Q3 2020 Earnings Call
Ladies and gentlemen cities, calling for scheduled to begin momentarily until that time or let's say can be pretty simple thing for patients.
Ladies and gentlemen to these calling for a scheduled to begin momentarily until that time. It. Let's I gave you. Please on the whole.
Thank you for patients.
[music].
Thank you Julie and good afternoon, and welcome to Ethan Allen's conference call for our third quarter ended March 31st 2020.
This conference call is being recorded and webcast live on Ethan Allen Dotcom, where you are also find a copy of our press release, which contain supporting details, including reconciliations of non-GAAP information referred to in the release and on this call.
As a reminder, all comments today will include forward looking statements that are subject to risks and uncertainties that could cause actual results materially.
Please refer to our FCC filings for a complete review with those risks.
The company assumes no obligation to update or revise any Ford matters discussed during this call.
Joining me on the call is our chairman and CEO for route Caffari and Matt Mcnulty, Our Vice President Finance. After fruit provides his opening remarks I will follow with some details on the financial results Group will then provide some closing comments before opening up the telephone lines for questions.
That here's food category.
Thank you Corey.
As we mentioned in our press release, our third quarter results were negatively impacted as a result to all lower order backlog.
And during the quarter from our transition to the membership model combined with the disruptions due to go but 90.
[music] in the March quarter, we saw strong growth for the first two months of all fiscal third quarter.
Until the significant disruption in much due to cold 19.
[music], we are pleased with almost all of what design centers cold, we were able to generate about 35% off written orders.
In April compared to April 29 tea.
[music] Oh unique what did they integrate just structure very produce about 75% of a products in north American manufacturing enabled us to maintain our social.
In addition on logistics delivering products.
I continue to operate.
We're also pleased as of today over 60% so far about one.
Hundred 90 design centers in North America, or opened or about to open.
But also please that during the quarter, we have maintained strong liquidity.
While also purchasing three a 3.8% off our outstanding shares for $14 million and being 5.5 million off all the quarterly regular dividend.
After Coty provides a brief oh, we will financial results for the quarter I will discuss in greater detail our initiatives as we move forward.
Thank you for work.
During the third quarter fiscal 2020, our consolidated net sales were 149.8 million compared with 177.8 million the prior year quarter.
Net sales were negatively impacted as a result of lower order backlogs going into the quarter from our transition to the Ethan Allen member program, along with the emerging impact of the Cobot 19 health crisis that rapidly intensified during the latter half of the corridor.
Wholesale segment net sales were 93.1 million compared with 108.4 million in the prior year quarter.
There are 180, North American design centers this year compared to 184 in the prior year period as we continue opening new design centers, while closing older locations.
We saw continued growth in our contract sales primarily with the G.S. They contract. However, the growth rate slowed this quarter as the Cobot 19 health crisis began delaying some T.S.A. orders and shipments.
Our total wholesale orders decreased 21.9% in the third quarter compared with the same quarter last fiscal year.
Orders from our North American retail network declined 32%, while wholesale orders from China declined 25.7%, mainly due to local quarantine someplace, where most of the fiscal third quarter.
The closing of our retail design centers and manufacturing operations during March negatively impacted our results as evidenced by a 37.3% decrease in March wholesale orders compared to a year ago.
Retail segment net sales were 115.7 million compared with 138.9 billion than the prior year quarter.
Our retail segment orders grew during the first two months of the corridor in fact, our February retail orders increased by 13.6% with a very strong presidents day period.
Business conditions, then began to deteriorate as concerns over cobot 19 increased leading up to the March 11th and now so by the World Health organization or the Cobot 19 being declared a pandemic and the subsequent closures of our design centers by March 19th all our design centers were closed along with most of our North American men.
Are you factoring.
Despite the disruptions, resulting lower net sales our consolidated adjusted gross margin for the quarter of 56% remain strong.
Adjusted operating expenses for the quarter decreased by 4.4% to 83.6 million, which included 8.3 million of advertising costs impacted primarily by the lower sales adjusted operating income was 0.4 million.
Adjustments now the tax totaled 0.8 million and represented restructuring and asset impairment charges during the quarter.
Adjusted EPS was two cents compared with 31 cents in the prior year.
In the fiscal third quarter the decrease in wholesale net sales along with the decline in our stock price and the significant adverse changes in business climate, putting the cobot 19 health crisis.
That is to determine that an impairment triggering event occurred.
This required an interim quantitative impairment assessment of goodwill and intangible assets.
While our preliminary results released on April 22nd included the effect of an impairment to our goodwill.
Based on the company's interim assessment performed the fair value of our wholesale reporting unit exceeded yes related carrying value by approximately 25%.
Yes, no impairment of goodwill as at March 31st.
We also performed the interim Tradename impairment test and concluded that it's fair value substantially exceeded the carrying value as of March 31st. So there was no impairment of the trade name either.
Turning to the balance sheet, we ended the quarter in a strengthened position inventory of 138.8 million compared to 164.6 million in the prior year cash increased 116 point Ninemillion with 100 million and borrowings on our credit facility.
Yes roof mentioned, we returned value to shareholders during the quarter by paying regular quarterly cash dividends of 5.5 million and repurchased 3.8% of the company's outstanding shares.
As part of the company's Kobin 19 action plan the company have temporarily suspended the regular quarterly cash dividends and share repurchase program.
As we announced on April 1st we're taking many steps under our cobot 19 action plans to ensure liquidity, including the furlough approximately 70% of our global workforce. The decision by crew kept for it to Pergo. His salary through June Thirtyth 2020, and the salary reduction of up to 40% for all senior management and.
Up to 20% for other salaried employees through June Thirtyth.
Our board of directors reduce their cash compensation by 50% through June Thirtyth.
Elimination of on on the Central operating expenses.
Negotiating with our landlords to receive temporary rent deferrals or a basins for at least design centers.
Delaying non essential capital expenditures and taking other steps to reduce disbursements.
We are fortunate to all in all of our wholesale properties in about 35% of our retail properties.
We continue to monitor cash on hand to a detailed Casper and analysis and believe the fundamentals of the company remains strong.
As of March 31st 2020, we had total cash on hand up 117, melia and remaining borrowing availability of 24 million under our credit facility. In addition, there are no debt maturities until December 21st 2023.
Based on our current Casper and analysis, we believe our liquidity will be sufficient to fund our operations for at least the next 12 months.
With that I'll turn the call back over to Froch.
[noise] no. Thank you Corey.
As I mentioned in it Brltwenty trendy, we were able to generate 35% of written orders compared to April 29, Gee, It's basically all of our design said disclosed.
This was due to our interior design associates working remotely utilizing.
Technology, we deployed over the past few years, including the Ethan Allen in augmented reality, three D. room planner to live chat on Ethan Allen Dot com and communications to including Skype and say side.
As we move forward, we have a strong combination all personal service, our interior designers and technology.
We have started to open design centers and as of now where they mentioned about 60% of 590 design centers in North America are open or about to open. We can you continue to bring back fully loaded associates back.
[noise], our vertically integrated structure is an advantage, including making about 75% up our products in our North American manufacturing.
Most of our North American manufacturing is now operating and we continue to bring back out associates.
Our national and regional logistics are also fully operational.
We're also pleased that our licensees in China has opened up most of that hundred under locations and we continue to do business with the U.S. government.
In April and May we have maintained strong marketing initiatives, including distributing about 2.5 million copies of our spring magazine.
The magazine rejects fashion service.
Sensibilities and strong all her off savings of up to 25% free premium.
Home delivery.
48 month interest free offer and very importantly, complimentary design service.
Our objective is to can do you know a strong advertising to bring clients start design centers and let them know off all what strikes at a time when many retailers are in trouble, creating consumer concerns.
Crisis creates an opportunity and I feel strongly that are that we have positioned well to grow.
With this reef all of it would like to open for any questions I'll continents.
At this time if you like you asked a question seems please press star does that number one on your telephone keypad.
Yet you asked a question. Please press star one other telephone keypad.
Pause for just a moment to see if there any questions.
Your first question is from Jambo from Stifel. Your line is now open.
Yes, hi, there.
I don't know what that was but a good afternoon, Peru right.
And.
I was curious first of all could you, perhaps kind of loves where.
Your lease negotiations are going and what you think ultimately may happen there and then secondly, I'm curious when did you open.
The first I don't know handful or traunch him stores.
And is there any sense.
Time, there to get a sense of how bad.
Ramping versus full closure.
We are talking about a a discussions on currently is stores.
Yeah at least the payments on the 65%.
Yes at least stores right. Yeah, we are having just good discussions the.
Oh, the various landlords and I'd like you know in most most other businesses that is.
In summary, basements, taking place some reductions taking place.
And I think we're making good progress it's important but I was also has already mentioned.
Good thing is that we own most of our properties if that was not the case as you know I've always said, it's good to all of these properties because the next recession is going to make a difference. Unfortunately, we are in a better position.
And then stores.
Did you open when did you open your first at or near 10, 15, 20 stores and is there any color on the ramp up since you did that.
Well you know you're talking about when we have not open to many stores.
In the last couple of years, many very few actually if you take a look at antibody.
Yeah, and I have back the open downtown Chicago.
You're talking them new stores no other folks know no I'm, sorry, I was talking to close the stores all the stores you had to close Oh I'm. So sorry, yes. No then yes, but you know we closed most of them.
Towards end of March in early effort.
Yes, we reopened and probably most of them and we opened in the last two weeks and some may have open even you know the couple of weeks before that in some of the states that had more.
Relaxed.
Rules in place, yes, I'm sorry.
Luxury, but no I understand that yes, we closed almost all of them by the first by you know two words.
You mean much will almost all of them look closed and now we're starting to open the mob in fact, even today. Since every every day. We are hearing of states, which are loving stores to open up as long as they're done safely and distance has maintained and what we've done also is you know we have spent a great deal of time.
Making sure that we put the right kind of safety procedures on that in fact, we have also been able to obtain and just being received a fair amount of masks and globs from up bottler in China. They were able to range. It for us with that we are able to distributors on manufacturing and other.
Retail so as I said about as of now 60%, but just in the last one of his constant for instance decided that we could open up the design centers now what we're doing is this we're not we're bringing people in selectively.
Score you said, 70% of folks was followed in retail and in manufacturing. The good news is starting to bring them back and.
But in a bases that you know because there's going to ramp up it's not going to do it going fast.
I'd also opening them up in most of the stores are now being opened up.
Monday to Saturday or Tuesday to Saturday, So that we don't we are not opened seven days in many in most of the locations.
Yeah.
Last question is you mentioned Corey that you have enough cash to run for 12 months any any parameters around the scenarios uranium.
That makes you comfortable I mean is there.
Or percentage of sales decline for example, worst case that.
You could share that you still have the cash top 12 month. Thank you very much and good luck.
Yeah, John we use very conservative numbers, and we've actually ran into a few different scenarios and went very very low based upon the kind of a worst case scenario based upon the immediate drop off in business that we saw after March 19th when we closed dollar locations.
So it was a in a very slow ramp up to business going forward. So is very conservative our Ah we felt very comfortable that would be a worst case scenario and of course are outside auditors are also comfortable with it as well so we feel comfortable making that statement.
Concerning our liquid if at all levels at a couple effect as you know one of the that and what kind of business. Because this mostly custom as of March 31st we had $86 million of order backlog in the region Division Oh, that's important.
You don't have a cash and carry business was $86 million a backlog on which we did have about 55%.
Paul just about customers also helped us.
Maintain cash flow.
During during this period due in April also a.
When we take a look at.
Our.
Business in April 35% off our orders by regional Division were written.
Without any of the stores almost any of the stores open so.
It was these are very positive factors.
And program. So it did Oh, all the April where you wrote 35% last year's business was there did you get better towards the end of the month adjusting to you know the virtual world and we're working on line with the stores close it was there any improvement in.
Got it down trend through the month.
Did improve to us and look at you know because of defect.
No our E commerce business increased by 215%, but the reason that we don't do give a lot to put a lot of emphasis on that is all the business I'll just 35% was done two technology.
And as the day these without folks have a meeting.
Meeting our designers so yes, there was.
This increase as people become more became more comfortable but not in all like to normal towards end of the ended the month, you usually get big huge businesses not that but it was somewhat better as the month progressed.
Okay. Thanks for that call good luck.
Good good to talk to you.
Your next question comes from Bradley Thomas.
From Keybanc capital markets. Your line is open.
Yeah, Hey, Brett.
How are you guys and good afternoon perfect. All right. This is Andrew on for Brad.
Hi, Andrew Andrew.
Hey.
I wanted to ask.
Given the changing environment, where it has your strategy behind the membership model change at all and we were wondering if you could give us sense for how you're thinking about non membership model promotions. During this time as well.
Well you know it's very important question.
[music].
This crisis was coming along you know cause and we saw its happening in China, the salt and happening is overseas. So we decided that.
That we would.
For the time being hold up the membership program and in March we took it out so that people would be able to budget our products without being a member and they would be able to get premium free delivery. So at this stage the way the conditions.
Really are giving everybody the benefits of Amanda.
I understood.
And then it's also good to hear that May contract sales continues to grow throughout the quarter.
Going forward, how do you expect the a pandemic and the change in environments.
Only impact your contract business.
Well our government contract business at this stage is holding up.
I think that.
There is always you know every every and all of the world people have somewhat slowed down, but they're not slow down in terms of the needs.
Hello.
Placing orders a little slowly, but what we hear is that they will continue to do that trend.
Generally speaking is lost.
Then just this quarter in the next quarter generally very strong for the government business.
Gotcha, and then I guess last question from me.
Wanted to ask given the changing consumer environment have you noticed any changes and average selling price lately and if so how do you expect that Steve impact margins.
Well as you know even this quarter.
The improved gross margins considering the fact of this is our volumes were low and.
Our even if you look at our operating margins held up pretty good it was because of the retailers.
Not being able to deliver that had the most of the major impact so I think that.
We have continuously made improvements in our operations.
Actually all we've continuously made sure that we operate more efficiently we didn't have to wait for this crisis to consolidate some of our manufacturing we had already done. It. So we had operating very efficiently and I would think that.
We were able to maintain our gross margins despite very tough conditions. So we have an opportunity up improving our operating margins as we move forward.
Okay. That's good to hear thanks, that's all for me right Andrew Thanks.
Your next question is from Cristina Fernandez from Telsey Advisory Group. Your line is the open that up Christina.
Evening, and hope, you're all well I wanted to ask about.
The expense reductions that you're making is there anyway, you can side squirrels in aggregate.
With all the afterwards, you, including the for low listen and you know how much should we expect overall expenses to me to go down in the second quarter.
Maybe on either expenses or cash so we we have a sense of where business could be.
From a profit standpoint.
Yes. That's a good question you know I think that will let us studied because changing every day. We've already now opened up those 60% of bustos. It brought a lot of people. It certainly on expenses are going to be lower there's no question about it.
And how much Lola I think thats might be better for us to discuss it at the end of this quarter because overall, we're going to operate more efficiently. We are learning how to do business with zoo men Skype and all of that are traveling is going to be lot much less.
Our focus on making sure that our operating expenses across the board I'm not going to be reduced only now but as we go forward. So I think christina be better for us to do that kind of right at the end of this bought I would be a bit over time.
Okay understood it and in that light I wanted to get your thoughts obviously, a lot of change in the industry and perhaps some more permanent changes to how consumers shop more digital just will be I guess, how are you thinking about the furniture and home furnishing business, how that can evolve over the next.
One to two years and perhaps how the way you conduct your business will evolve.
We felt this pandemic.
Well I think that there's no question that there will be.
Great opportunity and I'm talking for us and most probably I industry to but certainly for US which is a combination of personal service and technology. Then I mentioned that we did 75% business of our written business in April under very tough conditions, all of which was done almost all of it.
It was done.
With our design is working with consumers of it.
So with most of the remote in some cases in some states are able to go up by appointment meat. So I believe the combination of personal service.
And technology is going to be very very important I think those kind of those businesses that basically sell a product.
Commodity like you know funds that we are seeing that in the patterns, we are seeing that and other other other toys. If they can bite online. They don't need my personal service. The chances are they're not going to go to stores. So you got to have stole has got to be able to create the opportunity for people to buy all offline.
But with personal service and I think that is important for products like our services like us because we're not selling items are taught us.
So I think thats, where the difference is going to be for state on.
Okay and last one.
Trends, you're seeing differently by region across the U.S.
You know for example, or been Merced versus more suburban and in the type of items consumers are buying.
Well, obviously you know when you look at urban areas like for instance, New York.
Overstated almost shutdown I'm talking to Manhattan.
Suburbs.
A little bit better.
And I think that certainly there has been some somewhat of a increase in home office because people like using their homes.
Also advertising into.
But overall it really people are paying more attention to the homes. If you take a look at our advertising we've gone to an advertising that we have done many many years back we said at home is the Haven.
All advertising is on that constant home isn't haven people are spending more time, they're learning how to operate so.
It has to be functional utilitarian and people you've got to be able to to be able to combine.
Great design, but also function.
And that's what we see.
Thank you and best of luck this quarter. Thank you Christina.
Your next question is from Bobby Griffin from Raymond James Your line is now open.
Bobby.
Good for good afternoon, how are you. Thanks for a extra time, taking the questions.
I jumped on the call late as having some problems guidance I apologize. If this was already addressed but the first question I wanted to ask that maybe about the health of the independent.
Well I didn't hear this good news is.
Very good shape because for a number of reasons.
And what would the is the one is a retirement.
All of those for the ones. We have looked at least fairly strong I had to have I have an opportunity of tokens them every week because they want to know how things are so so they are demanding the business. So far we've not heard of anybody going out of business, which had a great news.
Okay, and then how are they adopted to the membership model, what's the feedback you're getting from them on the membership model Yeah. I know the value just a question that was on us basically.
We decided.
I saw in February that things are going to get bad because we saw what's happening in China. What's happened in other countries. So we in much even before a lot of this emergency was taken phase. We said, we're going to give the opportunity to every customer to become a member. So every customer is getting the benefits of the membership without having to pay 100.
I don't know fee and we believe okay.
That's what are we going to do.
And that just temporary I did hear your answers and prior question I know you've got your numbers, we'll see at this stage will continue its a great opportunity grade benefit because what it means really is a great degree is giving an opportunity of delivering the products free to their homes, which we used to do all.
You know, but you have done from time to time will continue we'll see how did this crisis leads to but for the time being will give will give everybody and Henri membership and that's what we're doing.
Okay, and then I guess lastly from me I saw in the release the commentary about the China orders wholesale orders during the quarter, but how those trended in April in early May or you are you seeing a recovering your China wholesale order business.
Yes, they had gone down quite a bit not only because of this crisis, but because of all the other issues.
What did we faced in China. The good news is actually just starting in the last month, and which was a good surprise to us they decided to use our utilize our television commercials.
Which really focuses on that Ethan Allen, we make the American home.
And with all the contracts and problems facing and we hit about the China, They decided to use that commercial and based on that they're doing some some decent business. So we're starting to get back.
Orders after you know for months of really business being down.
Okay that was it from my questions I. Appreciate a appreciate the time and best of luck here in this tough environment now that Bobby thanks very much.
Again, just a reminder, if you wish ask the question. Please press star one on your telephone keypad again that is far one on your telephone keypad to ask the question.
And there are no further question at this time presenters he may continue.
Thank you very much if any questions comments, please feel free to contact Matt Mcnulty to Cory.
Are you and myself you'd want to but Matt and Korea available.
Funny questions or comments, thank you very much will participate.
And thank you very much.
The at least things like the ticket.
Sure. Most welcome thank you everyone for participating.
Concludes today's conference call forgive me now disconnect.
[music].
[music].
[music].