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Ethan Allen Says Manufacturing Tweaks Paying Off

Fiscal 2023 is off to a good start for Ethan Allen, with the home furnishings maker and retailer reporting a 17.7 percent consolidated net sales increase and earnings per share of $1.11 on revenue of $214.53 million.

Ethan Allen chief financial officer Matt McNulty credited the company’s ability to ramp up production and fill outstanding orders as a catalyst for the increase in the fiscal 2023 first quarter ended Sept. 30, 2022.

“Previous constraints, including COVID-related shutdowns, labor disruptions, supply chain challenges, shipping delays and raw material availability have eased in recent quarters, which helps us reduce the time to convert written orders to delivered shipments,” McNulty said. “Beginning about two quarters ago, we increased our manufacturing productivity as well as saw an uptick in receipt of imports and raw materials from a higher volume of shipping container receipts, which led to strong sales growth during the first quarter.”

As of Sept. 30, Ethan Allen’s wholesale backlog was $106 million, down 24.4 percent from a year ago, but up 62.1 percent from September 2019. And while written orders were down 8.6 percent compared to unprecedented 2021 highs, orders were up 7.4 percent compared to the pre-pandemic first quarter of fiscal 2020. Wholesale segment written orders were down 7.2 percent from last year, but nearly flat compared to Q1 of 2020.

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Ethan Allen’s consolidated gross margin was 60.4 percent for the first quarter. McNulty said that margin was fueled by a change in sales mix with the company’s retail segment becoming a larger portion of favorable product mix, previous product pricing actions that are now working their way through delivered sales, and higher manufacturing productivity and efficiency partially offset by higher input costs.

On the retail side of the business, Ethan Allen reported sales growth of 18.5 percent, increasing its retail sales mix from 85 percent of consolidated sales last year to 85.6 percent in this year’s first quarter and improving the consolidated gross margin.

“We expect a higher percentage of retail sales to consolidated sales to moderate towards normalized levels as we increase delivery of the high wholesale order backlog,” McNulty said.

Ethan Allen’s adjusted consolidated operating margin increased from 15.2 percent last year to 17.6 percent in the current year first quarter. McNulty said the adjusted operating margin increase was primarily from higher consolidated net sales, retail and wholesale gross margin expansion, along with cost containment measures, partially offset by higher selling expenses, including increased delivery and freight costs combined with higher marketing spend.

The company’s SG&A expenses when expressed as a percent of net sales decreased from 44.7 percent in 2021 compared to 42.9 percent in this year’s first quarter.

“Our ability to maintain disciplined cost and expense controls, including strong cost containment measures and tight expense management within our G&A expenses continued to help drive operating income growth,” McNulty said.

Ethan Allen’s operating margin expansion combined with double-digit delivered sales growth helped generate another quarter of strong profits with diluted EPS of $1.17, up 48.1 percent to last year. The company’s effective tax rate for the quarter was 25.3 percent compared to 26.3 percent a year ago.

As of Sept. 30, Ethan Allen had cash and investments of $142.4 million and no debt outstanding. The company generated $38.4 million in cash from operating activities during the quarter, an increase from $17 million in the prior year period, primarily due to higher net income and an improvement in working capital.

Ethan Allen’s capital expenditures were $3.2 million for the quarter and included further investments in various areas, including manufacturing, retail design centers and technology. The company continues to pay quarterly special cash dividends, and in August, its board declared a special cash dividend of $0.50 per share, in addition to our regular quarterly dividend of $0.32 per share, both paid on Aug. 30.

CEO Farooq Kathwari said Ethan Allen’s focus going forward is continuing its transition from simply being a furniture store to becoming an interior design destination. The company has increased its interior design associate numbers to 1,200 in its North American stores. The company has also started to refresh and relocate its stores to improve their status as an interior design destination.

CEO’s Take: Kathwari said that while Ethan Allen has enjoyed the same boost in revenue that most home goods companies experienced during late 2020 and most of 2021, the company anticipates softened demand and a return to more normal sales numbers going forward.

“We are coming to the next stage, which is where after having gone through very high demand for all in our industry, especially in home products, we see that there is obviously just leveling off,” he said. “However, as Matt said, we are still doing higher than our business prior to COVID. So I would say that we continue to do well because of the various programs we have. Our written business has moderated and is not as high as it was two years back, but still it is there. So we will continue to see some growth going forward.”