Earnings Call: Q1 2018

Oct 25, 2017

Good afternoon, and welcome to the Ethan Allen Fiscal 2018 First Quarter Analyst Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and As a reminder, today's program may be recorded. It is now my pleasure to introduce your host Corey Whiteley, Executive Vice President Administration and CFO. Thank you. You may begin. Conference call for our fiscal first quarter ended September 30, 2017. This conference call is being recorded and webcast live on ethanallen.com, where you will also find our press release, which contains supporting details including reconciliations of non GAAP information referred to in the release and on this call. As a reminder, our comments today will include forward looking statements that are subject to risks and uncertainties, which could cause actual results to differ materially. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward looking matters discussed during this call. After our Chairman and CEO, Fru Kaffuri, provides his opening remarks, I will follow with some details on the financial results. Proof of them provide further updates on our ongoing business initiatives before opening up the telephone lines for questions. With that. Here's Farooqe. Yes. Thank you, Corey. I am pleased to discuss our first quarter results and focus. As you know, many changes continue to take place in the economy in consumer attitudes in the competitive environment and in technology disrupting many enterprises. I have stated before that today, you better be a disruptor or you will be disrupted. After Kory provides a brief financial overview, I will discuss our initiatives and the AZ 50 S Celebration Convention we held last week, which was attended by more than 5 fifty team members from all areas of our enterprise. We discussed main areas of focus to help us increase sales and profitability. These included the various channels we utilize to grow sales, continued development of talent, production of relevant offerings, expansion of our marketing efforts, the combination of technology and with personal service and the strengthening of our unique vertically integrated structure, which enables us to continue manufacturing about 75% of our products in our North American workshops. Corey? Thank you, for the first quarter of fiscal 2018, our total written orders for the Retail segment increased 1.7% for the quarter, which followed an 8.1% increase in the prior year first quarter. The company estimates total written orders would have increased 2.5 percent without the disruption from the hurricanes. The hurricanes disrupted several key markets in which a company operates. 15 design centers in Florida, including 11 company operated locations, plus 5 company operated design centers in the coastal Carolinas, were affected by Hurricane Irma. And 11 Design Centers in Texas with 5 independently operated locations in the Houston market were impacted by Hurricane Harvey. Design centers and delivery centers were closed anywhere from a couple of days to more than a week with an effect on both written orders and that delivered sales. Hurricane Harvey also disrupted the company's wholesale logistics as the temporary shutdown of rail rate shipping through Houston impacted shipments from the company's upholstery plan in Mexico and ocean freight arrivals were delayed into the port of Houston for products en route to our Oklahoma distribution facility. Our consolidated net sales were $181,300,000 for the quarter compared to $193,300,000 in the prior year quarter. We estimate that the hurricanes and first run production of new products disrupted consolidated net sales by approximately 7% to 8%. Retail net sales were $141,600,000 and wholesale net sales were $111,600,000, At September 30, our retail division backlog was up 11.6% and the wholesale backlog up 61.6% from June 30th. 2017. We ended the quarter with 150 company operated design centers, an increase compared to 145 in the prior year quarter. Part of the wholesale backlog increases related to $12,400,000 of wholesale orders we have received from the Department of State $10,400,000 of which were orders booked in the first quarter. International sales were 11% of consolidated sales during the quarter, that compared to 10.9% in the prior year quarter. Consolidated gross margin for the quarter was 55.3%, and was negatively impacted by their hurricanes and first run production of the new products. The mix of retail segment net sales to consolidated net sales for the quarter was 78.1% compared to 78.8% in the prior year quarter. Adjusted operating expenses were 87,900,000 compared to 89,500,000 in the prior year, lower primarily due to decreased advertising expenses and lower variable costs. Adjusted operating margin was 6.8%, and adjusted net income of $0.28 per share compared to $0.43 in the prior year quarter. Adjustments in the current year quarter included $800,000 of costs related to organizational changes that included costs associated with some headcount reductions made in our headquarters and distribution division that also included an early termination of a capital lease. We also incurred a charge for which is million loss on the sale of real estate. All these items were tax affected for the adjusted EPS calculation. We estimate the impact of sales and operating expenses due to the disruptions of the hurricanes and first one production reduced adjusted EPS by 14% to 15 dollars. Our effective tax rate was 35.1 percent for the quarter. The company's structural rate remains at 36.5 percent We have a strong balance sheet. At September 30, 2017, we had no debt outstanding under our credit facility having paid off the term loan during the quarter. Our total cash and securities totaled 59 point During the quarter, we paid out dividends of $5,200,000, an increase of 10.6% compared to the prior year quarter and we invested in capital expenditures of $2,700,000 for the quarter compared to $7,400,000 in the prior year quarter. We do expect about 20,000,000 16 customer deposits of $69,200,000 increased $6,800,000 and inventory of 157,500,000 decreased by $1,800,000. With that, I'll turn it back over Thank you, Corey. The main highlights of our convention last week included recognizing the contributions of the many associates in our retail, manufacturing, logistics and corporate networks. The convention was attended by more than 550 team members. That number includes management as well as 235 of our top interior design associates from North America and overseas whose achievements were recognized during the event. Company operated retail division. This is one of our largest opportunities to increase overall profitability. The company's retail division currently has 150 retail locations, representing 76% of our total design centers in North America. For fiscal 2017, total consolidated delivered sales for the company were 763,400,000 with an adjusted operating income of 65,000,000 representing 8.5 percent of sales. Retail division net delivered sales of 603,700,000 represented 79.1 percent of total consolidated sales, while the Retail division's adjusted operating income was 1.3% of sales. For the fiscal first quarter ending September 30, 2017, due to disruptions, delivered sales for the Retail division amounted to $141,600,000, representing 78.1% of total consolidated sales and an operating loss for the Retail division of 2%. For the year over the years, we have been acquiring design centers from retiring retailers, repositioning them to more relevant locations. And strengthening their management, design and logistic teams. We've also been opening new design centers in strategic markets. Recently adding locations in the flat iron area of Lower Manhattan, the Buckhead area of Atlanta and in downtown Chicago. Over the years, we've continued to incur losses in transitioning the retail network. For fiscal 2017 and for the first quarter of fiscal 2018, losses attributed to the locations in transition amounted to $4,100,000 $1,400,000, respectively. As we move forward, our objective in the next few years is to operate our company retail division had an operating income of about 5% compared to about 1.5% of operating of adjusted operating income in the last few years. As I said it about, increasing profitability in our retail division is a major priority and opportunity. The next area of growth we discussed that I can mention is our wholesale business. Our wholesale division sells products to the company retail division as well as to all outside customers. The wholesale business in fiscal 2017 had sales of $453,300,000, with adjusted operating income of 12.3 percent of sales. For the first quarter of fiscal 2018, old sales had sales of 111,600,000 and an adjusted operating income of 12.8 percent of sales. During the last 3 years, wholesale adjusted operating income has averaged 14% of sales. With increased sales, the wholesale division has operating leverage to improve gross and operating margins. In addition to growth from our North American independent retailers, international retailers, we are focused on expanding our contract business, including our association with the U. S. State Department. We have received $12,400,000 in wholesale orders for the state department, including $10,400,000 during the first quarter of fiscal 2018. The program went live on the Fedbed website on July 1st. During the month of October, no bids were issued after a heck last quarter of the government's fiscal year ending September 30. We expect the process to start again in November. We are also in process developing contract business through special relationships with organizations such as Margaratable and Disney. The first project with Margaret Will involves furnishing about 1100 Homes and 100 and 86 Room hotel in Orlando, Florida. We expect to start shipping for the 1st of 1100 homes in the 4th quarter of this fiscal year and expect to complete the shipments over about a 3 year period as the homes are built The hotel furnishings are scheduled to ship based on an estimated completion of the hotel construction in the fall of 2018. A focus on increasing digital mediums such as Ethanolen.com, Amazon, and Disney, and live chat by our designers should result in increased online sales. The main benefits is customers, building our design centers and interacting with our interior design professionals. During the convention, we introduced our network to our new uptown projection, with a consumer launch expected in April 2018. This follows the consumer launch of Passport in November 2017. During the past 3 years, Our main focus has been on developing and expanding our more relaxed offerings, which included Santa Monica, Buckhead and Brooklyn. Passcode, while still in the relaxed category, has strong elements of a global attitude with inspiration from many places in the world. Up town as the name implies is more formal while maintaining the characteristics of livability. As with Passport, the new products were extremely well received by our associates. Our focus and initiatives regard to environmental stewardship, safety and social responsibility is a major competitive advantage. As it motivates our associates and our clients and reduces cost. Acquisition, retention and training of talent is a major focus. We at the conference, we discuss about our strong management teams in marketing, manufacturing, logistics and retail. In our retail division alone, we are we have about 200 managers, most of whom have risen to the ranks of our organization. With more than 1500 motivated and knowledgeable in in house interior designers in North America and about 2000 Internationally. We maintain a strong competitive advantage. The focus on acquiring, motivating and retaining talent in other areas including design, merchandising, manufacturing and technology was also a major focus of the convention. Our focus on marketing to expand our reach to more consumers. Today, about 70% of consumers who will start design centers first whizzed us digitally via Ethanolen.com and now through Amazon and Shop Disney. During the first quarter, we focused our efforts on developing stronger and relevant messages. While this was in process, we decided to change the timing of some of our advertising spend We have continued to increase our advertising at digital mediums, while reducing in the more traditional mediums. Our advertising spend represented 4.1% of sales compared to 4.4% in the previous year. We also need to keep in mind that our marketing on Amazon entails a compensation which is not reflected in the advertising expenses. While in first quarter of fiscal 2018, not significant, we expect it to grow. Our initiative with Disney continues at about the rate we saw in the last quarter, and we are just getting started launching stronger marketing in conjunction with Amazon. At this stage, while our online business continues to grow, most clients, even those chatting online, like to visit our design centers and interact with the designers. Combining technology with personal service is a new reality. We discussed our investments in the last few years in appropriate technology for our manufacturing, logistics and retail networks. Last year, the focus has been on having our interior designers qualify for live chat. Currently, 550 of our interior designs are qualified, and we expect that number to grow. We discussed initiatives to strengthen manufacturing and logistics. These included increasing capacity, faster delivery, and continued focus oncology. As a convention, a number of craftspeople from across our manufacturing division who are on hand to demonstrate the work they do. These workshops were very well received, especially by our interior designers. Our convention served to reinforce for all our associates These key initiatives and areas of focus for the company, and I'm pleased with the motivation and enthusiasm of our team. As Corey mentioned, we have continued to strengthen our balance sheet. As of September 30th, cash on hand was 39,800,000 We had 0 debt and had customer deposits of $69,200,000. During fiscal 2017, We distributed $20,000,000 in dividend, representing 32.8 percent of our free cash flow. In the first quarter of fiscal 2018, cash dividends were $5,200,000, a 10.6% increase from the previous year. We continue to reveal the best opportunities to utilize our cash while also keeping in mind that we are in a cyclical industry. With that, we will open questions. Our first question comes from the line of Bradley Thomas from KeyBanc. Hi. This is Sameet Dasein on the line for Brad. Good afternoon, Farooq and Cory, and thanks for taking my questions. On the State Department contract, can you talk a little bit more specifically about the $10,400,000 of orders in the first quarter and how we should think about extrapolating the run rate there? Whether there's any seasonality to that given their fiscal year end and what percentage of orders you think you're capturing? Thank you. Yes, Sumit, this is, this is a, this is sort of a sum was unknown. In the sense that, this was this just got started in this last quarter. And the last quarter for the government is when they do tend to give large orders. So we're going to see as this as they open it up again, that they, of course, as we understood initially, that it is approximately, closed to a $50,000,000 annual contract before the Fed bid, the Fed bid does to some degree reduces the amounts So I think that if that is the case, you're talking about, anywhere from $12,000,000 to $15,000,000 a quarter, even though keeping in mind, the last quarter is strong. We do not completely know all the numbers, but I believe that we did get the substantial portion of the contract. Okay. That's great to hear. If I could talk about Passport, I believe you're launching the new product assortment in November. And did the 1st run production of that represent the majority of the increase in the retail backlog and how significant is the presentation going to be on your floor space? The retail backlog was is different than the wholesale backlog. The passport impacted our wholesale backlog because the retail backlog rarely is sold orders to our customers. So passcode had no impact on the retail background. It had basically more at the wholesale level. So retail backlog was really sold orders to the customers. Okay. And can you comment on how significant or what percentage of your force base may be allocated to passport? It's a relatively small we are introducing product lines, even the next one, the uptown is very, very tight, very careful, I would say, if I just had to guess no more than 800, about 800 square feet or so. Okay, great. Thank you. Thanks. Thank you. Our next question comes from the line of John Baugh from Stifel. Your question please. Hello, John. Hello, Farooq. I was wondering, I know you touched on advertising and I apologize. I missed the commentary. I know it was a point of earnings leverage this quarter. Could you tell us maybe the next three quarters what the plan is, on advertising as well as on promotional activity. I believe you talked about tightening that up, moving forward. And, as a follow-up and maybe in conjunction with that, the key drivers to the 350 basis point expansion you're talking about in retail margin? Okay. Good, John. Today, I said that our advertising for the quarter, and I use the traditional advertising, not the advertising note that we are doing through all the digital mediums like Amazon, was 4.1% this quarter versus 4.3 or 4.4 in the previous year. Going forward, John, also, I think, Governor has to also keep in mind when we talk of advertising, we also have to take a look at the promotional impact today, we have to, whether we like it or not, there is somewhat more of, you might say, higher discounting going on, even though for us, it's relatively small compared to others, but we can also keep that in mind in terms of the special offers that we make and the impact that they have in the business going forward, I would say that our advertising spend in the more of the traditional manner would range for anywhere between 4 to 4%, 4.5%. And our promotional activity will be similar to what we have today. And then what would be, how does the margin in retail improve? Is this strictly volume related? Are there cost reductions planned? Is there, reduced promotional activity? What sort of will be the keys to making that happen? Yes, that's an important question. We today the top 10 top, you might get 10% of our design centers already have reduced over 8% operating profit. The reason we this, when you take a look at our operating profit or even like a negative 2% lot of it is due to, volume. As well, volume decreased in this quarter, it has an impact on the breakeven. So increasing sales is tremendously important. We are already at a level where any incremental sales will have a significant impact on our margins. We see that as a wholesale level, and we see that at our retail level, increasing profitability is important. The second is continuously of many of these retail, locations that we've taken over from our independent retailers, and then we have relocated them. That process has been a major process in the last 5 years. The good news is, I think, towards, at this stage, we are slowing that down and that will give us an opportunity to catch up and not have these losses that we have in what we call the transitional stores. Okay. Thank you. Are there any raw material issues, I guess, Foam is a point of, a popular topic today. Anything, any pressures there that concern you? I think you did your pricing already for the year, if I'm not mistaken, but any adjustments needed on pricing given raw material inflation? John, I mean, there's always some pressures from some sources, but not nothing, significant that will not be covered by the price increases that retail. Our next question comes the line of Jeremy Hamblin from Dougherty and Company. Your question please. Yeah, hello, Jeremy. Hi, thanks for taking the questions and congrats congrats on the traction you're seeing in some of these programs. I wanted to, to see if I could clarify some things on your backlog. So if you look just at your wholesale backlog and the color that you provided, that increased by nearly $30,000,000 in the quarter. And I think if you add in the 11.6% retail backlog growth, that's probably combined almost a $40,000,000 increase in your backlog over the last 3 months. Can you give me a sense of when you can deliver on those backlog? How long is it going to take you to work down those backlogs given the time of year and holiday production demands and so forth. Jeremy, I would say that, we expect about half of that to be deliver this quarter and about half in the next quarter. And kind of as a follow on to that, it sounds like maybe the traction that you got on the state department contract surprised, even your highest expectations. Two questions here. The first is, is it fair to assume that you guys captured more than 50% of the orders that were posted over the last, since it went to an online process in early July. And then the second one is I believe you have, like a 60 day requirement, to deliver on that. And it sounds like you're putting that maybe a little bit at the front of the line. And that could be some of the reason why your retail backlog grew as much as it did. But is there any risk to not delivering some of those orders on time and needing to ask to an extension? I'm sure that you're prioritizing that contract. Given the size of it in the newness of it? Yes, Jeremy. I mean, it is fair to say that we did get over 50% from what we stand of the orders. We also the 60 day requirement was was and is somewhat of a challenge because some of the product lines were not our current product lines that we were running. In fact, some of the one of the product lines we had to bring in was a product line called Georgian Court that we were selling in the 1980s 70s 80s. We brought that back because it's an 18th century design and they like it. So we did have to get going and producing this product line for, in a relatively short period of time. At the same time, we were also making floor samples on our new passport collection. All of those contributed to creating some backlogs for for the retail division that they did not receive the sole orders because of the timing of this. And, the good news is we are fast catching on and we are also as I mentioned previously to John, that we would expect that his backlog have to be covered in this quarter and about half in the next quarter. And as far as the state department is concerned, I don't think we have any issues. One good thing is this that after they place all the orders, our team has been in touch with all the embassies and some of those orders they now want in a little bit extended time period. So that also works good for us. Great to hear. And then just one more and I'll hop back in the queue. Your operating expense run rate, about $88,000,000 in the quarter, given the adjustment there. I think what you said was your advertising was only down like $300,000. In terms of thinking, and I realize there's a variable component related to sales being down $12,000,000, but I think even if that was a more normalized number on sales, does it look like your run rate is closer to $90,000,000, which is where you've been the last couple of quarters rather than up in the 91% or 92% range? Yes. Just to tell you, our advertising, again, I use the word traditional advertising because we did spend money in other mediums, which affected our cost of goods and margins. I think that the advertising was down by over a $1,000,000 or so. Right, right. It was 4.1% this year versus 4.4% last year of sales. So it's about 1.1 Yes. So the next question, Corey, Jeremy had. This on the longer term, the operating expense run rate, it feels like or it looks like it's pulled back a little bit and maybe that's part of of getting to a slightly higher margin that it looks like your run rate, even if you normalize sales to be equivalent to last year probably would have been about $90,000,000 as opposed to 91 or 92 where the run rate had been tracking, previously. Is that fair to assume is that something we've just tightened it a little bit? Let me give you a little perspective on that because we have fixed costs, and then we have variable costs. Variable costs, especially in the retail end of the business, for instance, payment to all our interior designers, our logistics is somewhat of a variable cost. So as we increase our sales, As a percentage, the chances are our operating expenses will be same or lower, but in dollar amounts, they could go higher. And I don't mind having them go higher. They will go high because they're increased in sales. On the wholesale side, obviously, there are some variable costs, but less. So we do have an operating leverage, as I mentioned, both at the, certainly at the wholesale level, and even very much also on the retail level. So I would say that, the leverage is there, but overall costs could increase based on increase in business. But about 90, at this stage, about $90,000,000 is a run rate. Understood, because I guess what you're saying over the next couple of quarters as you deliver on these, on in this massive growth in your wholesale backlog, that won't translate to as much variable cost because it's a wholesale order, correct? That's right, yes. Thank you. Our next question comes from the line of Christina Fernandez from Telsey Advisory Group. Your question please. Good afternoon. I wanted to follow-up on your commentary regarding the operating margin opportunity and how you could fit, from the relocated stores being more profitable. If you look back at some of the stores that were relocated a few years ago, Like, how long does it normally take? How many years for those stores to get to that sort of mid single digit operating margin? It all depends on there is no one simple formula. It also depends upon where the locations are. What kind of our volumes we are doing. But I would say if you had to generalize something, I would say it takes between 2 to 3 years. Okay. That's helpful. And, on a different topic with regard to the Amazon interior design, website. I guess, can you share what you've learned so far and what has been selling better through that site? It's a little bit early. Because, this was somewhat of a learning experience for both sides because, as you know, what we established on the Amazon was an Ethanol And Design Studio, not just selling it as a commodity. We also established with them live chat which in fact took a fair amount of time to get going and which is now operating, but still some bugs, but it's operating. So what we have learned is the fact that it does expose us to more customers. We are doing some business on Amazon, but as I said earlier, we are also seeing that a lot of those folks do come into our design centers and meet our clients some of them are starting to do live chat. And if they do any live chat, then obviously, we credit Amazon for the sale. It's a little bit early, but I think we're going in the right direction. In fact, we just launched with them what they have, what's called the holiday gift guide. So we participated in that with 2 or 3 items. So they are very heavily marketing that. Those few items from us as they're doing with many other items too. So most probably you may be seeing those 2 or 3 items from Ethan Allen as part of the Amazon gift guide for the holidays. Okay. And then one last one on the Disney collection. How is that doing as you've expanded to new channels like disneystore.com and some of the international locations? And as you look to introduce Passport and Uptown over the next 6 months, do you expect this square footage of this need to remain the same in your the signed centers or you plan to make changes to that? Yes. We have seen, as I said in my comments, the rate in the United States is approximately what it was before, has been somewhat more of a increase in China, they're doing well. And, as far as the space is concerned. Our objective is what has was to give it a reasonable, in fact, a fair amount of space or about a year, year and a half. And then we'll still give it space, but that space will then be utilized for some other programs that we are intending to introduce next summer. Alright, Christina. Thank you. Our next question comes from the line of Justin Bergner from Gabelli and Company. Your question please. Hello, Justin. Hi, Farooq. Hi, Corey. Hi. Just wanted to clarify a couple of things. The advertising spend is now going to be on the order of 4% to 4.5% versus just over 5% of sales last year. Is that, the current thought? Well, I think that, you know, we have had perhaps there's only one period that our advertising went, to 5%. Most of the time, it has been in the range of between 4%, 4.5%. And so that's where it really is a question of if you take a look at it, we did have it went for our fiscal year, last fiscal year, we did have a went to 5.2% before that was 4.3%, 4.2%. So I think it'll sort of it'll range between 4% 5% Justin. Okay. Thank you. And then I think I missed a comment that you made at the beginning of the Q regarding the state department, was there something that's affected the overall size of the program? What I said was this that, this is the first time the government, the state department has put it on this Fed bid which makes it that you got to bid on every one of the contracts. And I, what it has done is because it has made it more competitive. So I think it has to some degrees, lowered the overall contract in our opinion. Lowered the overall ASP or lowered the actual amount of merchandise? No, no, overall. They had expected it to be close to, in $50,000,000 or $60,000,000, it'll be more probably somewhat less than that, but still pretty significant. Okay. Got it. And then is the margin on the State Department business? Are you expecting it to mix up or mix down versus your wholesale margin? It most probably will be somewhat lower than our regular margin because of this Fed bid, but what it does is it creates Having said that, it has a very major positive impact of creating an overall, operating margin improvements in our manufacturing because incremental business has an opportunity of creating more incremental margin, even though for the state department, it may be somewhat lower than the margin we get from selling at retail. Okay. So just to put words around that, the incrementals might keep pace with the margins in the wholesale business today, even though if you were to look at a stand alone basis, it would be lower margin business. That's right. That's a better way of putting it. Okay. Got it. And then, I mean, your cash balance is building up. Are there any plans to do anything with that cash balance, resume share repurchases or other activities? Yes, Justin. We always keep that in mind. As you know, we have been over the years always proactive, but I don't mind sometimes having some money in and then we decide what to do with it. Okay. I mean is there a sort of point at which you do a special dividend, if you don't sort of want to ramp up their purchases? I mean, is the cash balance just get too big? Yes, no. We'll consider we have done that in the past. We have purchased stock. We've given special dividends. So all of those things will be under consideration. Okay. All right. Thank you for taking my questions. All right. Thanks, Justin. Thank you. Our next question comes from the line of Matt Cooper Smith from Iron Compass. Your question please. Hi guys. Just a few questions focused on the, on the retail business. First off, on the dollars per order, were the dollars per order in the retail business down year over year? No, it's approximately year to talking of, you're talking of, retail tickets or orders, retail ticket orders, Matt, I'm talking about the however you calculate orders, the amount of dollars per retail order? Our average order is approximately the same as last year. Okay. And I guess, I'm trying to understand how weather impacted the quarter, again, the retail business a little more specifically. And you guys put up a negative 9% comp. But it looked like only a pretty small number of your company operated stores were actually closed for either of the hurricane events. So maybe you could put some more metrics in around it. I know it's like one of your competitors in Haverdeys has reported some specific metrics in how weather impacted them. Corey? What I would say is on the delivered sales for retail, which we're referring to with our written orders, we're actually up. On the delivered sales, there were 2 things that had an impact on delivered sales during the quarter. And part of it was the hurricane impact. And then also the new product production, the first one production of new products in our plants, both for the state department orders and the new Passport collection. So as the wholesale backlog increased as Ruth mentioned, that also had some impact on shipments being delayed to retail, which is then created the impact of the retail backlog increasing a little bit then as well. So had retail backlog not increased, then those orders would have flowed through the delivered sales and it would have been a much less of a impact. So it's really a combination of both the hurricanes as well as new product production. Yes, but I think the other difference I would say in our case is that our written sales increased despite the hurricanes and everything else. It was our delivered business that was lower. So please keep that in mind. Okay. And I think, last quarter, you guys commented on sort of a real time look at orders in July. Can you provide that for October? It's a little bit early. I think the reason it's early is because this 1 week is going to determine how well we do. So it's a we can get 50. We do get 40% to 50% of the business, unfortunately, in the last week of the month. This is a very critical month for October. We've got strong programs, strong initiatives. And so we'll be able to get a better understanding, obviously, after the end of the month. Got it. Okay. All right. Thanks guys. Thanks very much. Thank you. Our next question comes from the line of Budd Bugatch from Raymond James. Your question, please. Hello, Scott. Hey, it's Bobby actually filling in for Bud, but I appreciate you taking my question. Most everything's been answered. So I just kind of have 2 quick follow-up questions. But Corey, on the detail about the delivered comp, is there any way to parse or help us understand what was the bigger impact? Was it a hurricane, the bigger impact of driving the down 9% delivered comp or was the Passport collection delaying the delivered orders the bigger impact? In the state. Yes, it was the bigger impact was the combination of state department, new product production orders and the passport. And then the secondary impact was the hurricanes because the production affected everybody. Okay. Okay. And then, so, all right. And then from and then the last one for me, on the first run production and some of those inefficiencies that impacted gross margins, I mean, moving forward now that you have that you would expect everything kind of to return back to normal in terms of efficiency or is it take more than just a quarter or so on a first run production basis to get to get back to a level that, that you're used to on for production? Bobby, about in the first one, about 70 centers. So we'll be over, then about 30% will go to the next quarter, but most of it is behind us. Okay. That's helpful. And then I guess real quickly, through the comments about the retail margin, the goal of 5%. How does that How does that play into kind of your thoughts about your store base today being 150 company on stores? Is that a number you're comfortable with or is there you still see room for real estate expansion? I mean, how do we think about that in our model, kind of on a couple of year basis, long term basis? Yes. Bobby, I think that 5% is something we've got to do. I mean, what it will require is really some incremental business because all our overheads are covered. That's what's going to do. We all, as I said, are that our top 10% of our top designers, I mean, design centers average over 8%. So we our objective is to do that by the fact that we are they are in better locations. We have stronger teams, and now we need more volume. And that's where our focus is. And as we go forward, our we have, to a great degree, completed the transformation of our design centers. Over 60, 70 percent of the stores that we acquired, we have now relocated because some more will be done but I believe that the pace of change is going to be much, much less. So that will give us an opportunity not to have these startup costs for our retail. And as you know, we don't keep them separate. We keep them as part of our expenses. And my apologies. This might be something you've touched on in the past, but I I and if so, I apologize for asking you, but out of the 150, do you have any type of statistic of how many of those you've touched kind of in the last couple of years in terms of maybe relocations or redesigns or anything like that to give us a sense of how much is in kind of the new and modern day style or location? Well, as I said, I would say that at this stage, it is a this is a process that continues. 10, 12 years back, we that's before the things were different. So we were opening 18,000 square foot, stores in great locations. Today, we're opening 8 to 10000 Square Foot locations. But I would say that while the process will continue, the majority, I would say 80, 80 percent plus of our stores are in the locations they need to be today. Okay. I appreciate all the additional color. Very helpful. Best of luck going forward. All right, Bobby. Thanks. Thank you. Our next question is a follow-up from the line of Jeremy Hamblitt from Dougherty and Company. Your question please. Hi. Thanks for the follow-up opportunity. In terms of those top 10% of your stores that are generating 8% margins are better. What are their average unit volumes? It's, average is a tough thing, but, I mean, maybe Corey can look at it, but Jeremy, I would say that it's interesting they can range from $3,000,000 to $15,000,000. It all depends upon where they are, what their occupancy cost is, what their other costs are, much of, sales they are doing relative to their total expenses. So it's really it is, it's right across the board. Right, Corning, right. Okay. Fair enough. And then just one other follow-up here. Your gross margin it sounds like that was impacted by a couple of things. First run productions, clearly, some logistics issues related to the storms. You still generated a pretty solid gross margin given those headwinds and having sales down over 6%. Do you still feel comfortable kind of 56% as a target, for your gross margins, even though your business is likely you a little bit towards your wholesale division over the next couple of quarters? Yes, that's a good question. If you take a look at Our gross margins, fiscal 2015, we had 54.5 fiscal 15, 55.7, fiscal, 16, 55.8. So we did, and of course, 1 quarter, we went over 56 percent. That is the last, first quarter of last year. So I would say that having 55%, 56% is a very healthy gross margin the more important issue is having a higher top line, that really then drives it down to the bottom. Right. No, understood. I guess, the point that I'm driving at is, even though you do have much better operating margins with your wholesale business, but I'm assuming that, you're not going to have the hurricane impact, this current quarter, the next one likely. Unless we have more. But I'm assuming that just because you're going to have a higher SKU of wholesale business, typically, that does relate to a little bit lower gross margin. It does. I think that all you're absolutely right. And you see what I think we need to keep it really in mind is the operating margins. The gross margins are fine, but it's operating margins that really matter, and that's where we have the opportunity. Gross margins are also and both are impacted by even some of our special offers of discounts. So we just continue to assume that today, we have to be we have to stay relevant. We have to always, every month, we've got to figure out what should we do that will maintain our credibility with our clients, with our designers, and also create something special for our clients, not easy, because over the everybody else is there giving 60% to 70% off every day. And that's what we have to deal with. How do we convince new people to come in when we say we give 20% discount for us, it's a major thing. But for new customers, they're used to something different. So we have to contend with that. And I think what we are what I'm really looking at is maintaining a healthy gross margin, but really, more importantly, maintaining a healthy margin. All right, Jonathan. I think that should do it, right? Any questions, any comments, please call Cory. Thanks very much, and good to talk to everybody. Thank you. And thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect.