Q2 2020 Earnings Call

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Ladies and gentlemen business Yeah freighter today's conference is scheduled to begin momentarily.

Hi, Phil actually going to be please oh, thank you well you paid yet.

Again, ladies and gentlemen, vicious the operator, but it's gone French is scheduled to begin momentarily.

Hi, good luck for like I'm deeply oh.

Thank you for your patience.

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Welcome to the you tend to our fiscal 2022nd quarter and at least on French golf.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question answer session. If you would like just a question. During this time shifted fresh start then the number 1 million telephone keypad.

And it's now my pleasure to introduce your host Corey Whitely Executive Vice President Administration, and Chief Financial Officer. Thank you you may begin.

Thank you, Jeff Good afternoon, and welcome to Ethan Allen's conference call for our fiscal second quarter ended December 31st 29 gene.

This conference call is being recorded and webcast live on Ethan Allen Dot Com, where you'll find a copy of our press release, which contains supporting details, including reconciliations of 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 to differ materially. Please refer to our FCC filings for a complete we view at those risks.

A 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 fruit category and that Mcnulty. We have recently promoted to Vice President Finance, Matt had been serving as our vice President corporate controller into his new role that will also be involved in in Investor Relations together with me after our chairman and CEO.

Through kept Bari 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 with that Irrs for Caffari.

Thank you Corey and thank you all participating in this conference call.

As I already mentioned I'm also pleased that Matt technology is making good contributions.

Taking on more responsibility and she's going to keep on working very hot.

As you mentioned your press release, we continued to strengthen our marketing, including the introduction of the member program and continued it hadn't single just program.

Our sales and profitability were impacted in our second quarter.

Due to the introduction I'll just program.

We will see continued impact and I'll tell you caught up primarily due to lower backlogs at the end of the second quarter.

We expect stronger order growth in our third and fourth quarter positively impacting fourth quarter sales and profitability.

Yeah fees that are unique logical structure continues to provide strong operating leverage do allow us to return value to shareholders through quarterly dividends periodic cash dividends and share repurchases.

During the second quarter, we paid 5.6 million in cash dividends.

We repurchased 546000 shares representing 2.1% up what outside its yes.

After this budget the board authorized further repurchases up to 3 million shares.

Yes for information since our taking the company public we have generated strong cash flow repackaging 611 million.

Dollar as opposed to talk paying 472 million in cash dividends and investing 800, a 19 million in capital expenditures.

After quality provides a b financial overview, I will discuss our initiatives to grow sales and Braava and braava.

Alright.

Thank you for.

During the second quarter fiscal 2020, our consolidated net sales were 174.6 million compared with 197.2 million. The prior year corridor that sales were negatively impacted due to the transition to the Ethan Allen number program along with the decrease in consolidated International net sales wish list price.

The early related to lower sales to China, and the Canada due to the economic uncertainty surrounding international trade disputes and a challenging global economy net sales to China decreased 45.1% and we expect continued headwinds there with the emerging concerns around the CRO when a virus.

As we had previously stated the implementation of the email number program was expected to negatively impact our sales and profitability. During the initially here as we transition to the membership model our second quarter results reflected us and we expect similar impact and that sales and profitability for the third quarter ending March 31st 2020.

Oh segment net sales were 91.9 billion compared with 107.7 million in the prior year quarter.

There were 180, North American design centers this year compared to 188 in the prior year period as we continue to reposition our retail footprint opening new design centers and closing or relocating older legacy locations.

The company has experienced continued growth in contract sales, which grew 66.9% primarily due to higher sales from the GRC contract and hospitality sales.

Our total wholesale orders decreased 21.8% in the second quarter compared with the same quarter last fiscal year International wholesale orders declined 53.6%.

Retail segment net sales were 139.1 million compared with 158.5 million in the prior year corridor.

Were 144 company operated design centers at the end of the second quarter compared to 146 in the prior year period.

Our consolidated adjusted gross margin, which excludes 0.4 million then restructuring activities was 56.1% reflecting improvement from our optimization initiatives.

Retail sales as a percentage of total consolidated net sales were 79.7 per cent compared with 80.4% in the prior year second quarter.

Adjusted operating income, which is good zero point Threemillion in restructuring was 9.5 million with an adjusted operating margin of 5.4% compared to 8.3% in the prior year.

Our adjusted EPS of 27 cents compared to 46 cents a year ago.

The effective income tax rate was 23.5% for the quarter compared to 25.1% in the prior year.

Turning to the balance sheet, we ended the quarter with inventory of 139 million compared to 159.2 million in the prior year.

Cash of 28.3 million and no debt, yes fruit mentioned during the quarter, we paid regular quarterly dividends of 5.6 million repurchased 545727 shares representing 2.1% of the company's outstanding shares also as we announced on January 13, the board of directors and.

Greece, the share repurchase authorization to 3 million shares.

With that I'll turn the call back over to [noise].

Thank you Corey.

We continue to strengthen our vertically integrated structure of our regional network.

Manufacturing and logistics.

By strengthening our product offerings.

Rejection in our design centers enhanced marketing and continued investments in technology.

A key areas of focus in food.

Strengthening talent.

Developing strong entrepreneurial leaders in retail continues a major focus and we have made good progress.

In culprits, Rodney Hodson joined as Chief Marketing Officer on January 1st after a three month consultancy arrangement.

Madden Mcnulty.

Did you had with a strong financial and accounting background was promoted to vice President finance and it'd be reporting to Coty Coty right.

The second area is our marketing this month, we have enhance the marketing program.

In October the membership program was launched and for all practical purposes customers had to become a member to budget is up projects, which it did impact our traffic in stage.

As of now we have made a change and we have expanded a program. So that so that non members can also budgets products, especially those savings in effect at that time.

Members will continue to see just secured and hasn't benefits, including 20% savings on all our products from our everyday best price free in home delivery and 24 month finance.

We have also expanded a marketing and advertising to include radio.

Television and increasing presence in digital mediums.

Auto service or manufacturing in North America, I know a unique logistics network is an excellent position to service our gross.

We completed the consolidating initiatives in manufacturing and logistics started last yeah.

About 75% of our products are made in our north American facilities.

The next focus is it has always been on technology and this is a major focus to implement new technologies in all areas of our enterprise and finally, social responsibility continues to be a major focus to maintain our leadership in this very important area where this.

With this we are ready for any comments or questions.

Hi, Jeff, though you can go hadn't given the instructions for people that.

I ask questions.

Thank you ive it sounded like 20 might have to one in order to ask the questions. Please press star one on your telephone keypad.

Well pause for just a second.

The company roster.

We have one question from Bobby Griffin.

Sorry Griffin your line is now open.

How does not have a bobby how about you. Good fruit. Thank you for taking my questions Hope you and everyone. There is doing well my first question I just want to see if we can you help us understand a little bit more what happened during the quarter, what how how to consumers react to the membership program how much of the sales decline would you attribute to just a little bit.

The learnings of the new program versus the overall environment and then what are you seeing kind of as the progression of the business are you starting to see sales get better as more people get used to the program anything like that to help us frame up what exactly to the took place during the quarter no. Bobby. This is a good question. This is something that views that we are constantly working on.

We introduced the program.

Yeah, we decided that we called upon I'll just the structure that we have with about 1500 interior designers that it makes sense for them to work and provide this service to their clients without having to you might say everybody about Boston sales.

So we decided that the member programs will give a sudden benefits the benefits off especial savings from every day best price special financing complement Reengineered design services complementary in home delivery, all great things and and all of our interior designers love it.

Our clients love. It however, the issue that was that it did not create urgency whereby we used to have ended up on sales and that does create an agency. That's number one the second thing was that the way we introduced a member program was that in all practical.

Just as everybody had to become a member to take advantage of the benefits as of February we made some changes we just now.

I have implemented a program that nonmembers can also budget is based upon what type of the especially savings are all at that time wins right now you're running especially savings are not living room products.

Well that will do is that enhance people coming in.

And because the way we started it it did impact our track and traffic impact sales. So I think that the in addition to the learning. In addition, do not having the sense of urgency all those factors contributed to lower sales. So we have now taken some steps.

First is people are learning they love designers love it.

Our customers love it because they want to do that do have great homes. They don't want to have to wait just new sales come in but the real world people do wait for sales or customers that are not members. So we have bobby taken steps to improve it and I believe that you're going to stop.

The benefits of that while maintaining the membership program.

Okay, I guess two follow ups real quickly on that when you. When you took the steps to add some benefits for the non members have you seen anything and the traffic results yet or is it still too early to tell you just too early because just started this month and I think that.

It also reflected the baby at marketing she'd been our marketing and the and Oh second quarter basically was to get members now our marketing it's an extra getting members, but also expanded to all others have come in so we had made some we have made some changes hindsight is all just trendy dredging okay.

Okay, and then there's the way the programs to work now, though the members would still get the absolute lowest price it that prices, even better than the special savings going on at the time.

Yes, David yet because for damages, especially savings in addition to that they will get complementary or in home delivery.

And because those are two important benefits that will continue to get they'll get the best price loss complement bringing home delivery.

Okay, and then I guess lastly, not financing of that.

[laughter] financing and a complementary interior design centers, everybody else, but also gets complementary design centers.

But everybody will not get the free in home delivery.

Okay, and then I guess last we.

Are you can you disclose whether or not you know kind of what you're seeing in terms of total members are usually a number or are you continuing to see them grow month over month anything to help us get a sense of how the program's going from an adoption standpoint, Bobby <unk> all in our business now its members. So we have a great increases members, but now.

With what do you have just done it will also expand it to non members and effects remains that nonmembers most of them will become members, but they've got to come in first the reason is this that's $100 they become a member and get a better that's all up three delivering its cost of $190 for them for delivery.

If they're buying funded yet.

Okay. Okay that makes sense. That's it from me for now I'll jump back into queue and five anything else all boats backend. Thank you for the time and thank you for answer the question I'll, let Bobby.

Thank you next question from that I never Sungy back up Stony point capital.

Sir Your line is now open.

Yeah, Hi, this and right.

Good how are you for hey, Corey.

You just just to drilling on the membership model again can you help us understand how much would be retail business, specifically was impacted by those shifts a membership model in the quarters. Since I think you called out both the membership model transition and some cautious consumer a headwind. So I guess, one if you get help us bifurcate the June.

Great and maybe asked another way I think on the last call you guys. Previously suggested a 3% to 4% net revenue headwind for the full year from the membership program, but clearly you're making some changes to the savings offered around the members and non members et cetera. So is that 3% to 4% numbers still your beliefs or how should we kind of think about.

That.

Mathematically, yes on the 3% to 4% just to clarify that that was on a piece of the deferred revenue for the membership fee.

Yeah got it wasn't explained that Sanjay it is a quarter, even going to discuss that because it does not seem to 4% on total sales. Your question is a good one which is the impact on sales due to the membership and also due to perhaps you know the issues and the economy and everything else I would say that.

I would say that 90% decline was due to the membership program. There was some external factors in terms of you know what's taking place in the well what's taking place in for instance, Unfortunately in China, that's had that impacted opposed to our international business you know some in.

Back in the United States, because we do have a lot of Chinese customers in the United States, especially on the best goes, but I wouldn't say that.

I would say that at least 90% loss was due to the fact, we implemented the membership program, which is great I said, our designers lot love It and just to give perspective, Sanjay that before the great recession.

We used to have an everyday best price no sales. It was like it was like a membership program.

Without people become being members.

That is a great recession, we first started into that 10% saving that 15%, saying that vendee propensity going on at all so going so I believe that Oh. This is.

The impact of the membership because people have to get used to it.

Secondly was the fact, all why did it given grade savings, but we did not have the end of the month urgency for people to close and water end is generally very very important. So it's a learning process. All the team members believe they tell me again and again they love it declines love it but again.

Oh practical reasons, we always have to make show we create an agency and bring people in and that's why we have made the changes we have.

Right that's helpful and I remember the deferred revenue that that that makes sense. Thanks.

Alright sounds it take care.

Next question from that I know John buff UBS Stifel. Sir Your line is now open.

Hi, there thank you.

Well I'm well for rooms, I hope you are as well yeah. Good to hear from you.

Yeah.

I just wanted a point of clarification on the change.

The non members versus the membership.

Are you still are you running a sort of give or take depending on the time.

20, 30% of your product at a like 2020, 5% off type sale and and they're going to get.

Access.

Or Ah that's different because here before and then up at a member they wouldn't have gotten that or is there a savings across the board of some 2020, 5%.

For all the members.

All right John I understand let me just go back a little bit before the membership program.

For the membership program, we had some savings every month every quarter and those savings ranged from anywhere from you know said 15, 20% even 25%.

So those savings we gave everybody at once in a while we would also give free delivery.

So by the membership program started we said the members are going to get.

20% savings for our.

Retail prices be called them out of every day best prices.

The members. It also get a 24 month financing and they will also get complementary interior design service and delivery that was the plan and are now what you have done is.

We have added.

A savings.

For which would also not only before a members but will also be utilized by non members like for instance in December we did have especially savings because only really meant for our members now starting in.

I just had in February we have seen so just announced if you. If you see our marketing you wouldn't see be have especially on the 25% savings on all living room.

That's all it those savings are.

Under utilized by members because the members will get 50% savings and everything.

On members, we got 25% I'm, sorry, and a members will get 50% savings on everything.

And there was down also get many 5% savings on the living room, while non members will get saving up 25% members also get a benefit of free delivery.

No. That's a change we have made what it does is it expands our reach them all people what can be found was John that the that people felt that they had to become a member to come in and that's all for students people coming in it had an impact on traffic we have now changes and I believe.

It has to be very relevant street by James and our marketing has taken care off it. So we don't increased traffic both on our website and God design centers and as I said most of these folks are going to come in.

John This is a they'll become members, but they're going to come in first and that's what this program does.

Okay. So the members, we're getting 20% off of everything now when you decide to run, let's say, 25% savings on living room, there getting 25% additional savings and of course, the non members had nothing percent off and.

Now when you run a special in this case, 25% of living rooms are getting back is that Clinton is that correct now what's the members was not getting additional 25%, David we've got 25% onto living rooms, and anything else I get 20%, they're not going to get additional 25%, okay, 20% on everything.

Oh, Okay, yeah, and and the non member is paying full price on everything except the special that's right Yep.

Okay, Oh, it as it relates to China, and sourcing did you update us or again on your rough percentage of product you're bringing in.

There are at or maybe age in general and whether or not.

You fear you know supply disruptions from what's going on there.

John You know, 75% office furniture is made in our North American facilities.

And the other lost majority knowledge about the furniture, then I'll come to excellence because we just excellence represents at this stage approximately 20% of our business.

Now the other five or 10% of a funny, Jeff is coming from countries, such as Indonesia, and we had already moved most of our production we didn't have much business in China any bad you know, we sell to China. So from a from a perspective, all although our sourcing.

Got it very very good shape.

Now did have some projects that come from China, there like lighting and accessories.

And yeah.

The you know.

So far we've not seen a problem, but it's possible that there might be some disruptions depending upon how they handled this issue of UBS unfortunate situation, that's taking place in China. So all I want to make sure in China has been the fact that we have been shipping Nobody's Michelle and ship bought two products. Then we buy so we were first impacted.

By the tariffs up 25% and now we are impacted by the fact that most of the locations you know our partner there as 100 locations most of them up close now. So this is an already down I think it close to 60%. So it's going to be it's going to go down, but what do it already down 60%.

Due to the tariffs and <unk> and to some degree softening of the call them in China.

That was going to be my follow up question on that it's been down for awhile.

Magnitude, what's remaining must be pretty pretty small.

Yeah, I still has some what do you just want to it's not a in in fact TV. This this quarter I think was more or less pretty close to what we'd was down from the previous calls a good news is that's called he said we have made good good via made good very good inroads in the business, we do today with a G.S.A.

The government and also some contracts so that has that has been good for us.

And then you used the word enhanced marketing programs.

What what would be the dollars either in gross dollars or percentage of revenue.

And you know I'm thinking maybe more how under 20 <unk> what should we expect from from Ethan Allen in terms of either gross dollars.

Oh marketing your AD spend year over year or as a percentage sales flat down up.

Well you know John if you take a look at this second quarter, we spent 888.5 million, which represented 4.8% office sales in the last year in the same quarter, we spent 7.6 million, which represented 3.8% of sales.

Now in the next quarter that we're looking at that does have a third quarter. That's very no lost you have you spend $7.4 million represented about 4.1% I think we're going to spend anywhere between seven and I have to $80 million in our third caught up and I gave the percentage of course is impacted bid overall sales.

So percentage has gone up because of let's say it so I would say John that approximately a utilizing.

On four and a half a cent would be a good number.

Okay, and then sort of the that's very helpful. But as we go sort of June through December quarters, and just stick that dollar since we don't know exactly what sales are going to do you indicated you would hope June quarter will be better just the kind of gross dollars you spend on marketing when you when you add up.

Four quarters in calendar 20, you know match or exceed likely what you did a 19 or you just don't know.

Well I think in the V., we'll probably spend close with to $30 million asked you entered what's probably spend close to that this year.

Okay. That's very helpful. Thank you and good luck.

John good to talk to him.

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Next question from the line at Cristina Fernandez.

Telsey Advisory group.

Ma'am. Your line is now open yeah, Hello, Hello, Christina Hi. Thank you. Good afternoon. I also wanted to follow up on the member program and understand the impact is having on the I see any line item. So no I guess 308 hundred basis points to leverage this quarter. It seems from your comp.

From the last call that about 100 afraid what's marketing how much of the rest was due to the member program and I assume it's mostly the impact of the free delivery to the members.

Cory.

Yeah, you know most of that was really the reduction in sales and the de leveraging you know that's being a vertically structured company, we really benefit when sales increase but it sounds Madonna like we do get the reverse or that the advertising.

It was about a million more than where we were last year. So that was.

Probably the biggest impact on.

Yes, DNA side.

The wise it was.

You know relative to sales it was fairly well control you know had person I'll give you I mean, you know could take a look at our total sales which of course, you will see that you know they they've got Oh, we had 175 million versus on the $97 million and lost yeah.

Yes.

Again, it's a question of our all I could compare our selling.

Which is.

Yeah, We had 52 million at this you have it 51 million.

But they're all our expenses this quarter over 88 million versus $93 million last yeah, I shall we did reduce expenses as a total of while I'm also obviously as a percentage of total sales on expenses were higher because of.

You know there because of lower sales. Our total dollars went from 93 million to 88 million.

As a percentage was 50.6% versus 47% lost yet again because of cities.

Okay understood.

And then I wanted to I guess follow up on Cory your commentary about the this next quarter to third quarter being an impact similar to what we just still ended December quarter, what in some of the changes that you're making I like the additional discounts or be able to drive a little bit better sales or I guess what are your comp.

Completing it that outlook.

Well you know, we do have an opportunity to see a stronger order growth as result of our enhanced marketing plans that we haven't place. However, there's a little better lag time between ordering yet and then live bring it out that far we expect to see our C O benefit.

Beginning in the fourth quarter from the stronger orders this third and fourth quarter. Yeah. I think that's good says Coty said, we had and Vietnam and training of a third caught up with lower backlogs because of lower sales in the second quarter.

These are now but as they become very efficient we don't have lot of backlogs reduce deliver fast. So this pause has caught up we expect all that we expect with all the changes we have made and all the marketing doing do have a improvements in our audiences, which will inflect then more.

And the deliveries in the fourth quarter. So on auto side, we see positive, but the delivery side, obviously shipments this quarter is going to be lower because of the lower backlogs and doing so called.

Okay. That's helpful. And then lastly on different topic can you remind this up.

Do you products that you have coming up in the next couple of quarters, that's geared towards the bigger spring summer selling season.

Yes, it's a very important initiative that together going right now in fact, I'm quoting is probably going to talk to all of your weekly we'd like to have an investor meeting in may in Manhattan.

Then we would be a little bit eat I mean earlier, you can do it but I think in Manhattan, most low bulk people do come up we are in the process of E. F also making more improvements in the projection on design centers and the products as you know.

He has a very strong.

Products categories off you might see classic products with the model perspective, we're strengthening it and we got to be maxing that because those products for some customers want that falling back there had been too much focus on schedule contemporary and including us to some degree.

The second important category for US is what we call country, but again, we the model perspective, so you're going to see products introduced in that yields you products introduced the first got to be that's baskets Oh.

Oh, and olden days, we call them formal but today well classic said livable did a lot of perspective and the Ted is our version of the mall, which is you're going to be pleasantly surprised at the new products.

Routing watch vehicle, Josh Lewsey, which is.

Great programming upholstery in fact is gonna be not design centers, starting next month and we'll be starting marketing. So these three categories lasik sort of on model to spec to come through the launch perspective, and our modeling is products that'd be going to be doing a lot of marketing starting.

Oh, So I'm just bought up and then some and also the next fall.

Thank you.

Oh, that's pushing the thank you.

Okay. So lots of questions. Please press star one on the telephone keypad.

Next question from the line of Bradley Thomas of Keybanc Capital Mark Sir Your line is now open Oh, I don't imagine Brad how are you.

Hey, good afternoon for can Corey this is Andrew on for Brad.

I just said I had a question on not contract side of business I Wonder if you could tell us how the state department contract performed during the quarter and how you are thinking about the contract side of the business going forward.

Yeah.

He said you know substantially increase over 50% 40, right or 50% of business in the state Department during the quarter and also it was better margins.

Then we also gotten business like I think we discussed it moved out a good good.

Partnership with a modest reach a bill grubbs buried in furnishing a number of hotels. We finished one in Orlando leveraging volume Houston imaging and few other places. We also continued to do some more business with the just the programming contracts. So that is growing those that's a bright spot.

Great under understood.

Wanted to follow up on promotions you are doing in addition to the membership model.

Could you give us a sense for how often you plan trying to run these additional promotions going forward.

You know began to see how we books, but certainly at this time, we wouldn't be plan to have in addition to the savings from members. We like we will continue to have some special savings reached a non members can use come in and I believe that most of them has become members.

And I believe those programs it most likely have monthly.

Okay, Okay understood, but that's all for me. Thank you.

Pretty much.

Okay. So that's a question. Please press star one I can't tell us so keep that.

There are no further questions at this time please continue.

Oh, Thank you very much and if any questions Cummins. Please let us know and Cory and map team is all going to be ready to talk to you So take care.

That concludes today's conference thank everyone for participating even though it's tonight.

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