Q2 2021 Ethan Allen Interiors Inc Earnings Call

[music].

Greetings and welcome to the Ethan Allen fiscal 2021 second quarter Analyst Conference call. At this time, all participants are in a listen only mode of <unk>.

And answer session will follow the formal presentation.

The one should require operator assistance. During this conference. Please press star zero on your telephone keypad.

Note. This conference is being recorded.

Now I'll turn the conference over to our host Matt Mcnulty Vice President of Finance. Thank you you may begin.

Thank you Diego good afternoon, and welcome to Ethan Allen's conference call for the fiscal second quarter ended December 31st 2020 of 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 reconciliations of non-GAAP financial information referred to in the release.

And on this call a replay of today's call will also be made available via phone and on our website. After our prepared remarks, we will open the call for questions.

A reminder of 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 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 joining me today on the call he's the chairman.

And in T O group cash flow.

<unk> and our Chief Financial Officer, Corey Whitely, I'm pleased to now turn the call over to improve care for it.

Thank you, Matt and thank you all for participating in our quarterly call.

As we all know the last 12 months have been traumatic.

Allen Jing, an all sort of rewarding and many important.

The important changes to strengthen our enterprise and also achieving strong results.

This has been an amazing journey nine months back had to follow of about 4000 associates close all of our manufacturing and most of retail all of US talk price like most enterprises bottomed deferral of about $8.

As you know the good news is written sales have continued to grow.

Quarter, ending December 31, 2000 increased 45% from previous year.

Previously the quarter, our adjusted earnings per share of 69 cents increase of 155, 6% of backlog for our retail division increased 146%.

And after Corey provides a brief overview I will review all of the initiatives Corey.

Thank you Farooq during.

During the second quarter of fiscal 2021 of our teams remain focused on serving our clients and keeping our workplaces safe.

Our retail segment written orders continue to accelerate achieving 40 for quite a 9% growth compared to the prior year.

Our E commerce of orders reflected 194% growth for the quarter.

We are pleased that our January retail written orders are continuing the upward trend.

Consolidated net sales for the quarter were 178.8 million, a two 4% increase to the prior year quarter.

Wholesale net sales increased 10, 5% of production levels throughout our manufacturing steadily improved and our peak production weeks during the quarter matched the pre COVID-19 production levels.

Wholesale segment written orders increased 28, 1%.

Excluding GSA and the other government orders wholesale segment orders grew 39, 7%.

We continue to see COVID-19 pandemic related disruptions that are delaying the issuance of new GSA and other government orders.

Our retail net sales increased four 1% for the quarter.

And of the quarter, both retail and wholesale have high order backlogs that we expect to get caught up over the March and June quarters.

Our adjusted gross margin increased 80 basis points to 56, 9%.

The increase in consolidated gross margin was due to higher productivity in our manufacturing and the change in the sales mix.

Retail sales as a percentage of total consolidated sales.

The 81% compared with 79, 7% of year ago, which positively impacted consolidated gross margin.

Adjusted operating margin, which excludes the impact of pre tax charges from restructuring initiatives asset impairments and the other corporate actions increased to 13, 1% compared of five 4% of year ago, primarily due to a three 9% increase in gross profit.

And in the 11, 4% reduction in adjusted operating expenses.

Adjusted operating expenses for the quarter were lower due to reductions of the selling expenses, including advertising costs and reduced compensation expense as we are operating more efficiently with 19% of that head count than in the prior year period.

Our GAAP EPS was <unk> 67, compared to <unk> 27 of the prior year quarter, our adjusted diluted EPS increased 155, 6% to 69.

Comparator of 27 cents in the prior year second quarter.

As of December 31 of our balance sheet remains strong with cash on hand of $80 million inventory of $126 7 million and no outstanding borrowings <unk>.

During our fiscal first half, we generated $65 9 million of cash from operating activities.

181, 8% increase from the prior year period.

We paid regular dividends of $5 3 million during the quarter.

In November the regular dividend was increased by 19% and we just paid $6 3 million in the regular dividends on January 21, reflecting the increased 25 cents per share of dividend.

With that I'll turn the call back over to Farooq.

Alright, Thank you Corey.

I'm also pleased to provide a brief overview of our initiatives, which as we have discussed previously focuses on five important areas. The first is talent.

Talent development is key and the continuing process.

Crisis does create an opportunity to review the talent.

And I am pleased we have greatly strengthened our leadership in our regional network.

The merchandising marketing the manufacturing finance technology and other areas of our vertically integrated enterprise the <unk>.

Second area is marketing, we continue to refine it in and invest in various mediums. Most importantly in the digital mediums.

Digital mediums have enabled us to increase our reach to more potential clients, while reducing our marketing costs the.

So the area of service, we continue to make progress despite many challenges due to COVID-19.

Use of the transportation issues and getting products from East Asia shortages of raw material. However are the advantage of making about 75% of our products in all of North American workshops is an advantage and as reported we expect to catch up in the next few months and.

And we are also investing in our North American manufacturing, our logistics network of delivering projects and White glove service across North America, the strong advantage and we continue to refine.

The fourth area of technology, combining technology with personal service.

Personal service of of about 1000 talented in house just professional interior designers has been a key to increasing written business.

At retail.

We also as Corey said, we also have the halves.

A major increase on E commerce.

We are investing in technology in various areas, including retail network of manufacturing and operations.

The fifth area of social responsibility we have.

Always been in full from in this area not because of external pressures, but because it's the right thing to do for the welfare of our associates and our clients.

Now as we indicated in the press release, we see that our.

January written orders continue the upward trend.

Also the government or the type of postponed have started to come in in January and with this brief overview I'm pleased to open up for any questions and comments.

Thank you.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. That's the Starkey followed by the number one key on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press star followed by the number two if you would like to remove your question from.

The Q 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 questions. Thank you.

Our first question comes from Brad Thomas with Keybanc capital markets. Please state your question.

No Brad.

Hi, good afternoon, Farooq, good afternoon, Corey and Matt.

Thanks for taking my question.

Farooq I was hoping to ask about.

The important topic of converting these orders into revenue is particularly because the order trends that you've been seeing or just just so extraordinary of munis is the best for that can recall.

And over a decade of covering the company I know the this is an unusual world that we're in sort of logistical challenges.

It sounds like you'll be able to make some progress here in your fiscal third quarter, but could you talk a little bit about what a reasonable revenue growth rate might be given the strong backlog that you have to work through thank you.

Yes, Hi, Brad is that's a very important issue has been the challenge I would say that.

Overall, I don't have to mention all of the issues that everyone I'm sure you've all heard about the issues of transportation of raw materials and all of that all of our advantage is the fact that 75% of it is made in our North American workshops, and we have increased our capacities. We have worked very hard to get some.

For all materials, which have created issues like for instance, you know we.

We don't make the fabrics, we make 100% of our upholstery upholstered products, which is the largest category of the of in our business in our own workshops. So it is improving I would say that.

We would see.

Increases in this coming quarter, and maybe more by fall of flow into the fourth quarter, but we'll see how it goes bad.

Okay.

Okay is there a.

A M.

Any any sort of way you can help frame up.

What a reasonable revenue range of reasonable revenue growth rate might be for the March quarter, because of the normalized year of pure supply chain in your factories, where we're 100% one would think that we would be seeing double digit revenue growth. This quarter can you help give us any perspective on what reasonable growth might be.

For the quarter no Brad you know I mean, obviously, we have a bit of a.

146% increase in our backlog in the retail division we have of major in the wholesale I would say that I am just thinking loud right now because the game. There's so many factors beyond our control I would say debt we.

We should increase our revenue of us.

Although delivered sales that's what you're talking about driver this quarter.

I'd say that at least with anywhere between 10 15, 20% in that range is what I would like us to.

To increase our delivered sales.

That's very helpful Farooq and and lastly for me I was curious if you could just give us some sense of how you're managing.

Some of the inflation that we're starting to be to see bubble up obviously some of the raw material prices are increasing transportation costs et cetera.

How do you feel like Ethan Allen is positioned to deal with some of those you know in the quarters ahead here.

They are increasing and in fact I'm sure that Youre also aware of the fact that obviously our exposure of drugs.

Total of sourcing is less than 25%, but even there we see a major increase in transportation costs, especially I think the short term paying debt.

The I mean, everybody is being asked to pay a somewhat of a premium driven book of container. If all of the visits for the all imports of radio this would be of big Big issue I would say that Oh, we have Fortunately most of our lumber.

We do it via our own saw mills the go to draw to the fall.

We are okay over there where we do see some we do see increases is really more on the 25% of the imported products and of course, the fabrics. So I would say that our bad debt.

There is an increase and what we are considering is in the next few months of a small price increase that region.

Very helpful. Thank you so much for that.

Alright, Brad Thanks.

Our next question comes from Joe Feldman with Telsey Advisory Group. Please go ahead with your question.

Hello, Joe.

Yeah, Hi, how are you guys.

So I wanted to ask.

With the January backlog up so much.

Did the stimulus helped that at all or is it just the the demand is so strong like what what's driving that was it the marketing that helped or yeah.

You know it sounds are you seeing new customers come in where do you think the behind it all Joe We've got a great company.

We've got great products, we've got great people, that's the number one but also the but also I.

I would say that the result is suddenly the result of as people have been interested in home, there's a lot of interest in home.

And then people are looking at all of brand.

Well you know we of quality, we can deliver the products and you know it also goes back to the that Brad had asked we have also given the.

More discounts or savings than we normally would do and the reason for it even though our margins have held up the sales. The increase we have given savings of up to 25% and the reason is that we want to do and I wanted to make sure that all of the new people that are interested in home come to us and become a cash.

Cash and that's what also taking place so I would say the benefit of our client base plus increasing clients true of course, our marketing for our name and also the savings is always has all helped us increase the business.

That's kind of got it and then.

That was another topic, we wanted to ask you about was on the the.

Promotional side I mean, you know do you have you had to have you scaled back the promotions. This period just given the demand is so high and how do you envision the environment in the coming you know six months to two to round out the fiscal year like Joe take a look at the.

When you take a look at what the off what we have done we have given modest comps we've had somewhat less production, we have been faced with all issues, but our margins at the wholesale increase and our margins at retail increased with all of this so there's a lot of reasons behind it but the efficiency in terms of operating our business at all of.

Shrink level at the retail level has given us at this stage greater margins with all of the challenges I've talked about without an increase in sales.

I'm talking of gross margins, our operating margins have also increased with a lot of reasons and of course as Corey just mentioned, we have reduced our expenses, we haven't even reduce of marketing expenses from spanning close of a five percentage of spending less than 3% not because there's been less we have is less effective.

But today digital marketing and in all of the tools that we're using is giving helping us reach more people and less costly.

Understood understood.

If I could just sneak one more in I guess, the if I were to walk in today and buy a new sofa.

How what are you telling people. These days is at eight weeks for 12 weeks I assume 14 weeks of like what's the time frame, you're giving them. These days. The good news is that this is being reduced and approximately eight nine weeks of the timing of giving.

And keep in mind from vault customer.

For chip disaster, and we also have and we also have of an element, which we call quick ship, which is still made custom but there. We are now shipping in less than six weeks.

Oh, that's great that's great.

Thank you.

The most of this quarter again, none of it.

Sure.

Thank you there are no further questions at this time I'll turn it back to management for closing remarks. Thank you.

Well. Thank you very much and I know of course, we have given a lot of information out and I understand the reasons. We don't have questions just because we've given a lot of information and of course. The result of goods. The objective really is the continue to operate the business as I said earlier. The first the important thing is do it safely the the welfare of off of.

For the tremendously important at all levels and we're very very pleased that all of people have really done an amazing job in terms of managing this health crisis. So we're going to continue to be very proactive we have a major major focus in increasing our offerings to reach it.

The consumer base that we believe it is very much relevant to us we are going to increase our technology. We are going to increase our manufacturing for instance, we are doubling our production in some of our wood products in North America, We had already in the last few years invested greatly to double our capacities in <unk>.

Of the capacities of our facilities in our upholstery manufacturing and so we are ready to grow the business and we are ready for service. So again, thanks for everybody being part of the Ethan Allen and to all of our stockholders and also to all all of our associates who are listening.

Thank you. Thank you very much today's conference you may disconnect. Your lines at this time. Thank you for your participation.