Ethan Allen Interiors - Q3 2024

Transcript

Operator (participant)

Hello, and welcome to the Ethan Allen Fiscal 2024 third quarter analyst conference call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. You may be placed in the question queue at any time by pressing star one on your telephone keypad. 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.

Matthew McNulty (SVP, CFO, and Treasurer)

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 (Chairman and CEO)

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?

Matthew McNulty (SVP, CFO, and Treasurer)

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 our 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 totaled $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 design 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 reduce 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 22nd, 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 (Chairman and CEO)

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 12 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. 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.

Again, very importantly, as of March 31, 2019, that is the pre-COVID, our cash was $25.7 million. We've also maintained strong cash dividends. For quarter ended March 31, 2024, paid $9.2 million, and as we just mentioned, and Matt did in our 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 reduce our headcounts. As of March 31, 2024, it was 3,448, compared to 3,816 as of March 31, 2023, a decline of 9.6%.

And very importantly, we had a headcount of 5,120 as of March 31, 2019, a reduction of 32.7%. Tremendously important is the fact of reviewing our, 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 12 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 are, 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 10,000-12,000 sq ft from the 20,000 or so, 20,000 sq ft that most of our Design Centers were operated at. The extra space has been converted in the Design Centers, that way 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, been very cash positive, but it also had an impact of lower margins because we were selling a lot of floor sample products. 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, 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 of, we just introduced our new Style Book, which has been very well received by our teams and clients, that they will this Style Book will be again available, but 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 Furniture Fair, so that we understand where we are, and again, as you know, our focus has been 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, we're focused 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 ten or fifteen 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 accents and some 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 any questions or comments.

Operator (participant)

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. One moment please while we poll for questions. Our first question. Today is coming from Taylor Zick, from KeyBanc Capital Markets. Your line is now live.

Taylor Zick (Analyst)

Hey, good afternoon.

Farooq Kathwari (Chairman and CEO)

Hi, Taylor. How are you?

Taylor Zick (Analyst)

Hey, Farooq. It's Taylor Zick on for Brad Thomas. I just wanted to ask about cadence of the business for the quarter. You know, 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 (Chairman and CEO)

Yes. 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, 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 (Analyst)

Great. And then maybe just on the refresh of your design stores, you'd mentioned you're complete on most of those refreshes. I'm curious on what you're hearing, you know, from your customers or maybe your designers there, and any feedback on some of those updated products as well.

Farooq Kathwari (Chairman and CEO)

Yeah, you know, this is a really, it's almost like a revolution. Five years back, folks in New Jersey thought they needed something very different than in Connecticut, and so California or Texas. But the fact is, good design is good design. And we decided that we will, along with, we had to make sure that all our interior designers and our 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. This was. 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're 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'll 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 setting. You know, five years back, you could not imagine that the amount of virtual business we are doing combined with technology. The personal service and technology is making a big difference.

Taylor Zick (Analyst)

Great, thanks, Farooq. I'll pass it along.

Farooq Kathwari (Chairman and CEO)

All right. Say hello to him, would you, please?

Operator (participant)

Thank you. Our next question.

Farooq Kathwari (Chairman and CEO)

All right.

Operator (participant)

Coming from Cristina Fernández from Telsey Advisory Group. Your line is now live.

Cristina Fernández (Managing Director)

Hi, good afternoon.

Farooq Kathwari (Chairman and CEO)

Hello, Cristina.

Cristina Fernández (Managing Director)

Hi. I wanted to follow-up 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 (Chairman and CEO)

Yeah, 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' interests go to other areas. And before that, you know, 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 abated, 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.

It is going to be relative to see how much better we are going to do, but certainly we're going to do better than what we did in the last couple of quarters.

Cristina Fernández (Managing Director)

Then I wanted to ask about the order intake, the spread between retail and wholesale was wider than what we've seen in the past couple of quarters. So is it.

Farooq Kathwari (Chairman and CEO)

Yeah.

Cristina Fernández (Managing Director)

The timing of the State Department contract or, or I guess, what other factors are at play in that wholesale order intake?

Farooq Kathwari (Chairman and CEO)

Yeah, that, that, that's all. That is important. There are two important factors. One is our government business. This conflict taking place, a lot of interest, I mean, a lot of attention from the government went into spending money on security and other areas. That's what we understand. The good news is that 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 going to other areas, and our business was substantially down. Then, of course, also our international business slows down quite a bit, especially in China. Good news is that the China is now, they've started the process of creating this interior design destination in design centers there, in China.

The businesses 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 (Managing Director)

Thanks. The last question I have is in relation to the SG&A dollars. You've been able to reduce those. You were down 10% year-over-year this quarter. Where, 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 (Chairman and CEO)

Yeah. 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 spend, what?

Matthew McNulty (SVP, CFO, and Treasurer)

Yeah.

Farooq Kathwari (Chairman and CEO)

3%-4%?

Matthew McNulty (SVP, CFO, and Treasurer)

Marketing actually is up 24% year-over-year and was 3.4% of sales, versus only 2.2% of sales last year. So we've increased it.

Farooq Kathwari (Chairman and CEO)

So we increased our marketing. Of course, we're comparing to somewhat lower sales, but marketing has increased. It really was the, what you mentioned, the reduction in headcount has been a major factor.

Matthew McNulty (SVP, CFO, and Treasurer)

I would also add to.

Farooq Kathwari (Chairman and CEO)

And other.

Matthew McNulty (SVP, CFO, and Treasurer)

Some of that flexing down is variable in nature. So as sales, delivered sales do come or were 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 (Managing Director)

Thank you.

Farooq Kathwari (Chairman and CEO)

Okay, Cristina, thanks very much.

Operator (participant)

Our next question today is coming from Budd Bugatch from Water Tower Research. Your line is now live.

Farooq Kathwari (Chairman and CEO)

Hey, Budd, how are you? Is Budd Bugatch there?

Operator (participant)

Budd, perhaps your phone is on mute. Please pick up your handset. There you go. You're off mute now. There you go. I'm sorry. Sorry for that. Can you hear me now?

Farooq Kathwari (Chairman and CEO)

Yeah, Budd, I am, and how are you?

Budd Bugatch (Senior Research Analyst)

I'm not bad for an old guy. I'm trying to catch up to you, so.

Farooq Kathwari (Chairman and CEO)

Budd, Budd, I don't like to hear that. You're, you're just getting started.

Budd Bugatch (Senior Research Analyst)

Well, we're not old, we're just getting older. I wanna punch into that retail, the consumer adding back to the home, and I hear you, and, you know, it's one of our true failings is try to put numbers on things. 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. I meant 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, how do you look at that?

Matthew McNulty (SVP, CFO, and Treasurer)

Yeah, that, that is correct.

Farooq Kathwari (Chairman and CEO)

You know, Matt.

Matthew McNulty (SVP, CFO, and Treasurer)

Yeah. Sorry, go ahead.

Farooq Kathwari (Chairman and CEO)

Go ahead, Matt, yeah.

Matthew McNulty (SVP, CFO, and Treasurer)

So what I was saying.

Farooq Kathwari (Chairman and CEO)

Matt, go ahead.

Matthew McNulty (SVP, CFO, and Treasurer)

Yes, our deposits are up year-over-year. Part of that was timing of when the orders come through in the quarter, but also it's 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 (Senior Research Analyst)

I see.

Matthew McNulty (SVP, CFO, and Treasurer)

So that backlog.

Budd Bugatch (Senior Research Analyst)

You gave us a backlog number for wholesale. If you gave us one for retail, I missed it. What is the retail backlog at the end of the third quarter?

Matthew McNulty (SVP, CFO, and Treasurer)

Yeah. We typically do not disclose the retail backlog, although we do say it is approximately 2x that of customer deposits on hand.

Budd Bugatch (Senior Research Analyst)

Okay. So the customer deposits, it's about 50% of, of what, 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, or are you seeing it, or what you saw at the end of March? How do you? When did that begin, and help us account for it?

Farooq Kathwari (Chairman and CEO)

Yeah. Well, you know, the March, we just. Well, March was somewhat unique because Easter fell on March 31st, and we were closed, and closed on the last day of the month is not a day to be closed on. So that is, that's, that did impact the numbers, or in March. Now, of course, Easter is gonna be in April this month. What we did see was just in the beginning, right after the end of Easter, there was, we could see more increase in business. Because the timing of the Easter did impact March, but I think that some of that business also did also go into April. So I see that what we are seeing is, it's still a start from, you know, we still have to watch it carefully, but it's somewhat of a positive start in April.

Budd Bugatch (Senior Research Analyst)

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-

Farooq Kathwari (Chairman and CEO)

Yeah.

Budd Bugatch (Senior Research Analyst)

That's one of the.

Farooq Kathwari (Chairman and CEO)

No, having it on March 31st is not a good, good day to have it.

Budd Bugatch (Senior Research Analyst)

No, no, it is not. It's never good for the business. Okay, well, that really gets to the heart of my questions, which is really, and I think that's the key for Ethan going forward, is what is the viability, what's the vibrancy of what you're seeing 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 that. We'll see how that portrays into the numbers. But thank you for taking my questions.

Farooq Kathwari (Chairman and CEO)

Yeah. Thanks very much, Budd.

Operator (participant)

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Mr. Kathwari for any further closing comments.

Farooq Kathwari (Chairman and CEO)

Well, thanks very much. I'm pleased that we have this opportunity of discussing 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, you know, many others increased their expenses, we were able to reduce it, but in a positive manner. We just didn't reduce it for the sake of reducing it. It was a combination of great talent, technology, and the last 10, 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, and look forward to talking to you in the next quarter.

Operator (participant)

Thank you. That does conclude today's teleconference webcast. You may disconnect.