Ethan Allen Interiors - Q4 2023

Transcript

Operator (participant)

Good afternoon, welcome to the Ethan Allen Fiscal 2023 Fourth Quarter and Analyst Conference Call. A question and answer session will follow the prepared remarks. If anyone should require operator assistance, please press star zero on your telephone keypad. Please note that this conference is being recorded. It is now my pleasure to introduce your host, Matt McNulty, Senior Vice President, Chief Financial Officer, and Treasurer. Thank you. You may begin.

Matt McNulty (SVP, CFO, and Treasurer)

Thank you, Daryl. Good afternoon, and thank you for joining us today to discuss Ethan Allen's Fiscal 2023 and Fourth Quarter Results. With me today is Farooq Kathwari, our Chairman, President, and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will then open the call 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 ethanallen.com website. There, you will find a copy of our press release, which contains reconciliations of non-GAAP financial measures referred to in this release and on this call. A replay of today's call will also be made available via phone and on our website.

Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. 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)

Thanks, Matt. Thank you for participating in our Fiscal 2023 and Fourth Quarter Financial and Operating Results. As we reported, we had strong financial results for our fiscal year and fourth quarter, ended June 30, 2023. For the year, sales of $791.4 million, gross margin of 60.7%, adjusted operating income of $133.5 million, which is 16.9% of sales, and adjusted earnings per share of $4.03, compared to $3.93 in the previous year. Our fiscal fourth quarter was also strong, with adjusted operating income of $30.6 million, for an operating margin of 16.3%.

We have continued to generate strong cash, and as of June 30, 2023, had cash and investments of $172.7 million and no debt. We are also pleased that yesterday our board approved a regular quarterly cash dividend of $0.36 per share and a special cash dividend of $0.50 per share, both payable August 31st. As expected, the focus and very high demand of consumers on the home during the COVID-19 pandemic has moderated. We are well positioned to continue our progress. After Matt provides a brief overview of our financial results, I will provide an overview of our focus to continue our strong operating and financial results. Matt?

Matt 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 include restructuring initiatives, impairments, and other corporate actions and are further detailed in our press release. We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business. Our financial results for the fiscal 2023 full year and fourth quarter, ended June 30, are highlighted by strong growth in operating margins, improving lead times from decreasing backlogs, disciplined cost and expense controls, strong operating cash flow, and a robust balance sheet. As we operate in a post-COVID-19 era, our operations produce strong financial results, which I will now discuss. Our fiscal 2023 consolidated net sales of $791.4 million were lower than last year by 3.2%.

Our fourth quarter consolidated net sales totaled $187.4 million, a decrease of 18.4% due to lower delivered unit volume from softening order demand and reduced manufacturing production from lower backlogs. Sales in the fourth quarter a year ago set a near record pace, leading to a difficult comparison. Compared to the fourth quarter of fiscal 2019, which is pre-pandemic and more reflective of historical norms, our consolidated net sales were up 1.9%. Wholesale segment written orders during fiscal 2023 were 9% lower compared to last year, but only 2.1% lower than fiscal 2019. For the quarter, our wholesale orders were down 14.7% to last year and were 2.5% lower than our pre-pandemic fourth quarter of 2019.

Retail segment orders were 12.3% lower in fiscal 2023 when compared to last year, and down 12.5% for the quarter, primarily due to a strong prior year comparable and a reduction of consumer focus on the home. When compared to 2019, retail orders for the full year were up 0.8%, while our quarterly orders were down 1.2%. We ended the fiscal 2023 year with wholesale backlog of $74 million, down 27.7% from a year ago, as we were able to reduce the number of weeks of backlog. However, our wholesale backlog still remains higher than pre-pandemic levels, and our teams are effectively managing the business to work through this order backlog and to service our customers. For the full fiscal 2023 year, our consolidated gross margin was 60.7%.

106, 40 basis point improvement over last year. In the just completed fourth quarter, consolidated gross margin was 61.5%, our ninth consecutive quarter that consolidated gross margin exceeded 58%. When compared to last year, our quarterly consolidated gross margin was up 330 basis points due to favorable sales mix, disciplined promotional activity, and lower input costs, including reduced inbound freight and raw material costs, partially offset by lower delivered unit volume. Retail sales, which carries a higher gross margin, increased to 83.4% of fourth quarter consolidated sales, up from 82.1% last year. For the 2023 fiscal year, our adjusted operating margin was 16.9%, a 50 basis point improvement over last year as we carefully managed expenses in a declining net sales environment.

Fourth quarter adjusted operating income and margin was 16.3%, down from 18.5% last year due to lower consolidated net sales, higher retail delivery and health insurance costs, and new product display, merchandising and sample costs, partially offset by gross margin expansion and our ability to maintain a disciplined approach to cost savings and expense control. Our SG&A expenses decreased 7.6% and equaled 45.1% of net sales, which is an increase from 39.8% last year, due to fixed cost deleveraging on lower sales. On a full year basis, adjusted diluted EPS rose 2.5% to $4.03. For the fourth quarter, our adjusted diluted EPS was $0.96, compared to $1.25 last year.

Our effective tax rate was 25% for the full year, and 23.6% for the fourth quarter, which varies from the 21% federal statutory rate, primarily due to state taxes. Turning to our liquidity and capital resources. We ended our fiscal year with a strong balance sheet, including cash and investments of $172.7 million as of June 30th, and no outstanding debt. We generated $26.3 million of cash from operating activities during the quarter, bringing our total fiscal year amount up to $100.7 million, a 45.1% increase over last year. This growth was driven by strong profit performance and a reduction in inventory carrying levels and accounts receivable, partially offset by a decline in customer deposits.

Our inventory levels decreased $27.3 million since the start of the fiscal year, as we restore our operating inventory levels to more historical norms as backlog decreases, while also ensuring appropriate amounts of inventory are on hand to service our customers. Capital expenditures were $13.9 million for the year, including $3.2 million during the fourth quarter, as we continued to invest capital in manufacturing, retail, technology, and infrastructure. We also continued our practice of returning capital to shareholders in the form of cash dividends. In April, our board increased the regular quarterly cash dividend by 12.5% to $0.36 per share, which was subsequently paid in May, and brought our fiscal 2023 dividends paid total to $46.4 million.

As just announced in our earnings release, our board declared a special cash dividend of $0.50 per share, in addition to our regular quarterly cash dividend of $0.36 per share, both of which will be paid on August 31st. We have paid a special cash dividend each of the past three years, and have paid an annual cash dividend every year since 1996. In summary, our vertically integrated business delivered strong fiscal 2023 operating results during a period marked by industry-wide softer demand and challenging headwinds. We achieved these positive results and generated strong cash flows while protecting our margin gains through disciplined investments and solid execution. As we move into fiscal 2024, we must continue to carefully manage our expense structure while investing in growth initiatives that we believe will further our business.

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

Farooq Kathwari (Chairman, President, and CEO)

Well, thank you, Matt. As I mentioned, we and our industry greatly benefited from the consumer focus on the home during the COVID-19 pandemic, and as expected, consumer focus is now on many other areas as well. As we noted in our press release, we are very well-positioned. During the last three years, we have greatly strengthened our enterprise in several important areas, including the following: strengthening talent. We have strong talent in our various areas, from product development, marketing, manufacturing, logistics, retail, technology, and operations. Our product offerings and marketing have been enhanced. Our product programs, under the umbrella of classics with a modern perspective, are being introduced to our network. Our marketing has been greatly expanded, especially utilizing digital mediums. Repositioning of our retail network. We are in the process of launching our refreshed projection under the umbrella of interior design destination.

Our plan is to complete the launch in our 175 North American design centers during the next 6 months. This provides us great opportunity to reach our clients, is also strong motivation for our interior design team. As you know, we have the largest interior design, design network. We are pleased and honored that last week, in a study by Newsweek, we were named one of America's top 10 retailers, including recognition as number 1 retailer in the premium furniture category. Continued strengthening of our manufacturing and logistics. We have continued to invest in our 10 North American manufacturing operations, which produce about 75% of our products, with 75% of them custom. Our national and retail logistics continue to be enhanced. We provide excellent and consistent service at one delivered price to our customers throughout North America. Technology.

Our focus and continued investments in technology have been a game-changer, both in providing excellent interior design service, combined with technology and in the efficiency of our manufacturing and logistics operations. Finally, we remain focused on being socially responsible as it is an important part of our business, our culture, and to the communities in which we serve and operate in. As we mentioned in our press release, we remain cautiously optimistic. Operator, we are now pleased to open the call for any questions and comments.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would 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 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for your questions. Our first questions come from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your questions.

Farooq Kathwari (Chairman, President, and CEO)

Hello, Brad, is it you?

Brad Thomas (Senior Equity Research Analyst - Consumer and Retail Hardlines)

It is me here. Yes. Hi, good afternoon, Farooq. Good afternoon, Matt. How are you all?

Farooq Kathwari (Chairman, President, and CEO)

Good, good to hear Brad, after some time. You're doing well?

Brad Thomas (Senior Equity Research Analyst - Consumer and Retail Hardlines)

I'm doing well and thrilled to not have another earnings conflict here during this call today. Good to hear you live, Farooq. Well, thanks for all the prepared commentary. I was wondering if we could talk a little bit about the cadence of the business from a written perspective with a little bit of a slowdown from what you posted in the March quarter. I was wondering if you could talk about some of the dynamics behind that. You know, did you change it all? How promotional were you were? Is it getting more competitive?

You know, did the consumer seem to just, just pause, and how you're thinking about the cadence of orders as we, as we look forward here?

Farooq Kathwari (Chairman, President, and CEO)

Yes, as we mentioned, that we were operating the last 2 years at very, very high levels of orders coming in. Consumers' interest was tremendously great, and now it has come back to somewhat, you know, you might say, normal, which is as Matt also mentioned, we look at our fiscal 2019 as a base year prior to the COVID-19. Based on that, we are still holding up pretty good. Our backlogs are still higher than what we had in 2019, and where the positive thing has been that we have been able also to become more efficient at all levels. For instance, the role of technology has just been amazing of the efficiency it has brought in and the productivity it has brought in, both at our manufacturing and at our retail levels.

Today, we have most likely, when you go back to 2019, we have many, much less, many less interior designers doing more business because of the effect of technology. Similarly, our manufacturing 25, 30 years back, we had 30 manufacturing plants. Today, we have 10, and they're operating extremely efficiently and effectively because the combination of obviously good talent, but also technology. I would say that our business is obviously moderated, but as you can see, despite the fact we had lower sales at last fiscal year, our gross margins improved and our operating income also improved. We will continue to see us operate more efficiently and effectively, both at our gross margin level and the operating income level.

Brad Thomas (Senior Equity Research Analyst - Consumer and Retail Hardlines)

That's a great segue to my, my follow-up question there. The gross margin, obviously, you know, very strong. I know some of that is a function of channel mix and on where the sales come from. How are you all thinking about, you know, the puts and takes on gross margin as we think about the next year?

Farooq Kathwari (Chairman, President, and CEO)

I think that, You know, obviously, the gross margin is impacted by the amount of production and sales. You know, we are, we run, we are a vertically integrated company. We have manufacturing. Obviously, our manufacturing benefits with higher volumes. On the other hand, at lower volumes, the manufacturing does have a negative impact on gross margins. Those are issues from the, from the perspective of gross margins. Having said all of those things, I think that more or less where we are, we are, we expect to remain. That's what our expectation is, to remain at the level we are because of the efficiencies that we have brought in.

Brad Thomas (Senior Equity Research Analyst - Consumer and Retail Hardlines)

Gotcha. I appreciate it. Thanks so much, Farooq.

Farooq Kathwari (Chairman, President, and CEO)

All right. Thanks very much. Good to hear your voice. Now, this is normally, I tell you this, our folks don't completely know it, but I think you were there 30 years back when we took, when we took this company public, correct?

Brad Thomas (Senior Equity Research Analyst - Consumer and Retail Hardlines)

Not quite that far. Going through the great financial crisis, but not quite that far.

Farooq Kathwari (Chairman, President, and CEO)

All right. Okay. You're still young. All right.

Brad Thomas (Senior Equity Research Analyst - Consumer and Retail Hardlines)

That's right. Thanks, Farooq.

Farooq Kathwari (Chairman, President, and CEO)

All right, Gerald, please go ahead.

Operator (participant)

Thank you. Our next questions come from the line of Cristina Fernandez with Telsey Advisory Group. Please proceed with your questions.

Farooq Kathwari (Chairman, President, and CEO)

Yeah. Hello, Cristina. How are you?

Cristina Fernandez (Managing Director and Senior Research Analyst - Hardlines, Discount, Internet, Sporting Goods, and Food Retail)

Hi, I'm doing good. Good afternoon. Wanted to follow up on Brad's question around demand. Can you comment on, I guess, how volatile are these trends? Are you seeing, like, similar trends from week to week or month to month, or is there a lot of volatility in the market? I was also curious what you're seeing in ticket versus traffic. Is ticket, you know, outpacing traffic?

Farooq Kathwari (Chairman, President, and CEO)

Yeah, it's a good question. You know, it's an interesting time we are living in, that this summer, we have seen the impact of people going on vacations, not staying in their home. Quite different than 1 year back. I think what we've seen, I think if we look at it, we have seen more of an impact this summer of people doing other things. Also the fact remains that a lot of people did buy products for their home. I would say that our perspective is that as this summer time ends, that people will. We expect people to go back to the normal levels of coming into our design centers, perhaps not as high as we saw in the last 3 years.

I would say that our expectation is, we should do better in traffic than we did in the pre-COVID area.

Cristina Fernandez (Managing Director and Senior Research Analyst - Hardlines, Discount, Internet, Sporting Goods, and Food Retail)

And then, I had another question on the, also on the gross margin. How much of a benefit are you seeing from input costs, whether it's transportation, freight, and raw materials year over year?

Farooq Kathwari (Chairman, President, and CEO)

Yes, I mean, the, our gross margins and operating margins are both two important areas that are impacted both by the impact of freight coming in. Our... Also the delivery of our products. Keep in mind, as I mentioned, that we deliver our products at one price throughout United States and also throughout Canada. In the last three years, the transportation cost of delivery in the United States was extremely high. The cost of delivery of a container, let us say, from Indonesia or East Asia to the United States, had gone from $3,000 to $30,000. It's come back. Our costs in the United States were also very high at the retail level because of the domestic transportation.

Our cost of sending a trailer from east to the west, had tripled. It's coming back to the normal levels. To answer your question, I think we are having a positive impact on our margins, both at the retail and at the manufacturing level, due to the reduction of costs. Also, we are a manufacturer. Lumber costs have gone up very, very high. They now come back to the pre-COVID levels. On one hand, we are going to be impacted with the impact of somewhat lower deliveries, but on the other hand, we are benefiting from the lowering of the costs, whether it is of raw materials or freight, both to our manufacturing and to our retail, because as you parts, a lot of our freight goes into our operating expenses.

Some of it goes to our cost of goods, that portion that goes into our manufacturing side.

Cristina Fernandez (Managing Director and Senior Research Analyst - Hardlines, Discount, Internet, Sporting Goods, and Food Retail)

That's helpful color. Thank you. Then the last question I had was on the store refreshes. How many have you done so far? I know you did the Danbury store at your headquarters. And, of those that have been completed, how are they performing relative to the rest of the chain and the ones that have not been touched?

Farooq Kathwari (Chairman, President, and CEO)

Yes, it's a very important and good question. I think, yeah, I believe you came to the Danbury Design Center, you saw it. We are in the process right now. We have not completed any as yet completely, but they're all in the process of getting completed. I would say the process of getting them completed, because it needed products, it needed also the work in each of the design centers, needed painting, some electrical work, and all those kinds of things, that is being done right now. At this phase, we are in the process of updating the interiors, and in some cases, the exteriors of our design centers. Starting in about, I would say, four to six weeks, they will start getting products, which is being made and getting ready.

As I said, within 3-4 months, most of the design centers would have received the product. The objective is, which is something that we could have said that five years back, that the interior projection that you saw in Danbury is the projection that we're going to have nationally in 175 design centers. The other reason that we're able to do it today is that technology has played a tremendously important role. In the past, we had to have the product in the design center or the store for people to see it. Today, with our digital technology and virtual reality, our designers can develop, and they do develop designs for the consumer with all kinds of colors and design and products. That is a game-changer.

To answer your question, I think you'll start seeing it in the next two to three months, the process will start, and our objective is most of them will be completed in about six months.

Cristina Fernandez (Managing Director and Senior Research Analyst - Hardlines, Discount, Internet, Sporting Goods, and Food Retail)

Great, thank you.

Farooq Kathwari (Chairman, President, and CEO)

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

Operator (participant)

Thank you. I see no further questions in the queue, so I'll hand the call back over to Farooq Kathwari for any closing comments.

Farooq Kathwari (Chairman, President, and CEO)

All right, Gerald, thank you, and thank you everybody for being on the call. These are interesting times, and the good news is that we are very well-positioned, and we look forward to continuing our progress and our growth. Thank you very much for participating in this call.

Operator (participant)

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.