to tour: Let me remind you that some of the matters we will discuss today, including our business outlook, constitute forward-looking statements and, as such, are subject to both known and unknown risks and uncertainties including, but not limited to, those factors set forth in our Risk Factors section of our Annual Report on Form 10-K and other documents filed with the Securities and Exchange Commission. As such, our actual results could differ materially from those expressed or implied in the presentations, and they are not a guarantee of our future performance. As always, the Company assumes no obligation to update any statements made in these presentations. Today’s presentation, including reconciliation of non-GAAP measures, will be posted to the Investor Relations section of EthanAllen.com before the end of the day. So with that out of the way, we’ll go ahead and get started with the presentation, and I’ll introduce our Chairman and Chief Executive Officer, Farooq Kathwari.

Good morning, everybody. And thank you, Corey and welcome to all of you here. We are meeting in one of our newest locations; it’s 915 Broadway, and we just opened it a few weeks back. And we’re glad that you are all here and also participating in not only our conference call but also the launch of Ethan Allen Disney. I’m also very pleased that we have with us today some of our management team here, and also two of our newest Directors who joined us in the last year: Mary Garrett, she was a Senior Marketing Executive with IBM; and Tara Stacom, she’s the Vice Chair of Cushman & Wakefield. So pleased to have you here. Today we’ll be talking about change equals opportunity. And as you know, the amount of changes that we all are faced with are major. So in the last six or seven years, especially after the Great Recession, we’ve even seen more changes. So we’ll talk about it how, what steps we are taking to manage that. So our main focus is going to be that a customer experience has to differentiate us. To us, that means that we’ve got to have offerings that are relevant; they are stylish, livable, quality. And then our offerings also are part of our vertical integration. It’s our vertical integration that makes it possible for us to have offerings that have those attributes that I just mentioned. Our personal service of our 1,500 plus interior designers is in this new world: luxury. Personal service is the new luxury, but today it must be combined with technology, and we’ll talk about that. We’ll talk about our retail network, like what you see over here. Over the years, we have converted; taken it from a store to what we call…

Here? 12.

12. So he’s got 12 designers and they came from different parts. And frankly all of them, or most of them, had Ethan Allen experience because they’re paying us rent and to make it up Michael has to do a lot of business. So our design service is important: putting it all together, making sure that we are able to have the products for them. So it’s very, very important. And they play an important role. In fact, the next week – in two weeks, we have annual interior designer conference in Danbury. They’ve been doing it for 30 years, where 250 of our top interior designers are recognized. It’s like our Academy Awards. But it’s not just recognition, but we also spend half of the time listening to them because they come with a lot of experience. So it is sort of a half and half. We tell them what we are doing and then we want to know their perspective. And it’s a great experience for both. As I said, premier home delivery is very important for us. It’s a flat rate, no surprises. No heavy item charges. And they not only deliver, they set it up. And again, a very important part of our customer service. We have just launched a marketing campaign on this IDEAL that is bringing new designers in and even giving the opportunity to our existing designers if it makes sense to work on flex time. Being an employee, flex time, I think today in this world you have to be able to do both. Then investing in technology, I think adding technology at all levels of our business is critical. We are now including technology, as I said, in manufacturing, in our retail, even in our financial services, operations, warehousing. And that…

Thank you, Farooq. First, an update from last fall on our total shareholder return metric, which has shown good improvement. Our five-year return of 22.1% and one-year return of 29.4% outpaced each of the S&P 500, the Russell 3000 Index, and the S&P Retail Select Industry Index for both the one and five-year periods. Over the same period, the one and five-year periods, our TSR also compares favorably against our peers, and these numbers are as of September 30, 2016. I’ll give a quick update on our financials. For the first quarter of fiscal 2017, our consolidated net sales of $193.3 million reflected a year-over-year 1.5% increase for the quarter. Retail comp sales increased 5.7%; retail total sales increased 4.3%. Wholesale net sales decreased 4.9%. Retail written orders increased 8.1% overall, and comp written orders increased 8%. Wholesale shipments for the quarter were negatively impacted by reduced plant throughput due to the first run of the Ethan Allen Disney product and also our annual summer vacation planned downtime that coincided with the Disney launch. International sales were 10.9% of consolidated sales, and that compared to 11.9% last year. The mix of retail segment sales - the consolidated net sales for the quarter were 78.8%, and that compared to 76.7% in the prior year. That change in mix helped drive the consolidated gross margins of 56.1% from 55% in the prior-year first quarter. Now, our adjusted operating expenses increased $5.8 million to $89.5 million, and that excluded a $600,000 loss on the sale of one retail property. The past four quarters have run at approximately $90 million a quarter, and this tracks fairly close to the opportunity slide at that scenario A level that Farooq just talked about. We mentioned several discrete items impacting operating expense this quarter, including the impact…

All right. Thank you, Corey. What we’re going to do is we’ll open it up for questions first from the audience here and then we can open it up also for the folks that are online. And if - you have the microphones? Yes, we have microphones. If you could, please, because as you know this is being webcast, and if you could kindly identify yourself also.

Hi, good morning; it’s Jessica Mace from Nomura Securities. My question is about the environment overall, if you could talk a little bit about what you are seeing just competitively and in your category. And maybe as a follow-up you could talk about the promotions that you ran last year in this quarter and, along with your comments on the environment, how you see your plans for promotion in the second quarter of this year. Thanks very much.

Well, if you take a look at on a macro level, the environment is difficult. Many, many factors. You have first, election campaign and we’ll be glad it’s over in two weeks, and it’s been tough. It really has impacted customers and clients. It’s taken a tremendous amount of attention from especially discretionary budgets. So I think from that perspective, the environment this whole last six months has not been good. In terms of competitive situation, I don’t think that there has been a major change in the last six, nine months, except in the fact that you again continue to see a focus on the digital mediums, online sales, and heavy promotions, very heavy promotions across the board. As far as our marketing this quarter, this is going to still - our marketing is going to be strong this quarter. We have actually in October launched our new products. All of the new products that were introduced, we marketed them through our direct mail. We have increased - it still is a relatively smaller number, but we almost increased our digital advertising by 60%, 70%. You’re going to see us much more digital advertising. In fact, using the digital services of Disney is going to also get us an opportunity of utilizing their channels, and most of it is digital. So you’re going to see us maintain and increase our advertising. Now keep in mind our advertising does change from quarter-to-quarter. You know it’s not something that - like this last quarter our advertising represented 4.2% of total sales versus 3.5% the previous quarter. As we go forward, there’s going to be - we’re going to accelerate advertising; but again, advertising - total dollars will increase, but as a percentage of sales we’d like to keep it around that 4% or so number for the time being.

Thanks. Jeremy Hamblin from Dougherty & Company. Wanted to ask you some questions on the Disney collection. I think it looks like it’s covering about 10% of the square footage based on that 1,500 square feet total. Can you just give us a sense for what your internal expectations are? You haven’t done a whole lot in the past with kids’ collections, and so it feels like it’s incremental. Do you think that it’s going to have any negative impact - things you can’t show on the floor because you’re replacing it with this? Just any additional color would be…

No, Jeremy, it’s a good question and we have been ourselves discussing it. First of all, the amount of space varies. This is relatively large for a 9,000 or 10,000 or so square foot, giving 1,500. We are giving 1,500 when we’ve 15,000 to 18,000 square feet. So in here there’s a little bit more because of the presence of Manhattan. In most Design Centers, it will be between 500 and 1,000. 1,500 will be, what - do we have four or five in the country? About five or so in the country; our sixth will be 1,500 most of 1,000 and many 500. Yes, we had to take products off the floor as we had to do in the last year. 70% of our products had to be changed last year. Now the impact is positive in the sense that this should help us expand our reach to younger customers, to their children. So the objective is twofold. It is to reach - our customers are still - even over here you’re right in downtown; there’s a lot of young folks around. But our customer is still - and which is okay for us - is between 35 and 45 to 50 in this market as well. We have a relatively small number of folks in their 20s who will be able to get Ethan Allen. 30s? That’s when they have kids. So, we are starting to see people in their 30s with children coming in, right in this Design Center. And as we launch it nationally, we believe that we will have an opportunity of expanding our reach to the Millennials who right now may not feel that - they are not coming in to see what we have. Our advertising will also go through and reach a lot more Millennials, whether it is the digital mediums or through our direct mail. We are looking at direct mail to see how do we reach more of the Millennial crowd, but again with a demographic that’s going to be able - that is relevant for us. Now, in terms of what the impact is going to have on our sales, really it’s hard. You have to, of course, make a commitment on inventory because one of the things on this is faster speed. These folks don’t want to wait. We can’t tell them that we’re going to wait. So we have made commitments. And the good news is that even with our inventory and everything else and our Ethan Allen Disney inventory coming in - mostly coming in this quarter, in October, November, and December is when most of the inventory is coming in - it’s going to be anywhere from $25 million to $100 million. It’s hard.

I just want to follow up on the points on inventory and just think about potential impact. You did note that there is some spending that happened on this quarter on last week’s release. How should we be thinking about - I think the delivered sales probably don’t occur with the November 18 launch until primarily in the March quarter, I would think. Maybe a little bit that you capture at the end of this quarter. In terms of the spending though, I have to imagine a lot of that is going to happen this quarter, on top of what you’ve done last quarter with a launch like this. Last question, in kind of…

Well, let me answer that first, okay? So this way I remember, right? You’re right, Jeremy, that we’ll be spending at this stage more money. And also keep in mind last year we had a very major increase in business; and, of course, we made it public last October when we launched for the first time that major designer save 30%. Our business in October increased 32%. We then followed it in November with our Black Friday. It increased also by, I don’t know, 25%, 30%. So we had a very strong written quarter last year. But what it also reflected was that because it was such a unique offer, it took business from the past and some from the future last year. We’ve launched that offer again this October; it’s strong, but not the same impact that we had last year. So we’re going to take - so we are also comparing our written business against a very strong quarter last year. It does not mean that we are not going to do better; but we’ve got to always keep that perspective in mind, a strong, strong written last year. Now this year, I think from an expenses point of view, yes, we would be - because we continue to spend money on - at all levels. For instance, which is somewhat hidden, is the fact that what Corey mentioned is what we are spending on manufacturing. Our manufacturing, especially our Honduras shop, actually where most of this product for Disney is being made, they really have to go through a really, really major undertaking with a major impact on margins. It will improve it, but that will also be an impact in the next – in this quarter. But overall we remain positive, but keeping in mind what we did last year.

Should we be thinking that there is a little more clearance year-over-year because you’ve got to move out some product to make room for this on the floors?

A little bit more, but keep in mind our clearance, we’re going to take another year or so at least to get rid of what we did last year because we cannot bring all the clearance in here and mess up this. So we are on a planned basis selling what our design folks are doing. Is they’re incorporating in the presentations that they make to clients everyday some product that’s clearance as part of their presentation. That’s how we’re selling it.

Thank you.

Budd?

Yes, congratulations on the…

Budd Bugatch, I want to give…

Thank you. Congratulations on the launch of Disney and the opening of this beautiful Design Center. I guess part of my question goes to the gross margin performance in the first quarter, and it was up. You did reference the fact that it had an impact due to the change in mix of business. But how is factory margin doing with the launch of these new products, and what should we think about factory margins going forward? And I have a few more questions too after that.

Yes. While our total gross margins increased, as Corey mentioned, the first quarter – the fact of the mix between retail and wholesale. Second while relatively we had less clearance this quarter than the previous year relatively. But as I said, it does not mean that we’re not going to continue to have clearance and so those are the two factors. Negative was the fact that our wholesale margins were lower. They were lower because we had about, what 5% less wholesale shipment and as you know that operating leverage of 5% less or 3% higher makes a difference. So we had that impact. In this quarter, we will continue to have some challenges on our manufacturing side in our domestic. Overseas which reflects products – approximately 30% of the product program, furniture and non-furniture products come from overseas, so they are not impacted on the gross margin line. So I would say that the opportunity is being pretty close to where we are in the first quarter.

And capacity utilization in your wholesale division and your factories is…?

We have capacity now, which means that – and keep in mind the State Department contract specifies the products be made in the United States or countries where we have treaties, and which includes actually Philippines, it includes also Honduras and Mexico. So we are well positioned, but our manufacturing capacities in the United States is going to help us on the State Department contract. We have the capacities. But then you’ve got to hire people, because that’s – from a physical perspective, machinery perspective, we’re in great shape. I would say if we had to guess, we have 65% utilization, but not from the people point of view.

And aren’t you increasing Mexico by 300,000 square feet, is that in place or how does that work?

It is being completed this quarter under the – keep in mind, we started with I think 30,000, 40,000 square feet then added – made two major additions to it. The count is 300,000 square feet; started with 70 people to 1,000. They are the ones that do all our cutting and sewing and shipping it to our plants in North Carolina. We added another upholstery plant in North Carolina last year. So we have three upholstery plants in North Carolina. Our plants in Mexico we have now producing most of the product for China. We’re shipping directly from Mexico to China; and that product was made in the U.S. It’s much better because of fact that it is being shipped from the Pacific Coast of Mexico. And also all our leather, which you will see over here is now made in our Silao operation, which seven years back we were importing from offshore. So we have the capacity to make the product. Now, obviously, it’s a chicken-and-egg situation if you don’t have the capacities, as you cannot ask for new business. But if you’ve got the capacities, you’ve got to get business. So we have more capacity than business, so we’ve got to get more business.

Okay. Finally for me, you have these two new programs. And but it’s – is that going to change some of the geography of the results on the P&L, particularly in the revenues for Disney, where they get reported and the State Department? And also, I guess, there is probably a royalty you pay to Disney. How does that get booked into the P&L?

Good question. All the sales are reflected in our total sales and it – pardon me?

But within the segments, where does that show?

Within the segments, it will fall into either case goods upholstery or accents. So we will not show it separately as Disney. We may, but at this stage we don’t have any that sort of plan so far. So it will be shown in our three categories. And as far as Disney is concerned, you have very little royalty, which is part of our cost of goods.

Yes, Brad Thomas with KeyBanc. I first just wanted to ask for a little more color on recent trends and how you are thinking about the outlook for this upcoming quarter, particularly in light of how tough the consumer backdrop has been. I think just about every company in our home-related coverage has missed numbers or had slowing results as of late. In addition, as you mentioned, your comparisons were pretty volatile quarter-to-quarter last year. Could you just talk a little bit about what from a written standpoint, you had been seeing through the quarter and how reasonable it maybe to expect a positive written comp in this subsequent quarter when you did I think 15% last year?

Well, our two Vice Presidents of the retail division are here, and we had calls only this week given all their management teams. And my question always is every week about 30 of them send me information about business and what do they think of business, a question that you asked. They are positive, but they are cautious. This week is going to determine how well October is going to do. Last year that increase of 32% – 50% of that was done in the last week of the month, now unfortunately, if the elections were finished in October rather than November, which was not the case last year, there is some that uncertainty, but they feel comfortable only because the fact of our interior design network is stronger, it’s working. So they are cautiously optimistic, but it is a challenge meeting those high numbers of last year.

Great and then just a follow-up on the State Department program if I could. Seems like a very promising opportunity. We’ve talked about it for a while now. From a timing standpoint, when do you think you might see some revenues from this program? And could you remind us what you think the scope of the whole program is that’s addressable? And as you look out perhaps the mix of business that used to be done by the legacy suppliers, what would be a reasonable percentage that you all might get if you’re one of four that could be selling into that…?

As they have indicated, the total in five years is about $300 million. That’s what the State Department has mentioned in their contract. And so talking about $60 million or so a year. Now, Dan Grow and his team, I told them we’ve got to get $60 million. But we’ve got three other folks there. And so we can go from – anywhere from 20% to 70% of that. That’s opportunities there. But it all depends upon the other folks and their programs and how – we’re positioned well, because we have strong operations. We are vertically integrated, so we’ll be able to service it well. So we believe that we have a good opportunity of getting a fair share of that. But then we’ll see, and what time it will start – orders will start coming in by I think the start of January of next year.

Thank you.

Hi, Cristina Fernandez with Telsey Advisory Group. I wanted to follow-up on the Disney collaboration. You’ve been selling presale online for a couple of weeks. Can you talk about what the early feedback has been? And knowing that this is like a multiyear program, how is this collaboration going to evolve over time?

Yes. So far it basically has been more informational, more excitement, some business. The trend is really small – because the whole program was not shown to them. I think it was only, what 30 items?

35.

35 items were shown, just to give an indication what this program is going to be. So we’ll launch it in November; it is being launched on November 18. It’s a very, very important date. It’s Mickey Mouse’s birthday. So we are launching it with that on that day and with a lot of activities going on. Events taking place here, events taking place – in Manhattan we’ll be launching it at 10:10, and we’ll send – I’m sure we’ll get the information on that. And, I’m sorry what about the question on that term?

So longer-term, this collaboration is…?

Oh, yes, collaboration. We’ve started with Mickey and Minnie. That was – and what we are now looking at is the opportunities of including other characters. So we already started thinking about the next introductions. We’ve got to manage it because you just – we haven’t even shown this one. But the next one, the next year, we will add a better plant and other characters to this program; and by most probably next summer or fall we will incorporate those ideas. We are also looking with Disney. We’re talking about the possibilities of expanding it to other countries. China is an important one. So there’s a possibility of our partnering of – so we’re right now in the process of developing and discussing taking it to China.

And then one other question, if I look at where your fiscal year 2016 results came in relative to your long-term scenarios, your gross margin was 55.7%. If you look at the next target for $900 million in sales, you have 55.5% with most of the – all the operating margin expansion coming from lower operating expense as a percent of sales. Can you talk about the puts and takes of that? What are the different drivers and where you can get the operating margin leverage when you look at the investment in marketing and in digital?

Right, at this stage, we believe that maintaining or keeping our 55% is a pretty good number. And the leverage we will get is increase in sales and the leverage, as you rightly said, through operating expenses. It’s always possible that we have some increases in margins, gross margins. But we also have to keep in mind the fact that we also have to be – we offer special offers, promotions. So that has an impact on our margins. And all of that is somewhat unpredictable. So we have at this stage left it at 55%, which is – if we maintain that, increase our sales, it’s a great leverage to our operating earnings.

Thank you. Justin Bergner with Gabelli & Company, first question is, could you talk about the cadence of sales or written comps during the September quarter?

In September quarter, most of the business came in July, and that reflected the fact of our price increase, as you know it was a difference in timing. And then that was the major impact; somewhat lower impact in August and September.

Thanks. Second question, could you maybe talk about any initial effects on sales, to the extent you can quantify, from your three new accents, as well as the registry, as well as this flex employee model and online chat function? Are you seeing a meaningful uptick as these programs get more advanced and can you try and quantify them for us?

Well, it’s really hard to quantify it, but the fact is that we are having sales every day, every week. It’s still relatively small because in terms of – compared to the total numbers. But I believe that it has a tremendous potential of becoming relevant today. Keep in mind, I said traffic is down, even for us it’s down. It’s a challenge. We need to make sure that we get more people and we interact with them online, in Design Centers. And whether we do the business online or whether we get them into a Design Center is okay with us. So you’re going to see us increase our online business. You’re also going to see us maintaining a much more of a presence of our designers online. And flex time becomes very important. We just launched it. And what it’s also done is this, it’s also very important for our existing designers. Some of them already in some of our districts, they were $2 million writers who wanted to retire. When we give them this opportunity, they said no, we’ll stay because now we can work three days rather than five days. Family, children, so I think it’s a tremendous opportunity, tremendous potential because creating a flexibility is one of the great opportunities that we have.

And the three new accents, are they sort of matching your early expectations?

The accent programs?

Santa Monica, Buckhead, Brooklyn.

Yes. I mean they are. In fact, that’s where most of our business is, along with, of course, Capitol Hill and Sonoma. There’s a little variation in different items, different product lines, some are doing better than others. But they are all doing well. Now, Corey, do we have to open it up for the – okay, let’s open up the lines and we can come back. Okay, how do we open it?

I’m not showing any questions from the phone line at this time.

All right, then we go to Budd Bugatch. Hi, Budd.

Farooq, let’s just talk a little bit about cost if we could as well. Because I think you had a price increase, had some impact in this quarter, maybe if you could quantify that. And where do we stand on cost outlook? We’re seeing steel rise significantly and some issues with foam, particularly in other parts of the world.

Yes. This is a moving target, Budd. We took a price increase of 3% or 4%, and then we give a 30% savings this month. I mean on one hand, you have these price increases, but then promotions are a tremendous impact of what at the end of the day we are going to have. On the cost factors, our energy costs remain somewhat stable. Some increase in plywood, some in fabrics. Of course, our medical costs is one of the major factors we have to contend with. But I think the cost price increase net of 3%, 4%, will take care of most of the cost increases from our medical costs, compensation costs and these other costs.

Hey, thank you. Jon from Robotti & Company. One question. Can you talk about – I see you guys have been avid share repurchasers over the years. What factors go into your decision to buyback shares and also the timing of – the factors that go into the timing of buying back shares as well?

Well, first important is you’ve got to make sure that we’ve got enough cash to run our business. That’s paramount. We’ve got to make sure we have cash. We also look at the economy to make sure that we feel comfortable with the economy, because we think long-term. And then we say, okay, what else should we be doing? Next is, do we invest in our business in terms of priority? First is making sure that we run our business on sound principles and that we know it’s a cyclical industry. Look at what happened in the Great Recession. We went from making $147 million to 1,000 in two years. So we are in that business. Look at the stock price of some of our competitors. Some went to $0.49. Our stock went down to $7, too, in the Great Recession. So we’ve got to keep that perspective and not forget it. Then we take a look at our dividend. We believe that having regular dividends and as opportunity takes place of increasing it already, but that’s important. Over the years, we’ve also given special dividends. But as we go forward at this stage, we’re thinking maintaining and increasing our regular dividends, making sure that – keep in mind we also have $62 million of customer deposits. So while Corey mentioned all that cash, $62 million is customer deposits; we keep that perspective in mind, too. But we will continue to purchase our stock. And what goes on is that some of this dilution that takes place in our options and other stuff, by buying this 107,000 shares we have negated that annual dilution. And the next one is opportunities. You folks sometimes take steps to take the price down. So if you take it down, we will buy it.

Hi, Farooq; Jeremy Hamblin again from Dougherty. Just following up on the point that you were just addressing. You have built the balance sheet to be much stronger; nice net cash position. You did some share buybacks over the last 12 months, but not incredibly aggressive. Just in terms of a high-level view of where you think the economy is, there’s been some signs of softening as were noted in home furnishings, certainly; but also maybe some signs of concern around just the housing market in general, the economy. How do you feel we stand in regards to those things today?

Yes, that’s an important question. I said in the press release that we are cautiously optimistic. I’ve of course used that a lot of times, but we are. You have to be cautious, but you’ve got to be an optimist. We’re an optimist because of the steps we are taking. If we take a look at what the numbers are out there, what economists tell us, and other experts, you would – we would pull back. But if it wasn’t the fact of our own initiatives, we feel that our initiatives differentiate us. We have great offerings. We’ve got a network that is stronger. We are just in the process of getting to use technology which – in terms of sales I’m talking about. So we have the opportunities of doing better as a competitive differentiation, not necessarily because of the fact that the economy is going to grow.

You guys have had probably the strongest year in some time for the Company. Congratulations on that. I wanted to ask about one area that did see some softening this year, and that’s on the international side of your business. You had grown that to be about 11.5% of the business; it took a step back this year to just over 9% of sales. Wanted to just understand: How much of that is currency impact? How much of it is softening in China?

Actually, it’s again a good question. In terms of our biggest business overseas is China and of course Canada, where we operate our Design Centers. Canada, there we were impacted by the currency. China, a lot of it is impacted by the shipments. Interestingly last quarter, in the last six months, at the retail level, our business, the Ethan Allen business in China increased; yet our shipments decreased because they also purchased in the previous year that you referred to inventory. They do sell a lot based on inventory. So their inventory impacts our international sales rather than what’s happening in China. Interestingly, I was myself concerned that the business in China actually in the last quarter – the retail business improved; Ethan Allen improved actually a little bit better than the total business. But the inventory situation will dictate their – this quarter we have an opportunity of doing somewhat more shipments than we did the same quarter last year. But it’s a question of timing.

How long until that resolves [indiscernible]?

I think it’s already resolved. Yes. Right, Dan?

Yes, correct. End of Q&A