Ethan Allen Interiors Inc. (NYSE:ETD) Q2 2024 Earnings Call Transcript

Ethan Allen Interiors Inc. (NYSE:ETD) Q2 2024 Earnings Call Transcript January 24, 2024

Ethan Allen Interiors Inc. misses on earnings expectations. Reported EPS is $0.679 EPS, expectations were $0.76. ETD isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. And welcome to the Ethan Allen Fiscal 2024 Second Quarter Analyst Conference Call. [Operator Instructions] Please note this conference is being recorded. It is now my pleasure to introduce you to your host, Matt McNulty, Senior Vice President, Chief Financial Officer and Treasurer. Thank you. You may begin.

Matt McNulty: Thank you, Alisa. Good afternoon. And thank you for joining us today to discuss Ethan Allen’s fiscal 2024 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 for your questions. Before we begin, I’d like to remind the audience that this call is being transcribed and webcast live under the News and Events tab on the Investor Relations page of our website. There, you will find a copy of our press release, which contains reconciliations of non-GAAP financial measures referred to on this call and in this 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 risk factors 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: Thanks, Matt, and good to have you all joined. We are pleased to review our second quarter results and our initiatives to continue to strengthen our enterprise and our strong financial results. We are very well positioned, and after Matt provides a brief overview of our financial results for the second quarter ended December 31, 2023, I will review our initiatives and focus to continue to strengthen our enterprise and maintain strong financial performance. 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 second quarter are highlighted by strong margins, lower sales, and a robust balance sheet. Despite operating in a softening economy, our operations produced positive financial results, which I will now discuss. Our consolidated net sales totaled $167.3 million, reflecting lower delivered unit volume, reduced manufacturing from lower backlogs, and a strong prior year comparable.

Written order trends in the quarter were impacted by continued softening of the home furnishings market, reduced design center traffic, and – strong prior year demand. Wholesale segment written orders decreased 10.9%, compared to last year, while Retail segment written orders were down 9.4%. We ended the quarter with wholesale backlog of $54.9 million, which is near pre-pandemic levels. We improved customer lead times and reduced the number of weeks of backlog, bringing it more current. Helping to reduce lead times within case goods with increased production in Vermont as we recover from significant flooding that occurred in July 2023. Our Vermont wood furniture plant has resumed operations and operated at approximately 75% capacity during the just completed quarter.

Consolidated gross margin was 60.2% our 11th consecutive quarter, that consolidated gross margin exceeded 58%. Our current quarter consolidated gross margin was impacted by deleveraging from lower unit volumes, combined with a change in the sales and product mix, partially offset by lower input costs and headcount. Adjusted operating margin of 12.8% reflects lower sales, gross margin erosion, and incremental costs from our design center refresh and grand reopenings. These costs were partially offset by lower headcount and our ability to maintain a disciplined approach to cost savings and expense control. Our SG&A expenses decreased 9.1% and equaled 47.3% of net sales, up from 42.9% last year due to fixed cost deleveraging. On a sequential basis, our adjusted operating margin improved 70 basis points, as we increased sales by 2.1% while reducing SG&A expenses by 1.4%.

And when compared to our pre-pandemic 2018 second quarter, our operating margin has improved even more, up 460 basis points. Adjusted diluted EPS was $0.67. Our effective tax rate for the quarter was 25.5%, comparable to 25.7% a year ago. Now turning to our liquidity. We ended the quarter with a robust balance sheet, including cash and investments of $167.8 million and no outstanding debt. We generated $13.6 million of cash from operating activities during the quarter, driven by strong profits, improved cash collections, and lower inventory levels. In November 2023, we paid a regular quarterly cash dividend of $9.2 million, or $0.36 per share. Also, as just announced yesterday, our Board of Directors declared a regular quarterly cash dividend of $0.36 per share, which will be paid in February.

We are also pleased to pay cash dividends while maintaining a strong cash position. In summary, our vertically integrated enterprise was able to produce a double-digit operating margin during this post-pandemic period marked by industry-wide softening demand. Our business model generated strong positive cash flow and protected our operating margin as we remain committed to disciplined investments and strong expense management. With that, I will now turn the call back over to Mr. Kathwari.

Farooq Kathwari: Well, thank you, Matt. As we mentioned in our press release, we are now entering the post-pandemic period. The pandemic period, defined as fiscal years 2021 through 2023, reflected strong consumer focus on home, high demand, and major increase in sales. We had record high backlogs, which are now returning to pre-pandemic levels. For the second quarter ended December 31, 2023, gross margins increased to 60.2%, compared to 55.2% for the quarter ending December 31, 2018. That is a pre-pandemic period. Cash and investments of $167.8 million increased from $38.8 million five years ago. During this period, we have returned $137.9 million to shareholders in the form of cash dividends, an increase of $41.4 million or 42.9% during the three-year period leading up to the pandemic.

Our inventory was reduced 11.5% and headcount reduced 31.1% from the pre-pandemic levels of December 2018. Now going forward, we are well positioned. We continue to strengthen our offerings. And now that our supply chain has improved, we plan to start introducing new products. Our retail network continues to be strengthened. The repositioning of our design centers throughout North America has been a major undertaking and has placed us strongly. The interior design destination focus, is very important to position us for growth. We have also reduced the space of our interior design centers, which reflected selling of large amounts of floor samples. This resulted in lower customer orders, which is a core of our North American manufacturing, reflected in lower production.

We have completed most of the repositioning of our design centers. Our marketing has been greatly enhanced. While major reduction of costs, advertising expenses equal to 2% of net sales as, compared to 4% prior to the pandemic. Despite lowered delivered sales, maintained gross margin of 60.2% and an operating margin of 12.8%. We have strengthened our talent in many areas of our vertically integrated enterprise. While the post pandemic period has seen consumer focus on other areas, such as traveling, we believe that now consumers have again started to focus on their homes, which gives us an opportunity to continue our progress. We are positioned well and remain cautiously optimistic. And very happy to open for any questions or comments.

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Q&A Session

Operator: Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Budd Bugatch with Water Tower Research. Please proceed with your question.

Farooq Kathwari: Yes, hello, Budd. How are you?

Budd Bugatch: I’m good, Farooq. I hope you are as well.

Farooq Kathwari: Thank you.

Budd Bugatch: Yes, a couple of questions, if I might. First on, just can you talk a little bit about any variance across the country in terms of the volume and the results geographically that you can point to?

Farooq Kathwari: Yes, Budd. I don’t think so. I think that there has been pretty consistent across the country. If there were differences, it was more reflecting our strengths, or the positioning – in the market. But I cannot say that somehow that West or East or South are doing better. I think it is pretty consistent.

Budd Bugatch: Okay. And you mentioned that the consumer is starting to refocus on the home, which implies that – or I infer from that – there might have been some difference in the quarter as you saw the cadence of orders or cadence of traffic to the website or the traffic in the stores. Any comment or any color you can give on that?

Farooq Kathwari: Yes. I would say that well – in most of 2023, especially the last six or seven months, consumers were focused on other areas. They had already purchased a lot of home furnishings and their interest in other areas was evident. But what we saw actually in December is the month where we saw somewhat more of a – you might say greater trends and traffic, an interest in the home. So, we believe that after six or seven months of not having that focus, consumers are getting back into the home.

Budd Bugatch: So if I ask you if – it’s a quantitative question, was December a positive month for – written order business at the retail network?

Farooq Kathwari: Yes, it was.

Budd Bugatch: And any – do you want to put any more color to that, like a number?

Farooq Kathwari: You know, Budd it’s still too early. I think as I said that, we are in January and we also see positives and also there are challenge in some areas. But overall, the added – the perception is that consumers are now starting to get back in furnishing their homes. It’s still early, but we are starting in a positive direction.

Budd Bugatch: Okay. And I noticed, of course, that the operating margin differential was significant quarter-over-quarter in both segments. You mentioned some deleverage in the – which would imply from the Manufacturing segment, I would think. Can you talk to – what might have been other than volume? Were there any other issues other than unit volume going through that might have impacted that?

Farooq Kathwari: No, I think it’s substantially volume, because if you take a look at it, we still had strong margin. That’s why I compared it to the pre-pandemic levels that our margins were higher than the pre-pandemic levels. When I said that our gross margin went from 55.2% to 60.2% and that our operating margins went from 8.3% to 12.8%. Obviously, the year before, our operating margins were 18.1%, reflecting extremely high sales. But, when you take a look at historically, this 12.8% is a pretty good operating margin.

Budd Bugatch: No doubt. And my last question just, you talked about floor sample sales. That has an impact on both revenue and margin. Can you maybe help us get a feel of the color at the margin side – and how much impact that might have had on the gross margin and the operating margin on the Retail segment?

Farooq Kathwari: Yes, I think there were a number of impacts it had. As I mentioned in my comments, that substantial, actually all of our North American manufacturing, almost all of it is custom. And when we decided to reposition ourselves as an interior design destination, one of the things we developed and implemented was reducing the floor space. Today, with our strong interior designers, with our technology, we don’t need 20,000 square foot design centers. So we started, we decided early last year, in 2023 calendar year, that we will start repositioning and we would then reduce the size from, let us say, many of them from 20,000 to 12,000. And the rest of that product, we called it – designer floor samples. And it helped us sell the products. Obviously, the margins were lower, but it also had another impact. It was on a manufacturing. Because when we were selling existing inventory, we were not making custom product. So good news is that most of that is over.

Budd Bugatch: Well, thank you. Thank you very much. Good luck on – next upcoming quarters and the year. Thank you, sir.

Farooq Kathwari: Thanks very much.

Operator: Thank you. Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Farooq Kathwari: Hello, Brad. Is that you?

Brad Thomas: It’s me. Good afternoon, Farooq. Good afternoon, Matt.

Farooq Kathwari: Yes, good afternoon and good to have you, Brad.

Brad Thomas: Always a pleasure. Thanks for having us. I was first going to ask, Farooq, maybe if you could talk a little bit more about new products, and the degree of the broader assortment that you expect to change in the year ahead, and the degree of products on the floor in your galleries that, you’re expecting to change?