Q3 2021 Ethan Allen Interiors Inc Earnings Call

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Okay.

Greetings and welcome to the Ethan Allen fiscal third quarter earnings call.

At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Corey Whitely Executive Vice President Administration, and Chief Financial Officer. Thank you Sir you may begin.

Thank you Victor good afternoon, and welcome to Ethan Allen's conference call for our fiscal third quarter and at March 31, 2021 <unk>.

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 and 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'll open the call for questions.

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 SEC filings for a complete review of those risks.

And the company assumes no obligation to update or revise any forward looking matters discussed during this call.

I will provide a brief recap of our financial results and then turn the call over to our chairman and CEO for Caf worry.

During the third quarter of fiscal 'twenty, 'twenty, one and our teams remain focused on serving our clients and keeping our workplaces safe.

Our retail segment written orders continue to accelerate achieving 58, 1% growth compared to the prior year third quarter with our March written order setting a new March record.

This order growth also reflected 21, 9% growth over the fiscal 2019 third quarter.

And it was also a 23, 9% sequential growth compared to our strong second quarter written orders.

Our e-commerce orders reflected 100% growth for the quarter compared to the prior year quarter.

We are pleased that our April retail written orders are continuing an upward trend.

Wholesale segment written orders increased 39%.

Excluding GSA and other government orders wholesale segment and orders grew $48 three per cent.

Our consolidated net sales for the quarter were 177 million and 18, 2% increase to the prior year quarter on it.

Retail net sales increased 22, 2% and wholesale net sales increased 15.8 per cent.

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

Our adjusted gross margin increased 130 basis points to 57, 3%.

The increase and consolidated gross margin was due to higher productivity and our manufacturing and a change on the sales mix retail sales as a percentage of total consolidated sales were 79, 9% compared with 77, 2% a year ago, which positively impacted our consolidated gross margin.

Our adjusted operating margin, which excludes the impact of pre tax charges from restructuring initiatives asset impairments and other corporate actions increased to 11, 1% primarily due to the improvement on gross margin and a 2.1 per cent reduction and our adjusted operating expenses.

Adjusted operating expenses for the quarter and lower despite the strong sales growth due to reductions and selling expenses, including advertising costs and reduced compensation expense.

Our GAAP earnings per share for the quarter were 61 cents per share compared to a one cent loss per share on the prior year quarter, our adjusted diluted EPS increased to 58 cents compared with two cents and the prior year quarter.

And as of March 31st our balance sheet remains strong with cash on hand of $109 million and no outstanding borrowings.

Inventory of $135 7 million increased 7% from the second quarter, reflecting an increase in production and import receipts.

During the third quarter, we generated $36 2 million of cash from operating activities.

We paid regular dividends of $6 3 million during the quarter and we were pleased to announce on April 27th that our board of directors declared a <unk> 75, and special cash dividend along with the 25 and regular cash dividend and these were both be payable on may 25 to shareholders of record on may 11th.

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

Yeah. Thank you Corey and I'm very pleased to have all of you join us today.

And as we mentioned in our earnings release.

Crisis creates an opportunity to make positive changes.

In March and April 2020, refund owed approximately 70% of our global workforce.

Closed about 250 manufacturing logistics and retail design center facilities and no.

North America.

And closing over 100 retail locations internationally.

Borrowed $100 million as a precautionary measures and to maximize financial flexibility.

A year later of a day.

Teams have performed very well we have brought back most of our associates.

You know the culprit for logistics and retail network.

Workforce and on manufacturing has surpassed pre pandemic levels.

We have paid back all of the borrowings.

And in the quarter with over $100 million of cash and as Corey Just said earlier. This week day live declared a special dividend of 75 cents per share. In addition to the regular quarterly dividend for 25 cents.

We are positioned well to continue on growth.

We continue to strengthen.

From a manufacturing and in North America, which produces about 75% of our products.

About 70% of this production are made when orders are received.

Customization provides greater choices for our clients and also important and managing our inventory.

The combination of skilled crafts persons.

Increasing use of technology has helped reduce time to make our custom products.

We along with others and our industry had been impacted by delays and raw materials, especially that you show a foam used in our upholstery products.

We do see improvements and believe that we should be able to increase production this border and the next quarter.

Our long term focus on maintaining and growing manufacturing and North America is a major advantage.

During the last few years, we have expanded on facilities.

And invested and machinery and technology and in good position to service our growing sales.

We continue to strengthen to strengthen our product offerings under the three attitudes on classic country coastal and Martin.

In particular and utilizing our north American manufacturing, we have expanded our hundreds per cent custom upholstery program and have introduced important programs and case goods such as our custom dining program and custom bedroom program.

Yeah.

And we are in the process of introducing two other important cash good programs and this and following quarter income.

Home office program and custom bedroom program.

Again, offering many custom choices made in on North America and workshops.

Our focus on interior design services continues to differentiate us and held strong and savings.

Our investments and technology during the last few years.

Enabling our interior designers to virtually assist clients has been a game changer.

And we also continue to reposition our design centers.

And the last one year, we opened new design centers in Alpharetta, Georgia, That's Atlanta, San Mateo, California, Oxnard, California, Towson, Maryland, Portland, Oregon, Green Bay, Wisconsin, and Lancaster, Pennsylvania.

We continue to strengthen our marketing this includes utilizing traditional mediums such as direct mail.

<unk> TV.

We are increasingly using digital mediums, including our website emails and the recent introduction of a 'twenty 'twenty. One stylebook. Most importantly, we are forwarding digital magazines to our clients and millions of prospects.

And finally.

And these challenging times, we continue to focus on safety and treating on our associates and customers with dignity and compassion with this I'm very pleased to open up for any questions on Collins.

Thank you.

And that will be having a question and answer session.

If you'd like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate that your line is and my question for you.

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One moment, please go and now poll for questions.

Okay.

Our first question comes from Brad Thomas with Keybanc Capital markets. Please proceed with your question.

Hello, Brad how are you.

I am well good afternoon, and Farooq, good afternoon and Corey.

And congratulations on the momentum on the business.

Yeah. Thanks, Brad a lot a lot of good work for our team and teams really have done a great job.

Absolutely no question.

Hum.

And I wanted to just try.

Try to help connect the dots to our model on and try to think about what's what's possible from a financial perspective.

Given the strong order trends given that you have a very healthy backlog.

You know the last few quarters, you've done a sort of just shy of $180 million and revenue. Each the last two quarters can you help us get a sense for you know what what's possible from and output standpoint on a on a quarterly basis, because clearly it would seem like the demand trends and the back back.

While there is strong enough that you could be doing north of those kinds of numbers, how should we think about that.

Well, we certainly we do have the backlog.

Are we as I mentioned the challenges have been more on the issue of getting raw materials.

We are.

<unk> 25 per cent of our products are do come from outside our M.

Facilities and that is bad and we have had even a greater issues because some of that 25 per cent is offshore.

Having said this we have and we add up and they feel 100 containers tied up but they have now released so those products will be coming in.

All of our manufacturing is starting to receive more especially I'm talking on a policy that for them has been an issue. So I would say that and we are.

Going to have increases and.

Production in this quarter and I think that and.

How much more we will be able to do this quarter, we really still depend upon.

And receiving the products and time from overseas and the raw materials, but suddenly Brad we're going to look and we should do better than what we did and it did.

This quarter.

And that's that's very helpful for them and then just one other question for me and as a follow up on how to think about.

Costs going forward.

M.

How should we think about SG&A and and the need for investments and the business and things like advertising and those could think about you know growing SG&A going forward.

Yeah, I mean, you know we have up and I would also say this that would share perhaps the questions come up we did.

Had some solar business coming in for the State Department and the last four months, but songs and but in April it looks like those folks on the back to work. So we have had a good April and that's that's that's important because and Corey mentioned the difference between the two.

And wholesale this year and last year part of that was just effect on somewhat lower state department, but bad for good news is they're starting to send us orders.

And now.

The question about a M S.

The SG&A the SG&A you know Brad.

I think that our advertising is about was about three six and 333, 5% $6 $2 million. We spent this quarter as against last year. The same quarter. We spent $8 3 million. It's interesting with the medium that we're using and advertising are different today than last and digital.

Digital has changed our lives even and advertising.

He used to send a tremendous amount of breakthrough mail printed direct mail and now we had been able to purchase over three and a half million names and we are sending about the same size of our digital magazine.

True.

Digital mediums and think of this we just printed a 260 page I'll show style book I don't know if you've gotten that if youre not Cory and make sure they get it.

That is that today, you can see 260 pages style book on an iPhone and so what.

What I'm getting at is is all this digital mediums has made it possible for us from Roche and reach more people.

With less expense. So that's that is going to be what are we going to continue to do.

Alright, very helpful and congrats on the momentum and good luck going forward and thanks.

Thanks, very much Brad.

Thank you.

And as a reminder to our audience if you'd like to ask a question. Please press star one on your telephone keypad.

Our next question comes from Cristina Fernandez with Telsey Advisory.

Please proceed with your question Hello, if they stayed high and good to have you back and think.

Good afternoon, and Farooq and Corey and I.

I wanted to ask about the raw material shortages.

And specific default shortages that you know it seems like they're pretty broad based across the industry can you expand on why you're seeing.

And the delays you are experiencing and being able to deliver those products to customers.

Yeah, you know.

A L M via a major upholstery operations and North Carolina.

And.

And every week for the last few weeks.

Either but.

Three days on hand, sometimes two days, but now the good news is they're looking from three to four days you can see them all and the last two or three weeks, so and we've added more days.

We have and upholstery operations, and our operations and Mexico. Fortunately that has not been impacted by the phone shortage because it is available there. So I would say this kristina that it.

It is improving and people are getting more and I would think that from prediction is that by the end of may and they will come pretty close to.

Meeting the requirements.

Okay, that's good to hear and.

And I had two other questions one.

On the press release, you and orders that.

You already had broad back most of their day to work force and and <unk>.

So.

Sure and works for Us to watch both pre pandemic levels. So if that's the case I mean should we expect SG&A expenses to trend back up or can you can you have the whole workforce Wade and still keep SG&A and like.

And each quarter.

No.

We have reduced to some degree all our head count.

At the corporate and retail.

The manufacturing as I mentioned, we've increased it because our production and increased.

I think that we and our expenses are going to be it's going to be proportionate to the business coming in as a business increases on expenses for instance, and I'll say, our selling expenses relating to our design network increases. So I think you can take it and the proportionate to increase and business is that how long we expect our expense.

This increase.

Okay, and and then one last one.

Hey, Pearl.

And I guess the comment on what the business has been good any more details you can share or is it pretty similar to what you still like that.

And the second quarter ended March or is it you know I said it better even any more color that would be helpful.

And I would say this that we had a strong quarter certainly March was very very strong for a lot of factors within the first and most important is that we've got good programs. We've got really the calendar for interior designers and today using technology as I said is a game change I do not expect that our designers.

It will be able to do what they did.

And then also are we had a price increase on April 1st that took some business in March so who and expecting that perhaps april and she's going to be somewhat weaker, but as Corey mentioned and it is strong.

And again still consumer interest and the home our programs are strong. So those are the those are the factors that had a positive impact on April. Despite the fact, we had a very strong March because you know as you know when you increase prices people are trying to take advantage of it before it did yes.

Become effective.

So we are pleased with the fact that you know that our business and he probably showing strength and now.

So as we go forward, we'll see what we need to do we still have a fairly strong backlog and that would be able to deliver and we have somewhat better positioned than others and our industry because of our own manufacturing.

And but still we are also impacted by some raw material shortages.

And thank you and and best of luck this quarter.

All right. Thank you very much and ski.

Look forward to seeing you soon one of these days.

Thank you.

There are no further questions at this time I would like to turn the floor back over to management for any closing remarks.

Well, thank you and thanks, everybody for being on the call and as usual I think that.

And we were fortunate that we have a strong and that's what people strong net for all of US not politically integrated company. So I've got a lot of a lot of opportunity to continue the progress. So thanks very much.

Ladies and gentlemen. This concludes today's conference you may now disconnect your lines at this time.

You for your participation and have a great day.

Yeah.