Q1 2020 Earnings Call
Good afternoon, and welcome to the Ethan Allens fiscal Q, California, 21st quarter Analyst Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session I see question. When you press the star one on the telephone if you.
Required before it actually since he's supposed to start to.
And so my question to introduce your host Corey Whitely Executive Vice President Administration, and Chief Financial Officer thinking you may begin.
Oh, Thank you Mary good afternoon, and welcome to Ethan Allen's conference call for fiscal first quarter ended September Thirtyth 2019. This conference call is being recorded webcast lies on Ethan Allen Dot Com, where you'll also find a copy of our press release, which contains supporting details including reconciliation.
non-GAAP information referred to in the release and on this call.
As a reminder, our comments today will include forward looking statements that are subject to risks and uncertainties that could cause actual results could differ materially. Please refer to our FCC filings for a complete review where those risks the company assumes no obligation to update or revise any forward looking matters discussed during this call.
Joining me on the call is our chairman and CEO for Reukauf worry and our Vice President corporate controller Mcnulty after our chairman and CEO Pru Kathwari provides his opening remarks I will follow with some details on the financial results prove to them provide some closing comments before opening up the telephone.
Lines for questions.
The out years for category.
Yeah. Thank you Corey.
As reported in our press release, we had strong margins.
Earnings and cash flow.
First quarter ending September 30, 2019.
The challenge and opportunity ought to grow over sales, which provides the opportunity to further grow our earnings in a meaningful manner.
We have continued to strengthen our talent.
Marketing retail network offering manufacturing technology and logistics, while also maintaining our focus on good governance and social responsibility.
As you may recall that during the 99 jeez, we had migrated to an everyday best price model.
Which helped us to leverage our unique vertically integrated structure.
And leading interior design enterprise.
The great recession started a vicious cycle of sales which has impacted.
Our growth as well as many you know industry.
During the past six months, we've had discussions with our retail network and made the major decision to revert back to offering our clients the best value of quality service and every day best price.
During October we launched this major initiative.
The Ethan Allen member program.
Those were enrolled received especially members only pricing free shipping and white glove home delivery.
Complementary design service.
And you know by you and you know by U.S. design centers access to specialty finance options.
The member programs will benefit all clients.
Naval on what team of approximately 1500, North American interior designers and our vertically integrated operations to operate more efficiently with an opportunity to improve our sales and operating margins.
The member program is being launched during the second quarter.
We had a strong advertising campaign utilizing direct mail television and digital mediums.
We plan to continue with enhanced marketing as we moved throughout fiscal 2020 , yeah under our new.
We make the American home campaign.
Designed to further amplify our design how to JJ I know what American brand identity.
This evening, we start or annual convention with over 500 interior designers and management from the U.S. and internationally.
I will get a first look at our upcoming introductions fall for spring 2020 , including in upholstery, Brent aimed at a younger customer at a modern take on Pall Mall style.
As I stated earlier, we have an opportunity to differentiate for wide based service had increased sales and profitability and with this I'll turn it back to Corey.
Thank you for.
During the first quarter fiscal 2020, the company continued with its previously announced optimization project to convert the old for North Carolina facility into a distribution center and lumber processing facility consolidate the operations at RPC, If new Jersey facility and expanding our made in North Carolina manufacturing campus.
In connection with these initiatives the company recorded first quarter pre tax restructuring and other exit charges totaling 1.7 million.
As part of the optimization plans the company completed the sale of its for Safe New Jersey property during the quarter to an independent third party.
The company's wholesale segment recognized a pre tax gain of 11.5 million on this sale.
These onetime charges and gains have been excluded from our adjusted results now the financial results for our first quarter ended Septemberthirty 2019.
Consolidated net sales for the quarter were 173.9 million compared with 187.8 million in the prior year quarter.
Net sales were impacted by a decrease in consolidated international net sales, which is primarily related to lower sales to China and in Canada due to economic uncertainty surrounding international trade disputes in a challenging global economy.
Net sales to China were 49.4% lower compared with the same quarter last fiscal year.
Wholesale segment net sales of 101.3 million compared with 118.1 million in the prior year quarter.
The lower net sales were primarily due to a decline in sales to China and the company's North American retail network.
183, North American design centers this year compared to 190 in the prior year period, as we continue to relocate design centers and consolidate them where it makes sense.
The company experienced strong growth in contract sales, which grew 62.4% year over year, primarily due to higher sales from the GRC contract.
While our wholesale orders from China declined 37.6%, mainly due to the imposition of Tyrus by China total wholesale orders, excluding our China business increased 0.7%.
Including the impact of decrease China orders or total wholesale orders decreased 1.5% in the first quarter compared with the same quarter last fiscal year.
As expected our contract business driven by did you say contract had another strong quarter.
We believe by new format of reporting on wholesale orders booked through all channels provides a more holistic view of our business than our previous reporting approach that focused on the change and only that company retail division written orders.
Retail segment net sales were 137.3 million compared with 145.2 million in the prior year quarter.
There was a 5.3% decrease in net sales in the U.S. well softer order trends in Canada resulted in a 10.8% decrease in net sales that are Canadian design centers.
Were 145 company operated design centers at the end of the first quarter two less than the 147 in the prior year period.
Adjusted gross margin, which excludes restructuring activities was 56.3%.
Retail sales as a percentage of total consolidated net sales was 78.9% compared with 77.3% in the prior year first quarter, which favorably impacted.
Consolidated gross margin on a GAAP basis consolidated gross margin for the quarter was 53.9% compared with 54% for the prior year period.
Adjusted operating income, which excludes restructuring charges and gains was 12.2 million were 3.5% higher than last year with an adjusted operating margin of 7% compared to 6.3% in the prior year and improved adjusted gross margin lower depreciation expense and a decrease in wholesale just to be.
And costs contributed to the growth.
Adjusted EPS increased 6.1% 35 cents.
The effective income tax rate was 24.4% for the quarter.
Compared to 24.9% in the prior year.
Turning to the balance sheet, we ended the quarter with inventory of 151.4 million cash or 45.9 million and no bank debt outstanding.
Looking ahead as we mentioned in the press release release, we launched our new member program during October .
For an annual membership costs of $100 Ethan Allen members will receive everyday savings of 20% on purchases complimentary design service and free shipping and white glove in home delivery.
In the U.S. Ethan Allen members will also have access to special financing options.
We will treat the membership fees as deferred revenue and recognized these fees ratably over the 12 month membership period.
Since the 100 dollar membership fee will replace our former in home delivery fees, which were recognized upon delivery. We expect the deferral of the membership fees to create a 3% to 4% headwind on net sales during the first year until we anniversary the membership program.
With that I will turn the call back over to FERC.
Yes, Thank you Corey.
As I said earlier, we are positioned well.
And the focus is to grow the topline while we continue to maintain strong earnings and cash flow.
So I'm pleased with the progress that we have made so far.
And we have a great opportunity and a great team so with that I would like to open the open it up any questions I'll comment.
I See reminder, asked a question you would need to press star one Oh no telephones. So we do all your questions press the pound.
I didn't catch a question press star one of your telephone please stand by all the compiled acuity Ruskin.
Okay.
Your first question is from the line of a Bradley Thomas from Keybanc. Your line is open.
Yes, Hello Bradley.
Hey, good afternoon for can Corey this is Andrew on for Brad We're trying to get a sense of how the new membership model might affect revenue in orders that that's rolled out when you look at October which is which was a first month on it and this new membership program would you characterize this period as business as usual or did you see any lack of urgent.
See from customers as a result for the program.
No Andrew that's a good question.
Hello.
There's a crazy way off sales range as I mentioned earlier resulted in creating for US a monthly sales.
End of the bond is where that Russia was and in the last two days off three days, we got about 30% of our business.
In that period. It's also was not very efficient it made people vote rushing some mistakes are being made so what do we did was we did see that in the end of October the business that 30%. All showed did not come through but we did get business and good news is that it flowed well into November .
Because normally after the ended the month of the first two or three days, there's not much happening.
We have seen over here is not much mistakes not cancellations and good business in the late in the next three days, although of course October was lower what we'd need to what we're going to take a look at is the three months that is October November and December our team members are very excited.
Slide even though it's obviously the used to this end to the month, but they like it they are behind it as I said earlier I spent six months going all over the country, making sure. All this is something that our team members were ready fall because it also taking the risk. We have 1500 interior designers, we have management in retail we should.
Depend upon the earnings coming from revenues. So I'm pleased that they are positive and it just so happens like coincidently. The real also having our annual convention starting today. So we we have about 500 team members have lot of discussions and I think that we have to take a look.
Okay, we had even taking a look at the total compensation.
Metrics for the whole quarter, rather than a monthly as we did that previously. So this is a change and are very positive change for us.
Great Great I understood.
And then as you review the efficiencies related to the membership program could you share some of the benefits you'd expect to see a sales trends become more stable as a result of the program Yeah, absolutely you know.
We 75% of the products.
We sell our major North American manufacturing.
We had 30% of the broadest come in the last two three days with a month. It it is very disruptive.
A big before data folks are looking hard to get a business and over the next 10 days. After the end of the month dad rushing to make the products. This is going to help us become efficient from retail from manufacturing and we'll have an opportunity off also improving our margins on both sides.
Understood Great and then last question from me well you know we don't generally think of you guys strictly as a holiday retailer, but over the years you all run a number of promotions around holiday events like Black Friday.
And I was just wondering for this year's holiday season, what's sort of messaging do you plan on implementing now that you've switched over to the membership model.
The messaging is very simple that we offer great products. We also great service, we offer everyday savings of 20% from our everyday best price be off a white loud home delivery anywhere in the United States at no charge and then in the United States for at all.
Oh offering candy full months financing, but those are very very important elements. No consumers are used to the fact of thinking that that a company will do something different a month later so they wait.
Now we got to have the discipline and the strength to say that we go to stick by that we go to advertise it if you're going to get the message strongly showed that we are able to get it's a message of confidence if they believe customers leave whether it's a black Friday, our you know a green for.
Hi, Dave whatever they believe that something is a company, they're going to do something to weight our own associates.
Weighted I've got together the message no. This is the best way to go to do but we're going to increase our advertising to get this message. We just increased advertising we're going to this this quarter.
We had most probably go to Florida half percent.
All 4.7% from 4.1% that we just spent this last quarter I'm not talking to second quarter. So we go to spend more money on advertising and I know if you have seen a new campaign. It has been very well received.
Great.
Looking forward to see out all rolls out thanks for answering my question. That's all for me Oh that Andrew.
Your next question from the line of Cristina Fernandez from Telsey Advisory Group. Your line open Yeah, Hello, Christina Hi, Good afternoon, everyone can Corey.
I wanted to follow up on the member program common Ted what the impact would be on sales on the first year, but how should we think about the gross margin and expenses sort of like the operating margin profile over the next couple of quarters asked at the program Rolls out.
Yeah. It's a good question in a good are you know we of course job watching all of this very carefully as Corey mentioned there'll be a number of factors one factor is that our delivery charges Robert.
Well part of our sales approximately 5% or so.
Added to our sales and now that has taken out from the topline and we are now making that as you know free delivery, but overall, our gross margins should be somewhat better than what we had in the in the past that's important so it's possible that dog.
Sales will be impacted by the membership program then have also to be positively impacted by mark by marketing our Rob gross margins, we believe will be positively impacted.
Of course as long as our sales remained the same ought increased with efficiencies in our manufacturing.
The.
Fish and she is due to what I just mentioned in operating in a more off a more efficient manner plus also keep in mind.
The changes that we made consolidations. We made that has helped us in terms of becoming more efficient. We have approximately you have to it as you know consolidate to manufacturing operations, which reduced our headcount by 14% over 600 persons that also will help us in the.
In the margins.
Okay. So it seems like near term wish we should not expect a lot of change or a pressure on the operating margin if anything it could be a little bit better estimate the sales.
Same or better yet because this possible that our sales will be impacted because as I said those were 5% would be impacted because of the delivery charges.
It's possible that there is also the timing that's timing from a quarter to quarter, but overall I believe that the opportunity is for us to maintain our gross margins and operating margins.
That's helpful. And then I wanted to ask about that then you have this closure on wholesale orders can you help us understand how do the retail orders factor into this new metric.
I'm, sorry said that again.
You haven't do you sort of metric of total wholesale orders versus previously you disclosed.
The orders I guess, how hard to retail orders included in this metric.
No I understand you see what what happened as you know we have.
We have a wholesale business and we have the retail business.
The wholesale business receives orders from our own retail division. It received orders from independent retailers in North America, our independent retailers internationally and all our contract business is also goes to our wholesale show. The wholesale is a received all these orders.
And that holds and our main business will depend upon how much of a business. The wholesale receives from all these various channels and for instance, you know the government business is becoming important the China business has gone down. So if for instance, we only measured hour.
You asked retail that would not be the right measurement to take a look at the opportunities. We had so all these different channels end up going to our wholesale business and the wholesale business.
Has the opportunity are benefiting or not benefiting based on all the business. It gets.
Understood and one last one I guess what is your latest you on so on the shine a trend in China and when we started seeing some improvement there. Thank you.
Yes, So you know we have.
Unfortunately, the worst is somewhat owe a because we've had I can do we have had we have seen.
A major just reductions and this this is another coming into our second quarter. The reduction we had a fairly major reduction last year, so compared to last yeah. Yeah, I think is going to have stability.
In terms of increasing business.
It's something we if we do see some improvement in trends.
Our partner in China is also.
In a major marketing campaign.
However, the Chinese economy is solved.
The tariffs I'll still that that is as you know that talk about the fact that they may do something about it which could potentially positively impact us. So I would say that at this stage. We may have some gains but I don't think we've got a major decline from what we did in the let us say going into the second call.
To off office CLIA.
Thank you very helpful.
All right. Thanks Christine.
Again, if you would like to ask the question.
One on your telephone.
There are no further questions over here.
We continue.
Well. Thank you very much thanks, everybody and look forward to continuing our discussions dialogue any questions. Please let us know thanks very much.
Ladies and gentlemen, this concludes todays conference call. Thank you for participation you may now disconnect.