Q4 2021 Ethan Allen Interiors Inc Earnings Call

[music].

Good afternoon.

Welcome to the Ethan Allen fiscal 'twenty, 'twenty, 1 and fourth quarter Analyst conference call and webcast.

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

If anyone should require operator assistance, please press star zero and your telephone keypad.

Sure and answer session will follow the formal presentation.

As a reminder, this conference is being reported.

It's now my pleasure to introduce your host, Matt Mcnulty Vice President of finance. Thank.

Thank you you may begin.

Kevin Good afternoon, and welcome to Ethan Allen's Analyst conference call for our fourth quarter and fiscal year ended June 30th 'twenty 'twenty 1.

Joining me today, and that's why our chairman and CEO and Corey Whitely, Our Chief Financial Officer, Mr. Cat for I will open and close the call while Cory will speak for the financials midway through after our prepared remarks, we will then open the call to questions before we begin I'd like to remind the audience that this call is being recorded and webcast live on.

Ethan Allen and 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 our website. 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 the company and assumes no obligation to update or revise any forward looking matters discussed during this call with that I'm pleased to now turn the call over to free cash wise.

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

While fiscal 2021 began with heightened levels of uncertainty.

We were able to have strong performance for the fourth quarter and fiscal year ended June 32021.

After Corey provides a brief overview of the financial results I will discuss our plans to grow sales and profits and cash.

We believe we have a great opportunity to continue our growth and increased increase sales profitability and cash flow and continue the strong returns to our stockholders Corey.

Thank you Farooq.

Our fiscal year ended June 30th with challenging yet we performed well our retail segment written order demand continued to accelerate during the fourth quarter, achieving 105% growth compared to the prior year fourth quarter, and 42% growth compared to the fiscal 2019 fourth quarter.

And we are pleased that our July retail written orders are holding positive to the prior year's high order demand when our retail was reopening and are also positive to our strong July 2019 order demand.

Wholesale segment written orders increased 82, 3%, excluding GSA and other government orders wholesale segment orders grew 87%.

Consolidated net sales for the fourth quarter were $178.3 million and 94, 7% increase to the prior year quarter.

Our retail sales increased 113% for the quarter and wholesale sales increased 106, 2%.

Our international sales increased 4.1% while contract sales had a 7.1% decrease.

Contract or demand has recently started to rebound, especially for our government GSA contract total contract order demand increased 49, 1% during the fourth quarter and we expect this trend to positively impact wholesale net sales and the upcoming quarters as we produce and ship these orders.

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At the end of the fiscal fourth quarter, both our retail and wholesale segments had high order backlogs that we expect to get caught up during fiscal 2022.

Our GAAP gross margin for the quarter was 58, 7%, while our adjusted gross margin increased to 58, 8%.

The growth and consolidated gross margin was due to a shift and the retail to wholesale sales mix and.

Improved operating Leverages, and our manufacturing and due to higher production levels and benefits from our optimization of manufacturing and logistic initiatives over the past years.

Retail sales grew to 84, 5% of consolidated sales compared with 77, 2% a year ago, which positively impacted our consolidated gross margin.

We expect this higher percentage of retail sales to consolidated sales mix to continue and the near term as a result of the strong retail written orders performance and related high retail order backlogs.

Operating margin was 13, 5% adjusted operating margin, which excludes the impact of pre tax charges from restructuring initiatives asset impairments and other corporate actions increased to 14, 1% primarily due to net sales growth the improvement in gross margin and controlling cost.

<unk> by leveraging cost reductions for measures taken as part of our previously announced COVID-19 action plan.

Adjusted operating expenses were $7.2 million or 8.2% less and they were in fiscal 2019 fourth quarter.

Adjusted operating expenses for the quarter were lower despite the strong sales growth due to reductions and certain selling expenses, including advertising costs and reduce G&A compensation expense as we are operating more efficiently with less head count and our retail segment and at the corporate level than in the prior year period.

Advertising cost for approximately 2 percentage of net sales and the fourth quarter compared to our historical run rate of 4%, we expect advertising costs to return to the 3% to 4% range in fiscal 2022.

Our GAAP earnings per share for the quarter was <unk> 71, compared to <unk> 48 loss per share and the prior year quarter.

Fourth quarter adjusted diluted EPS increased to 74.

Compared with a loss per share of <unk> 15.

For the full fiscal year adjusted EPS of $2.37.

Compared to 52, and fiscal 2020 and compared to $1.56 for fiscal 2019.

As of June 30, our balance sheet remains strong with cash on hand of $105 million and no outstanding borrowings.

Mentor's sequentially increased 6.1% from our third quarter, reflecting our focus on increasing production and stock levels to service our backlogs.

Customer deposits from written orders for our retail segment more than doubled during fiscal 'twenty, 1 and totaled $130.6 million at June 30.

Strong retail order growth of 47, 7% outpaced net delivered sales growth of 19, 9% and led to high customer deposits.

During the fourth quarter, we generated 27.8 million net cash from operating activities and for the full fiscal year, we generated $129.9 million.

For fiscal 2022, we expect capital expenditures to range between 16 and $18 million as we reaccelerate our spend to further invest in technology increased manufacturing capacity and open new or relocated design centers, while also continuing improving all our design centers projection.

We paid a total of $31.7 million and regular and special dividends during the quarter and for the full fiscal 2021, we returned $43.3 million to shareholders and regular and special cash dividends.

We are also pleased to announce on August 3rd that our board of directors declared a <unk> 75 special cash dividend and allow us to 25 regular cash dividend both payable on August 31 to shareholders of record on August 17th.

We intend to continue with the shortened time period between the regular dividend declaration date, and the payment date as we've done for the past 2 dividends.

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

Sure.

Thank you Corey.

We are uniquely positioned as a vertically integrated enterprise.

Problem developing relevant offerings.

And about 75% of the products and our North American workshops, focusing on interior design services.

Increasingly combined with technology and a strong logistics network, providing in home, what we call White glove service to our clients.

We continue to generate strong cash flow and provide very strong cash dividends to our shareholders.

As many of you know I was involved and taking our company public and 1993 and.

And the share price adjusted for stock splits and dividends of $3 and 51.

Since then we have continued to generate strong cash flow.

Being $526 million and dividend paying off $585 million of debt.

And repurchasing $635 million of our stock.

And we also invested and our enterprise with capital expenditures and acquisitions of $839 million million strengthening our manufacturing retail logistics and technology.

For the past 10 years since June 32011, our adjusted share price increased from $14 and 76 to $27.60 60 cents on June 32021.

We use about $100 million of cash to repurchase our shares paid cash dividends of $233 million and invested $183 million and capital expenditures and acquisitions.

Our focus and the reason I'm, saying all of this is is that our focus and should continue to manage our business to provide strong region and returns to our shareholders.

The main areas of focus for us.

For us and fiscal 'twenty 'twenty 2 and.

And beyond.

Okay.

Continued growth in sales and profitability and cash generation.

For your information, we increase of July written audience at retail by 6% over a very strong July last year.

Our wholesale written orders were up 13% in July.

Year over year and up 16% over 2 years.

Due to strong orders from U S government contract business as Corey just mentioned.

Our second objective is a focus on supply chain.

Our backlogs and exceedingly high and need to be delivered.

While we are better positioned making 75% of our products and our workshops and North America, we have been impacted by raw material shortages.

The 25% of projects coming from overseas have been impacted by COVID-19, and some countries and increases and transportation costs.

Due to major investments and our North American manufacturing and logistics.

Well I would say a better positioned for growth.

Total area is that we are actively managing the delta where into North America, and keeping close watch internationally to date. It has not been a major and negative.

And number 4 as reported we had strong fourth quarter adjusted gross margin of 58, 8% and again. It also reflected the greater percentage of our retail business for total business and our objective is to maintain around 858% gross margin.

And finally.

We believe that we are well positioned.

<unk> and our product offerings, and advantaged and introduce very strong new products by early 2022 at this stage. We are pleased to answer any questions.

Thank you and I'll be conducting a question and answer session, if you'd like to be placed and the question queue. Please press star 1 on your telephone keypad.

Information tone will indicate your line is and the question queue. You May press star 2 if people like terminal for your question for me queue.

For participants using speaker equipment may be necessary to pick up your handset before pressing star 1.1 moment. Please while we poll for questions.

My first question is coming from broker Thomas from Keybanc capital markets. Your line is now live.

Hello Bradley.

Hi, Good afternoon, Farooq and Corey This is Andrew on for Brad. Thanks for taking our questions here I wanted to I wanted to start by talking about.

Raw material delays you gave some helpful detail on the state of and your supply chain, but could you talk more specifically on the raw material delays and you're facing including which particular raw materials and youre, saying youre seeing the most delays from.

And how has that situation evolves into July and August.

Yes, sure and raw materials.

We are.

And bolt.

Wholesale business and manufacturing and good projects for case goods.

As it relates to upholstery and the raw material issues.

And then of course from the industry have related for instance to phone and.

And springs and things of that day June.

We have of course operations also in Mexico, which has been less impacted and the 1 and the United States as you as we know a lot of this happened because of the problems and the Texas area, where a lot of this film factories up and it's improving it's still not where it needs to be what do we see gradual improvement every week.

And that is that is really the on the upholstery side in our wood products. There has not been a major issue.

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Initially some issues on the on the lumber procurement, but that has.

Got it.

We've caught up and I think it is more a question about catching up to the high orders.

Great. Thank you.

And it's great to see the strong gross margins and this quarter, despite the higher product and freight costs and youre seeing.

But could you talk about how the how these rising costs may impact. The next few quarters and then how are you thinking about ways to mitigate those costs and I know you've talked about price increases and and changes to your discounting and promotional strategy and.

And the past, but could you talk about how you're thinking about it.

As we go into the next few quarters here.

Andrew as I said, we will also keep in mind.

Having its about a 58% gross margin which was also.

And of course improvements.

Sales and efficiencies, but it also reflected a higher percentage of retail to total sales.

So as you move forward.

I think the gross margins.

Reflect what our percentage of business is the wholesale versus retail and so that'll be having some impact but that also doesn't necessarily mean debt.

And that much of an impact on the operating margins because and operating margins. If for instance, we have.

Yeah.

Operating.

Higher.

Business.

Overall.

From our let's say the contract business is possible that our gross margin could be slightly lower but the operating margins would be higher and that's why I said you got to keep in mind approximately close to 58% is a good goal.

Okay. That's helpful.

Shifting to a M.

Revenue outlook.

And given given continued strength and your written order trends.

Your rising capacity on top of a large very large backlog and I wanted to try to help connect the dots and try to think about what's possible from a financial perspective and the quarters ahead.

And I know that over the last 3 quarters, you've done just shy of about $180 million.

And revenue on a per quarter basis.

But from a capacity perspective.

And do you think net now that these raw material delays are getting.

Our moderating and a week by week basis do you think you are in a position to break above that $180 million.

Revenue level.

And the next quarter or and the next few quarters I had yes.

Andrew I think the obviously that is an opportunity as a possibility.

I would say that if you go up to say again, we have to be.

Mindful of base about.

Phil the issues about raw materials and other factors, but I think if you go up the $5.7.

$708 million that debt.

It would be a good number to use.

Okay, Great that's helpful.

That's all for me. Thank you all.

Alright. Thanks.

Thank you next question today is coming from Cristina Fernandez from Telsey Advisory Group. Your line is that line, yes, Hello, Cristina Hi, Thank you good afternoon.

And Corey.

Oh a question following up on the previous 1 yeah and wanted to see it and you can update us on.

And.

Sort of what is it what are the timeframes now from customer order to the literally have compressed.

You know in the past couple of months.

<unk> been able to increase capacity or are they still.

Pretty meaningfully above the pre COVID-19 time frame.

No Kristina this is still and much much above the pre COVID-19 time period.

And we as you know in our case, 75% of our products that are made in the North America most of them are custom.

And that's a big difference between us and many others, who purchase inventory and then the average the timeframe as every industry and with the sale of stock and perhaps we will discuss them.

Or is everything is custom so that's why our timeframes are impacted.

And it will come down.

And just coming down slowly, but on the other hand, if you just give us an opportunity to continue to operate more efficiently and increased sales and.

And.

And the other good news is that we don't have a lot of excess inventory to sell.

That's helpful.

And another question, we had with can you talk about why youre seeing and trough.

Thank you.

And it seems like trends are normalizing and I'll get to July orders for still above last year, but hum.

And how did the quarter progressed and what do you expect to see here over the next couple of months.

Yeah, we're sitting on 1 of the important factors of course, we were fortunate that and the last for 5 years, we invested in technology like 3 D. Virtual reality, if we had not done and I do not know how our custom business would have fit.

If you had a lot of inventory and strength and people see it and buy it but that's not what we had our designers and to work with clients.

And physically and virtually and it's amazing that I have and I I get every week to week on actually yesterday.

But at least 50 events, where they involved a customer and I and myself.

Surprised and pleased to see how much of the business is being done with a combination of personal service and technology. That's the difference between our business and those that are selling inventory out of stock or on the floor. We don't have much of debt. So as we continue to build.

Build a business.

We have less interior designers, but more qualified interior designers.

We're going to continue to invest in technology, and giving them the tools to be able to use their personal service and technology and we will continue to see debt and that is going to be a tremendously important sector and IC and advantage for us.

And then a last 1 I had can you talk about marketing.

How are you thinking about marketing spend.

Upcoming year and all.

So I.

And I guess.

I mean as you've seen your customers over the past.

A few quarters are you doing anything differently to try to retain those customers and bring that back.

Yes.

And pursue that as an important factor of course as Corey mentioned, we did reduce our overall advertising spend last quarter.

A lot of it was due to the fact that you know we had tremendous amount of people coming in and didn't have to spend that was once and other factors. We change the means of where we advertise and now we are using a lot more digital advertising compared to print and even to some degree TV sharp cost is lower.

But our regions regions, having said this is 2% and somewhat on the lower side, we would adjust for budgeting purposes was ticket for a 3 to 4 but I'll try to continue to keep and monitoring it.

And so that we use less money, but more effectively so our advertising mediums are changing which is very important we are reaching more people actually by spending 2% on an.

On advertising and then we just when we did spend for me.

4%, so and but for budgeting purposes, I think anywhere around 3.4% would be a good thing for us.

Thank you that's all I got for now.

Alright, and Christina Thanks.

Thank you.

Our questions and the queue I'll turn the floor back over to free up pretty further or closing comments.

Well. Thank you very much and we are as I said, we're very pleased with the.

Progress we have made but we have a lot of work ahead of US we've got to make sure that we continue to serve our customers. We've got very high backlog. So that's a lot of focus that we have so thanks very much to everybody and look forward to talking to you soon.

Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.

Alright, thanks, very much take care.