Good morning, everybody. I'm Corey Whitely, Executive Vice President of Administration and Chief Financial Officer, and I'd like to welcome everybody this morning to our Ethan Allen Investor Meeting on this nice spring morning. At least it's raining and not snowing. I want to remind everybody that our discussions contain forward-looking statements that involve uncertainties and risks as detailed in our regular filings with the SEC. Our actual results may differ materially due to a wide range of factors. We undertake no obligation to update any forward-looking statements. At the end of the slide presentation is a reconciliation of any non-GAAP measures set forth in the presentation. We do have a detailed presentation lined up this morning, and it'll be followed by a Q&A.
The meeting is being webcast on ethanallen.com, during the Q&A, we will ask that you state your name and the firm you represent, that people listening online can know who's speaking. We'll also be posting a copy of the presentation on the investor section of ethanallen.com later today. It is now my pleasure to introduce our chairman and CEO, Farooq Kathwari.
All right, Corey. Good morning, everybody. Good to have you all here in our latest and the newest auditorium. A few weeks back, this was full of furniture, we felt that two floors is enough, we decided that we'll make this into a small auditorium, Jimmy Di Bernardo, who's in charge of this, he was going to rent tables. I said, "What do you mean renting? We're going to make them." These are made in our U.S. plant. The chairs are also made, because we thought it was appropriate that we do it was done, and fairly fast. Today, we are also pleased that a number of my associates are here. We are joined by three of our independent directors. We are joined here by three of the four of our vice presidents in the retail division.
We are joined here by Tracy Paccione, who's the head of our merchandising, and I'm sure many of you met her with the tours. Dan Grow, the head of our business development. Corey Whitely, of course, spoke. We've also been joined by a couple of new associates in the last six months. We have Bridget O'Brien, who's joined in our marketing, also Kemper Johnson, sitting back there, who also joined us as a creative director in advertising, in addition to a lot of other folks that are here. I'm pleased to have all of you here. Today, we are going to focus on the fact that you have to differentiate. In this age of challenges faced by brick and mortar, you have to make sure that you have a differentiation, and for us, that means becoming more and more so an interior design destination.
Today, we just cannot afford to be a little bit in anything. You will see us that more and more in every element, creating an interior design destination. We're expanding. You saw some of our fashionable relevant product offerings. You got a glimpse of some of our newest products. We are going to leverage our vertically integrated manufacturing and logistics. We are increasing marketing. We are reinforcing our design service, expanding offerings and client service. Again, this message through our marketing will get across. We are also expanding our international e-commerce, government, and contract business. Again, we continue to engage and enhance our governance. To me, talent is a critical factor. We are blessed with great talent. We are a vertically integrated company from idea, to design, to engineering, to manufacturing. We run a major sawmill in Vermont.
Wood manufacturing, upholstery manufacturing, logistics, distribution, without talent, that does not work. In our retail network, we have about 2,000 interior designers, about 1,500 of them in North America. We have also about 6,700 interior design affiliates. These folks don't work for us, but they work with our in-house interior designers. Combining personal service and technology is critical, I'll be talking more about that in every element of our business. One of the major elements, as I said, in the North America is these 1,500 interior designers. They're long tenure. In fact, about 200 management associates in our retail division have come through the ranks of our interior designers. In fact, practically all of our vice presidents have come.
It has taken us 15, 20 years to develop that kind of a talent, but this talent, right from the ground up, is one of our greatest assets. The next important element has been transitioning our interior design network. 20, 25 years back, some of you folks are here who knew that about 80%, 90% of our retail network was operated by independent retailers. As they retired, we had to take over their retail, then on a planned basis, we have been transitioning them. Right now, you can see 69% we have relocated in the past 15 years. Most of these were legacy locations that we purchased. Are rented from our independents, 13% newly relocated in the past 3 years, 20% in the past 5 years, and 42% in the 10 years.
This continues, I'll talk more about where we are, the good news is, I would say we're almost towards the end. It never ends, the major work of having 70% or so relocated has been a major focus. When our Ethan Allen Design Centers, 25, 30 years back, or even 40 years back, it used to be a 15,000 square foot freestanding, whether it was in Birmingham, Alabama, or in New York. Before the Great Recession, before the advent of commoditization, technology, everything else, we also added about 18,000 to 20,000 square foot design centers. Beautiful locations around the country. Now in the last few years, we are now making them between 8,000 and 10,000 square feet, but in the right location. That's critical. We just opened last year in Flatiron, on Broadway and 21st.
Great location, however, it also has meant a tremendous amount of cost in the last year. Gearing up these new ones, especially in the downtown areas, it takes a couple of years. Just the rent alone is major. We've been absorbing major costs, over $1 million in each one of these design centers in the last year or so until we get them going. Same thing in Corte Madera in San Francisco. We opened it up, and we have had, again, a fair amount of costs in getting this going in this past year. On the other hand, we've also been relocating some of our legacy locations. This is in Indianapolis. It used to be 15,000 sq ft, and we opened it's about close to 10,000 sq ft in Indianapolis.
You would note, as you noted here when you walked in this design center, our designers used to be somewhere in the back, somewhere in the second floor, third floor. Now they're in the front. Because we are an interior design company, we want our associates with the technology right in front of the customers. That you're going to see in all our new design centers, and on a planned basis, we are implementing that throughout the country. Chicago also, we opened in downtown. I was there last week. Great location, but again, about $1 million cost last year in getting it going. In occupancy cost, beginning cost, all of those things we expense. In addition to what I just said, we have about, at this time, close to eight or 10 relocations taking place.
In fact, next week we are opening one in Calgary, Canada. We are in the process of moving our legacy Cedar Rapids, Iowa, design center. We are looking at about eight or 10, again, on a planned basis of relocating them, again, more to lifestyle centers. Internationally also, we're making progress. We've got 116 design centers, all operated by our partners and licensees. We go from Taiwan to Dubai to Philippines, also, actually, starting tomorrow, we have a retail conference here. In fact, a lot of our folks are coming in today. For the next two days, we are going to have all our independent retailers from North America and also from many countries, including from China to Korea to Jordan and other countries, will be all here in the next two days. Most of these are operated by families who are dedicated to Ethan Allen.
Of course, our biggest one is in China. Two weeks back, I was in China participating in the opening of the 86th by our licensee there. It's in Chengdu, China, which is the capital of Sichuan province. A great location and great presence. In fact, I had met our ambassador to China a few weeks back. I contacted him, and he sent one of his diplomats. The gentleman on the left of me, he also participated in the opening ceremony, along with Richard Feingold, the chairman of Markor. They also have what they call a goodwill ambassador. A very well-known personality, a television film personality, is their new brand ambassador. He was there, too. On our offerings, our objective is to continue to expand our reach. You had an opportunity this morning looking at some of the offerings in the design center.
70% of our floor has been refreshed in the past three years. We have relevant and fashionable offerings spanning multiple lifestyles and targeting multiple demographics. Our offerings, 70% of our furniture is made in our own workshops. It's a great opportunity, but again, the challenge is when you make so many changes as fast as we have done. We leverage our vertical structure. Spring and fall product introductions will further expand our reach to more people. For instance, in the last three years, I was giving a little of an overview of our product programs. We introduced a product program under the Brooklyn Collection. It's inspired by the city, functionality, scale, and clean style, are key to this effortless living. We introduced the Buckhead Collection. It's again infused with European inspiration. Our Buckhead Collection blends eclectic looks to create something refreshing, timeless, and livable.
Georgetown, again, we have to balance it. More and more of our teams were having a great discussion yesterday in Danbury. We want to make sure that we are known as a classic American brand. Our products and ideas are coming from all over the world. We then take them and, like the English language, we slightly modify them to make it American, and then we take it to the rest of the world. We want to make sure it works together, so that it's not just a product. It's a total offering that lives together, that works together, and that has implications as we go forward in the way we will project all of these. This is a Georgetown. It's a marriage of traditional and contemporary styles with a deep-rooted sense of history.
Santa Monica, again, the objective is to go from somewhat more of the casual to the modern and somewhat of the classic, traditional with a modern attitude. It's all about relaxed living, soothing palettes, mixed with painted and washed finishes, elements of traditional design combined with vintage flair. Postcode was introduced late last year. Vast array of curated materials focused on statement pieces that mix well with our current offering. Uptown, you might have seen it downstairs. This has just come in the last week to our design centers, and we're going to start marketing it this month. Of course, next month is really where we'll even expand our marketing of this, and I'll give you a little perspective for marketing of this program. It's modern elegance with a twist. Again, it's classic, but with a modern attitude.
Rooted in classic elements with modern glamour, as I said, the style bridges traditional and contemporary design. This is our newest program that normally we wouldn't be showing it as early as we did, but we felt this was a good opportunity. Also, we wanted to show it in this urban environment. We took this location. We're showing it. In fact, in the last week, we had a press preview. We have, this evening, independent IDAs, the Interior Designer Affiliates. They have a fairly large contingent coming in this evening to preview them. We want to make sure that this gets a lot of attention, and then it will be marketed later this year in our design centers. The next one I want to briefly talk about is our vertical integration. Our vertical integration today, we have to be smart in what we do.
Just the fact that we got manufacturing is not enough. The fact that we are in logistics. The question is smart. I had an opportunity of visiting a number of operations in China, and today they're using a tremendous amount of technology. We have to make sure that personal service and technology is combined in what we do. Again, talent is critical. We are blessed with people that have been working for Ethan Allen crafts people for 20, 30, 40 years. In the northeast of Vermont, in the Blue Ridge Mountains of North Carolina, even a plant right here in New Jersey, our operations, the new operations in Silao, Mexico and Honduras. Great talented people. We want to make sure we retain them. We've got to treat them well. My focus is you've got to treat people with dignity.
Doesn't matter where they are, whether they are in Indonesia or China or India or here and Mexico. We do that, you get great quality and long-term benefits. We have implemented many programs, which I will talk about, our social responsibility. I was a few weeks back in our Silao operation. We started from scratch, and now we have 900 people there. This is a management team, young. Of course, they have 900 of these selfies that they were taking. Amazing the world, huh. Everywhere you go. This is our people. This person, the lady who is in North Carolina, and when I was there, she showed a photograph that she had of me and her 30 years back. We have not much changed, right, Mark? 30 years back, I did something crazy. I invited 5,000 of our factory workers to come to Danbury in batches of 300.
That created a revolution. In fact, this lady had come there to Danbury. We also have health clinics in many of our operations. North American manufacturing, it supports a low inventory model, but also creates issues when we have surge in business, and I'll talk about it. That's what happened in the last six months. We do not buy a lot of inventory and then say, "Quick ship because we have it, we're going to ship it." Our balance is we make most of the products close to either it's completely custom or close to when we get an order. That's our North American manufacturing supports that. It also means we manage our inventories better. It enables custom product customization. We have introduced custom quick ship.
Also great, we are delivering our product fast, but when there's a surge or lack of orders, it also has its own implications in keeping our people busy. We are now also supporting our government business. I'll talk more about it. We have, as I said, we've got seven manufacturing plants in North America making about 70% of our furniture products. Using technology, as I mentioned, is critical. We have invested in equipment and we continue to. Fortunately, I'll go a little bit later, talk about the fact of how 10, 12 years back, we made tremendous investments, which has helped us to be where we are today. Even though today we are spending about overall $20, $21 million, we, in the last three years, we spent about $21 million mostly on new equipment for our plants.
That would not have been enough if we had not spent $300 million 10 years back, and I'll talk about that. Our next is logistics strategy. We also did something revolutionary, a little crazy also. In late '80s, we decided that we will deliver our products at one cost nationally. We took over the logistics. Something that was not done, and even today, I don't think a product like furniture is being done. It has helped us create a world-class logistics structure. As I said, we deliver at one cost. We have a strong network of direct LTL international parcel shipping. We are C-TPAT certified, and we have to operate import-export operations. In addition to our national distribution centers, in fact, we have three national distribution centers, one in Dublin, Virginia, one in Oklahoma, and one in New Jersey.
They are supported by retail service centers because we take the product from manufacturing to our national distribution centers to our retail service centers. Our products are prepped and delivered to the consumer, very important. We have today operating 28 retail division home delivery centers, plus 38 operated by our retailers. Again, in the company retail division, because of the consolidation we could have, for instance, we have one major distribution center, a service center in Connecticut that delivers from Manhattan to Maine. It replaced about, I think, close to 15 local service centers by dealers. Same thing all around the country. It gives us an opportunity, have a good level of service, and it also makes sure that we differentiate by this white glove delivery. We don't just drop it on the front of their homes.
Again, it's costly, but this is part of our service. The next one I'll talk about is our marketing. You'll notice that every detail matters because that is the differentiation in every element of our business. We are a known and desired brand. Actually, we are more known, and we need to make sure we get even more desired. That's where our focus is. We've got to expand the demographic base. We got to utilize and increase the broadcast and print. We are expanding our digital marketing and utilizing technology to expand reach. Bridget O'Brien, who came in, she comes with a very strong digital marketing background, and I'll talk a little bit more about that, what our focus is. Our focus really is to expand the demographic base.
If you can take a look at this, the so-called power elite, this is what our basic customer base has been and is. With all the work that we are doing, we've got to expand it to the other demographics, and I will talk briefly about it. When we felt comfortable that we said now is the time for us to expand our marketing, both somewhat in the traditional media as well as in the digital media. Our national broadcast started in March. We have invested a great deal in March, and we're going to invest more in April and May to get our message across, and the objective is to create a buzz, to create traffic, and it is making an impact. As you can see, these are all the various mediums that we are utilizing for our national broadcast.
National television, we launched it last month. In fact, this television commercial. I've got to press something. Nope. All right. Let's see.
Bit by bit, putting it together. Piece by piece, only way to make a work of art. First of all, you need a good foundation. Otherwise, it's 50 from the start. Takes a little cut to the conversation. Without the proper preparation. Vision's no solution, depends on execution. The art of making art is putting it together.
Budd, you see the changes?
Oh.
You okay? Yeah.
Two things that I like.
I know. You saw Ethan Allen being mentioned at Watermark, and you also saw that we had a discussion. I was in Orlando, and Budd is a smart fellow. Okay. I told him we were already thinking about it, but it was good that we were all thinking in the same way. This we launched, and actually, we had a commercial. This commercial has some elements, some products from the Uptown Collection. Again, that just has come into our design centers. This is being run right now, and we run this commercial for this month and next month. Then, as you know, last month, we had the same content but with the different products. Our direct mail is still important. We're going to continue it, but not as much as we did previously because we are now using digital mediums.
We're using national broadcast, but it's more targeted and tactical. It has been a proven revenue generator, especially with our customer base and folks who are pretty close to our base. We will continue to mail it, and we will take a look at in terms of what the right number. In this last quarter, we mailed 5 million magazines out. Digital marketing is important. Today, almost 60%-70% of folks who come to our design centers have first gone to our digital mediums, whether on mobile, whether on website. We got to make sure that is critical. If that is not right, they're not going to come to our design centers. We are working in terms of to reach people, to educate, to inspire, and convert new customers to Ethan Allen brand experience.
We have a number of initiatives, including some of the newer ones that we have just last year used to some degree, whether it's Amazon or shopDisney or ShopStyle or even with Army, shopmyexchange.com, in addition to our own efforts of getting the message across. Now, if you've noticed it, we have launched a new top-level navigation of our ethanallen.com. Higher click-through rates. Email revenue growth is up, and acquisition growth for new subscribers is up 40% quarter-over-quarter. Facebook continues to be a strong traffic driver, representing 67% of social sessions overall, and I hope they do well. User-generated content drives high click rates. Reputation management is important, and we are managing ratings and reviews very proactively.
While overall our digital revenue has increased, of course, that's a very small portion. We've increased 50% of our web sale, that again, is a very small portion. We want them to come to our design centers and interact with our designers. Chat online is critical. This is combining technology and personal service. Last year, we launched it and now about 600 of our designers are certified for live chat. It connects online client activity with brick-and-mortar design services. It's a personalized service, as little or as much. Now they are chatting at 6:00 in the morning, in the middle of the night, in the morning. Now more and more designers are closer to where people live. That also is taking place.
We are also seeing higher average orders as it gets in and also fortunately, lower returns still. When you do something like that, you've got to worry about returns. Our technology strategy is we utilize technology to find the next generation of shoppers and convert them to buyers, deploy technology, empower, and differentiate designers with wow moments. Extremely important. We leverage technology to deliver personalized and relevant experiences, through automation while improving quality, reduce costs. You're going to see us maximize the use of data across our vertical enterprise. We have also been working in the last year, now we are launching these. An Ethan Allen in-home augmented reality app. It utilizes the leverage of over 10,000 3D digital assets and continues to grow. It's compatible with Android and iOS mobile devices. It optimized for Google ARCore and Apple ARKit-enabled devices.
To visualize furniture, accents, rugs, artwork, and decor in your home. AR app is free for designers and consumers, and we're going to be launching it next month. Keeping on this augmented reality app, products shown as a 3D virtual rendering, all to scale, and showing how Ethan Allen products complement and fit. It customizes products with the most popular finishes and fabrics. It configures multi-piece items such as sectionals and media walls with ease. It shares design ideas with friends and local designers via email or social media, effective in both empty spaces and furnished rooms. Ethan Allen in-home app demo. I'd like to show this to you. Corey, I'm a technology person here.
Yeah.
I try to do that. Okay, got it.
First, tap the Add Furniture button to add furniture to the interior. Select furniture from the list of the available products. Tap the Place button to place the chosen furniture in your interior. Now drag the object to the desired space. You can add as many products to your interior as you need by repeating the previous steps.
All right. 3D Room Planner. This has also been a major work of our teams to enable the designer to enhance the customer experience from 2D to 3D, rendering in HD. The designer can work with a client in the design center or work remotely with an online customer. Again, with chat, this is extremely important. We also last year, as you know, built associations with a number of marketplaces, Amazon, shopmyexchange.com, shopdisney.com. This has been the main thing that is driving people to our website. We're doing some business, we have not done what is needed to even do a lot of business. That is to advertise on those. We have decided that we'll do very minimal. We'll use advertising money to bring people directly to our own site. This is an incremental business that we are doing.
Government and GSA Department of State contract is another channel. Another channel is hospitality, real estate. We are looking to expand in all these areas. The government contract, it was sort of great. It also created a lot of issues. We did receive, in the last few months, about $20 million of orders, that all came in at one time and had to be delivered in 60 days, at not a good time when we had to produce products for our holiday sold orders. We had to juggle a lot of things. We had to work a lot overtime. We had to ship products on trucks rather than rail. Still, we created issues of approximately, I'll talk more about it created an issue of not delivering about $15 million of sold products at our retail division.
That had an impact on our profitability in the third quarter. The good news is, this product line is now being made, all of it is being made in our plants, mostly in the United States. That's why we have had to hire people in Vermont and North Carolina. A lot of the products was new product or product that had to be modified, so our people had to learn it. Every time, it takes us about six, seven months for a new product to get it through the factories. Our objective is, we think that we have a 30-million-plus opportunity in this contract. Next one we are looking at, again, is we've got to make sure our sales match our production capacities. We don't buy a lot of products and get an inventory and then sell it. Our model is manageable contract, manageable custom.
We got into, for instance, we developed an association with the Margaritaville Group. The first one we are about starting is 1,000 vacation homes in Orlando, where they're selling these homes completely furnished with Ethan Allen furniture, about $17,000 a home, about a $17 million opportunity in the three years. Similarly, we are now working on 3,000 homes in Daytona. In this case, the customers don't buy the home completely furnished. They have a choice of buying from us or from others, but we have a good opportunity, and we are in the process of working in other areas as well. Going back to this, we also, of course, had a number of other contract opportunities. We have furnished a couple of major Disney hotels. We are also their preferred source for all their sleeper programs, which is a good contract business for us. Regional social responsibility.
As I said, treating people with dignity, making sure that our environmental work is done is tremendously important. Something like this, we have done since this company was founded 86 years back. If you start doing it now, not easy. I'm glad that we have received lots of awards, recognitions for the work that our folks do. Sustainability is tremendously important. In 2010, we implemented American Home Furnishings Alliance environmental management systems. If you take a look at it, we have our carbon footprint. We watch it very carefully, whether it's a carbon footprint, electricity usage, water usage, landfill waste, greenhouse gases, biomass. Keep in mind, we are manufacturing, especially in states like Vermont. It's not easy. In Vermont, a few years back, we used to burn thousands of gallons of oil. Today, it's zero. We produce electricity. We produce steam.
All of those things are important. Code of conduct is important. We have a very strong social responsibility. Tracy Paccione and our folks, we have a compliance officer. We inspect every company that we do business with. If they don't meet our social responsibility, I don't want to do business. If there's child labor, we're not going to do business. We're going to be very selective. I don't want to do business just for the sake of business. We want to make sure it is done right. We follow great environmental and social responsibility in Mexico and Honduras. People are amazed because people go there because they can get away with these things. We said no. Because of that, we got high caliber people.
Social responsibility is good for profitability, but you've got to be consistent and not do it as a gimmick, and that's what we do. Safe processes in manufacturing, not easy. One accident can be $1 million. We've had once in a while something like that. Safe processes when you are in manufacturing is critically important. I mentioned about the fact that we've established medical facilities in Mexico and Honduras, and also medical facilities in our U.S. workshops. It adds cost, but also is important. We've also made sure that comprehensive non-harassment and non-discrimination policies are practiced. We make sure that we adhere to the laws and regulations of wherever we operate. These are very, very important factors that one has to today operate in.
In terms of continuing with our corporate governance, I basically also would like to talk briefly about the fact, and I'll of course talk currently, that we have made sure that we continue to return value to our stockholders. We have reduced, since we went public, $385 million. Of course, everybody is interested in what we have done lately. We got to talk about that, too. Right, Bud? Yeah, I know. This, what is good to know that those of us who are long-term shareholders, we all benefited from this. For instance, I'll talk at one of our other slides. Share repurchases. I know it's always a question about should we be purchasing more shares. Yes, we've already purchased 41% of our company. I want to do it at the right time. Makes sense.
We have purchased, and I'll discuss later the impact of it. We're going to consider again buying shares. The timing has to be right. We also got to make sure we don't jeopardize the welfare of this company. Today, much less. When I bought all these shares, keep in mind, I had taken the company private in a management buyout with 90% debt at 18%. We had to pay that back first. We had to purchase $600 million approximately of our stock back, which we did. We had to pay $400 million, $500 million of dividends. Capital expenditures are important. This is important. If you take a look at it, our capital expenditures, when we take a look at from the critical years 2000 to 2008, we spent close to $400 million, most of it, a lot of it, in improving our manufacturing and logistics.
That's why today, while we have to spend money, we've got a great base because we have invested in our manufacturing and our logistics and in our real estate. We'll continue to do this. We're spending close to $20 million annually. If it makes sense, we'll spend more. This is what we've done recently. This fiscal year so far, we have increased our dividend by 65%. We just had a special dividend that we just paid this quarter, $14.7 million-$24.3 million right up to March 31st. We want to make sure that we take care of our shareholders, also we do it sensibly. Capital strategy. Today, good news is we have paid all our debt back.
We are in a position that while we're going to be spend about $20 million, $21 million in capital expenditures, we have spent $37 million given back to our stockholders. We've increased our marketing to $43 million this year. That's approximately what is estimated for the whole fiscal year. We're going to take a look at where else should we be spending money. We will do that, whether it is our capital expenditures, whether it is share repurchases, dividends, we balance it. We also continue to improve our corporate governance. We are keeping up with all the new things that are coming in. We want to do what's right. I'm not interested in trying to avert anything. We eliminated requirement for business combination to be approved by a majority of the continuing directors.
We implemented a number of significant changes, proxy access, majority voting, provision for stockholder removal of directors with or without cause. I mean, a lot of things we did in the '90s were different rules, but today we want to be current, and overall, we've updated our governance documents. Also we want to take a look at how do we give incentive compensation, including myself. Jim Carlson, where are you, Jim? Okay, he was here, Jim Carlson. Oh, there he is. He's looking at products. Come on, Jim. Join. He is one of our directors. He's also chair of our compensation committee. We said, we got to make sure we are current. Our metrics is going to be sales growth, operating income growth, return on equities, shareholder return. All those things are important.
I have, if it makes sense, I've given back things that were by contract given to me if I thought it was something that I should give back. A few years back, I gave, I don't know, Corey, what, 2, $3 million? We were discussing it yesterday, and this year I'm going to give back half a million dollars more, or more than that. Because I want to make sure that I'm entitled to it. It's my contract. I've got to make sure that it's consistent with what everybody else in the company gets. We're going to focus on those things. Now, let me talk of something very important. Corey and I sat down and we said, "Let's update this opportunity scenario." We had done that a number of years back, right after the Great Recession.
I said, "Corey" This weekend, we sat down and we said, "Okay, let's take a look at fiscal 2006." That was the peak. That's before the Great Recession. We did $1.1 billion. We made $147 million of operating income with a gross margin, again, 50.7%, and operating income was 14%. Comes the Great Recession. In 2 years' time, our sales were down 40% and operating income went to zero. Now all of a sudden we got to get back on our feet. We're still making progress. Last year, fiscal 2017, our sales was $763 million. Our gross margins were 55.8%. Keep in mind, gross margin is also impacted by the relative retail to total sales. In 2006, relative retail sales, I don't have the numbers, Corey, later on we can share, was most probably 40, 40, 50%. Now it is 70%.
That's one of the differences. Operating expenses also reflect that because the retail operating expenses are higher. Now, we said, "Okay, what are our growth opportunities? What could happen?" Our objective really is there's no reason why we shouldn't go back at least $1 billion. My objective is $1.5 billion. If you take a look at even $900 million, our gross margin, we have said about close to 55%, operating expense of 44%, and operating income of 10.9%. Other factor that you can see is now take a look at the operating income. Operating income from 2007, operating income goes up 50%. Our diluted EPS goes to 80%, and again, that's of course reflective of the lower tax rate. Our tax rate as we go forward is 25%. This year it's going to be 30%. Previous year it was 38%.
Take a look at $1 billion. We've looked at our operating expenses. We have a leverage. I'm trying to be reasonable, conservative, not trying to sell anybody on this. We have an opportunity of doing at least 12% in operating income. This has an opportunity of having a diluted EPS of $3.26. Look at much, much higher than the 2.5 9 when we did $1.1 billion in 2006. 86% increase in operating income, diluted EPS. In 2006 to 2017, our average shares went down by about almost 20%, from 34.1 million to 27.9 million. For these scenarios, we have kept the average shares of what it is current. As I said, we'll take a look at whether we reduce the share count.
We do that, then we have even a greater opportunity of leveraging the operating income in a diluted EPS. This is something that's what we're working on. We have worked very hard, and I think this opportunity is there. We've got to make sure we do it sensibly, and I think we have that opportunity. Our directors, they are independent. Average tenure is five years. Gender diversity is 33%. Average age is 66 years. We've got Tara Stacom and Mary Garrett. They're both here today. I'm glad to see you, and Jim Carlson, who's looking at products. Where is Jim? With that, I want to also briefly, before I talk of growth, I'll just comment on our third quarter. We just sent a press release. Our third quarter, and I know you folks have questions on that, but let me upfront give you some information.
Our sales were $181.3 million. Compared to $180.5 million previous year, small increase. We mentioned that our regional sales in our retail division were $155.2 million, up 2.6% for the quarter and over 6% in the month of March. Our wholesale orders were $126.3 million. They increased 14.2%. It's all in our press release. Due to the bottleneck, mostly caused by start-stop of the U.S. government contract, our delivery suffered. Our deliveries in the retail division were down 3.6%. That's a big difference because that difference is what is going to make money or not make money. We didn't make money in the retail division in the third quarter. Our backlog had increased by $15.5 million, which we took that product and had to make it for the State Department. The U.S. government owes us something here. The backlog increased by $15.5 million in retail.
The shipment of this, if that would have added about close to $0.10, $0.11 to our EPS, if we had shipped that product. Because that is the incremental that we need to make things happen. Anyway, that's an opportunity we have in fourth quarter. I also mentioned, in addition, our third quarter advertising increased by 20%. Impacting our operating expenses, that's impacting our EPS. The other factors impacting our gross margin. Some of you folks are very much focused on gross margin. I do like gross margin, but I like operating margins better. Our gross margins were impacted by higher wholesale sales to total sales. That has an impact. Our gross margins were impacted by manufacturing inefficiencies, especially in our U.S. wood plants. Because we are gearing them up, we're hiring people, which is good news, in Vermont and North Carolina.
We also had incurred higher logistics costs because what we did was this, we had to determine, deliver our products from Mexico to the U.S., from East Coast to the West Coast by trucks rather than by rail because people needed their products. It cost us, and Corey can later on give an impact of over $1 million, $1.5 million just by changing from rail to truck in this quarter. We wanted to make sure that the product is there. We also, which our industry has also talked about, is the increases in, especially in upholstery, raw material costs. We have taken a price increase as of April 1st. Also, of course, as you know, we also have to balance our prices with some sort of savings and sales and discounts that we give.
With that, I'd just like to open it up for any questions or comments that you might have. Yes. I feel it's a waste. We will get a microphone, as you know. By the way, this is all webcast, so if you could kindly give your name and your company and your question. If you get up.
Thank you. Evan Stein, Gagnon Securities. Could you just highlight some of the key areas, in regards to that last financial slide, that you see to get you from where your current run rate of sales are today to some of those goals that you laid out in the chart?
All right. This is what you mean, right? We have to make sure that we balance between what we sell and what we deliver. 70% of our product is made either custom or close to when we get an order. Now, that's great positive for inventory management and all those things, but it creates issues. It creates issues if you get lots of orders at one time, or it creates issues when we don't have enough orders, we've got to keep our manufacturing busy. That we've got to keep in mind. I think right now we have invested in manufacturing, we're going to invest more to create capacities. Both in North America and outside North America. Because I don't want to invest at rated in marketing and not be able to deliver it to our level of quality.
To develop a tremendous amount of inventory and then sell it on giveaway prices. As many folks in our industry do that. I think that today we are in a better position. We are increasing our marketing by 20%. We are investing in raw materials. We're investing inventories so that we're going to be able to deliver it as well. Yeah, Jeffrey?
Good morning. Jeremy Hamblin from Dougherty & Company. Just wanted to follow up on some of the points that you made on the Q3 update. Did you indicate that the government contract, you had $20 million of orders that were received over a three-month period, or what was the timeframe on that?
Most of it was received in this government's new fiscal year, which starts in October.
Okay. In terms of, you mentioned that really impacted delivery timeframes. The $15 million of impact to your delivered sales, that is for the January to March timeframe for your third quarter?
That's right, yeah.
Okay. You have about $1 million-$1.5 million of shipping impact, because you chose to deliver faster by truck rather than rail, I think.
Right.
Are there still some delays from the hurricane, or what was the choice there on that?
Yeah, we had some impact of hurricanes also. Cynthia Bero, she runs our West Coast, and she's somewhat happy because now she's getting her products from our Virginia distribution centers, what, about six days faster. Interestingly, a lot of this product they did get in the third quarter, but in the last week, so they can't deliver to the customers. They'll deliver it in April. It is an impact now. The fact is that they've gotten used to faster deliveries, so they expect us to continue to ship by truck. We'll balance it. We shipped a lot of raw materials from Mexico to the U.S. It will continue because faster deliveries are important. We will not be spending as much as we spent, I think, in the third quarter.
Hi, Cristina Fernández from Telsey Advisory Group. I wanted to ask about marketing. How are you thinking about the spending here in fiscal year 2019, also in the back half? Because you said you spend 20% more in this third quarter. I thought before you had said maybe 33% then 15% in the fourth quarter. How should we think about that total spending? Also, if you could help us understand sort of maybe at a high level, the breakdown between print, digital, TV, how that's shifting going forward versus what it has been in the past.
Well, obviously, I want to spend as less as possible. When we look at it and get all in all, then we get all kinds of information. I don't want to spend just for the sake of it. We thought that 20% was a big increase. Last year, fourth quarter, we had a substantial increase in advertising from the fourth quarter of the previous year. We also had national broadcast last year, fourth quarter. We're going to increase by 10% from that higher increase that we had in the previous year. I think that's approximately 10%, will still give us an opportunity of maintaining a strong presence in broadcast, which we're going to do in April and May. Direct mail. Then this question of digital. This is something that we are looking at. I want to make sure it makes sense.
I don't completely understand it, I'll need to understand before I approve things. Bridget and her team really are spending a lot of time letting me know why we should spend this money. I do understand, as I said, that 60%-70% of our customers who come to our design centers first go through our digital mediums. If we don't get them there, the chance that they're not going to become customers. All digital mediums, as I mentioned, is under review, and we're going to expand. It's possible that we will reduce some of the print and the direct mail that we've done in the past.
Then I have a second question. On the new stores that you've opened in the higher traffic locations, New York, Flatiron, Chicago, I understand there's been higher costs, are you getting more traffic and higher volumes, how do you think about the ramp-up of those stores to be profitable?
I think that we look at profitability, fortunately, a little bit differently. The retail division looks at the retail store profitability. It's very, very important. They got to make profits. I look at the fact, what does this contribute to our overall business? Which is because we are in the wholesale business, we are in the manufacturing business. At this stage, we have a net negative in all these major markets. They're not contributing overall because they're not making enough sales to be able to have on the wholesale side, the margins we get on the wholesale side. I think we have another year. We're making progress. We opened up in Buckhead, for instance, another location, and Kathy is responsible for that. We have actually a task force, which I'm deeply involved with, which is focused on Manhattan, Chicago, San Francisco, and Atlanta.
In Atlanta, I think that we're going to most probably, we're going to reduce most probably by 50%-60% the losses that we had in next fiscal compared to this year. Still, it's still gearing up. Yeah, Bud?
Budd Bugatch with Raymond James. Trying to understand a little bit about what was in the release. You talked about the wholesale backlog, I think, being up 70%. How much of that backlog represented the governmental orders? What percentage of that? Can you put some numbers or dollar numbers to that backlog?
Yeah. I'll give you some broad numbers. Corey will have the details. I will say that 70% of the increase in that backlog represented our government contract and international business, 30% or so represented the business that came from the retail that was not delivered. Corey?
Yeah, that's fairly close. About 10% of it was the State Department, that was a big piece of it. The rest was our retail and the international business.
Yes.
10% of the increase or 10%-
No. Overall.
Overall. 10% of the overall. Okay. That will be delivered in the fourth quarter?
Most of it.
Okay. As you look at the wholesale business.
Yeah
Was the wholesale backlog or the wholesale business of the independent dealers up as well, and that wholesale backlog was higher for them, and that was because of the $15 million of undelivered orders?
Keep in mind, our total retail business increased 2.3%. It is not that a tremendous amount of increase came from our retail. The wholesale increased because we didn't deliver the products that we had received. Same thing happened with the dealers, too.
These are ready for delivery now.
That's right. By the end of this, we've caught up, which is good news. Didn't catch up enough to be able to make retail deliveries, but caught up enough to make it to the wholesale. Now we are in a much, much better shape.
I'm trying to understand something, because this is the second time we've had that issue with the deliveries. Is that over, or is that something that should continue? What was the issue that caused the deliveries?
Well, Bud, we did not know in September how much of orders we're going to get from the State Department, which was uncertain. Dan Grow, he sleeps on this, he works on it. All of a sudden, we got, because the fiscal year of the government ends in September, we got it, and by contract, got to deliver it in 60 days. They didn't take it in 60 days, even though we were obligated to do it. Now, we also, at the same time, had to make this product in our factories first. Actually, all of this product had been designed specifically for the State Department, with changes in finishes and changes in sizes, some new product. Now two things are there. One is that we've gone through most of the costs of making new product.
In fact, part of that product is now in warehouses ready to be delivered. We made more product than they took because we're obligated, but they didn't take it. The government makes an obligation, but then they don't fulfill their side. They're working hard to take it. The next thing is, Bud, now we also can somewhat estimate. Just keep in mind, this contract is on a competitive bidding. This is not something that we automatically get. Every order, every day, is bid in what's called a FedBid. It's like an eBay. Every order.
Yeah.
So far we have, I think, got a fair amount of it. Now we will do some projections for the rest of the year, and we'll prepare if, let's say, the last month of the fiscal year, the government, they give us big huge orders, now we've got to plan ahead. Now we got to see how much do we plan in inventories? How much do we plan in making the product? Which we can do all of that, but on the other hand, I don't want to build a lot of inventories, and those orders won't come, so we're balancing it. We're in a much better position, but it's not something that is automatically, they'll give us $40 million. It's bid every day.
Also, I think you told us you had accommodated a lot of extra cost to open up New York and open up the Chicago store. I think $1 million each, if I heard you correctly. You have a mid-single-digit target for retail margin. What's the timeframe that we can hold you accountable for getting there? When do you think that is?
I think our retail division vice presidents are there. I would hold them accountable. As I said, this question was asked earlier. I said that in the next year, certainly, we are going to break even between a consolidated margin, between wholesale and retail, not on the retail itself. When the cost of Manhattan, even this one, hard to make a profit here just by itself. On a consolidated basis, we sort of break even, make a little bit. I think in the next, under two years, we should be in a position whereby we will be making not only a consolidated margin, but some profit in the retail itself.
Last from me. You've increased marketing, and you and I had some serious conversation about that. You did have a good acceleration in March. Can you pinpoint where that came from, what the effectiveness of the advertising was in driving traffic and closing?
Yes. We started in March with a national broadcast. We spent close to, Corey, what, $9 million in March? We spent $9 million in March between running a broadcast as well as we expensed the total cost of producing it all in March. $9 million was spent in March. We have received a fair amount of comments. People are happy that we are on national television. We have had some increase in traffic. I would not say that people just getting up and coming, because that is not something we expect. We expect to make sure that people see the Ethan Allen brand. As I started by saying, I want to make sure that while we are known, we are also desired today. This is one element of creating that desire, and one month is not going to do it.
Far positive, but it is not something that. Also, as you know, you and I had a discussion. We didn't make it to say that, "This national television is, that come and you got 72 months of interest-free, 30% off." We would've had a lot of traffic. That was not it. We had to balance, should we be very sales-oriented, or should it tell people that Ethan Allen today is the desired brand? We've had favorable, but still, we're going to see its impact in April and May and June. Yes, John. You haven't changed, John. I don't know what for 30 years.
No, I'm aging, trust me.
I don't know.
John Baugh, Stifel. Thank you. You slipped in the April 1st price increase, then we saw the 20% promotion off on April.
Right.
My question is not just really for the month of April, but how do we think about that price relief versus raw material versus discount affecting your margin? That's my first question.
John, it's an important question, it's really something that the fact that we took a price increase don't automatically mean we're going to get higher margins. We're going to see how do we manage this whole issue of sales discounts. We're looking at what do we do that is sensible, that makes us get more traffic, yet we do not create a precedent that next month we got to do at higher level. Take a look at our industry. Our industry today, you are very familiar with it. Almost everybody is saying that you're going to get 72 months or 60 months of free interest. You're going to get 30% to 40% off. That's what we are living across the board. Hardly anybody that is not doing it, especially certainly the large retailers in our industry. We're confronted with that.
We're balancing it of how do we create so that our customers, and especially the new customer, understand the value that a 20% is a great value. Not an easy job, but that's what we are working on. Because the new customers who are used to seeing 30%, 40%, 50% off, how do we convince that our products and our offerings. That's where our 1,500 interior designers come in. These are 1,500 folks out there who each one is our marketing agent. More and more, we want each and every one of them to be, which they're doing, establish their grassroots marketing, get the message across. All I can say is this is a balancing act that we have to do every month, that what discounts to give, on one hand maintaining credibility, bringing traffic, and also maintaining our margins.
It's something that we'll continue to see, John.
My second question is, you seem to have a bit of a growth problem. Your revenues are sort of stuck in the $750 million-$800 million range for three straight years here, and if we backed out the government business this year, it might even be down. What would you attribute, looking backwards over that three-year period, as to what those pressures are, maybe in order one, two, and three, then how you change that going forward?
All right. I mean, look here, John, this pressure is not new. We've been confronted with the impact of globalization and commoditization. I talked about the fact that 25, 30 years back, a sofa was selling at $400, and now it's selling at maybe $450 or even lower. Deflation has been a major factor in our industry as it has been in many, many industries, whether it's apparel, whether it's electronics. We have been faced with the fact of deflation. A lot of that started, in my view, in the last 12, 14 years. That started with the globalization and the commoditization of products. Today, products coming, let's look at case goods, for instance. Tremendous amount of product is coming at offshore in countries where they are making the product that was made over here, for instance, and even in China.
When you take a look at our numbers, to stay even, we got 15%-20% ahead to stay even. That's the biggest issue. Having said this, I think not completely, the deflation is somewhat, I think, ebbing because cost of labor, let's say countries like China. China, in fact, they are now outsourcing a lot of their products to other offshore countries. Vietnam has been a great beneficiary. Cost of labor in Vietnam is increasing. Up to now, it was decreasing. This question of the fact that we haven't grown is the fact that to stay even, you've got to grow 15%-20% and stay even. Our prices haven't gone up. That's one factor.
The other is the change in the demographics, the change in the demographics in terms of people's attitudes of furniture, what they want, what styles they want. Third is technology. The fact of look at what's happening right now with people selling products on these online retailers. They are not making any money, but taking market share. Even some major retailers not making money, but taking market share, and Wall Street likes them because they show big, huge sales and no money. I want to make profits. I could also increase our sales, but we will have no profits. It's a question of balancing it.
Hi, Seth Rosen from Nitorum Capital. You mentioned in the third quarter, the margins were impacted by the mix towards wholesale, the lower margins. Can you give us some sense of, for the wholesale-only, the business that's not running through retail, how much lower are the margins? What's the mix now? I guess for the opportunity that you laid out, the different scenarios, what type of mix do you envision to get to those? Thanks.
It's a good question. Right now, again, our gross margin is going to be impacted, as I said, number of factors. First, a mix between retail and wholesale. Second is the gross margins that we get at retail and the gross margins we get at wholesale. I'm right now looking at approximately 68%-70% retail versus higher retail a few years back. Corey?
78% is what we generally say, because last quarter it was 75%.
78% to 75%. If our wholesale increases, which is great news, it could go down to 75%, which has an impact. Even at 77%, 78%, the gross margin, assuming we have the similar gross margin at wholesale and at retail, it will go from 55.5% to 54%. Right?
Yes.
That is approximately, at this stage, about a 54% gross margin, assuming that the ratio goes from 79% to 75% of retail to total. Right? Okay.
To get to these scenarios, what do you envision the mix to be?
The mixes will be approximately, I would say, 75/25. Yeah. That's a good mix, Jeremy.
Thanks. Jeremy Hamblin from Dougherty. Just a couple of follow-up questions here. The Artisan Collection that's going to launch, I think in September timeframe. That has, what I would characterize as significantly lower starting price points. It's definitely a simpler collection, very modern. What would the margin profile look like on that product line versus your typical collection?
A lot of discussion, debate. Tracy, you have no idea how much time I spent with Tracy on that. Keep in mind, first let me tell you, that all the product line is exactly the same specs of quality that we make. We had a discussion, should we make it so that it reaches a larger consumer base and we make it cheaper? I said, "No. We're going to kill our brand." We said, "Let's be creative. Let's make sure that we design it." The next question was where to make it. That has an important application. A lot of this will be made, some in our U.S. plants, but some in our other North American plants, and some also from great plants we have in Indonesia.
That has an opportunity of giving good pricing and about pretty close to the gross margins we get at the wholesale. Maybe one point or two point difference, not much. Right, Tracy?
That's right.
Okay. She's been living and sleeping on this.
A couple of other follow-up questions. You've mentioned you've done nearly 70% of the locations have been relocated over the last 15 years. What's the maturity curve of a new store in a new trade area versus relocating a store, let's say from Cherry Hill, New Jersey to Marlton, New Jersey? What is the timeline to maturity on an average unit volume in those two?
Well, Jeremy, most, other than major locations like downtown Manhattan or Atlanta or Chicago, most of these are relocations of existing stores. In most cases, the opportunities are doing more business with a relatively small impact on our profitability because these are existing businesses with wholesale, with people. Sometimes what happens is, let's take a look at downtown Manhattan or Chicago. We have to expense occupancy cost or rent, sometimes six months, even before we open it, because according to the accounting rules, the rent has to be expensed. That sort of adds up the cost when we have, like for instance, we're doing in Calgary right now. We're opening next week. Kathy's going there. Great location, and we are moving it from an existing one.
In this one, our cost would be about 6 months of paying rent under terms of renovation, construction before we move there. Other than that, it's the same staff, same people, and most of our real estate is relocations.
In terms of the timeline to get to your typical average unit volume, there's no catch-up time?
That's right. In the relocations.
Okay. Another question, just to follow it up on the transition of the company from, and I think this really follows up on this gentleman's question. You've gone from predominantly independently operated network to now more than 60% of the locations our company operates.
70% in North America.
Okay. That has almost by definition, a negative impact on your operating margins. Is there any thought to potentially swinging the pendulum back to more independently operated, in which you are simply coming through with the designs, the marketing plans, and letting the independent operators, the third parties, run the stores? Because you seem to execute really well in creating the collections and so forth, and operating the retail design centers is a little bit more of a challenge.
Yes, Jeremy, that's a good question. We have actually, as I said, starting tomorrow, all our independent retailers are coming here, both domestic and international. This is subject. We have to also keep in mind a number of factors. Some of our competitors, almost everybody, other than a few that are exclusively running their brands, they sell their products not only through their stores, they sell them also to large retailers. Now, we can do that. We have people coming in, and they would take our products and put it in. It's negative impact on brand in managing it. For short-term, we could get lots of business in aligning ourselves with department stores, with large stores, but the credibility, the service, certainly the top line will go up. I think that we believe that short-term, while we'll gain, longer term, it will be negative to our brand. Yes.
In North America, our objective is to grow, and we're going to look for entrepreneurs. In fact, you mentioned that our retail division model that we have been working on, and I've spent a lot of time on it, is to create an entrepreneurial business unit. When we started it, we had just three or four people running the whole thing. Today, every month, we are creating what I call an entrepreneurial model, like a dealer would. In fact, most of our independent dealers have one, two. There are only two that have more than two stores. We have now created over 30 entrepreneurial units, and each of those units, we are discussing with them a incentive program as if they're an entrepreneur.
What you are talking about is, yes, we would look for and encourage people to come in and run an entrepreneurial business, but they've got to be the right people. They've got to be willing to make investment. Today, business environment is different. People are not good entrepreneurs of the '60s and '70s, '80s are no longer there. We are looking at it, and it's possible that we would sell some of our retail to entrepreneurs, but they've got to be the right people. Yes, Maggie?
Oh.
Maggie Gilliam is another star. She interviewed Ethan Allen CEO when we were public in the '60s, '70s. Okay, go ahead, Maggie. I was sitting there. You were there. Go ahead.
Yes. I'm Maggie Gilliam, and I would like to know what has been your experience with your operation with Amazon and also with Disney, please.
Good questions. As I said earlier, our experience is mixed. I thought that, foolishly maybe, that there are 60 million, 70 million, 80 million folks who are Prime members and all of them will rush to us. I found out you got to pay for them.
Oh.
That you've got to advertise, pay. We're doing some, but I'm not interested in spending a lot of money to advertise. I've told them that, too. Similarly, Disney is better. I think in there, we are making progress. We are also doing actually some reasonably good business in China. We just went to Qatar and opened up an Ethan Allen Disney there, and it is growing, and also we are aligned with them on the disneystore.com. Amazon is okay, but we want to control it. I don't want to be in a business of their controlling our business. It's small.
Yeah.
Yeah. Growing but small. It's growing. It's obviously doubled in the last year, but from a very small base. All right. I hope it's been productive, I'm glad that you all were here. I tell you this, that I feel more comfortable in the fact that we have the opportunity, I think that with all the changes we have made, our objective is to increase the top line. That's really where it is at. Whether we do it with our wholesale business or the retail business, the leverage we have is very, very good, and that is going to be our total focus in growing our top line, but doing it in a disciplined manner so that we are able to also leverage it to be profitable, and we have that opportunity. Thank you very much for coming.