Earnings Call: Q2 2018

Jan 24, 2018

Good afternoon, and welcome to the Ethan Allen Fiscal 2018 Second Quarter Analyst Conference Call. It is now my pleasure to introduce your host Corey Whiteley, Executive Vice President, Administration and CFO. Thank you. You may begin. Thank you, Brandon. Good afternoon, and welcome to Ethan Allen's conference call for our fiscal second quarter ended December 31, 2017. This conference call is being recorded and webcast live on Ethanolen.com, where you will also find our press release, which contains supporting details including reconciliations of non statements that are subject to various risks and uncertainties, which could cause actual results to differ materially. Please refer to our SEC filings a complete review of those risks. The company assumes no obligation to update or revise any forward looking matters discussed during this call. After our Chairman and CEO, Farooq Athuari, provides his opening remarks, I will follow with some details on the financial results. Fruit will then provide further updates on our ongoing business initiatives before opening up the telephone lines for questions. Thank you, Corey, and welcome to our earnings call. Our second quarter sales were up 2%, they would have been higher, but due to bottlenecks on production and delaying shipments. We ended with wholesale backlogs increasing 56.8% and retail division backlogs increasing 7%. Several factors impacted our production, gross margins and shipments. We processed a large U. S. Stage bottomed order of mostly new product to be delivered in 60 days as per contract, although a significant portion that was produced had to be held up for shipment until our third quarter at their request. We were also affected by political events in Honduras this quarter. These events are now resolved and production has resumed. Our adjusted EPS of $0.53 increased 35.9 percent from the prior year, helped by change in the tax laws. While we maintained a strong operating margin of While we are making good progress, expanding our business with the U. S. State Department, a Worldwide residential furniture program, In our contract division and Internationally, we need to increase written business in our North American retail network. With many already initiatives underway, including continuing to develop a strong talented team, strengthening our offerings and the projections and the locations of our design centers and improvements in our production capabilities we plan to substantially increase our marketing efforts in the third quarter. We expect to increase our advertising expenditures by 33% in the 3rd quarter 15% in the 4th quarter from higher levels spent last year in the 3rd 4th quarters. After Corey gives a brief overview, I will discuss our initiatives in greater detail. Thank you, Farooq. For the second quarter of fiscal 2018, our consolidated net sales increased $98,500,000. Wholesale sales increased 3.8% on stronger international and department of state shipments. While retail sales decreased 2.1%, primarily due to delayed shipments to retail as we geared up our manufacturing, especially with the impact of new products during the quarter. At the end of the second quarter, our retail division backlog was up 7% from December 31, 2016. And the wholesale backlog was up 56.8 percent, which includes the Department of State Order backlog. We ended the quarter with 148 company operated design centers, and that compared to 146 in the prior year quarter. Our international sales were 10% of consolidated sales during the quarter, which Our consolidated gross margin for the quarter was a mix of retail segment net sales to consolidated net sales for the quarter, which was 77.1% compared to 80.3 percent in the prior year quarter. Our adjusted operating expenses were 90,600,000 compared to $91,000,000 $3 per share compared to $0.39 in the prior year quarter. Adjusted EBITDA was 11.2% of sales. The adjustments in the current year quarter included 0.3 There were no adjustments in the prior year quarter. Our effective tax and 23.5 percent for our fiscal first half as a result of the Tax Cut and Jobs Act. We expect our effective rate for the next two quarters will be about 30.5%. And for fiscal 2019, we expect effective rate to be about 24% to 25%. The 2nd quarter rate benefited by 14.6% as we provisionally remeasured deferred tax assets and liabilities. We have a strong balance sheet. At December 31, 2017, we had no debt out outstanding under During the quarter, we paid out dividends of $5,200,000, an increase of 11% compared to the prior year quarter and we invested in capital expenditures of $2,300,000 for the quarter compared to $3,800,000 in the prior year quarter. We expect about $14,000,000 in capital expenditures for the second half. At December 31, 2017, customer deposits were $58,600,000 and inventory of $160,800,000 was in line with our backlogs. With that, I'll turn it back over to Farooq. Thank you, Corinne. As I mentioned, our major focus is to increase traffic and we plan to launch a major advertising campaign to further create desire and action. Broadcast medium will be a major factor in this increased advertising. We are in an advantageous position to make major investments. Our offerings continued to be strengthened. We recently launched the Passport collection in early spring, we will launch the uptown collection. And this summer, we will introduce an important assortment that is classic modern and youthful with a smaller scale and even more attractive pricing. The increase in our 3rd quarter advertising spending reflects about a 33% increase from higher levels spent in the last year, 3rd quarter. In our fourth quarter, we plan to increase our advertising spending by about 15% also from the higher levels of 20 seventeen's fiscal fourth quarter. We also continue to focus on our priorities including on talent. We operate a vertically integrated business from design to manufacturing to retail and logistics, and we continue to strengthen our teams. For the retail division, we continue to create more what I say are entrepreneurial manageable business units. At corporate, we continue to strengthen our teams in merchandising and design and we have made the important addition of 2 senior executives to our marketing advertising team in the last quarter. Increasing capacities in manufacturing and improving service capabilities is important. About 7 5% of our furniture is made in our North American facilities with about 65% of furniture custom made on receipt of order. While this is a major positive point of differentiation for us, managing inventories creates issues when orders surge. Our focus is to increase production and also manage this major differentiation from service perspective. Technology is also tremendously focused combining the work of our 1500 in house interior designers with technology is an important initiative. We are in the process of deploying an augmented reality mobile devices, allowing clients to visualize furniture in their rooms. We expect to launch it in March. About 600 of our interior designers have been approved by us to do online live chat with clients. We've also launched a reputation management system to monitor and manage consumer reviews and social media online. And we are adding necessary technology in our manufacturing facilities Finally, operating our business with utmost attention to social responsibility continues to be a strong focus. Our enterprise relies on our 10 leadership principles, which state that good governance is good for the bottom line. And we maintain our focus on the environment save processes, social conscience, diversity, technology and a corporate culture to support our associates. I'm now pleased to open for questions or comments. Brandon, go ahead and open it up then. And your first question comes from Bobby Griffin. Good. How about you? Thank you for taking my questions. Good afternoon to you and Corey. Just quickly, I want to make sure I understood the comments about the tax the tax rate in the quarter. So 14.5 percent was the benefit you guys referenced for the revaluation of the tax liabilities. Is that correct? Yes, about 14.6 percent was deferred tax assets and deferred tax liability reevaluated. And then Corey, I couldn't hear the rate for the next two quarters, what was the rate that you referenced that is the microphone was breaking up when you were talking, I'm sorry. Sorry. It was about what we said is 30.5% would be for the next two quarters. Okay, perfect. I appreciate that detail. And then I wanted to talk about, I guess, on the retail segment, the written orders, any color on how kind of the quarter progressed, in the pre release you guys in January was up, but we ended, I guess, we ended last quarter with kind of close to 2% rent growth and they kind of fell off. Was that coincide with the drop in advertising in the quarter? How should we think about that to get a better understanding of kind of the trends? You're talking of written? Yes, I'm talking about written this quarter. I guess the comp rent was down 6 2 in total was down 5.8% and last quarter it ended kind of on a positive note. So I was just trying to hope to get some more detail about what progressed during this quarter to change the trend? Corey, go ahead. Yes, value is probably 2 parts to it. One is, the advertising, as you recall, in the first half, first quarter was lower than where we were in the prior year quarter. So as we moved into the 2nd quarter, amortizing was up just slightly, and we increased it as we went through the quarter. So we did see written sales progress as the quarter progressed. December was actually our strongest month in the quarter from a comparative standpoint. And, and that's how we saw it. That's right. I think Bobby also just giving you a color on this whole question of advertising. Now we are making a major commitment to increase advertising. In fact, if you take a look at it, when we take a look at our advertising on quarter 2 was a little bit lower than in fiscal 2016. But in quarter 3 of last fiscal, that is fiscal 2017, we had increased our advertising quite a bit. Now we have gone from $9,400,000 to $11,400,000. And now we are talking of increasing it by approximately under the 3% on this base of 11.4%. Now the reason is this, that, and it's an important differentiation, and I believe will make an impact. We have to a great degree relied for lots of reasons on print as our major advertising mediums. Direct mail has been a very important one. Now this quarter, while we are going to increase our advertising, we are going to have some direct mail, but we are also going to have a very strong television broadcast this quarter and similarly in the next quarter. And we believe that has an opportunity of raising of reaching a lot of people. Now the issue really is that while we are spending a lot more money, keep in mind in 2016 third quarter, we spent 9,400,000 when we now, we are talking of spending over $15,000,000. It's because of the fact that in this broadcast medium, unless you really make a great impact you are spending money and not getting the benefit. So that's why we are going to now take a major we'll make a major investment, I would say, in advertising, but the mediums are going to be different. Okay. I appreciate that detail. And then I guess one more follow-up for me on the retail. So I noticed that two stores were closed during the quarter. From a modeling standpoint, how should we think about company owned stores going forward? Or should we expect you guys were those, I guess, just relocations that we should expect to reopen going forward? Are those permanently closed? And is there any meaningful EBIT impact that I should account for for the next four quarters as those roll out of the comp base? No. Actually, if you take a look at in the second quarter, our company owned or increased by 2, our in the United States, our dealer went down by 3. So, our company, we have 148 locations, I'm sorry. I'm sorry, Brooke. I was looking. Yeah, right. We're down too. Yes. But approximately, it will go to approximately remain the same, Bobby. I'm sorry. Yes. Okay. That's all. Curious if those were going to open back up as part of relocations in future quarters, but no worries. Okay. And, that is all my questions. Oh, sorry, one more head on my list. I apologize. But, from the production standpoint, now that we think about the government kind of being on, you got a little bit more understanding of the cadence that they're going to be ordering, should should we kind of assume that the production kind of the production shift between you guys were having to balance making orders for retail or making orders for government should we assume that is kind of on a cadence that's more manageable now going forward? Oh, yes, absolutely. See, what happened was this that we got almost all these orders towards in September, which is the last month of the government fiscal year. And according to a contract, you're supposed to have made it in 60 days and ship it in 60 days. And a lot of that product was new. So it did really complicate our lives, but, and we made it. So now the good news is we have shifted and we also are in a better position with our manufacturing, having made the products because every time the first time is always inefficient, considering that, we still ended up with 11.8% operating margin with all those inefficiencies. But right now, we're in a good position. I really appreciate all the detail and the time you guys for answering my questions. Best of luck going forward. And your next question comes from Brad Thomas from KeyBanc Capital Market. Hi, good afternoon, Farooq. Good afternoon, Corey. How are you all doing? Good. A couple of follow-up questions if I could here on Bobby's. I guess first, starting with a question maybe about the backlog clearly that's both at wholesale and retail. Can you give us a sense for how big that is, what the magnitude of that is? In dollar terms so we can maybe try to get a sense of the tailwind that you may have behind you as you work down that backlog? Brad, we don't have those backlog numbers that we give out every quarter. And I don't think we want to start doing that either. But that said, a lot of the wholesale backlog was the state department, the orders that we brought in, you know, we had shipped out just a portion of it. We had probably about a third of the orders that we shipped and 2 thirds of it was still in backlog at December 31st and that's shipping now. So, a lot of it was related to that. And then the rest is what we're catching up on the retail backlog, which was up 7%. So that I think that the as we move forward, you'll see that now normalize. Got you. Okay. Okay. And then just as we think about some of the, the manufacturing challenges that you've gone through as you've expanded the assortment cater to the state department. It sounds like we're pretty close to that being worked up and being more efficient. I guess as we think about maybe the efficiencies of the plants and the gross margin on a normalized rate, do you feel like the underlying gross margin trend should be more back to normal on the as you move into the fiscal third quarter? And, what kind of gross margin drag might we still see as some of these products are moving through the system for the state department? Brad, our gross margin, as you know, consists of, gross margin from the retail as well as a gross margin from our wholesale business. So the percentage of retail to total sales is an important factor. So the gross margins are important, so they are impacted, like for instance, this last quarter, Our gross margins were lower mostly due to there was some impact due to manufacturing, but they're mostly lower due to the fact that our retail sales as a company of total sales were lower. So keep that in perspective. So it also depends about how much our business we are going to do at the wholesale level in the contract business, in the government business, although they're very, very good, it might, while we may be showing a lower gross margin the opportunity of increasing the operating margin is better. So keep that in perspective. Got you. And so just at a high level, do you think that the third quarter would still potentially have a lower gross margin trend just because you're still working through some of these newer state department projects, product and that they're hitting the P and L. And it may take another quarter here before you maybe start to gain some of this back? Yes, I think that's a good assumption. But again, as I said, the opportunity is on the operating margin side. But it's possible that the gross margin could be lower because of the higher component of wholesale to total sales. Great, great. Okay. Maybe 2 more housekeeping items if I could. Just on Amazon Farooq was hoping for an update on how that is progressing for you? It is progressing and it's an interesting observations we are getting. Yes, we are getting some sales. Slower than what I thought, but what we are now seeing is that, people go to Amazon, they buy some but they also end up coming to our retail design centers. That's what we thought would happen, but more of that is taking place because people want to see the product taste, feel it, taste it, and also meet our designers. That's a positive thing we are seeing. Great. And then just with respect to tax reform, obviously, you all have a lower tax rate as we've talked about. You are increasing marketing here, but I guess just to ask it directly, Farooq, are you and the team changing how you all approach business and how you want to spend money and hire and advertise because of the lower tax rate or tax reform at all? Or is that that tax change not having any impact on how you're thinking about the business? No, well, Brad, we we always like the fact that we're going to get some credits and money. It's always good. I think on this, on an annual basis, we most probably would get close to $10,000,000 are showing that range, Corey? About 6 to 8. Depends on our 6 to 10 depends on what our business is. So it is important, but not that critical. More critical is the fact that we are spending money on our marketing. We're spending on capital expenditures. Yes, it's having an impact. In fact, today, we also gave special, the payable date was today of our special dividend was about $13,000,000. Right. With the total dividend. The total dividend because it was a special and the regular gave our $13,000,000, our branch, I wish, we had gotten that kind of a money. So we did that, but you're but we are going to spend money on marketing. And fortunately, we are in a decent position to do that. Got you. Well, thank you so much. And I'll turn it over to someone else. Thanks again. And your next question comes from Jeremy Hamblin from Dougherty and Company. Hello, Jeremy. Hi, good evening, Farooq and Cory. Thanks for taking the questions. I need to see if we can clarify a little bit more, Cision on a couple of the things that have been brought up. The first is when we look at the gross margins, you really have been running at very nice run rate over the last couple of years. You saw a fairly significant step back to 54.3%. You called out a few, one off items that might have had a little bit of drag, but I think what we need to get clarity on is you really have been running above 55 percent, for the last 2 years. This was the lowest level in all 3 years, with a 54.3, I want to understand that there's not something that's a little more structural here, whether it's a state department contract or whatnot. And I think it's, you look at retail as a percent of total sales, it was 77.1%. And that's down 300 basis points from a year ago. But as I look forward to Q3, you had like 78.6% last year. Retail sales as a percent of total. You know, I think what I'm trying to ask you is, do we see a similar step down? Like, should we be thinking that retail as a percent of total sales in Q3 is more like 75% to 76% of total sales, or and tied into this question is you said that you've now shipped a lot of these state department order but clearly you didn't ship nearly the amount in the December quarter that you had expected when you hosted the call in October. So I'm trying to put those 2 things together to make sure that the expectations are appropriate for where your gross margins are, as well as your sales level in Q3. Can you help me out in providing more color? Let me give you some, maybe Corey will add or add to that. Our gross margins at retail was still slightly lower this quarter than last quarter. And that reflects a gain that like everybody else we do, we are some pressure of giving higher discounts. And in fact, a lot of that happened where we gave free delivery and that had an impact on our gross margin. So that pressure is there, but I think that, we have the opportunity of managing that pressure. So that's one element. In addition to the fact of retail sales to total sales. The second one is somewhat of a pressure on gross margins at retail. And slightly, we also had some pressure of our gross margins on our manufacturing at the wholesale level, because of these inefficiencies and production delays. So those are the three factors that had an impact on gross margin But as I said, you're right, we've got to keep that in perspective where I think as we move forward, you've got to keep your perspective also on the operating margins. I totally agree with that. I guess the point is we need the appropriate starting point. And I think what you've communicated is we're past some of those one off issues. We don't anticipate any from here, And so, if we kind of have this 55%, starting point, is that an area where you feel comfortable, Corey or for as where expectation should be on gross margins? Well, from quarter to quarter, possible, it will vary. But around that range of 55 is where we should be. Okay. Fair enough. The second point is on the marketing side, I think as I do my calculation versus what you disclosed last year, it looks like about a $4,000,000 increase to your marketing spend in this March quarter. Corey, is that a pretty correct calculation? Yes. And then about $2,000,000 in the June quarter. Where do you how does that compared to the, let's say, embedded structural SG and A run rate you've been at because the last couple of quarters, you've been really more like $89,000,000 to $90,000,000. And I think in theory, this would would assume that you are going to be running more like maybe $93,000,000 in SG and A. I think, Jeremy, you're on the right track. It could be close to $94,000,000, $95,000,000 more closer to $94,000,000 or so at that run rate. And of course, it also depends on how much of written business we write because our, that has an impact on our sales, incentives and commissions. That has an impact too. But that will be related. That is impacted by increase in sales. So you got to keep all of those perspectives in mind, but you think about on a flat basis, increase in if we have no increase in sales, then from a perspective of, our operating expenses will be in the close to $94,000,000 range. Okay, fair enough. I want to come back to the State Department and finish with that. So I think the statement you made was that you've made really good progress on those deliveries. You didn't come close to the expectations you had in October on your deliveries. My gut says you're probably not going to fully catch up in this March quarter, on your deliveries. But, where do you stand on clearing through some of that backlog? Are you still going to be reporting in April that your backlogs are up 30%, forty percent, 50% Or do you feel like that will mostly be cleared through? And that's part one of the question. The second part is, are you thinking one at a time, Brad? Go ahead. I'm sorry, Jeremy. Jeremy, I would hope that we've got a very, very strong increase in backlog but I don't think it is going to be because of the past business from the state department. That most of it will be shipping. We are getting new orders But as I said, they do tend to give to write a lot of orders towards, middle and the, towards the end of their fiscal year. So our order rate is we are getting orders, but they're relatively small compared to what we got in September. So I think as we stand right now, state department is not going to be a major factor in the backlogs going into our 4th quarter. Are you continuing to I gather that probably in this quarter, the order rates on an absolute dollar basis were quite a bit lower than the September quarter just because of the fiscal year end and kind of all the budget carry concerns going on in the government. But as a share of the total business that's out there, are you still winning well over 50%? That's what we hear. And your next question comes from John Baugh from Stifel. Hello, John. Hello, Peru, hello, Corey. Good evening. Thank you for taking my question. Several have been answered already, but I guess I wanted to go back to your Amazon comment and, you said your experience to some degree has been people coming into the store, which is not to say good if that's happening, but I'm trying to square that with the 6% down written order comment. Is it that these people are still putting together their thoughts that have been steer to your store from Amazon. They just haven't written an order yet or no, you really are getting orders from these people, but you're on our day to day business is down a steeper percentage from 6%. I know it's early, but I'm just trying to get a sense of how much traffic you really think you are benefiting the store from Amazon, if any? We are, but John, it's still relatively small. I mean, it's not something that I can say that we have major business coming in from folks going to Amazon and coming to us. I think it's incremental. It's growing every month. Still, it's like the Disney program, which is growing, but at a smaller rate, we're doing better with Disney in China. We just opened a Disney in the Middle East this past week. It's a small incremental, but not enough to make a difference. To our, these numbers. Okay. And then any issues as we think about manufacturing costs, a lot of materials and energy have moved here. And I'm wondering if there's any any concern there? I know you took pricing. I believe it was last summer, but, how's the pricing decision working out versus input costs? Well, it's a good question, John, that our raw material costs have significant increases in the upholstery material segment of our business. We have seen increases driven from plywood, form, packaging materials. So they have been significant. And we are also considering, in the next few months of a price increase to just for these increases in pulse stream material costs, which is, of course, as you know, has been faced by our industry as well. Okay. And lastly, you talked a fair bit about marketing and increasing it. Wasn't clear to me, are you and you mentioned TV, are you increasing digital, or mobile or online or whatever you want to call it? Of total dollars year over is the mix changing more to TV or no, more to digital, but you're going to still be spending more on TV year over year? We are going to substantially spend more on National Television And Digital. Somewhat less on print. Okay. Okay. Wonderful. And can you help us when when will sorry, I don't stay glued to the TV? When will we see these if we haven't already start to see them hit give us a feel for, because I know there's a lag between when you advertise and when you hopefully write business. And then that ties in to some degree to whatever monthly or quarterly promotions you're doing. So trying to think about, when we talk 90 days from now, how this all plays out, hopefully in higher written orders or will we be measuring on something else because, it's lagged. John, again, a good question. Most of our advertising in broadcast is going to start in 1st week of March. So March is going to be very, very strong and I said earlier, unless you do it very, very strong on a national basis, you do not get any much of a benefit. So we look upon the fact that we have an opportunity of increasing our business this quarter in Britain And, and the impact of that in deliveries should be in our 4th quarter. We'll afford to continue our increase in advertising, including our, digital and broadcast in the fourth quarter as well. Okay. But it sounds a little bit back end loaded quarter at least in terms of the advertising dollar spend? That's right. And as you may know, we have already sent a beautiful direct mail, which you might have received in January February, we sent 5,000,000 copies of that. But then in March, really, as I said, we are accelerating, increasing our exposure, advertising for lots of reasons. As I said, we are more ready today. Offerings. We are ready in our retail. Now what we had to make sure also is, which is that we are also able to produce it. And I mentioned that We have failed a large portion of our business is done custom. That's great, but it also creates issues, which is what we saw when we got all these Amazon orders because the fact that we don't have a lot of excess capacity people sitting on the sites I'm sorry, the state department auto. What did I say? You got me, I'm thinking Amazon, John, state department auto. Yes. So this managing that, I think, is important. So what you're going to see is that, we should benefit strongly in our written this quarter. That's expectation. And then with that expectation, we should be having a strong delivery in the fourth quarter. Okay. And then my last question is simply You mentioned having the discount a little bit more. That's not atypical from what we're seeing everywhere. Could you give us a sense of what you did in the December quarter. And I guess year over year would be the best in terms of discounting and how the March quarter year over year may set up similarly or differently? Thank you. Yes. And we did increase our some of the discounts. And And again, volume has a very important factor in our overall business, so that when we had a lowest delivered, and somewhat lower written, you see that impact on our gross margins in our operating margins. Our operating gross margins are impacted by lower deliveries. So while we may have had given more some discounts, but keep in mind, the lower delivery has as much an impact on our margins as discounts. With higher increase in volume, we have an impact, both on the gross margin and an operating level. With increase in volumes. So decreased volume had an impact on gross margins and some increase in discounting. Again, I was just curious, will there be any incremental or kind of a similar discounting level? I get that you certainly hope to ship more particularly state department in the March quarter. I'm just curious as whether the planned discounts are fairly similar year over year or even maybe more aggressive? No, it'd be about similar, John. And your next question comes from Justin Bergler from Gabelli And Company. Couple of questions in mind that I guess haven't been asked yet. If you could provide just a little bit more detail on the Passport collection, and the timing they're in and how that will relate to your stepped up advertising, that would be helpful. Justin, the Passport collection overall was well received. And of course, our main advertising medium was direct mail. And, it was it went into our design centers mostly towards the end of the of our second quarter. So from a retail, we are hearing good news. And now the uptown is getting into our design centers around in, in March. So we'll also be marketing that And, I would think that we have had good reviews internally, externally, we need more traffic to our digital as well as our design centers. We do that. I think the passport, along with our other programs, have a good opportunity of increasing business. Okay. And just on the Uptown, how will that be different than anything that you currently have in your stores? The Uptown as the name implies is somewhat more, you might say, more, more of the but of course, relaxed today. So it's while the passport was more on the relaxed side. And before that, we introduced Brooklyn and Santa Monica and others. So uptime basically is the new, you might say, the new traditional. And then as I mentioned, we are right now working our teams are working of introducing the next product line for summer, which will again, which will then go in reaching more of, you might say, more of the younger people, the millennials, as well as our current customer base. Okay. Got it. And then on the Disney sales, I mean, in the past, you mentioned that maybe that was revenueing around a $15,000,000 annual rate, if I recall correctly. Is that still sort of the ballpark that it's in or is it materially jumped up from that? No, it's approximately in that range. Justin. Okay. 1 or 2 more, if I may. Given the manufacturing issues, and the need to deliver the state department contract. Is it possible that you could estimate for us the degree to which your retail comparable store sales or written orders might have been affected in the second quarter? And that delivered, we had, increase in backlog and the delivered of 7%. And that that had an impact of that 7% not being delivered, a 7% increase in delivery in the retail have increased our gross margins in fees, our operating margins. And we would have we did well, but we would have done very, very well by delivering that that 7% because that incremental volume really helps increase our profitability across the board. Okay. Got it. And then just one clarification question. If I add up, the profit in the wholesale and retail segments, I end up with something sort of on the order of, high 14,000,000. And you're operating income on an adjusted basis is $17,200,000. So there's like a meaningful positive that is part of the reconciliation to your overall operating income. Could you maybe clarify Cory what that relates to? Yes, it's between the consolidation of the wholesale and retail, it's the is the intercompany profit adjustment that's made. I guess it was unusually large sort of just tracked sort of the history of the company over the last couple of years. Is there any reason why it's so large as sort of greater wholesale I mean, is there something that's going to cause that number to stay sort of in the $2,000,000 to $3,000,000 range? Or is it just more of an outlier? Yes, it kind of fluctuates all over if you look at it over time. It really, there's a number of factors that go into it between changes of inventory wholesale and retail and then the and also the how much retail sales versus the wholesale sales. So it's and also the margins. So there's a number of factors that influence that I wouldn't necessarily look to model that in. We don't look at that when we work with our models. Okay. I mean, there's no like the fact that retail is lower as a percentage of overall sales wouldn't sort of skew that number consistently higher going forward? No, it would not. Okay. Thanks for that back and forth. I appreciate taking my questions. And your next question comes from Christina Fernandez from Telsey Advisors. Yes, hello, Christina. Hi, good afternoon. I wanted to see if you could provide a little bit more color in the marketing initiative. I wanted to understand if the messaging that you are going to be showing around the brand is changing? And should we think about it as you're going to be in the same networks or for more time? Or are you adding expanding the number of TV networks you're using to reach a wire customer? Just more color there would be helpful. Christina, really, we haven't had for some time, national advertising, television broadcast advertising at the level we are talking about now. So this is going to be major for us in terms of, broadcast media and the messaging is also very, very important. And you're going to see you have taken our look at our direct mail for January, I assume. And you saw the projection, the color, the details, it's all in the details as in the story. And so you're going to see us talk about the details of our differentiates Ethan Allen in a very attractive manner. And, this is something we've not done at a level we are going to do starting in March. Okay. That's helpful. And, as it relates to the contract work, the other work you're doing as far as with some of the hotels, how is that progressing? Are there any new initiatives on that side of the business? As you know, we have, this first major undertaking with with the Margarita Will project in Orlando. We have just in the process of also starting to furnish the model homes in the in Daytona Beach there, we're building another 5000 homes. And we are also in the process of finishing a hotel, Margaretville Ethanolen Hotel in Orlando. And also right now working on another hotel in the West Coast. So yes, we're making progress, and I believe that we're going to continue to make progress in the contract business. And then just lastly, when you look at the new collections, launching in the spring and in the summer, how is the complexity of, manufacturing that product different from past board in, I guess, the state department where you had the few issues? Thanks. Well, keep in mind, it's not the complexity of the products. The question was, that it's also related to the structure of our business. And we, of course, are making some adjustments to it. When I said that We have a great, great advantage of having 1500 interior designers. Then about 65% of the business we get every day is custom business. That is great advantage, but then all of a sudden, when an incremental business is thrown to it from the outside, then have to react in terms of creating capacities. So we are increasing capacities. Our model is not that of a manufacturer who receives orders and then makes them an order retailer that builds a lot of inventory and sells it. That's why our inventory management is, is very good at Ethan Allen, but we are adjusting to the factor of providing for making products in our North America and offshore because some of this product is being made offshore. Certainly our operations in North America, including in Vermont, North Carolina, Mexico, Honduras, they're all now getting ready to not only make custom product, but to have some capacities for making this contract. Now if the contract comes with a very short delivery time as we had initially on this U. S. Stage department, that did create lots of issues. But I think as we get contracts where there is lead times that are sensible that we can meet, then we have no problems. Or less problems. Next year, I'll just add that per state department. We'll have a little bit better understanding of what to expect and be, better prepared as we move into that final quarter. And also, we, these were the first time we made those proxies. A lot of these were new products. And we all had to make them at a time when we were busy making a custom products, then this came in. Good news is we've gone through a lot of that. So, and I think moving forward, we're in a better position in Cristina. Thank you and good luck to your next quarter. Thank you. And your next question comes from Matt Cooper Smith from Iron New Compass. Just wanted to come back. It looks like on the national TV advertising, you guys ran it for present day last year. What was the decision making process not to have it for the holiday this year? And I guess how should we think about that impacting the quarter? I think that most probably, Matt, I took a look at it. We may have done some advertising at the regional levels, so that course, from a, from a persons viewing point of view, it's hard to tell whether it's national or local. We been doing some TV, for instance, we've been doing TV in local markets, even today, like in New Jersey, we have television going on at a local level and in many markets. But this is the difference here is this is being going to be done at a national level And, in major television networks, and a lot of it is going to be paid at the corporate level rather than at the retail either the retail is our company operated or our independence. When they do it at a local level, the retail phase, this is going to be done at the national level by the corporate. Got it. Okay. So you're saying there was no national advertising last year for Presidents Day? I don't think so. Corey, I don't remember having any national. And if he did, it was mostly local, regional, not national. Got it. Okay. All right. Thank you. We have no questions in queue at this I think that the steps we are taking are very important steps in terms of taking our business to the next level. Some of you have always wanted me to really advertise to spend more money. So we're going to spend a lot more money than anybody thought we were going to do, but we are ready to do it. So look forward to, with all of this, increase business, and keeping our plants busy and hopefully with all of that business, we have an opportunity of having continued profitability, strong profitability. And this does conclude today's conference call. You may now disconnect.