Ethan Allen Interiors - Earnings Call - Q1 2026

Executive Summary

• Q1 FY26 was mixed: solid gross margin (61.4%) and positive operating cash flow ($16.8M) offset by lower delivered sales; both revenue ($146.98M) and EPS ($0.43 adj.) were modest misses versus consensus as marketing and promotions weighed on operating margin (7.2% adj.). EPS and revenue missed S&P Global consensus of $0.445 and $149.15M, respectively; EBITDA also missed ($14.35M vs. $18.10M)*.
• Retail demand continued to heal: retail written orders rose 5.2% YoY (second straight quarter of positive growth), while wholesale written orders fell 7.1% on softer U.S. government/contract activity; backlog and customer deposits increased sequentially, supporting near-term deliveries.
• Management leaned into marketing (national spend up ~44% YoY, 2.4%→3.4% of sales) while maintaining price discipline; gross margin benefited from mix, lower input costs, and higher average ticket but was partially offset by promotions and floor sample sales.
• Balance sheet remains a differentiator: $193.7M in cash and investments, no debt; Board maintained the $0.39 quarterly dividend (payable Nov 26, 2025), continuing multi-year capital returns.

What Went Well and What Went Wrong

What Went Well

• Retail demand inflected positive again: retail written orders +5.2% YoY, with higher conversion despite “30+% lower traffic”; management highlighted “more qualified” customers working with designers.
• Gross margin resilience: 61.4% driven by mix, lower materials, selective price increases, and average ticket; vertical integration (≈75% North America) mitigated tariff impacts on furniture.
• Strong liquidity and cash generation: $16.8M operating cash flow; cash and investments $193.7M; no debt; dividend maintained.

What Went Wrong

• Delivered sales softness and deleverage: consolidated net sales fell 4.8% YoY to $146.98M, with adjusted operating margin down to 7.2% (from 11.5% LY) due to lower volume and higher marketing/promotions/floor clearance.
• Contract/government headwinds: wholesale written orders -7.1%; management cited U.S. government delays and shutdown risk; State Department-driven orders dependent on government reopening.
• Consensus misses: Q1 revenue, EPS, and EBITDA fell short of S&P Global consensus; marketing investment and promotions weighed on profitability near term (see Estimates Context)*.

Transcript

Operator (participant)

Good afternoon and welcome to the Ethan Allen fiscal 2026 first quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. 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.

Matt McNulty (SVP, CFO, and Treasurer)

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 am pleased to now turn the call over to Mr. Kathwari.

Farooq Kathwari (Chairman, President, and CEO)

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?

Matt McNulty (SVP, CFO, and Treasurer)

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 at 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 continued to improve. Retail written order growth at 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 backlogs 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 three 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 mpacted 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 six 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, 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.

Farooq Kathwari (Chairman, President, and CEO)

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 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 benefits 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 is the size of a design center by 25%. We developed 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 has 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 were 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 products 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 locations 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 on 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 two 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 one year, which, of course, resulted in our selling of floor samples. We also have included new products, which we introduced in Danbury two 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 (participant)

We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we pull for questions.

Farooq Kathwari (Chairman, President, and CEO)

All right.

Operator (participant)

Our first question is from Taylor Zick with KeyBanc Capital Markets.

Farooq Kathwari (Chairman, President, and CEO)

Hello, Taylor.

Taylor Zick (Assistant VP)

I'm doing well. How are you, Farooq? 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.

Farooq Kathwari (Chairman, President, and CEO)

Yeah, that's a good question because, you know, the first quarter we were looking at all these 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. What we saw was that 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, you know, if the environment was different and we didn't have about a 30%, 30%+ lower traffic into our design centers because of the fact, you know, with the economy and what is taking place. The people who came in were interested, qualified. They worked with our designers, thereby helping us increase our business.

Taylor Zick (Assistant VP)

Yeah, that's great. Maybe just to 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 all want to comment on that?

Farooq Kathwari (Chairman, President, and CEO)

Yeah, 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 do give a special savings every quarter, and we have maintained that. We do also provide financing, but also at the level that we have been doing in the past. Small changes, but not much. 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.

Taylor Zick (Assistant VP)

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? Maybe if you've taken any pricing yourself.

Farooq Kathwari (Chairman, President, and CEO)

Yeah, that's an important issue. 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%-80% of our furniture in North America, in Vermont, North Carolina, then we have in Central Mexico, and in Honduras. There has, first, there was hardly any tariffs in Mexico. There were tariffs, and now they are thinking of not having the level of tariffs that they had last two weeks. It's ever-changing. 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 are non-furniture products, a lot of that does come from overseas and has been impacted by tariffs. We have taken, and again, that changes.

One has to be careful that you don't act too fast. We have made some changes, and we have taken some price increases anywhere from, depending on the country, the region, anywhere between 5%-10%. Some of our partners overseas have worked with us to manage the costs. Overall, I think that we have been much less impacted by margins, by the question of tariffs. Most of it has been on our non-furniture products. We do have one major plant that we have in Southeast Asia, which has been impacted. Again, we have to watch that every month the tariffs change. Overall, I think we're managing it well because of our strong presence in North America and our own manufacturing.

Taylor Zick (Assistant VP)

Great. Thanks, Farooq. I'll leave it there.

Farooq Kathwari (Chairman, President, and CEO)

Thanks very much.

Operator (participant)

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

Farooq Kathwari (Chairman, President, and CEO)

Hi.

Cristina Fernández (Managing Director and Senior Research Analyst)

I'm doing good. Thank you. Hi, Farooq. Hi, Matt. I had a couple of questions. I want 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%. At what point will we see that demand translate into growth for that segment?

Farooq Kathwari (Chairman, President, and CEO)

If you take a look at our retail, you know, we had, 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 the 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. 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.

I think that at this stage, Cristina, our objective is to still watch, but to come close to what we did last year.

Cristina Fernández (Managing Director and Senior Research Analyst)

Okay. 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. Do you think it can normalize here in the near-term over the next quarter or two, or should we expect this lower trend to be a new steady state?

Farooq Kathwari (Chairman, President, and CEO)

It's a good question. It depends upon the opening of the government. What we have seen is this, and what we hear is that we would get orders if the government was open. Because of the fact that the government is not open, new orders are not coming in. It all depends upon what happens with the government. It also has, 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. We hope that the government opens up. What we hear is that there are some higher pending orders that they will forward to us when they open.

If that happens, let's assume that it happens in this quarter, then the impact of that would be towards the middle or the end of the following quarter because we got to make that product.

Cristina Fernández (Managing Director and Senior Research Analyst)

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

Farooq Kathwari (Chairman, President, and CEO)

Yeah, it's a good question. Where we increased is on our, 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. We accelerated. That's where most of the increase at the national level took place, you know, close to a 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 believed 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. Going forward, we'll continue with our direct mail as we have in the past.

As to answer your question, most of the money, the new money, our new advertising was on paid search and paid social campaigns.

Cristina Fernández (Managing Director and Senior Research Analyst)

Thank you.

Farooq Kathwari (Chairman, President, and CEO)

All right. Any other questions?

Operator (participant)

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

Farooq Kathwari (Chairman, President, and CEO)

Thank you very much. We are fortunate that we have a very, very strong team. As you know, I always talk of five things. 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 and knowledgeable. It is also due to the tremendous increase in technology that is helping us in our work. We've 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.

With strong talent, strong product programs, vertical integration, and our focus on technology, we believe we are well-positioned in somewhat challenging conditions because we do not know the overall international and the domestic situation. Despite all of that, we've 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.

Operator (participant)

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

Farooq Kathwari (Chairman, President, and CEO)

Okay, thank you.