Ethan Allen Interiors Aktie

Good afternoon, and welcome to the Ethan Allen Fiscal 2026 Third Quarter Analyst Conference Call. [Operator Instructions] Please note that this conference is being recorded. It is now my pleasure to introduce your host, Matt McNulty, Senior Vice President, Chief Financial Officer and Treasurer. Thank you. You may begin.

Thank you, operator. Good afternoon, and thank you for joining us today to discuss Ethan Allen's fiscal 2026 Third Quarter Results. With me today is Farooq Kathwari, our Chairman, President and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will then open up the call for your questions.

Before we begin, I'd like to remind the audience that this call is being webcast live under the News and Events tab within our Investor Relations website. A replay and transcript of today's call will also be made available on our Investor Relations website. There, you will find a copy of today's press release, which contains reconciliations of non-GAAP financial measures referred to on this call and in the press release. Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially.

The most significant risk factors that could affect our future results are described in our most recent quarterly report on Form 10-Q. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call.

With that, I am pleased to now turn the call over to Mr. Kathwari.

Thanks, Matt, and thank you all for participating in our third quarter financial results call. As we reported, despite many challenges, we performed reasonably well. We were mainly impacted by a reduction of business from our State Department contract, primarily due to government shutdown, lower international sales and to some extent, sluggish demand for home furnishings.

Our written sales in North America were flat compared to last year, while our wholesale orders declined 7.6% from reduced, as I mentioned, governments -- U.S. government sales and slowdown in our international business.

Tariffs also impacted our earnings, especially the unexpected tariffs on our Mexico manufacturing products. The increased tariffs during the quarter of about $4 million were mainly -- were the main reason of our reduced earnings.

Matt will now provide more information. And after Matt, I will review our initiatives. Matt?

Thank you, Mr. Kathwari. Our third quarter financial performance was highlighted by strong operating cash flow and a robust balance sheet despite operating in a challenging macroeconomic environment. Our consolidated net sales of $136 million benefited from a higher average ticket price, increased clearance sales and fewer returns. These increases were offset by lower contract sales, a decline in delivered unit volume and inclement weather.

Retail segment written orders were flat versus last year, while our Wholesale segment declined 7.6% due to macroeconomic challenges, reduced government activity and a slowdown in our international business. Demand levels were choppy and the pace of written orders declined slightly throughout the quarter. Our retail written trends were strongest in July despite adverse weather, which slowed traffic late in the month and continued into February. There was a pullback in demand during March following the Iran conflict, but we are excited for the introduction of several new products this spring and believe they will complement the current home furnishings Ethan Allen has to offer.

We ended the quarter with wholesale backlog of $42 million, down 23% from a year ago. Lower U.S. State Department and international business, combined with improved customer lead times helped reduce our wholesale backlog. Our consolidated gross margin of 59.4% was impacted by incremental tariffs, delivering out orders with increased promotional activity and higher clearance sales, partially offset by a change in sales mix, lower inbound freight, reduced headcount and a higher average ticket.

Our adjusted operating income was $6.8 million with an operating margin of 5%. Lower operating margin was driven by higher tariffs, incremental digital and technology spend, fewer U.S. government sales and delivering out orders with higher promotions. Disciplined spending, cost control initiatives and lower headcount helped to drive SG&A expenses down 3% and offset additional investments we are making in our business. At quarter end, we had 3,105 total associates, a decrease of 6% from a year ago, with decreases noted in both wholesale and retail.

Adjusted diluted EPS was $0.24. Our effective tax rate was 24.2%, which varies from the 21% federal statutory rate, primarily due to state taxes. As noted earlier, our business has been impacted by the current tariff environment, which remains dynamic and uncertain. Since the beginning of 2025, the U.S. government has announced several different measures regarding tariffs. More recently, in February, the U.S. Supreme Court invalidated certain IEEPA tariffs introduced last year. Shortly thereafter, a new 10% global import tariff under Section 122 was made effective and last until mid-July of this year.

Our current exposure is concentrated on the 25% tariff that took effect in October 2025 under Section 232, which is on upholstered wood products produced and exported out of our Mexican manufacturing facilities. Our remaining exposure is under the aforementioned Section 122 tariff, which applies a 10% tariff on furniture manufactured and exported out of our Honduras facility as well as on imported wood furniture from Indonesia, select fabrics from Asia and imported home accents.

In total, we estimate our current tariff exposure to be in the range of $15 million to $20 million annually. In the past month, the U.S. Customs and Border Protection Agency released guidance regarding IEEPA tariff refunds, including last week's April 20 launch of software that will process IEEPA refund claims at scale. We are currently working through recoverability of previously paid IEEPA tariffs and expect refunds to take up to 80 days to receive.

Now turning to our liquidity. We remain debt-free with substantial liquidity to support long-term growth. We maintain a robust balance sheet and ended the quarter with $181 million in total cash and investments. During the just completed third quarter, we generated $15 million in operating cash flow, up from $10 million a year ago due to improved working capital. Through the first 9 months of fiscal 2026, we have generated $22 million in free cash flow.

In February, we paid a regular quarterly dividend of $10 million or $0.39 per share. Also, as just announced in our earnings release, our Board declared a regular quarterly cash dividend of $0.39, which will be paid this May. We continue to view our dividend as an attractive use of cash and a positive return to shareholders.

As I conclude my prepared remarks, we are pleased that our business model helped deliver another quarter of profitable growth. Our efforts to identify ways to leverage operating expenses are constant.

We seek to properly balance investing in future growth while managing ongoing costs. Ethan Allen's vertical integration and focus on one brand are core differentiators that will help us navigate through these current industry headwinds.

With that, I will now turn the call back over to Mr. Kathwari.

Yes. Thanks, Matt. As I mentioned, we have continued to take steps to strengthen our unique vertically integrated structure, including strengthening our product offerings.

During the last 6 months, focus has been to introduce new relevant product programs, strengthening our retail network. We have continued to reposition our retail network in North America, design centers numbering 172 locations with smaller footprint with major introduction of technology to help our talented interior design associates. continued strengthening our North American manufacturing, which produces about 75% of our furniture, almost all made custom on receipt of orders.

Continued strengthening our North American national and retail logistics, which enables us to deliver our products with what we call white glove delivery at one delivered price to our clients in North America. And importantly, combining personal service of our interior designers and our manufacturing associates with technology has been a game changer. This has helped us provide great services while reducing costs.

And with this brief overview, happy to open for any comments and questions.

[Operator Instructions] And our first question comes from Taylor Zick with KeyBanc Capital Markets.

Well, I just wanted to first ask kind of about the retail written orders. You gave some good color here, trends slowed a little bit in February and then you saw a pullback in March, I assume, related to the geopolitical situation. Any sense of how retail written orders are trending here so far in April? I assume there's some Liberation Day noise in there as well, but maybe if you can kind of touch on that?

Yes, it's a good -- it's an important question. First is that in this quarter, despite all these challenges we have had in the economy, our retail, retail -- I mean, our written retail held up. In fact, our retail division basically where written orders were about the same as last year, which tremendously important. As Matt also mentioned, the decline was mostly due to the international issues and the State Department issues. So our business has held up. And now in April, it's actually -- it's been positive. There has been positive news so that we will continue the progress that we saw despite all these challenges last quarter. We maintained our retail. And I think in April, so far, it has been positive.

Great. And then maybe if I can ask maybe on the tariff side, and maybe I can wrap two questions in one here. You also gave some great color on the tariffs and where you're exposed. You called out, I think, $15 million to $20 million of exposure on an annual basis. Can you kind of just talk a little bit about how you plan to mitigate some of those tariff expenses? And then related to that, maybe if you can touch on the gross margin as well because we also have rising diesel costs and increasing foam prices as well. So if you don't mind touching on.

I'll say a few words, and Matt can also join. Our tariffs are -- the impact of tariffs are on our products coming, of course, from imported products, which is mostly Asia. And then recently, last year, there were tariffs imposed in our North American operations, both in Mexico and in Honduras. And interestingly, Mexico has been close to what 25%?

Correct.

25% and Honduras is 10% -- so they were -- and that really is interestingly, especially in Mexico. The advantage we have, of course, in Mexico to some degree to some degree has mitigated because we operate and own the manufacturing operations. And according to Mexican law, we can ship the products from Mexico to the United States at a relatively small margin. I think it was about 5% or so, 5%. So 5% if that was not the case, we had to buy all those products, nobody would be able to operate 5%. Even with the 5% margin that we have, we still were impacted substantially with the impact of Mexico, to some degree, Honduras.

And then, of course, our products that come from Asia there, the margin -- I mean, the tariffs have gone very, very high. But now in the last 6 months, tariffs have been reduced from Indonesia, from India and other places, even in China. So I think that we do hope that there is some resolution to what is taking place with the United States and Mexico. It's nothing to do with business. There's a lot of politics that has resulted in those high tariffs.

Yes. That's a great answer. And I'd just like to add a little bit more on to that for you, Taylor. The -- your first part of your question was what steps have we taken? And I think in my prepared remarks, I said the tariff situation is dynamic and ongoing, meaning that the rules and the regulations continue to change. The Section 122 of the 10% global tariff rate was a 150-day set tariff rate, which is set to expire in July. So the rules may again change in July. But we got to play with what the rules are as of today. So we took certain steps and we continue to take certain steps to mitigate the tariffs. Those include partner sharing or sharing of costs with vendors, sourcing diversification, identifying alternative sources for products if possible.

Third is absorb some of the costs. We know we can't pass along all of them or have our vendors absorb all of them. So we do absorb some ourselves.

And last is price increase. We mentioned on the previous call last quarter that we took about an average 5% price increase in October and November of 2025. So those have helped mitigate some of that incremental tariff exposure that I quantified of $15 million to $20 million.

Yes. But those tariffs really impacted our operating margins. I mean, when you take a look at our operating margins coming down, it's mostly because of those tariffs. Our retail business in the United States held up. All right. Next, any other questions?

No, I think we covered it here. I'll pass it along.

[Operator Instructions] Your next question comes from Cristina Fernandez with Telsey Advisory Group.

I had a couple of questions. The first one is on the State Department contract and just the whole wholesale contract side of the business. It's been a pressure point now for at least a year. What is your outlook from here on that part of the business? Do you think it's near reaching stabilization? Or should we expect weakness for the rest of 2026?

Cristina, a number of factors. First is that we have had a fairly long-term contract with the state department. And recently, just in the last few months, the contract has been up for renewal. So we had to bid, and I'm sure others have bid on it, too. So the bidding has taken place and the state department is right now reviewing all those bids, and we do expect to hear from the state department. And depending on what happens, we do have an opportunity, which we have done to increase some of our prices based on these issues of tariffs.

But I think in the next few -- I think hopefully, in the next couple of months, we will know about the new contract. Right now, we do have the current contract where we are getting business, not at the level we did last year, but the business is coming in under the current contract.

Then the second question I had was on the impact of promotions you mentioned during the quarter. Is that mostly related to the increased promotional activity back in the second quarter and those deliveries being made now? Or did you offer incremental promotions to consumers during this current quarter versus a year ago?

So there are two factors. First is we decided to increase our marketing spend, both in our -- especially in our digital mediums. And so we increased that. And that's -- when you look at our advertising, a lot of it was done because of the fact we increased it. Now which is the right thing to do because our digital mediums are tremendously important. So that is what you look at it as not because of the -- not only because of the existing promotions, but we expanded in a very strong manner in our digital mediums. And that has helped us and will continue to help us.

And we do have the flexibility as we go forward in determining how much we spend. But last quarter, we spend more relative to the sales. That's why our percentage of marketing was higher.

And then the last question I had was on the real estate plans on the press release, you noted a couple of new locations planned for this year. Do you still see opportunity, I guess, mostly in the U.S. to enter newer markets that you're not in? Or are most of these store openings relocations or updates to existing stores?

It's both. We -- in the last couple of years, we have -- 3 years, we have spent a great deal of effort, resources to reposition our existing network. At that existing network, the repositioning has involved, first, investing in the -- our existing design centers to make sure they project well and also reducing the size. We have been able to overall reduce the size of our design centers by at least 25% to 30% because of the technology that we are able today to utilize in helping our designers work with clients. So that's tremendously important.

The second is we do have a number of locations that we actually currently are working on about 5 new locations in the United States. And we also have opened up one or two locations in Canada. So we'll continue to open up new locations, but also relocate the current ones. And as I said, we have had a major, major impact of taking our current locations, repositioning them in both in size and also in the new products.

So one of the factors we've got to keep in mind is that our -- and that affected to some degree, our margins is the fact that bringing in lots of new products meant we had to sell what we have. That had somewhat of an impact on our margins because those products we had to sell, and we're still selling them.

All right, Cristina, any other questions or comments?

Sir, there appears to be no additional questions at this time. So I'll hand the floor back over to Mr. Kathwari for closing remarks.

Well, thank you very much. And as I said, on one hand, we are going through challenging times, but the good news is we have continued to position ourselves well. We have -- every week, I focus on five important things.

First is talent. We are blessed with very, very strong talent in our vertically integrated enterprise from our manufacturing, to our logistics, to our merchandising, to marketing, logistics. The second thing is, as we look at after talent is technology. Technology has played a tremendously important role in everything we do today. Third is marketing. Marketing is important at national level, at the retail level. And fourth is our whole focus on making sure that we provide great service. And fifth and tremendously important is social responsibility. Those five things are critical and I think has helped us maintain a strong presence in all our operations.

Thank you very much for participating and look forward to our continued -- making sure we continue to focus on our business and to grow our business.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.

Good afternoon, and welcome to the Ethan Allen Fiscal 2026 Second Quarter Analyst Conference Call. [Operator Instructions] Please note, this conference is being recorded.

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

Thank you, operator. Good afternoon, and thank you all for joining us today to discuss Ethan Allen's fiscal 2026 Second Quarter Results. With me today is Farooq Kathwari, our Chairman, President and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will then open the call up for your questions.

Before I begin, I'd like to remind the audience that this call is being webcast live under the News and Events tab within our Investor Relations website. A replay and transcript of today's call will also be made available on our Investor Relations website. There, you'll find a copy of today's press release, which contains reconciliations of the non-GAAP financial measures referred to on this call and in the press release.

Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our most recent quarterly report on Form 10-Q. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call.

With that, I'm pleased to now turn the call over to Mr. Kathwari.

Well, thank you, Matt, and thank you for joining our second quarter ending December 31, 2025 earnings call and our initiatives to grow our business.

The second quarter results were strongly impacted by the government shutdown, resulting in lower consumer confidence, lower traffic to our design centers and lower orders at retail and especially from the U.S. government contract, also impacted by a very strong previous year comparison. The good news is that we have started the third quarter with stronger traffic and positive written sales in January, as we mentioned in our press release.

During the last few years, we have made major changes to our vertically integrated structure, including our retail network, manufacturing, marketing, logistics and are positioned well. After Matt provides a brief overview of our second quarter financial results, I will provide more details of our business -- of our initiatives to grow our business, and then we'll open up for any questions or comments.

Matt, please proceed.

Thank you, Mr. Kathwari. Our financial performance in the just completed second quarter was highlighted by a robust balance sheet and strong margins despite a challenging environment. Our consolidated net sales of $149.9 million benefited from a higher starting retail backlog, a higher average ticket price, incremental clearance sales and fewer returns. These increases were offset by fewer contract sales and lower demand. Retail written orders declined 17.9%, while wholesale orders were 19.3% lower than a year ago, with both metrics declining sequentially throughout the quarter as our prior year comparables got tougher.

Our demand trends reflect the combination of macroeconomic challenges and a difficult prior year comparison as well as an 11% decline in design center traffic. With that said, we are pleased to see positive written order growth in January.

We ended the quarter with wholesale backlog of $49.8 million, a lower volume of contract orders combined with improved customer lead times helped reduce our backlog. Our consolidated gross margin was 60.9%, up 60 basis points from a year ago due to a change in sales mix, reduced headcount, a higher average ticket price and lower inbound freight, partially offset by increased promotional activity, incremental tariffs and elevated clearance sales.

Our adjusted operating income was $13.5 million with an operating margin of 9%. For historical context, adjusted operating margin during the pre-pandemic 2019 second quarter was 5.4% or 360 basis points lower than it is today. Our current year operating margin was impacted by fixed cost deleveraging from lower sales, combined with delivering out orders with higher promotions, additional marketing, higher occupancy costs from new design centers, increased employee benefit costs as well as incremental tariffs. These increases were partially offset by disciplined approach to controlling operating expenses, including reduced headcount. At quarter end, we had 3,149 total associates, a decrease of 5.1% from a year ago. Adjusted diluted EPS was $0.44. Our effective tax rate was 25.3%, which varies from the 21% federal statutory rate primarily due to state taxes.

Now turning to our liquidity. We ended the quarter with a robust balance sheet, including total cash and investments of $179.3 million with no debt. Our liquidity position remains strong, although we generated an operating cash flow deficit of $1.8 million during the quarter due to changes in working capital, including lower customer deposits and the timing of our biweekly payroll.

In November, we paid a regular quarterly cash dividend of $10 million or $0.39 per share. Also, as just announced in our earnings release, our Board declared a regular quarterly cash dividend of $0.39 per share, which we paid in February. We are pleased to continue to pay cash dividends while maintaining a strong cash position.

Before closing, I'd like to spend a few moments on tariffs. We are exposed to tariffs assessed on raw materials and finished goods we import into the U.S. Recently enacted Section 232 tariffs made effective in mid-October have resulted in manufactured upholstered wood products being subject to a 25% tariff. Our non-U.S. manufactured case goods are currently subject to a 10% tariff that is partially reduced based on the consumption of U.S.-sourced materials.

With regards to imports, our exposure is primarily concentrated on imported case goods from Indonesia, select fabrics from Asia and imported accents consisting of lighting and area rugs. To help offset some of the tariff impact, we worked with our vendors on cost sharing, performed additional sourcing diversification and recently pushed through selective retail price increases, which averaged 5%. These carefully measured price increases were applied strategically across select SKUs rather than broadly. We will continue to review pricing and we'll respond quickly and thoughtfully as conditions evolve. We believe our North American manufacturing, which represents approximately 75% of the furniture we sell, provides us with a strategic advantage. By controlling more aspects of the production process within North America, we believe we can mitigate some of our tariff exposure.

As I conclude my prepared remarks, we are pleased that our disciplined investments and strong expense management are helpful -- are helping to build a fundamentally stronger company. We delivered another strong quarter and entered the 2026 calendar year with a debt-free balance sheet, strong liquidity and a proven ability to provide clients with custom furniture and complementary design services.

With that, I will now turn the call back over to Mr. Kathwari.

Thank you, Matt. I'm pleased to share our initiatives to help us to grow our business as we move forward. Our key focus remains to continue to strengthen our unique vertically integrated structure, including continued strengthening our product programs. Our design centers have started to receive our new products introduced in the fall of last year. Our products continue to be developed under the umbrella of classics with a modern perspective. About 75% of our furniture is made in our manufacturing workshops in North America, and all products are custom-made. All products made in North America, I'm talking of furniture, are custom-made on receipt of models. This is possible because of our North American manufacturing and provides a strong competitive advantage.

Strengthening our marketing programs, in our second quarter, we continue to utilize various mediums, including direct mail and digital advertising. We increased our advertising by 25%, mostly in digital mediums. While we did not get the full benefit in our second quarter of this increased marketing spend due to economic slowdown, we feel it will benefit us in the future.

Our retail network, today, we operate 172 design centers in North America and reflects our current projection under the umbrella of, we say, classics with a modern projection. The design centers reflect the reduction of the size due to strong interior design talent and digital technology.

Continued strengthening our manufacturing. As I mentioned, about 75% of our furniture is made in our North American facilities. Combination of strong talent and technology is key to our productivity. Again, I repeat that all our manufacturing in North America is based on custom-made furniture. 20 years back, 80% was in stock that we sold furniture, especially what we call case goods.

Strengthening our national and retail logistics continues to be a very important initiative. We deliver our products to our clients all across North America at one delivered price with what we call white glove service, very unique. If a customer is in Seattle or in Florida or in Texas, it's exactly the same delivered price, and it took us a long time to do this, and it reflects the investments we have made to have a very strong logistics network. And again, very, very important, the focus on continued strengthening of talent combined with technology, combined with technology is key to future.

With this, happy to take any questions.

[Operator Instructions] And our first question comes from the line of Taylor Zick with KeyBanc Capital Markets.

I just wanted to ask about the retail written orders during the quarter. You noted that the monthly trends decelerated during the quarter just due to difficult comparisons. But as you kind of look through that, do you have any sense of what the underlying trends were during the second quarter?

Yes, I think Matt can give you the exact numbers of the retail, I mean from -- our retail business in the quarter was somewhat impacted.

But Matt, what are the numbers?

Yes. Each sequential month during Q2 decreased by a higher percentage. We don't typically disclose the breakdown on a month-to-month basis, but it did blend to an average decrease of 18%. But we started out stronger in October, and it decelerated more so for the government shutdown combined with the prior year comparison. If you recall, November, December last year were very strong. So it was a difficult prior year comparison. If we go back two years to fiscal '24, that calendar year '23, we were only down very low single digits compared to this past -- a year ago was much higher written.

Got it. Yes. And certainly good to see the positive rent comps here in January. That's great. And Farooq, maybe for my second question, can you touch a bit on the contract side of the business? You have obviously cited the government shutdown as sort of a headwind here. But since the government has reopened, have you seen any improvement in the orders? Or does those remain relatively soft?

Well, during the last quarter, the orders stopped. That, of course, had a major impact on our results last quarter because of the fact that the government being closed, they were not sending any orders.

The good news is the orders are coming in, and they are coming in reasonably high, but not as strong as we had last year because it is now taking the government, all the embassies all over the world, a little time to get back on. So, yes, we are seeing new orders. It's a little bit lower than last year, but every week, it's growing.

Understood. And then maybe one last question for me before I turn it over to others. The company continues to put up very strong gross margins here despite the difficult environment and tariffs and all that. So how should we think about the sustainability of these margins as we look to 3Q and 4Q ahead?

I think we have a good opportunity of maintaining them because of the fact that a lot of work has been done at all levels in terms of combining great talent and technology. That has really impacted all elements, especially our retail network, our manufacturing, our logistics. So, I believe that, obviously, the volumes have an important factor, but we have an opportunity of maintaining them.

And our next question comes from the line of Cristina Fernández with Telsey Advisory Group.

I appreciate all the color on the tariffs, Matt, that you gave. I wanted to see if you could give more detail as far as, I guess, what the total impact is. And you mentioned that you were mitigating some of it. So I want to see if you can give some color on what the unmitigated amount is? And how should we think about that impact as we move forward? Do you think with the price increase and some of the changes you've made, you can mitigate the costs? Or we're going to see some impact flowing through the cost base?

Yes. Go ahead, Matt.

Sure. Yes, I'm happy to answer that one. So there's a couple of strategies we took. It's really a three-pronged approach to trying to mitigate some of the tariff impact. One is vendor cost sharing or partner cost sharing, reaching out to partners to help negotiate and sharing some of the costs that we did over the last several months and was very successful. Another strategy that we've employed is supplier sourcing diversification, trying to source from other countries, which we've done to some extent. And then the third prong is really the retail price increases, which I mentioned we pushed through a select -- about a blended average of 5% in October this past quarter increase. Those did help mitigate some of the tariff impact. It did not do all of it. Now price increases were late in the beginning of October, but late from a delivered perspective. A lot of those orders did not get delivered out fully in the quarter. So we'll see a little bit more of a benefit from price increases moving forward.

With that said, there will still be some more headwinds. You mentioned the Section 232 tariffs that came into play mid-October. So we hadn't really experienced a full quarter worth of those. That's probably the largest. That's about 40% of our overall tariff exposure is there. And then the IEEPA tariffs, which are currently under review by the Supreme Court is about 40% and the remainder is Section 301 tariffs. I would say, all in, we're still seeing a headwind. We don't disclose the actual percentage of the headwind overall, but I think the steps we've taken will help mitigate a significant amount of that, plus our current structure of being 75% in North America does help mitigate it naturally that way.

Yes, Cristina. And also, of course, we are not counting on it, but the U.S. Supreme Court has still not decided on the validity of the IEEPA tariffs. And it's possible that it goes away and which will -- and that will impact 40% of our exposure if they take it down completely with an annual savings of approximately $8 million. But again, as I said, we are hoping that happens, but our plans are to keep them on the side while making all changes so that we are able to maintain strong margins.

I had a question on the January trend relative to the second quarter, I guess what would you attribute it? Do you think it's marketing? I mean promotions seem pretty similar to last year. What would you attribute the improved trend?

I think the most important one is that the consumers came back. I think in the last quarter, with all the uncertainty, government shutdowns, all people were scared. People are not coming in. What we have seen in January, people are coming back. Now the good news is because of our structure, because of our interior design network, and we have most likely the strongest interior design network, they have maintained good contacts with their clients. And what we've seen is our traffic has increased.

People are coming back. Again, there's still some concerns, but the concerns we had in the last quarter about all the uncertainty in the marketplace that created issues. We see in January, the government shutdown was not there, somewhat of a better consumer attitude. So people -- also the people or designers worked with clients. And as in last quarter, the ones who did not close, they are closing the business now.

And the last question I had was on marketing. The 25% increase I mean, do you expect that level to continue as we move through the year? And where are you mostly seeing the benefit of this marketing? Is it better traffic? Is it new customer acquisition? How are you measuring the efficiency of that marketing spend?

Yes. That's a very important issue. Now if we knew that the government shutdown and all of those were going to take place, we would not have increased our marketing by 25%. That's what we did. But the reason it is mostly on digital marketing. This is the digital marketing is where clients today, it used to be that our designers had to spend a tremendous amount of time working with the clients physically. Today, consumers and our clients and our designers are able to work virtually with our -- with the amount of technology that we have. So all this was to help bring more people through our virtual advertising and also help them close business. And that we'll continue to do.

But having said this, we are going to reduce some of our advertising expense in some other mediums. Look at 10 years back, we spent a lot of money on national advertising, zero. Then we -- in the last year or so, we spent a fair amount of money on sending magazines, digital magazines and print magazine. So one of the things we looked at was the impact of our digital magazine, where we're spending close to, I think, close to $18 million a month. We decided that we'll take it down to $9 million or $10 million and still make an impact and especially spending this more money on the digital marketing will help us. So those are the areas where we are looking at.

And with that, there are no further questions at this time. I'd like to turn the floor back over to Farooq Kathwari for any closing remarks.

Well, thank you for joining. I would say that we are stronger today. We have spent a fair amount of time. First, we've got -- as you know, every week, I get about 40 reports. They don't all report to me, but they have to write on five things. First is talent. What have they done to improve talent. The good news is we've got strong talent. We have less people, but strong talent. And as I said, our headcount today is about 30% less than what was only five or six years back. Now that is due to high talent, and it's also due to technology. So we're going to continue to have technology tremendously important.

Second, third thing is marketing. And marketing, again, is tremendously important, but the means of marketing are constantly changing. And this also reflected what we did last quarter in terms of spending more money on digital mediums. We'll continue to do that.

And service is critical. That's our fourth tremendously important area. And the services provided by interior designers, services provided by our logistics teams, as I said, that we today deliver our products at one price nationally to our consumer with service. And then finally, social responsibility is tremendously important, and we'll continue to do that.

So, thanks very much for joining and look forward to our continued discussions next quarter.

Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

Thank you.

Good afternoon, and welcome to the Ethan Allen Fiscal 2026 First Quarter Analyst Conference Call. [Operator Instructions] please note this conference is being recorded. It is now my pleasure to introduce your host, Matt McNulty, Senior Vice President, Chief Financial Officer and Treasurer. Thank you. You may begin.

Thank you, operator. Good afternoon, and thank you for joining us today to discuss Ethan Allen's Fiscal 2026 First Quarter Results. With me today is Farooq Kathwari, our Chairman, President and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will then open the call up for your questions.

Before we begin, I'd like to remind the audience that this call is being webcast live under the News and Events tab within our Investor Relations website. A replay and transcript of today's call will also be made available on our Investor Relations website. There, you will find a copy of today's press release, which contains reconciliations of non-GAAP financial measures referred to on this call and in the press release. Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our most recent quarterly report on Form 10-Q. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. With that, I'm pleased to now turn the call over to Mr. Kathwari.

Thank you, Matt. We are pleased to have you all on this call. Considering the many challenges, we are very pleased that our unique vertically integrated enterprise and our focus and investments over the years are providing strong results. Our interior design focus, investments in technology and many years of developing a strong retail network, our North American manufacturing and logistics have positioned us well. Our written sales in the first quarter increased by 5.2% despite the question of tariffs. We continued our history of returning capital to shareholders by paying $16.4 million in cash dividends and ended the quarter with $193.7 million in cash and no debt.

Our U.S. government sales were impacted by delays in advance of the government shutdown. I will discuss a lot of this in more detail after Matt provides a brief financial overview of the quarter, and we will also discuss our initiatives to continue to strengthen our enterprise and provide an opportunity to grow our sales and earnings and cash. Matt?

Thank you, Mr. Kathwari. Our financial performance in the just completed first quarter was highlighted by retail written order growth, strong gross margin, positive operating cash flow and a robust balance sheet. Despite macroeconomic challenges, our operations produced positive financial results, which I will now discuss. Our consolidated net sales were $147 million as higher average ticket prices and designer floor sample sales were offset by lower delivered unit volumes, reduced traffic and fewer contract sales. Retail written orders grew for the second consecutive quarter as demand patterns continue to improve. Retail written order growth of 5.2% was driven by improved order conversion, increased promotional activities, the strength of our brand, the loyalty of our clients, new product introductions and additional marketing efforts. Wholesale orders decreased by 7.1% during the quarter as the segment was impacted by lower contract business, including reductions in government spending.

We ended the quarter with wholesale backlog of $53.5 million. A lower volume of contract orders, combined with improved customer lead times helped reduce our backlog from a year ago. However, in the last 3 months, our wholesale backlog rose by $4.7 million due to the timing of incoming contract orders. Strong consolidated gross margin of 61.4% was driven by a change in sales mix, lower raw material input costs, selective price increases, lower headcount and a higher average retail ticket price, partially offset by increased promotional activities, elevated designer floor sales and higher inbound freight, including incremental tariffs.

Our adjusted operating margin was 7.2%. For historical context, our pre-pandemic fiscal 2020 first quarter operating margin was 20 basis points lower. Our current year operating margin was impacted by fixed cost deleveraging from lower delivered sales combined with increased promotional activity, additional marketing, higher occupancy costs from new design centers and sales of floor inventory to make room for new products. Partially offset by a disciplined approach to controlling operating expenses, including reduced headcount. Our headcount totaled 3,189 at quarter end, a decrease of 4.7% from a year ago as we continue to identify operational efficiencies and streamline workflows. Adjusted diluted EPS was $0.43. Our effective tax rate was 25.4%, which varies from the 21% federal statutory rate primarily due to state taxes.

Now turning to liquidity. We ended the quarter with a robust balance sheet, including total cash and investments of $193.7 million with no debt. We generated $16.8 million in operating cash flow during the quarter through lower inventory levels and higher customer deposits. Capital expenditures of $2.4 million were primarily for retail design center build-outs and investments in technology. We continued our practice of paying cash dividends. In July, our Board declared a special cash dividend of $0.25 per share in addition to our regular quarterly cash dividend of $0.39 per share, both of which were paid in August. We have paid a special cash dividend in each of the past 6 fiscal years and a cash dividend every year since 1996. Also, as just announced in our earnings release, our Board declared a regular quarterly cash dividend of $0.39 per share, which will be paid in November.

In summary, we are pleased to deliver positive first quarter results. With a resilient client base, a debt-free balance sheet and a vertically integrated business, we are navigating the current environment focused on what we control, what we can control, which is talent, service, marketing, technology and social responsibility. Looking ahead, we remain focused on our strategic initiatives in the face of ongoing economic uncertainty. We are confident in the strength of our business model, including our North American manufacturing base and vertical integration, which allows us to provide clients with custom furniture and complementary design services.

With that, I will now turn the call back over to Mr. Kathwari.

All right, Matt. Thanks very much. Now as we have mentioned, considering the many challenges, we are pleased with our results. Our written sales increased by 5.2% despite lower traffic. This is due to: number one, we have continued to position Ethan Allen as a desirable brand. Two, we had more qualified customers who visit our design centers, less customers but more qualified. We continue to focus on key areas of strengthening the following: talent. We have strong dedicated team members in our vertically integrated structure. In marketing, during the quarter, we increased our national marketing with many initiatives. Our marketing costs at the national level increased 44%, going from 2.4% of net sales last year to 3.4% in the current period. We believe that we should continue to see the benefit of this increase as we move forward.

In technology, continued utilization of technology in our vertically enterprise is a game changer. This time included technology in our manufacturing. This has included technology in our manufacturing, retail, marketing and logistics. Our focus continues, reinvention has positively impacted many areas included interior design network. We have relocated about 75% of our design centers in the last 20 years, while reducing the design center footprint that's the size of a design center by 25%. We have stronger interior design talent. We have 50% less designers today than 10 years back but generating 75% more business per retail associates, again, combining good talent, technology, products and all the other things we do have made it possible.

We invested in our manufacturing, including new technology. Opening new retail locations while closing other locations has been important, new design centers that were opened in Colorado Springs, Greater Toronto and Greater Houston. We have 173 retail design centers in North America, including 143 company-operated and 30 independently owned and operated. About 75% of our furniture is made in our North American manufacturing and almost all custom on receipt of custom orders. This is very different than what happened, say, 20 years back when about 80% of our case goods was made for stock. We deliver our products at one price to our clients in North America with our white glove delivery service. This is very, very important. Not easy to do to deliver the product, whether you are in Seattle or you are in Miami or New York at one delivered price to the customer with white glove service. It is unique, but very important for us.

We have consolidated our national distribution into one major distribution center while reducing the number of company-operated retail centers location by 35% in the last 10 years. Keep in mind, we had about 10 national distribution centers. Now one major distribution center with two smaller locations is what makes it work. On social responsibility, our teams continue to focus operating a socially responsible enterprise and treating our associates and our clients with respect. In addition, we focus on operating in an environmentally responsible manner. We recently had our annual convention about 2 weeks back, which was attended both physically and virtually by our entire enterprise. Under the theme of always moving forward, we reviewed our many initiatives, including the launch of new products that will be presented to our clients in the spring of 2026 in our design centers.

The new products have been important. We have launched new products in the last 1 year, which, of course, resulted in our selling of floor samples, but we also have included new products, which we introduced in Danbury in 2 weeks back and will be in our design centers by spring of next year. As I stated earlier, both the domestic and international economies are going through major changes. We remain focused on providing great service to our clients through our vertically integrated structure. We remain cautiously optimistic.

At this time, we are open for any questions or comments.

[Operator Instructions] Our first question is from Taylor Zick with KeyBanc Capital Markets.

First off, congrats on the strong comp here in this fiscal first quarter. I just wanted to ask more specifically about the cadence of retail written order trends during the quarter, maybe what you saw during the Labor Day sales period and outside of that as well.

Yes, that's a good question because the first quarter, we were looking at all these -- the challenges of government shutdowns and everything else. What we saw was much lower traffic, interestingly but more qualified people and the ones who came in were buying. And what we saw was that mostly -- most of the quarter, we maintained more or less the similar increases. We did not see any major highs or lows during the quarter. What we saw was people coming in, working with our designers and buying. Now if the environment was different and we didn't have about a 30% -- 30-plus percent lower traffic into our design centers because of the fact of the economy and what is taking place. But the people who came in were interested, qualified. They worked with our designers, thereby helping us increase our business.

Yes, that's great. Maybe just a follow-up here on promotional activity. Obviously, we've seen the industry become more promotional over the past few quarters. You noted it this quarter here for Ethan Allen. Can you talk a little bit more about what you're seeing and maybe what your expectations are for the balance of the year or 2026, if you want to comment on that?

Yes. I mean we are watching what is happening in the industry. We have more or less maintained our promotional activities across the Board. We have not gone into any major promotions we have -- we do give special savings every quarter, and we have maintained that. And we felt we do also provide financing, but also at the levels that we have been doing in the past, small changes, but not much. So we have maintained our -- and that's because of that, you see our margins have been maintained. If that was not the case, we would not have the gross margins that we have today.

And then I guess just one last question for me before I turn it over. Tariffs continue to impact the industry pretty broadly. What are you seeing in terms of pricing across the industry? And then maybe if you've taken any pricing yourself?

Yes, that's an important issue. And of course, it's changing consistently. So we do not know where we're going to end. We do make about close to 80% of our product or 75% to 80% of our furniture in North America. In Vermont, North Carolina, then we have in Central Mexico and in Honduras. Now there has -- first, there was no -- hardly any tariffs in Mexico, then there were tariffs and now they are thinking of not having the level of tariffs that they had last 2 weeks. It's ever changing.

So fortunately for us, while on the furniture side, we are less impacted by tariffs, we are able to manage it because of the fact of our North American presence. Our other products, which is our non-furniture products, a lot of that does come from overseas, and that has been impacted by tariffs. Now we have taken and again, that changes. So one has to be careful that you don't act too fast. But we have made some changes. We have taken some price increases anywhere from depending on the country, the region, anywhere between 5% to 10%. Some of our partners overseas have worked with us to manage the costs. So overall, I think that we have been much less impacted by margins -- by this question of tariffs, but most of it has been on our non-furniture product. We do have one major plant that we have in Southeast Asia, which has been impacted. But again, we have to watch that every month, the tariffs change. So overall, I think we're managing it well because of our strong presence in North America and our own manufacturing.

Our next question is from Cristina Fernández with Telsey Advisory Group.

I had a couple of questions. I wanted to start with the retail segment. It's been two quarters where the written demand has been positive, but sales for this quarter for that segment were still down 3%. So at what point will we see that demand translate into growth for that segment?

Well, if you take a look at our retail, we had -- on the -- interestingly our delivered retail was about 3.3% or 3.2% lower than last year. We were able to maintain our relative cost structure. I think that at this stage, our objective is to work towards -- and we are seeing that, that there are challenges that objective is to come close to what we did last year. That's what our objective is. We'll see what happens in November and December. October is just ending. But people, as I said, have been challenged. Our traffic has been down considerably, fortunately, because of the fact of qualified people coming in and especially our talented interior designers. If we didn't have that, the chances are we would be severely impacted with lower sales. So I think that at this stage, Cristina, our objective is to still watch but to come close to what we did last year.

Got it. And then on the contract side, can you talk more about what's happening with the state department? It seems like this was a pretty challenging quarter for that particular contract. So do you think it can normalize here in the near term over the next quarter or 2? Or should we expect this lower trend to be a new steady state?

Well, it's a good question. It depends upon the opening of the government, where what we have seen is this and what we hear is that we would get orders if the government was open because the government is not open, new orders are not coming in. So it all depends upon where -- what happens with the government. And it also had to some extent, impact on our sales, not completely, we were able to ship some products but it's mostly on the new orders coming in. The government is closed. So we hope that the government opens up and what we hear is that there is some higher pending orders that they will forward to us when they open. And if that happens, again, let's assume that it happens in the next -- in this quarter, then the impact of that would be towards middle or end of the following quarter because we got to make that product.

And then my last question was on the increased marketing spend year-over-year. Can you share where the spending is going? Is it reaching more customers? Is it a different type of, I guess, advertising that you're doing compared to last year? And where are you seeing the benefit of that advertisement and traffic or conversion? Or where do you think you're seeing the return?

Yes, it's a good question. And where we did was where we increased is on at a national level, we increased it in additional direct mail and paid search and paid social campaigns. We didn't have much in paid search and paid social campaigns in the past. So we accelerated. That's where most of the increase at the national level took place, close to 50% increase. Now we don't see the benefit of it right away. I would say that we should see some benefit as we go forward in this current quarter and as we move forward because this is a longer-term investment, but we believe it made sense. It also made sense that we had also this past quarter an additional direct mail that we didn't have in the previous year. So going forward, we'll continue with our direct mail as we have in the past. But to answer your question, most of the money, the new money, new advertising was on paid search and paid social campaigns. All right. Any other questions?

There are no further questions at this time. I'd like to hand the floor back over to Farooq Kathwari for any closing comments.

Thank you very much. We are fortunate that we have a very, very strong team. As you know, I always talk of 5 things. So we have very strong talent, even though we have been able to reduce the number of associates, but the team members that we have are very motivated, knowledgeable. And it is also due to the tremendous increase in technology that is helping us in our work. We have reduced the size of our design centers. We have refreshed our design centers. We are opening new design centers and we'll continue to do that. Many of them are relocations. We also have -- we believe very strongly that the new products are going to continue to position us well.

So with strong talent, strong product programs, vertical integration, our focus on technology, we believe we are well positioned and in somewhat challenging conditions because we do not know the overall international and the domestic situation. But despite all of that, we have done well in this first quarter, and we believe that we'll do relatively well going forward. Thank you very much for participating. And I'm sure if you have any other questions, please let us know.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Good afternoon, and welcome to the Ethan Allen Fiscal 2025 Fourth Quarter Analysis Conference Call -- Analyst Conference Call. [Operator Instructions] Please note, this conference is being recorded.

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

Thank you, operator. Good afternoon, and thank you for joining us today to discuss Ethan Allen's Fiscal 2025 Full Year and Fourth Quarter Results. With me today is Farooq Kathwari, our Chairman, President and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will then open the call up for your questions.

Before we begin, I'd like to remind the audience that this call is being webcast live under the News and Events tab within our Investor Relations website. A replay and transcript of today's call will also be made available on our Investor Relations website. There, you'll find a copy of today's press release, which contains reconciliations of non-GAAP financial measures referred to on this call and in the press release.

Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our most recent annual report on Form 10-K. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call.

With that, I am pleased to now turn the call over to Mr. Kathwari.

Thank you, Matt. We are gratified at the hard work of our team and our unique vertically integrated structure, which continues to enable us to have strong results and position us for growth.

After Matt provides a brief overview of our fourth quarter and fiscal 2025 financial results, I will discuss our initiatives to continue to position us for growth and strong financials. Matt?

Thank you, Mr. Kathwari. Our financial performance during fiscal 2025 was highlighted by strong margins, positive operating cash flow and a robust balance sheet. Despite operating in a challenging environment, our operations produced positive financial results, which I will now discuss.

Our fiscal 2025 consolidated net sales were $614.6 million, which included fourth quarter sales of $160.4 million. Our sales reflect higher average ticket prices and fewer returns, offset by lower delivered unit volume, reduced backlog, less traffic and fewer contract sales.

As noted in our earnings release, the home furnishings industry has been challenged. However, overall demand patterns began to show signs of improvement during the just-completed fourth quarter as Retail written orders rose by 1.6%, driven by the strength of new product introductions, promotional levels, elevated clearance and the pause of additional tariffs.

Wholesale orders decreased by 6.8% during the quarter as the segment was impacted by our contract business. We ended the fiscal year with Wholesale backlog of $48.9 million, reflecting historical norms. A lower volume of contract orders, combined with improved customer lead times helped to reduce our backlog.

For the full year, our consolidated gross margin was 60.5%, comparable to 60.8% last year. In the just-completed fourth quarter, our consolidated gross margin was 59.9%, which was impacted by fewer delivered orders, higher clearance sales, increased promotional activity and lower manufacturing production, partially offset by a change in sales mix, lower raw material input costs, reduced head count and a higher average ticket price.

Our head count totaled 3,211 at fiscal year-end, a decrease of 5.7% from a year ago as we continue to identify operational efficiencies and streamline workflows.

For the full year, our adjusted operating margin was 10.2%, while our fourth quarter operating margin was 9.7%. These strong operating margins reflect our ability to tightly manage expenses while increasing advertising spend. Compared to our pre-pandemic 2019 fourth quarter, adjusted operating margin has improved 110 basis points.

On a full year basis, adjusted EPS was $2.04. Our fourth quarter adjusted EPS was $0.49. Our effective tax rate was 25.2% for the full year and 26.4% for the quarter, which varies from the 21% federal statutory rate due to tax -- state taxes and recording of valuation allowance on retail deferred tax assets.

Now turning to our liquidity. We ended the year with a robust balance sheet, including cash and investments of $196.2 million and no outstanding debt. We generated $24.8 million in operating cash flow during the quarter, which brought our full year total to $61.7 million. We also reduced our inventory levels as clearance sales helped to offset new product introductions.

Capital expenditures were $11.3 million, including $1.9 million during the just-completed fourth quarter as we invested capital into manufacturing, retail and technology. We are confident in the investments we are making for the future but recognize the need to remain cognizant of the uncertain economic environment.

We continued our practice of paying quarterly cash dividends. In May, our Board declared a regular quarterly cash dividend of $0.39 per share, which was subsequently paid and brought our total annual dividend paid to $50.1 million. Also, as announced earlier today, our Board declared a special cash dividend of $0.25 per share in addition to a regular quarterly cash dividend of $0.39 per share, both of which will be paid in August. This recent action marks the fifth consecutive year we have paid a special cash dividend.

In summary, our vertically integrated business delivered positive fiscal 2025 results. We are confident in the strength of our business model as Ethan Allen has successfully navigated challenging times to serve our clients and deliver value to our shareholders throughout its 93-year history.

Looking ahead, we remain focused on executing our strategic initiatives in the face of ongoing macro uncertainty. Our robust balance sheet and financial stability provide a solid foundation and positions us well as we head into fiscal 2026.

With that, I will now turn the call back over to Mr. Kathwari.

Thank you, Matt. As we have conveyed, the focus of our enterprise continues to strengthen the five key areas of talent, marketing, service, technology and social responsibility.

Great talent, we are gratified to have a strong talent in our vertically integrated enterprise. We continue to make about 75% of our furniture in our North American workshops located in Vermont, North Carolina, Central Mexico and Honduras. Keep in mind, about 20 years back, we had 18 manufacturing locations.

Also, our unique logistics operations delivers what we call white glove delivery at one cost to our clients in North America. This is unique. In national logistics, we have replaced 10 national locations to 2 locations and in Retail, replaced about 100 warehouses to about 20. In our Retail network, about 75% of our -- about 160 Retail leaders have been either relocated -- I mean, Retail locations have either been relocated or made smaller due to the impact of technology, customization and especially a strong interior design professional network.

Technology continues to play a central role in all our operations from manufacturing, logistics and especially marketing. For example, about 15 years back, we spent major dollars in national television and today has been replaced mostly by digital and print magazines, including forwarding about 10 million 36-page digital magazines every 2 weeks. We have also continued to strengthen our product programs and introducing new products on a planned basis.

And financially, we have maintained strong results, as Matt mentioned, we have maintained margins -- gross margins of 59.5% -- 59.9% for the quarter and 60.5% for the year. Our operating margins of 9.7% for the quarter and 10.2%. This is despite lots of turmoil in the industry and in fact, in the economy. We've also been able to maintain strong cash. We ended the cash with $196 million and no debt. And as Matt said, we continue to also give out very strong cash dividends.

With this, I'm very happy to open up for any questions or comments.

[Operator Instructions] Our first question comes from the line of Brad Thomas with KeyBanc Capital Markets Inc.

My first question was just going to be around industry trends and what you were seeing. And I was wondering if you could give us some more color about what you saw through the quarter. It did seem like you had a nice acceleration in your orders from what you had seen in 1Q to what you -- I was wondering if you could talk a little bit more about what you're seeing out there and what you're hearing from your customers.

Yes. As I had mentioned, these are challenging times, all -- so much uncertainties with what's happening with the economy, the international conflicts, tariffs and everything else. But I think that having said all of those things and Matt had also mentioned, we were very pleased that our written orders for the quarter were up 1.6% despite all these challenges. So I think our people did a good job increasing our written orders in our Retail division in a very tough environment.

That's great. And I was wondering if you could help us think about how tariffs have been affecting your business. I know that you are so important as a U.S. manufacturer, but if you could talk about how, if at all, that's affecting your business directly and how you think it maybe is affecting the competitive landscape in terms of price increases that you maybe have seen from the competition?

Yes. This has been really, really an interesting environment to operate. Fortunately, Brad, we have close to 70% of our furniture or more is made in our North American operations in Vermont, in Carolinas, in Mexico, Honduras. Obviously, there are no tariffs in the United States. And also because of the North America trade treaty, we are not impacted with tariffs in Mexico. There are smaller tariffs in Honduras.

So then about 30% of the products in furniture is coming from overseas, in places like Indonesia, mostly in terms of furniture, some from Vietnam. And I think between the two countries, that's most likely some impact there. Our accessory products do come from all over the world. And there, of course, we have been impacted. But overall, because of the nature of our operations, our impact of this whole issue of tariffs has been very limited on us.

That's great. And then you all have done a lot to control costs in this difficult environment, Farooq. I was wondering if you could help us think about the operating costs of the business. And are there incremental areas where you think there's particular efficiencies and costs to go after? Or do you feel like this is a good level to hold at as we cross our fingers that we get a recovery on the horizon here?

No, I think that these are very, very important issue. It is a question about, as I mentioned in that technology, and of course, our vertical integration has been very, very important in managing our costs. Think of the first thing is we have -- as I said, from 2019, we have reduced about 35% of our head count. We reduced our head count in the last fiscal year around 5% or 6%. And this is all due to the fact of retaining very strong talent and technology making it happen.

So from that point of view, we have today -- think of this, it's almost impossible to think that we have close to 30% to 35% less head count today than we had in 2019. And a lot of this is due to the technology.

Now this also has an implication in our marketing. Think of this, Brad, we used to spend close to $30 million in distributing our magazines, print magazines. Today, all of it is done digitally, and we do most of our advertising again through digital medium, no print mediums. It's amazing what is done in terms of our expenditures.

So our -- while we've been able to maintain our margins -- gross margin, especially because of our unique structure of manufacturing in North America and then strong partners overseas as well, we have been able to continue to reduce our operating expenses, and that has helped us maintain stronger, I would say, gross margins and operating margins and especially good cash flow.

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

I had a follow-up question on the trends and also related to gross margin. On the prepared remarks, you talked about some clearance activity and promotions in the quarter. Can you expand on how you're using promotions to drive sales? Were they incremental year-over-year? And what's your approach for the remainder of the year?

Yes. As I said, fortunately, we did not have much of excess inventory to sell. That is because of that, we've been able to maintain. Think of this, our gross margins for the quarter were at 60%, and they were 60.8% in the previous year. So we've been able to maintain strong gross margins.

So our clearance and everything has been relatively small because of the fact close to 80% of our products are custom. Keep in mind, only 15 years back, 80% of our products were sold from stock. The customization is tremendously important. That also has the implication of our national distribution. When I mentioned we had many, many -- I don't know, 8 or 10 major national distribution centers as against one major one now, it is because going from about 70%, 80% inventories to 80% custom has also resulted in the reduction of not only inventory, but all the space that we required to stock it and to ship it.

And then my second question is regarding price increases. You took some earlier in the year. Are you seeing any impact on unit sales? And with the tariffs increasing for some countries like Vietnam, do you plan to have to make more price increases over the next 6 to 12 months?

Yes, we are watching it carefully. We have been able to maintain our pricing, very small increase, not much. Only -- again, because of the fact of close to 80% is made right here in North America. If that was not the case, where some of our products are made in a country like Indonesia. Now we are watching the issue of tariffs, as you know, they announced yesterday, the tariffs. And so we'll watch that to see the impact of it.

Our partners have also helped. When these kind of things happen, they also contribute towards a reduction of the cost. So the impact of the tariffs is less. But overall, no, I think considering the fact that even though our volume was down, we were able to maintain strong margins, again, because of the efficiency of our operations.

And my last question, following on from Brad's question about trends for the quarter. When you look at the increase in Retail orders, the 1.6%, what do you attribute that? Was that better customer traffic as the quarter progressed, some of the new introductions? More details there would be helpful.

Yes, it was a combination of factors. One was the fact that as the quarter progressed, we saw more consumer positive attitudes. I think that helped. I think we have a very, very strong network of associates. They also maintain a very strong relationship with our clients. That also helped. And I think that we've gone through, as you know, it has been somewhat of a challenging environment for our industry and for most companies. The reason we have been able to do well is because of our structure, our vertical integration. And the fact, which has been tremendously important is combining great personal service and technology. In fact, we slightly increased our marketing expenditures. Matt, we went from what -- to 3.2% of -- what is it?

3.4%.

3.4% from?

From a year ago, 2.8%.

We went from 2.8%, and we're -- still is relatively small, and a lot of it is we did it to increase our communications and especially our digital mediums, especially digital mediums. So it's not a big, huge amount. Look, we used to spend 5%, 6%, 7% of our sales on advertising. Now we went to 3.4%. And what it did was, interestingly, it helped us bring in traffic and sales.

All right. Well, thanks very much. Any other questions or comments?

And it appears we may have reached the end of the question-and-answer session. So therefore, I'll turn it back over to you for closing remarks.

Thank you very much. Again, I want to thank all of our team members for doing really an amazing job in tough conditions. It also -- fortunately, our positioning is such that it gives us our vertical integration, maintaining 80% manufacturing and having our design centers.

Keep in mind also, we relocated many of our design centers. We repositioned our design centers, reduced our size by 30% or so or more in the last 2, 3 years. So our design centers have been renovated. They have been relocated wherever we need it to be. And we have also opened up a few. We have opened up -- where did we open up? We opened up four or five new locations in this last year, and we have a few more coming up. Many of them are relocations, and we'll continue to do that.

And again, thanks for everybody, and thanks to the support of our team and the work that they do and look forward to continuing our progress. And thanks again.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.