Ethan Allen (NYSE:ETD) Interiors Inc. (NYSE: ETH) reported its fiscal 2024 third-quarter results, showcasing a strong balance sheet with a robust cash position of $181.1 million and no outstanding debt. The company announced a 61.3% consolidated gross margin and a 10% adjusted operating margin, despite facing a softening market and other challenges. The Board of Directors declared an increased quarterly cash dividend of $0.39 per share, up by 8.3%.
Key Takeaways
- Consolidated net sales reached $146.4 million amid lower delivered unit volume and manufacturing reductions.
- Written order trends were affected by market softness, high interest and inflation rates, less designer center traffic, and adverse weather.
- Ethan Allen ended the quarter with a wholesale backlog worth $57.7 million.
- The company's strong cash position and lack of debt underline its financial health.
- An increase in the quarterly cash dividend reflects confidence in the company's financial strategy.
- Cost reduction measures include headcount reduction and operational streamlining.
- Investments in technology, manufacturing, and logistics, alongside a redesigned interior design network, aim to reinforce the company's market position.
Company Outlook
- Ethan Allen is cautiously optimistic about the future, expecting an improved home furnishings environment.
- The company is repositioning design centers and reducing their size to enhance efficiency.
- Focus on strengthening product programs and utilizing technology in marketing and merchandising.
Bearish Highlights
- Challenges such as elevated interest and inflation rates, reduced traffic, and weather conditions have impacted sales and orders.
- International freight costs have risen, although the impact on Ethan Allen has been minimal due to its North American production base.
- Wholesale order intake was impacted by lesser business from government and international markets, particularly China.
Bullish Highlights
- Despite market challenges, gross and operating margins remained strong.
- The company's financial health is solid, with a significant cash reserve and no debt.
- Retail backlog is approximately double the customer deposits, indicating potential future revenue.
- Positive trends were observed towards the end of the quarter and in April, signaling a potential market recovery.
Misses
- The timing of Easter in March negatively influenced the quarter's performance.
- The company saw a shift in consumer interest away from home furnishings in recent months, although this trend is showing signs of reversal.
Q&A Highlights
- CEO Farooq Kathwari emphasized investments in new machinery and equipment and commitment to environmental and social responsibility.
- The company has strategically reduced the number of manufacturing plants over the past decade, focusing on North American facilities.
- Ethan Allen's redesigned interior design network has received positive feedback from consumers and designers.
- Marketing spending has increased despite overall reductions in SG&A expenses through headcount reductions.
Ethan Allen's fiscal 2024 third-quarter results demonstrate resilience in the face of a challenging market. The company's strategic focus on operational efficiency, technological integration, and a strong financial foundation positions it to navigate the current economic climate and capitalize on future opportunities in the home furnishings sector.
InvestingPro Insights
Ethan Allen Interiors Inc .'s (NYSE: ETH) latest fiscal results have painted a picture of a company with a strong financial backbone, as evidenced by its significant cash reserves and zero debt. The company's strategic decisions are reflected in its impressive gross profit margin, which stands at 61.02% for the last twelve months as of Q1 2023, according to InvestingPro data. This margin is a testament to Ethan Allen's ability to maintain profitability even when sales volumes are challenged.
InvestingPro Tips highlight two critical aspects of Ethan Allen's financial health. First, the company has been able to hold more cash than debt on its balance sheet, which is a reassuring sign for investors concerned about financial stability. Second, Ethan Allen has maintained dividend payments for 29 consecutive years, a significant achievement that underscores its commitment to returning value to shareholders. This is especially notable considering the dividend yield stood at a generous 6.17% as of early 2024.
From a valuation standpoint, Ethan Allen's market capitalization is currently at $730.24 million, with a Price/Earnings (P/E) ratio of 10.55, which suggests that the stock is trading at a reasonable valuation relative to its earnings. Additionally, the company's share price is at 80.7% of its 52-week high, indicating that it has maintained a relatively strong position in the market despite broader economic headwinds.
For readers interested in a deeper dive into Ethan Allen's financials and future prospects, InvestingPro offers additional insights and metrics. There are 11 more InvestingPro Tips available that can provide a more comprehensive analysis of the company's performance and outlook. To access these insights, visit https://www.investing.com/pro/ETH and remember to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Ethan Allen Interiors Inc (ETD) Q3 2024:
Operator: Hello and welcome to the Ethan Allen Fiscal 2024 Third Quarter Analyst Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to Matt McNulty, Senior Vice President, Chief Financial Officer and Treasurer. Please go ahead Matt.
Matt McNulty: Thank you, Kevin. Good afternoon and thank you for joining us today to discuss Ethan Allen’s fiscal 2024 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 the call for your questions. Before we begin, I’d like to remind the audience that this call is being recorded and webcast live under the News and Events tab on the Investor Relations page of our website. There, you will also find a copy of our press release, which contains reconciliations of non-GAAP financial measures referred to on this call and in the press release. A replay of today’s call will also be made available on our Investor Relations website. 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 risks that could affect our future results are described in our 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.
Farooq Kathwari: Thank you, Matt, and thank you all for participating in our third quarter earnings call. As we stated in our press release, we are pleased with our financial performance and continued strengthening of our enterprise. We are also seeing incremental consumer interest returning back to the home after being previously diverted to other areas such as travel. Again, after Matt provides a brief financial overview, I will discuss in greater detail our initiatives. Matt?
Matt McNulty: Thank you, Mr. Kathwari. As a reminder, we present our financial results on both a GAAP and non-GAAP basis. Non-GAAP results exclude restructuring initiatives, impairments, and other corporate actions. We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business. Our financial results in the just completed third quarter were highlighted by a robust balance sheet, strong cash dividends, and a double digit operating margin. Despite currently operating in a challenging home furnishings industry, our operations produced positive financial results which I will now discuss. Our consolidated net sales total $146.4 million reflecting lower delivered unit volume, reduced manufacturing from lower backlogs, a cautious consumer environment and a strong prior year comparable. Overall demand patterns across our industry have been sluggish. Our written order trends in the quarter were impacted by continued softening of the market, elevated interest and inflation rates, reduced designer center traffic partially due to adverse winter weather conditions and a strong prior year demand. Wholesale segment written orders decreased 14.6% compared to last year while retail segment orders were down 8.6%. We ended the quarter with wholesale backlog of $57.7 million reflective of historical norms and pre-pandemic levels. We continued to improve customer lead times and reduced the number of weeks of backlog during the quarter. Consolidated gross margin was 61.3%, the 12th consecutive quarter that our gross margin has exceeded 58%. The 140 basis point increase in consolidated gross margin was driven by a change in sales mix, lower manufacturing input costs and reduced headcount partially offset by deleveraging from lower unit volumes and higher sales of designer floor samples. Adjusted operating margin of 10% reflects fixed cost deleveraging from lower sales partially offset by gross margin improvement, lower headcount, less variable expenses and the ability to maintain a disciplined approach to cost savings. Our SG&A expenses decreased 9.6% and equaled 51.4% of net sales, up from 44.7% last year due to lower sales volume relative to fixed costs. Compared to our pre-pandemic 2019 third quarter, our operating margin has improved 380 basis points due to our initiatives focused on streamlining and reducing the operating cost structure while enhancing operating efficiencies. Adjusted diluted EPS was $0.48. Our effective tax rate for the quarter was 25.1%, consistent with a year ago. Now, turning to our liquidity, we ended the quarter with a robust balance sheet including cash and investments of $181.1 million and no outstanding debt. We generated $23.7 million of cash from operating activities during the quarter, primarily due to net income and improvements in working capital. In February 2024, we paid a regular quarterly cash dividend of $9.2 million or $0.36 per share. More recently, on April 22, our Board of Directors increased our regular quarterly cash dividend by 8.3% to $0.39 per share, which will be paid in May. This recent action marks the fifth time we have increased our regular quarterly cash dividend since January of 2021. In summary, we remain cautiously optimistic as the strength and stability of our balance sheet has us positioned well to maximize on our vertically integrated structure in anticipation of a better macroeconomic and home furnishings environment. We are building a fundamentally stronger company, protecting our profitability and enhancing our operational efficiency. With that, I will now turn the call back over to Mr. Kathwari.
Farooq Kathwari: All right, thanks Matt. As we discussed in our last quarterly meeting, our results reflect post-COVID business environment. COVID emergency started to end about twelve months back and consumers' interest diverted to other areas such as travel, resulting in lower sales for us and our industry, also resulted in a number of bankruptcies in our industry and in my opinion they did not take the precautionary measures. We did take strong measures to reduce inventories and expenses and increase our cash. We do now see the start of increased interest in the home and start of positive sales. While Matt has given some financial information, I would like to again emphasize the fact that our operating margins of 10% for quarter ended March 31, 2024 are of course lower than the 15.2% for the quarter ended March 31, 2023 and however, our pre-COVID that is March 31, 2019, our operating margins were 6.2%. Our net income of $12.4 million for quarter ended March 31, 2024, again compared to $22 million as of March 31, 2023 and $8.2 million as of March 31, 2019. We have continued to have strong cash position as Matt just said at March 31, 2024 of $181 million, March 31, 2023 at $156.2 million. And again, very importantly on March 31, 2019, that the pre-COVID our cash was $25.7 million. We have also maintained strong cash dividends for quarter ended March 31, 2024, paid $9.2 million. And as we just mentioned and Matt did in the press release, that the Board increased our regular dividend to $0.39, an 8% increase. Very importantly, with the combination of technology and personal skills, and looking at our business from a base zero, we have been able to have reduced our headcounts. As of March 31, 2024, it was 3448 compared to 3816 as of March 31, 2023, a decline of 9.6%. And very importantly, we had a headcount of 5120 as of March 31, 2019, a reduction of 32.7%. Tremendously important is the fact of reviewing all our operations, you might say, from base zero, having great talent and technology that has resulted in strong efficiency in our enterprise. Now, very briefly, on some of our current initiatives. During the last twelve months, we launched the interior design initiative. This initiative reflects our next reinvention in our 93 years. Most of our 175 design centers in North America have been repositioned and the main elements are our design centers reflect consistency of product programs across North America and we are currently working with our international partners. Very importantly, the size of our design centers have been reduced. At this stage, our objective is to have the maximum size of 12,000 square feet from the 20,000 or so, 20,000 square feet that most of our design centers were operated at. The extra space has been converted in the design centers where we have the space into what we call a design floor sample area. We've been selling the extra inventory resulting from the change. Now, the impact of this has been, that is of course has been very cash positive, but it also had an impact of lower margins because we were selling a lot of slow sample products. And another impact it had was on our manufacturing because instead of products we made for manufacturing, we were selling a lot of products from floor samples. Now the good news is most of that is over. We still have products that will be sold because this does take some time, but we have now started to have more of the orders coming in and going to our manufacturing. As I said earlier, the combining very strong interior designers and technology is a game changer in terms of productivity and costs. Now in our marketing and merchandising, our marketing is constantly utilizing technology in developing and distributing our message. During each month, two digital magazines of about 36 pages are distributed each time to $9.5 million customers and prospects. In April, we just introduced our new style book, which has been very well received by our teams and clients. This style book will be again available both in print form and digitally. Merchandising is focused on strengthening our product programs and introducing them to our network and consumers in a planned manner. We did hold up some of our product introductions, but now we have been very aggressive and in fact, in the next six months we'll have a fair amount of new products introduced. We also want to make sure we stay relevant. I, along with some of our key people, had an opportunity last week to review products in the Milan fashion and furniture fair so that we understand where we are. And again, as you know, our focus has been to be to have products that differentiate us and that will be our focus. You'll see more of that coming in. Our product programs, I say we will focus on classics, but with a modern perspective and we believe that is the right attitude for us. Now in manufacturing and logistics, we have 75% of our products are made in our manufacturing in North America. In furniture, I mean, we do get other products, like accessories and other things from different parts of the world. And we continue to invest in many areas from new machinery and equipment and strengthening our environmental and social responsibility in the various regions. Keep in mind, with technology and of course, strong people, we have now, today reduced our manufacturing from about 30 manufacturing plants only 10 to 15 years back to about 10, but it's in North America. Now, as we know, with all the conflicts taking place in the world, the international freight has increased. Again as we make 75% of our furniture in North America, the impact has been less, mostly on products that are coming from overseas in excess [ph] and from furniture. So overall we are well positioned. Our interior design network has been redesigned in terms of the projection. Very important, we have continued to have strong interior designers and technology in all areas. With that brief overview, I'd like to open it up for any questions or comments.
Operator: Thank you. [Operator Instructions] One moment please, while we poll for questions. Our first question today is coming from Taylor Zick from KeyBank Capital Markets. Your line is now live.
Taylor Zick: Hey Good afternoon.
Farooq Kathwari: Hi there, how are you?
Taylor Zick: Hey, Farooq. It's Taylor Zick on for Brad Thomas. I just wanted to ask about cadence of the business for the quarter. You'd mentioned that January was kind of weak because of weather, but some of the trends have seemed to get better as the quarter had moved along. So, curious to what you have seen during the quarter and then if you have any thoughts on how April is trending?
Farooq Kathwari: Yes, but I think that in this quarter we did have an impact of weather in the middle of the month, it really had an impact and that created issues. And on top of it, as I said, with our focus, with the consumers interest in other areas that also impacted, but as we went into towards March, we did start seeing some improvements. And in April, consumers, as we said in our press release, we have seen more interest in the consumers getting back into the home from travel and all other areas.
Taylor Zick: Great. And then maybe just on the refresh of your design stores you'd mentioned you're complete on most of those refreshes. So I'm curious on what you're hearing from your customers or maybe your designers there and any feedback on some of those updated products as well?
Farooq Kathwari: Yes, this is really almost like a revolution. Five years back, folks in New Jersey thought they needed something very different than in Connecticut and forget California or Texas. But the fact is, good design is good design and we decided that we will. Along with it we had to make sure that all our interior designers, folks who are managing, were on board because they have to, they are the ones right in the field. They all loved what we did. We introduced it last April actually in our Danbury headquarters design center, and then it took us close to a year in implementing it across. Very well received by consumers, very well received by our designers because they have good design, and of course, what differentiates us is that 75% of our furniture is made custom when they come in. So if we were in a business of selling just products alone, what we show on the floor, it will be a different model. We need to make sure we have the best representation of our products on the floors and then have the ability of our designers through the use of technology, of creating room settings. Five years back, you could not imagine that the amount of virtual business we are doing combined with technology. Personal service and technology is making a big difference.
Taylor Zick: Great. Thanks, Farooq. I'll pass it along.
Farooq Kathwari: Say hello to him, would you please?
Taylor Zick: All right.
Operator: Thank you. Our next question is coming from Cristina Fernández from Telsey Advisory Group. Your line is now live.
Cristina Fernández: Hi, good afternoon.
Farooq Kathwari: Hi Cristina.
Cristina Fernández: Hi. I wanted to followup on the first question and your comment about seeing improved interest in the home. If I understand your comment correctly, it seems like you're seeing some sequential improvement in March and April. Can you talk about what you're seeing year-over-year? Are the declines lessening? And I guess what is giving you the confidence to, or kind of what green shoots, what are you seeing with the traffic to feel confident that the consumer is in fact, kind of back purchasing for the home?
Farooq Kathwari: Yes, Cristina, the issue is really what I was referring to is the fact the improvements are from the last six months or nine months because that's when we saw consumers interest go to other areas. And before that, a year back there was a lot of interest in the home. So you've got to compare this more to the last couple of quarters or three quarters at most when a lot of interest COVID sort of debated and a lot of interest went to other areas. We are now seeing that people have traveled, people have spent money in other areas and they are now looking back into the home. But keep in mind, during the COVID period a lot of folks did spend a lot of money on home. There's a lot of attention. So it is going to be relative to see how much better we are going to do, but certainly we are going to do better than what we did in the last couple of quarters.
Cristina Fernández: And then I wanted to ask about the order intake, the spread between retail and wholesale was wider than what we've seen the past couple of quarters. So is it the timing of the State Department contract or I guess what other factors are at play in that wholesale order intake?
Farooq Kathwari: Yes, that's all -- that is important. There are two important factors. One is our Government business, this conflict taking place and lot of interest, I mean a lot of attention from the Government went into spending money on security in other areas. That's what we understand. The good news is recently, now in the last couple of weeks, they've started to pay more attention to their furniture needs, so we've seen increased business. But for the last three, four, five months there was a lot of attention given to other areas and our business was substantially down. Then, of course, also our international business was down quite a bit, especially in China. Good news is that China is now, they've started the process of creating this interior design destination in design centers there in China. So the business has started to improve, but the factors of our international business, China being the number one, but our business in other countries also was down. Our State Department business was down. That was the big difference between our wholesale and retail.
Cristina Fernández: Thanks. And then the last question I have is in relation to the SG&A dollars, you've been able to reduce those. They were down 10% year-over-year this quarter. I guess, where are you flexing the SG&A? Is it mostly the headcount reductions in the last year or are you also pulling back on marketing or other sort of expense buckets? Thanks.
Farooq Kathwari: Yes, actually it is mostly headcount and that is both in manufacturing and retail. The combination of technology has really had a tremendous impact in the business we are doing. We have actually somewhat increased our marketing relative to what we did in the previous quarters. Matt, how much in this quarter? How much did we win what is it at 4%?
Matt McNulty: Yes, marketing actually was up 24% year-over-year and was 3.4% of sales versus only 2.1% of sales last year, so we've increased it.
Farooq Kathwari: So we increased our marketing, and of course, compared to some of the lower sales, but marketing has increased. It really was what you mentioned, the reduction in headcount has been a major factor.
Matt McNulty: I would also add to some of that flexing down is variable in nature. So as sales, delivered sales do come or we're down lower this year, variable compensation comes down, whether it's designers selling compensation or delivery costs and we're benefiting from lower fuel costs year-over-year, so that's coming down on the SG&A line.
Cristina Fernández: Thank you.
Farooq Kathwari: Okay, Christina. Thanks very much.
Operator: Our next question today is coming from Budd Bugatch from Water Tower Research. Your line is alive.
Farooq Kathwari: Hey Budd, how are you? Is Budd Bugatch there?
Operator: Budd perhaps your phone is on mute. Please pick up your handset.
Budd Bugatch: There you go. You're off mute now. There you go. I'm sorry. Sorry for that. Can you hear me now?
Farooq Kathwari: Yes, Budd, I am and how are you?
Budd Bugatch: I'm not bad for an old guy. I'm trying to catch up to you.
Farooq Kathwari: Budd, I don't like to hear that. You're just getting started.
Budd Bugatch: Well, we're not old, we're just getting older. I want to punch into that retail, the consumer adding back to the home and I hear you, and it's one of our true failings. Just try to put numbers on things and you're good with numbers, and you're also good at sidestepping us when we want numbers. So let me see if I can get a couple of them. The backlog increased from the last quarter to this quarter by about, if I do it right, and not the backlog, but the customer deposits increased about $17 million from the second quarter to the third quarter. Is that about right, Matt? Is that, do I have that correct? And last year it was about a $29 million increase and is that reflective of what's going on in terms of retail orders? How do you look at that?
Matt McNulty: Yes, that is correct. Sorry go ahead.
Budd Bugatch: No, go ahead Matt.
Matt McNulty: So what I was saying yes deposits are up year-over-year. Part of that was timing of when the orders come through in the quarter. But also it is reflective of, as Mr. Kathwari said, increasing focus on the home and a higher dollar volume of orders that we saw this past quarter compared to the last six to nine months, so the customer deposit balance did increase.
Budd Bugatch: Actually you gave us a backlog number for wholesale Matt. If you gave us one for retail, I missed it. What is the retail backlog at the end of the third quarter?
Matt McNulty: We typically do not disclose the retail backlog, although we do say it is approximately 2x that of customer deposits on hand.
Budd Bugatch: Okay. So the customer deposit is about 50% of what the backlog is. Okay of what an order is. And so when you look at Farooq, you're talking about increased attention to the home. Are you really talking about what you're seeing in April? Are you seeing or what you saw at the end of March? How do you -- when did that begin and help us account for it?
Farooq Kathwari: Well, March was almost unique because Easter fell on March 31 and we were closed, and closed on the last day of the month is not a good day to be closed on. So that did impact the numbers in March. Now, of course, Easter is going to be in April this month. What we did see was just in the beginning right after the end of Easter, we could see more increase in business because the timing of the Easter did impact much, but I think that some of that business did also go into April. So I see that what we are seeing is, it's still a start from, we still have to watch it carefully, but it's somewhat of a positive start in April.
Budd Bugatch: Okay, that is helpful. When I had my retail business, I would always say that Easter or Passover was either late or early, but it was never on time and so that's one of the…
Farooq Kathwari: Having it on March 31 is not a good day to have it.
Budd Bugatch: No, there's not. It's never good for the business. Okay, well, that really gets to the heart of my questions, is which is really and I think that's the key for Ethan going forward, is to what is the viability? What's the vibrancy of each thing in the consumer? And I know you've got a big plan to reduce the size of the design centers and make them more efficient, so we'll see how that portrays into the numbers. But thank you for taking my questions.
Farooq Kathwari: Yes, thanks very much, Budd.
Operator: Thank you. We reached end of our question-and-answer session. I'd like to turn the floor back over to Mr. Kathwari for any further or closing comments.
Farooq Kathwari: Well, thanks very much. I am pleased that we have this opportunity of discussion and a lot of challenges. Our industry, the economy, however, with all the great work that our team has done, that is at a time when many others increase their expenses, we were able to reduce it, but in a positive manner. We just introduced it for the sake of reducing it. It was a combination of great talent, technology and the last 10 to 15 years of reducing our manufacturing to a more sensible operating model that we have. So all of those things are impacting, and we look forward to continued progress as we move forward. So thanks very much, everybody. I look forward to talking to you next quarter.
Operator: Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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