything one time or related to the.

Store refreshes can do mission is bad.

Incremental this quarter and its the 12% operating margin like a new level that we should think about the next couple of quarters, given the macro and the refreshes in the stores or or kind of get back to you know a little bit higher level like what you've seen in the past couple of quarters.

Matthew McNulty: In addition to losses related to inventory and state-of-the-art manufacturing equipment, the flooding also resulted in a temporary work stop pitch for many sources and a disruption in delay of shipments. The gross financial loss incurred from the disposal of inventory, inoperable machinery equipment from water damage, facility cleanup and restoration amounts to $3.6 million, and after insurance proceeds of $1 million and a grant from the state of Vermont at $500,000, the net amount of the pre-tech loss was $2.1 million, and was reported within restructuring and other charges and is excluded from our adjusted Ajusted EPS was 63 cents compared with $1.11 cents last year. For her historical context, our adjusted diluted EPS for three months that is September 30, 2019 was 35 cents. Our effective tax rate was 25.6%, which is comparable to 25.3% a year ago.

It's a good question Cristina there at this stage, it's really hard to say because the good news is that we are operating much more efficiently both at the manufacturing level and at the retail level.

So when I talked about the decrease in our associates. It is taking place in all levels and especially.

With the use of technology, it's amazing how the technology has helped us, especially at retail with our interior designers today.

About 30% less than what we had just a few years back writing more business because of the combination of technology.

And their personal cell.

And of course. This was also a tremendously important in the Covid. When you know many many people are working with them.

Matthew McNulty: Now, turning to our liquidity and capital resources, we ended the quarter with a strong balance sheet, including cash and investments of 163.2 million and no outstanding debt. We generated 16.7 million of cash from operating activities during the quarter, which was driven by strong profits. Our inventory levels decreased $18 million from a year ago, as we restore our operating inventory levels to more historical norms as backlog decreases. We continued our practice of returning capital to shareholders in the former cash dividend.

From their homes, so I think that from our perspective, it is more or less I would say consistent between the two major areas of our business wholesale and retail.

Maybe asked another way is there room to cut expenses more or is that kind of 80 million you saw this quarter sort of like a slow you can go.

On the on the expense side.

Matthew McNulty: In August, our board declared a special cash dividend of 50 cents per share in addition to a regular quarterly cash dividend of 36 cents per share, both of which were paid on August 31. We have now paid a special dividend in each of the past three years.

Well you know it's a good question because you know when we get when we then.

Matthew McNulty: Also, as just announced yesterday, our board declared a regular quarterly cash dividend of 36 cents per share, which will be paid in November.

$92 million that we had in.

In the previous year quarter to 80 million, that's a pretty major decline in.

From a year too yeah. So I think that will all be always keep on taking a look at what needs to be done, but there's always a possibility, but we're always looking at the opportunities and again as I said, the combination of technology and personal service and on manufacturing is.

Matthew McNulty: In summary, our vertically integrated business was able to produce a double-digit operating margin during a period marked by industry-wide software demand and a temporary work stoppage at our Vermont plant that led to lower sales. We generated 16.7 million in positive cash flow and protected our margins through discipline investment and a strong expense management. We will continue to carefully manage our expense structure.

Not retail in our logistics is tremendously important so there is that possibility, but I think they've come down quite a bit.

Okay.

Okay, and then I wanted to see if you can share more color on the demand side, what you're seeing from here, where you know from there.

Rube Kepwari: With that, I will now turn the call back over to Mr. Kepler. Thanks, Matt. As you know, we have had our interior design focus for decades.

Their design centers that people like you were getting at it seems like the consumer so.

Well you know another step down this quarter, maybe any more color on the behavior, you're seeing how is it changing relative to three four months ago earlier this year.

Rube Kepwari: However, the recent focus, our initiative under the umbrella of interior design destination, takes our business to an entirely different level. This includes the following impacts. Repositioning of the interior of our design centres with strong and consistent programmes across the entire network. We launched this concept in our Danbury design centre in April of this year and have recently started launching in our design centres across North America and internationally. Recently, we have ribbon cuttings in 16 locations, just to give you a perspective, including having this enhanced projection in Manhattan, New York, in Albany, New York, in Godover, Tennessee, Plastown, New Hampshire, Malton, New Jersey, Venkast, Pennsylvania, Garden City, Long Island, Westchester, New York, Mount Pleasant, South Carolina, Green Bay, Wisconsin, Beach, Peaks, City, Georgia, Knoxville, Tennessee, Princeton, New Jersey, and Sir Talk of Long Island.

I think that consumers. It's if you take a look at it right now there's still some what are very good.

Conservative I think that we are expecting that.

The main.

For the next few months and the good news is that the question of what we are comparing it to comparing it to last year. It was a very tough comparison, but if you compare it to for instance, going back to pre COVID-19.

You can see the differences that we are starting to we are actually higher than the pre COVID-19 and bolt at odd.

Our retail business our wholesale business.

And I would think this that.

Consumers are.

We are looking to see the consumers' somewhat get back into.

Into finishing their homes have already done a lot of it I think we've spent a fair amount of time and traveled in other areas.

And so we would say that.

So certainly coming into this quarter. The next quarter, we should have more.

Rube Kepwari: This week, actually, this now, we are in the process of having grand opening in Kassar, Georgia, this is in the near Atlanta, San Francisco, California, Oklahoma City, Oklahoma, Birmingham, Alabama. Our objective is to continue implementing this in our 174 design centre locations in North America. Next 30 days, 67 are scheduled and in December 27 and by the end of December, 114 of the design centres will have been repositioned with The initiative has many benefits, including consistent projections across North America, continued strengthening of our interior design associates, consistent marketing across North America, strengthened and motivated interior designers and clients, consisting consistently in offering across North America, health-improved service, and gross and operating margins.

Consumer and more interest in the home.

Yeah.

Thank you and good luck this quarter.

Okay. Thanks very much.

Our next question comes from the line of Zach Donnelly with Keybanc. Please proceed with your question.

Hello Zack.

Hey, Brook, Hey, Matt. Thank you for for taking our questions.

I know, Matt had mentioned earlier that you don't break out gross margins based on retail or wholesale segment.

Q kind of noticed that you had mentioned that gross margins were unchanged year over year for the retail segment and so I was wondering I'm, assuming you're seeing some some hormone.

A little product mix on that and.

Input costs, but noticed that the clearance sales were higher so I was wondering if you could kind of bridge that for us or maybe help us understand what impact elevated clearance has had on gross margins on the on the retail segment.

Rube Kepwari: After an amazing focus of consumers in their homes during the COVID pandemic, we see consumers have spent more time and focus in other areas such as travel. We expect to see that moderate and more focus on home, although not at the level we saw during the COVID period. We continue had developed very strong new products during the last two to three years. We decided to hold off introducing during the COVID period.

Yeah. That's a good question because of the fact that.

We did a number of.

Initiatives, one was of course that.

After we did the Danbury design center with Great projection of course, I think you saw that and we also had it in Manhattan and now we are launching it all over the country. What it has done is it has.

Done a great job of having very strong projection in all our design centers, but it also created.

Some projects that had to be sold clearance. So that is and if there has to be sold at a lower margin. So that affected our gross margins. The other thing we did which I think we havent made may not have mentioned too much is that the.

Rube Kepwari: We have now started introducing new products and we'll continue to do so in the next 12 months. During the last three years, despite high demand, we continue to strengthen and streamline our operations, including strengthening our interior design teams in our design centers. Today we have about 30% less interior design professionals who are about to do the same business. In fact, from 2019, our total headcount in our company is less by 21%.

The size of our design centers has is going to change it's already changing.

Keep in mind in Manhattan for instance, it'll be for 30 years or so what in a 30000 square foot location and we have you been to 7000 square feet in many many areas of the country. We are going to 7000, 8000, 10000, and what we also did.

Starting in and.

And in Denver, even we reposition Denver, which was a 20000 square foot design Center, we said anything over 12000 square foot will not be part of our regular design center.

Rube Kepwari: By using technology in whether it is in our manufacturing, whether it is in our retail, especially retail, annual logistics has helped us make our interior designers more proficient and as they say, is the game changer. We have strengthened in our talent and unfortunate recent bankruptcy or furniture retailers has brought us also new and experienced talent. Our manufacturing also has continued to benefit from strong teams and use of technology. Keep in mind that 75% of all our products are made in our North American operations and 75% of the products are made custom when we receive the order.

So we created space so projects have to be sold and that product was sold.

Lower margins they are all good products.

I think there's always suddenly give us business brought in customers, but it also in the shot did sell products at a lower margin.

But as we get out of those we will have a greater benefit of having less product on the flows.

Because today I also mentioned that almost 75% of the products that we sell is a combination of our interior design and technology 25 years back we sold wherever we showed on the flows. That's why we have 20 30000 square foot design centers all of that has had a tremendous impact but as we go forward.

Rube Kepwari: So we are in a good position and I know that we are some challenges because of the economy but we are positioned well, we are stronger, both interpret our people in terms of our offerings and our facilities.

He will take us under the six months or so to sell off this excess product set we had all these design centers in the country.

Rube Kepwari: And with that, I'd like to open it up for any questions and comments. Thank you. Ladies and gentlemen, we are now ready to take your questions.

The good news is as we move forward, we'll have smaller design centers and much more efficient.

Operator: If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tunnel indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Got it.

That's really helpful. Thank you farooq.

And kind of piggybacking off of that just really honing in on the retail segment gross margins something we've been kind of tracking really closely with you over the past month or so.

It's just credit delinquencies and kind of financing for big ticket discretionary items, we've noticed over the past two quarters, you've kind of called out increased financing costs as an impact to two retail gross margins I was just wondering could you do you have any sense of what person.

Budd Bugatch: Our first question comes from the line of Bud Buduch with water power resources, please proceed with your question. Good afternoon. It's Budd Bugatch. You have been covering us since I've been 15 years old. How are you, Budd? I probably since I was 15 too. I'm fine. Thank you. Congratulations on the on the margin performance and what has it got to be a very challenging environment? I do have a few questions and trying to just project forward.

Sense of your retail sales are financed versus non finance and then on that and can you provide any color on what you're seeing in terms of interest rates associated with that.

That's a good question because interest rates.

On financing has gone up quite a bit.

And we we were offering until two months back.

Budd Bugatch: As you look at the volume and going forward, you noted that your deposits are down about 29 percent year over year at the customer deposit that would be at retail. So I'm thinking and you did a pretty good job of less, you were less down in orders for the retail than you were in actual net sales. So I suspect that for the second quarter retail sales will be down year over year but probably somewhat lower than what we were saw in the first quarter lower than the less than the 24 percent.

24 months free.

Pre interest I'm in our.

Laws with a free interest for I don't know 12 months or 24 months or 24 months and we said no that was too much and even though we realized it was probably close to 15% to 20% of our business was done with that did those loans, we took it down to.

To 12 months and instead of 24 months and because you know I think the interest rates went up from 3% to a close with 5% 6%. So.

I think as we go forward of what we feel is that still there are people, who whose needs are financing, but we believe that a 12 months is sufficient that we have.

Budd Bugatch: 27 percent per week upon me. Yeah, it's a little bit early, but I think that your comments are good comments in the sense that while we have reduced our backlogs to a grade degree but still you know keep in mind as I said our backlog is now down because it's down because we delivered we're down by about 27, 20, 27 percent and 28 percent also at our wholesale, 27 percent at retail.

Be careful that you don't want to lose business. So it would be good.

Watched very very carefully but at this stage, we have taken down from 24 months to 12 months, which has an impact off of mobs.

The impact on our margins because the interest has gone from 5% to 3% or so.

Okay.

Got it okay. Yeah. Thank you that does that make sense to us.

Budd Bugatch: So we've delivered a lot of backlog. We still have reasonably good backlog. We are still backlog is when you go back to pre-COVID when for instance our backlog is still about 20 percent higher than it was in 2019. So we have a decent backlog not as what we had last year but that backlog still gives us an opportunity to continue to ship products and we're also expecting hopefully. Hope it's not a method but we're expecting that consumers attitudes as I mentioned are going to somewhat go back into home after in the last three or four months they've spent a tremendous amount of time in traveling other areas.

And then I guess my my my last question, it's kind of just on wholesale in order trends and just breaking those out.

We kind of noticed that.

In terms of contract orders you were down about 18% year over year this quarter.

I was just wondering if you could maybe touch on.

What sort of impact of that or if there's any sort of timing shift that's impacted that.

Where maybe the GSA is pushing out orders later potentially into fiscal two queue for you.

And just how to think about that maybe moving into the next quarter that'd be really helpful.

You've actually answered most of the question yourself. It is the GSA used to have a cut off at the end of the government's fiscal year that is September 30th that all orders had to be put in but this year I don't know if they'll do the next yeah. They have allowed them to enter orders after the end of the fiscal year.

Budd Bugatch: I understand that and you did note that the retail orders were down 13 percent year over year and I'll ask the obligatory how did that proceed during the quarter? What was those comparisons look like as the quarter progressed? You're talking about this last the first quarter? Yes, sir. Yeah, I mean when 13 percent was for the entire quarter? It was a pot consistently more or less the same. And for me to just one thing on the on the market performance which is notable with that 61 percent can you kind of give us a yeah I know you don't disclose that but give us a flavor of how that compared retail versus wholesale and I know you had the the issue in the in the audience plan so I'm just curious as to how that proceed.

So that's really what it's done is it's created in a sort of a low orders.

In September because not everybody you didn't have to put it in so they're now going to put this in this quarter. So we believe from what we hear is that the orders that didn't come in in September they'll come in this quarter and that's been the one one major factor. The other is if you took a wholesale obviously when our.

Retail businesses globally, it does affect our wholesale.

Orders and.

Most of the majority of our wholesale is from our own retail division, but you. When you asked about the question of the government. The government business has been lower and that's outside visitors that you referred to that's known retail was impacted by this decision by the state Department and the GSA that too not.

Budd Bugatch: Matt, do we give those margins of what's roughly an outbreak outgrowth margins on a retail and wholesale perspective? We do on an operating margin. But generally I would say this that if you take out this question of what happened in all leans but again what happens in all leans was considered as extraordinary. I think that on a basis of our operations we have been consistent both in our wholesale margins and the retail margins.

All of the orders in September.

Yeah.

Got it got it.

Really helpful. And then I guess just to follow up on that is as a final point maybe.

With that being the case moving into fiscal two cube.

As we kind of see that timing shift maybe benefit written orders into Q.

Hum.

Budd Bugatch: Okay, and last for me on the inventory it's down I think about 11% year over year. How does that compare retail, again retail versus wholesale? It's approximately let me just see the magic of that information. Inventory is down 11% from last year. No, he says inventory is down. It would be more down on the wholesale side versus the retail side. As Mr. Kessler pointed out we do have a new product that's coming out on the floor of our design center so the retail inventory was a little bit higher compared to a year ago versus the bigger decrease with that wholesale. Yeah, about 11% are so down but. Okay, thank you and good luck for the all for the balance of this year and on to next.

Also believe that the school <unk> of the prior year.

Your contract orders were down maybe around 88%, so just easier comparisons moving into the next quarter the benefit of the timing shift.

Would it be fair to assume that that we should see some sort of sequential improvement in written order trends on the contract side moving into the next quarter.

Yeah, I think that we can make that assumption because unless the government does something different but we are expecting that and.

The retail of course will depend upon how the all of our retail network works. How the economy is are we are you know.

I think we are a lot of people are very motivated. This initiative off interior design destination is creating a lot of impacts because at this time. If you know if you didn't do it because of the fact that you're going to and into this softer economy. We did it was the right thing to do but it is but this has given us a great opportunity to get a messy.

Cristina Fernandez: Thanks, thanks, but our next question comes from the line of Christina Fernandez with Kelsey Advisory Group. Please proceed with your question. Hi. Good afternoon. I want to ask about the S-E-N-A expenses in the quarter. I know that they climbed 13% but obviously significant leverage on the sales decline.

A crawl around at a time when the only message that is being given out is that a deep discount and you know and going out of business. So yeah. It's getting the message across that we are alive, well and very strong in our offerings I think that is going to help us.

Got it.

Yeah. That's that's that's it for us. Thank you Farooq. Good luck on the refresh and congrats on the strong margins this quarter. Thank you.

Rube Kepwari: So what I guess want to wanted to know was there anything one time or related to the store refreshes and the initiative that was incremental this quarter. It's the 12% operating margin like a new level that we should think about the next couple of quarters even the macro and the refreshes and the stores or can it get back to a little bit higher level like what you see in the past couple of quarters.

Very much.

Any other player in terms of comps.

There are no further questions in the queue I'd like to hand, it back to Mr. Katz worry for closing remarks.

Thank you very much and thank you for participating and attending and.

You know as Bud knows this is most likely I can go to 120 at around 25th consecutive quarterly call and now we are just getting started so stay with us and we got a lot of a lot of good things happening. So thanks very much for participating.

Rube Kepwari: There's a good question. Christina, at this stage it's very hard to say because the good news is that we are operating much more efficiently both at the manufacturing level and at the retail level. When I talked about the decrease in our associates it has taken place in all levels and especially with the use of technology. It's amazing how the technology has helped us especially at retail where our interior designers today are about 30% less than what we had just a few years back writing more business because of the combination of technology, and their personal health.

Rube Kepwari: And of course, this was also tremendously important in the COVID when you know many many people were working with them from their homes. So I think that from a perspective, it is more or less, I would say, consistent between the two major areas of our business wholesale and retail.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

Yeah.

Rube Kepwari: [inaudible] that you are seeing, how is it changing, what is 2, 3, 4 months ago earlier this year? I think that consumers, if you take a look at it right now, there is still somewhat very conservative, I think that we are expecting that will remain for the next few months. And again, there is this question of what we are comparing it to last year, it is a very tough comparison. But if you compare it to, for instance, going back to pre-COVID, you can see the differences that we are starting to.

Rube Kepwari: We are actually higher than the pre-COVID in both our retail business, our wholesale business. And I would think this that consumers are, you know, we are looking to see the consumers somewhat get back into furnishing their homes, they have already done a lot of it. I think they have spent a fair amount of time in travel in other areas. And so we would say that certainly coming into the next quarter, we should have more consumers and more interest in the home.

Cristina Fernandez: Thank you, and good luck this quarter. Okay, thanks very much.

Zach Donnelly: Our next question comes from the line of Zach Donnelly with Keybank. Please receive it your question. Hello, Zach. Hey, Brook. Hey, Matt. Thank you for taking our questions. I know Matt had mentioned earlier that you don't break out gross margins based on retail or wholesale segment. And in the queue, you kind of noticed that you had mentioned that gross margins were unchanged year over year for the retail segment. And so I was wondering, I am assuming you are seeing some form of a favorable product mix on that end.

Zach Donnelly: A favorable input cost, but notice that the clearance sales were higher. So I was wondering if you could kind of bridge that for us, or maybe help us understand what impact elevated clearance has had on gross margins on the retail segment. That's a good question because of the fact that we did a number of initiatives. One was of course that after we did the Dan ReDesign Center, the great projection, of course I think you saw that we also had it in Manhattan and now we are launching it all over the country.

Zach Donnelly: But it also created some products that had to be sold clearance. So that is and that clearance has to be sold at a lower margin. So that affected our gross margins. The other thing we did which I think we haven't been able to mention too much is that the size of our design centers is going to change. It's already changing. Keep in mind Manhattan for instance, we for 30 years or so were in a 30,000 square foot location and we went to 7,000 square feet.

Zach Donnelly: In many many areas of the country we are going to 7,000, 8,000, 10,000. And what we also did starting in the Danbury when we repositioned Danbury which was a 20,000 square foot design center. We said anything over 12,000 square foot will not be part of a regular design center. So we created space so products had to be sold and that product was sold at lower margins. They are all good products. They did two things that are certainly given business brought in customers but it also in the short term did sell products at a lower margin.

Zach Donnelly: But as we get out of those we will have a greater benefit of having less products on the floors because today I also mentioned that almost 75% of the products that we sell are the combination of our interior design and technology. 25 years back we sold whatever we showed on the floors. That's why we had 20,000, 30,000 square foot design centers. All of that has a tremendous impact but as we go forward I think we will take us another six to two months or so to sell off this excess products that we had all in all these design centers in the country. The good news is as we move forward we will have smaller design centers and much more efficient.

Rube Kepwari: Got it. That's really helpful. Thank you for Rook. And kind of piggybacking off of that just really honing in on retail segment growth margins, something we've been kind of tracking really closely. If you're over the past month or so is just credit delinquencies and kind of financing for big ticket for discretionary items. We've noticed over the past two quarters you've kind of called out increased financing costs as an impact to retail growth margins.

Rube Kepwari: I was just wondering could you give me a sense of what percent of your retail sales are financed versus non-finance and then on that end can you provide any color on what you're seeing in terms of interest rates associated with that? It's got a good question because interest rates, on Final Anything has gone up quite a bit and we were offering until two months back 24 months free interest I mean loans with a free interest for I know 12 months or 24 months for 24 months and we said no that was too much and even though we realize that most probably close to 15 to 20% of our business was done with those loans we took it down to to 12 months and instead of 24 months and because you know I think the interest rates went up from 3% to a close of 5% to 6% so I think as we go forward what we feel is that still there are people who need financing but we believe that 12 months is sufficient now we have to be careful that you know we don't want to lose business so we're going to watch very carefully but at this stage we have taken down from 24 months to 12 months which has an impact of about you know as I said the impact on the margins that the interest has gone from 5% to 3% or so.

Rube Kepwari: Got it okay yeah thank you that makes sense to us and then I guess my last question is kind of just on wholesale written order trends and just breaking those out we kind of noticed that in terms of contract orders you were down about 18% year over year this quarter I was just wondering if you can maybe touch on what sort of impact that or if there's any sort of timing shift that's impacted that where maybe the GSA is pushing out orders later potentially into fiscal 2Q for you and just had to think about that maybe moving into the next quarter that would be really helpful. You've actually answered most of the question yourself it is the GSA used to have cut off at the end of the government's fiscal year that is September 30th that all orders had to be put in but this year I don't know if they'll do the next year they have allowed them to enter orders after the end of the fiscal year.

Rube Kepwari: So that way what is done is it created and sort of lower orders in September because now everybody didn't have to put it in. So they are now going to put this in this quarter so I we believe from what we hear is that the orders that didn't come in in September they'll come in this quarter and that's been a one major factor. The other is if you talk of wholesale obviously when our retail business is lower it does affect our wholesale orders and most majority of our wholesale is from our own retail division.

Rube Kepwari: But when you asked about the question of the government yes the government business has been lower and that outside business that you referred to that's known retail was impacted by this decision by the State Department and the GSA to not enter all the orders in September. So got it guys that's really helpful and then I guess just to follow up on that as a final point maybe. So with that being the case moving into fiscal 2Q as we kind of see that timing shift maybe benefit written orders in 2Q you know also believe that fiscal 2Q of the prior year, your contract orders were down, maybe around 88%, so just easier comparisons moving into the next quarter, the benefit of the timing shift.

Rube Kepwari: Would it be fair to assume that we should see some sort of sequential improvement in written order trends on the contract side moving into the next quarter? Yeah, I think we can make that assumption because under the government does something different, but we are expecting that and the retail, of course, will depend upon how our retail network works, how the economy is. We are, I think we are, our people are very motivated, this initiative of interior design destination is creating a lot of impacts because at this time, we didn't do it because of the fact that we're going to end into this soft economy, we did it or the right thing to do.

Rube Kepwari: But this has given us a great opportunity to get a message around at a time when the only message that is being given out is that of deep discounts and going out of business. So we are getting a message across that we are alive well and very strong in our offerings, I think that is going to help us. Got it.

Rube Kepwari: Yeah, that's it for us. Thank you for Luke. Good luck on the refresh and congrats on the strong margins this quarter. Thank you. Thanks very much. Any other questions? There are no further questions in the queue.

Rube Kepwari: I'd like to hand it back to Mr. Cathwari for closing remarks. And thank you very much and thank you for participating and attending. And you know, as but knows, this is most likely I can go over 120 at the round 25th consecutive quarterly call. And we're just getting started. So stay with us and we got a lot of, lot of good things happening. So thanks very much for participating. 30s and gentlemen, this does include today's teleconference. Thank you for your participation.

Operator: You may disconnect your lines at this time and have a wonderful day.