Q1 2022 Ethan Allen Interiors Inc Earnings Call
Good afternoon, and welcome to the Ethan Allen fiscal 2022 first quarter Analyst Conference call.
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It is now my pleasure to introduce your host Matt Mcnulty Vice President of Finance. Thank you you may begin.
Thank you Alan good afternoon, and welcome to Ethan Allen's analyst.
For fiscal 'twenty first quarter ended September 32021, joining me today is fruit category, our chairman and CEO and quite widely our Chief Financial Officer, Mr. Katz, why well open the call.
Of course, it will speak to the financials midway through it after our prepared remarks.
The call for your questions.
Again, I'd like to remind the audience that this.
Call is being recorded and webcast live and Ethan Allen Dot Com, where you'll find a copy of our press release, which contains reconciliations of non-GAAP financial measures referred to in this release and on this call. A replay of todays call will also be made available via phone and on 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 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 fruit category.
Thank you Matt.
And thank you all for participating in our earnings call today.
We are pleased with the continued strengthening of many aspects of our enterprise, including our financial results.
Our talent.
Our manufacturing our service.
Marketing.
Technology and social responsibility.
We have continued to strengthen our talent and our vertically integrated enterprise bi.
By adding to our workforce and manufacturing.
Logistics and retail.
Our headcount of 4200 and travel has increased 18, 5% from the previous year first quarter.
Continuing personal service of our interior design teams with technology.
Has it been a game changer and will continue to provide a major competitive opportunity to grow.
So what we're seeing our large backlog of orders is of critical importance.
At September 32021, our retail backlog was up 73% from a year ago.
Which provides us.
The continued opportunity to increase delivered sales.
75% of our products are made and most of them clustered in our north American manufacturing workshops, providing us a good opportunity to service our clients.
We have taken steps to strengthen the business, including additional work shifts within our North American workshops.
Building, a new addition to our maiden North Carolina plant.
Continuing our investments in Vermont plant in Honduras, Mexico, and also in our various logistics centers.
And also growing our manufacturing head count by double digits over the last several months.
Through these actions we have increased capacity and are focused on servicing a large backlog of written orders.
We continue to strength, our product offerings, the projection of our design centers and the various elements of marketing.
While quarter ended September 30, 2021 we substantially increased our digital marketing, reaching over 15 million households, with our 36 page digital magazines.
We reduced our advertising in other traditional mediums, thereby reducing our overall advertising spend to 2% of sales compared to 414.1% in the previous year quarter going forward, we expect to increase our advertising to about.
3% to 4% of sales.
We had strong financial results during the first quarter of fiscal 'twenty to 'twenty, two which Corey Whitely will now briefly walk you through corporate yeah. Thank you farooq.
We had a strong performance for our fiscal 2022 first quarter ended September 30th.
Retail segment written order demand continued to accelerate during the quarter, achieving six 1% growth compared to the strong prior year period, and 17, 6% growth compared to the first quarter ending September 2019.
Wholesale segment written orders increased eight 1% strong retail demand and contract sales growth, which increased 51, 1% due to a rebound in government orders helped drive the strong wholesale performance.
Consolidated net sales for the first quarter were $182 3 million, a 27% increase to the prior year quarter.
Our retail sales increased 31, 3% and wholesale sales increased 12, 4%.
At the end of the quarter, both our retail and wholesale segments had record high order backlogs that we expect to get caught up on during this fiscal year.
We were able to achieve a strong gross margin of 59, 9% despite ongoing supply chain challenges.
This growth was due to a shift in the ratio of retail sales to wholesale sales improved operating leverage within our manufacturing from higher production levels and benefits from our optimization of manufacturing and logistics initiatives.
The retail sales Miss next screwed up 85% of consolidated sales compared with 78, 2% a year ago, which positively impacted our consolidated gross margin.
We expect this higher percentage of retail sales to consolidated sales to moderate towards normalized levels as we ramp up delivery of the high wholesale order backlogs.
Our merchandising and supply chain teams continue to work through the current environment of rapidly escalating commodity and freight cost product shortages price increases in shipping delays.
We were pleased with our strong gross margin of 59, 9%, we expect our gross margin to return to a more normal range of approximately 58 to 58, 5% in the near term as the sales mix returns to more historical norms.
Our operating margin was 15% for the quarter adjusted operating margin increased to 15, 2% primarily due to net sales growth the improvement in gross margin and controlling costs.
Adjusted operating expenses of 44, 7% of sales for the quarter reflected operational leverage under our vertical structure, along with reductions in certain selling expenses, including advertising costs.
Our GAAP earnings per share for the quarter increased to 79 cents compared with 37 per share in the prior year quarter.
First quarter adjusted diluted EPS increased to 80 cents compared with 36 cents in the prior year.
As of September 30, our balance sheet remains strong with cash on hand of $93 7 million and no outstanding borrowings.
During the first quarter, we generated $17 million of cash from operating activities and paid a total of $25 4 million in regular and special dividends with that I'll turn the call back over to Farooq.
Yes, Cory tanks, and just to again focus on some of these important financial metrics.
We had.
Strong sales and profitability in this quarter.
He ended up $182 3 million increased 21, 7%.
Gross margin increased to 59, 9%.
And operating income increased 134, 2% and operating margin was 15% and the diluted EPS was 113.5% also showing the impact of a vertical.
<unk> business and the end and deliveries that we have bought and bought our margins gross margins and profitability.
Segment operating margin increased to nine 3% from two 3% last year again, a very very important element just shows the impact of sales.
And its impact on our margins because we were able to then have a lot of a lot of our costs are fixed.
On the balance sheet, we ended with cash of $93 7 million and no debt.
Distributed $25 4 million of regular and special dividends.
Our inventory grew $258 7 million due mostly to sold orders that how do we delivered and improving on manufacturing position to better service our backlog.
We remain committed to our sustainability practices.
Including both corporate social responsibility and ESG practices as they are a fundamental part of our operation for the last 19 years.
We understand that are that are approaching to managing the business must be aligned with our commitment to sustainability.
Many of our decisions are based upon factors, such as energy consumption reduction of waste and emissions.
FX off our operations on climate change equality equity and inclusion in the workforce employee safety and security and to look base.
All the more important and this last one yeah compliance with national and international legal standards for the gone into a business.
And enforcing the most rigorous social standards in every jurisdiction.
In which we conduct business. We are pleased with what we have accomplished in the first.
10 years of the major step sustainability initiatives that we undertook and offsetting our new 10 year goals through 2000 2030.
As part of those goals, we have established our commitment to achieving net zero emissions by 2050 and are developing methods plans and resources to meet this commitment.
Now as we look ahead, our focus remains on long term growth.
And we acknowledge the support of our shareholder base with focus on longer term returns, especially cash dividends.
I previously mentioned, we paid $25 4 million in regular and special dividends and our objective is to continue strong shareholder returns and now I'm pleased to open the door open for any questions or comments.
Alex.
Thank you.
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Our first question comes from the line of Bradley Thomas with Keybanc Capital markets. Please proceed with your question.
Hello there.
Hi, This is Andrew good afternoon, Farooq and Corey This is Andrew on for Brad Thanks for taking our questions here.
Hi, Andrea I wanted.
Hi, Farooq I wanted to start out by talking about capacity and delivered revenue. We know that in this quarter you saw about a $4 million increase in delivered revenue sequentially versus fiscal for Q.
As your capacity continues to ramp how should we think about the improvement and delivered revenue over the next few quarters do you expect to continue to grow delivered revenue by a similar amount of a $4 million sequentially in the quarter is that or do you expect to achieve a different pace.
Andrew I would think that it would be somewhat higher than what you have done because we as I mentioned, we have continued to invest.
American manufacturing.
Our.
Some issues that we have had in some raw material supplies. They are they have they have raw material suppliers have improved so I would say that it would be somewhat of an increase from what you've seen.
Understood and speaking of raw materials I know in the past few quarters phone. The phone supply was you know a significant bottleneck for you all what what are you seeing on the film supply and are you are you seeing continued improvement.
And in that area of your supply chain, yes, we are almost back to normal.
Okay, great and so.
Yeah, I'm sorry go ahead.
As as as foam.
It looks like Palm has recovered back to normal, but what are some of the remaining bottlenecks you have to work through on the supply chain to achieve.
To meet this higher level of demand that you're seeing.
Well you know as long as.
We have mentioned, there's about 75% of our products are made in our north American facilities.
You might have read about you know a couple of months back I was in Vermont.
I was hiking on the Green Mountains, and I said I bet, a visit to our plants and they were having a tough time in terms of getting labor, we have tremendous amount of capacities investments. So we discussed with the team and then we increased the base rate from I think $13 $16 and then of course increase other ways.
Yes.
That had getting labor was a big factor, but the good news is since we did that we are starting to get good strong labor not only in North Carolina, but we of course implemented and throughout North America. These new wages, especially in the United States. So labor was a big factor that is under that is.
Much better positioned we are better positioned.
And then of course.
The 25% of some of the products that are coming from offshore having the challenge we had in a better position than most of it still.
The challenge in terms of getting containers and then of course the cost of the containers has gone from okay. No. Let us say about 2000 $2500 to 20 to $25000. So it's.
It's not only the question of cost has been an availability. However, as I said, 75% coming from North America has has given us an opportunity to increase our production and our deliveries.
Understood that's good to hear shift.
Shifting to written trends. It was good to see continued positive written sales growth through the quarter. Despite the long delivery times.
However, it's difficult to assess how written trends compare to the strength you saw in recent quarters given the lumpiness of the pandemic compares so I was wondering if you could share how written trends are pairing on a two year basis.
And how that strength compares to what you've seen earlier this year.
Korea was it yeah.
For the quarter just ended why were up six 1% of that really strong you know prior year. When we saw the recoveries just start after the Lockdowns are.
Please go back all the way to September 2019, a 17, 6% growth. So it's still a good trend.
From either direction and.
That's been good to see.
And we're also seeing that growth on the contract sales as the GSA businesses rebound as well and.
And so we're just in the end of the government fiscal year. So that helped on the order growth side, and then they'll turn of course into our wholesale shipments as we then start delivering that product out yeah, Brad having said this in the way we have had strength has been in the state Department, where the weaknesses has we have been in our international business because of it.
Still a lot of issues, whether it's in China or in the South East countries are in the middle East that has been somewhat slow, but fortunately most of the business is North America State Department is a big part of our business, so they're doing well.
Understood. Thanks for the detail there.
How are you now pass it on to others and I'll jump back in the queue. Thank you.
Brad Thanks.
Thank you.
Our next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please proceed with your question, Yes, Hello, Cristina Hi, good afternoon, Farooq, and Corey and congratulation to order them I had a couple of questions I wanted to follow up on that question in maybe if you can talk more broadly about.
Demand trends, how do you feel about them continuing to generate positive orders over the next couple of quarters and as you look at the health of the consumer I guess, what gives you confidence that the strong demand we've seen for alternative things can continue as we go into 2022.
Yeah, Kristina that's a that's a very important.
Question, but when.
When we take a look at it in the last year, we have done extremely well.
You just mentioned that emanated in September quarter, we are up six 1% in Britain against a very strong orders that we had in the previous year I.
I believe that you know consumer.
Interest in the home has been very strong in the last year and a half.
And we would I would think that the consumer interest will not be as strong going forward. So we got to work hard you got to be in a much better position I would say that the easier days for our industry are over now having said this in a better position because we have strengthened our offerings we have.
Strengthen our retail teams to be able to read.
We have really is very very strong interior design network.
And combined with technology, because even our reach at our designers are about 75% of the products that they order that they take is custom designed if we didn't have the technology and the ability of our interior designers to work from their home or wherever else our consumers working at home.
Would not be doing this business I think we have an opportunity to continue our growth and we have an opportunity to continue to expand our reach to more people as we are doing in the interim we are going to be an early next year, we are going to be introducing a very strong product offering.
<unk>, which we held back.
Have you held back because of you know the supply situation. So we're going to get that in in the early part of this this year and I think that also is going to make an impact. So we are positive, but I think we are also cautious.
Okay that makes sense I then my second question I wanted to delve a little more into the gross margin, even though it was very high this quarter and it seems like you know some of it was due to the retail mix blood.
As you look forward 58 to 68, five who have been hired them why do you talk before so I wanted to see if you could talk more about them I guess, how are you offsetting some of the supply chain pressures and you know what are the drivers of that higher gross margin.
Well you know Korea also mentioned is that.
Gross margin of 59, 9% that we had this quarter is because there is hot and it reflected a number of factors. One was that we had a lot higher total retail sales to total sales are but as we know.
As we increase more shippers, let's say for the state Department contract that gross margins may slightly go down but.
It has a positive impact on the operating income so it gives us a suspected in mind because you.
Do you have to look at gross margin and you also got to look at operating margins. So I think that the gross margins, if you're able to maintain the rate more closer to the rates we have.
Uh Huh, that's a very very strong gross margin. It also reflects the fact that are we have been able to even offer.
Oh, great savings to our clients and also absorb.
Some of these costs that we've talked about some of the raw material costs.
All on 25 or 30% of our 25% of our projects coming from offshore very high prospectus that will be a boston some increases, but we have not been able to pass all because I would I would hope that those crazy increases in container costs are temporary so we have taken some part.
Price increases, but we don't want to overdo. It. So I think this gross margin.
Of you know close to $58. So it's a very very good gross margin for us.
Yeah.
And another question I had with marketing.
You mentioned today and that's the goal is to get to 3% to 4% or 2%. This quarter. You go back I said person then they you know it was more like four four and a half four 5% if I recall correctly. So has anything changed in how you're thinking about marketing and how much do you want to spend money.
One way is you want to spend it.
Kristina that's a very good question.
Our marketing people I said, we are going to control our destiny rather than leave it to all of these characters out there I don't want to give you all of the names of these.
These companies that are utilizing that it's taking a lot of money on on all on you know the digital medium. So we said we'd go to control. It ourselves. So we went and we decided that we are have the ability to reach consumers clients ourselves our prospective clients through digital mediums that we didn't have.
Before that's why I said, yeah, we have been in Vietnam mailing close to 15 million copies of our digital magazine every month. So we are buying the prospects. They are much less expensive than the traditional mediums. So we're going to continue with that but that is one very important factor. The other one was we felt that.
With this high demand for consumers interested in the home there was no need for us to spend a lot more money.
But as we go forward, we'll spend some more but the medium that we will spend on will continue to be different than what we did in the past.
Okay.
Helpful and one last one which is just more of a modeling question.
The increases that you've made on wages, particularly in the manufacturing I guess how material are those two.
Yeah. That's a good question I think that.
You know the board I think Corie and Matt are trying to figure that out.
No. It has to it has two elements because on one hand. It does include the cost of goods, but on the other hand, it reduces because we can produce small so if you're not able to produce more you may have lower labor costs, but you don't have the profit you don't have the products. So overall I think the benefit is going to be better than it was it would be more beneficial for.
Two because.
We increased our production. If you don't include in our production then of course it goes the other way.
Okay got it yeah, so higher higher labor costs, but you're going to manufacture more should you get more layperson does call. It doesn't exactly yeah. That's the main thing if on the other hand, we increase all of this and don't increase none of it than that.
That's going to be an issue Christina.
Okay. Thank you very helpful. I appreciate it.
Yes.
Thank you. Our next question is a follow up from the line of Bradley Thomas with Keybanc Capital markets. Please proceed with your question.
Yeah.
Hi, Hi, Thanks again for letting me in here this is Andrew on for Brad.
Just wanted to follow up on some of the written a trend commentary I was wondering if you could talk about the cadence and what you saw on a monthly basis throughout the quarter and if those trends have continued thus far into fiscal two camp.
Oh, you're talking about the first quarter that we just ended.
Yes, Yeah, I think that the what we saw the trends whereas usual.
That we had strong end of the months, that's what happens every month and that's continued every month now in October.
<unk>.
October we haven't closed the month, it's always in the last week, we do we are able to do 30% of the business.
However, we are now comparing to very high numbers last year. So we got them all just keep that in perspective. So all comparisons are going to be more tougher well most likely unless you know I'm pleasantly surprised that we have very high numbers, but I think we are going to have lower increases are.
We moved through the quarter than we had in the last previous year. That's what we are picking up the state because we are comparing to very high numbers.
Yeah, Yeah understood.
Yeah, Andrew I would just add that the labor day was also a strong period for us.
Okay got it thanks for that.
And just wanted to follow up I know that earlier in the call Corey you mentioned that.
Retail segment written order growth was up 17.6% on a on a two year basis if.
If I heard that correctly.
And so that that compare it I mean that that's you know that's a very strong, but but that compares to.
Last quarter, where you saw around around a 42%.
Increase in retail segment written order growth if my notes are correct.
What do you think what do you think drove the deceleration there and do you think it has anything to do with with these extended lead times.
Yeah, Corey you look at the numbers, but you know Andrew we are comparing with numbers when we add a lot of our business was closed.
Last year right.
You got a two year stack.
I think part of it though is also just the timing of the quarter are being.
For the September quarter versus the June quarter comparison.
So it's a little hard to compare from period to period, but still.
It does.
As we moved a lot.
Yeah, and also the marketing programs that we had running at the time have an impact in that as well.
Okay got it I appreciate the detail.
That's all for me thank you.
Yeah.
Alright, and Alex and the other question.
Ladies and gentlemen, there are no further questions in the queue I will now turn the call over to Farooq, sorry for closing remarks.
Alright, Thank you Alex and thank you for all for participating and as usual if you have any comments or questions. Please make sure you, let us know and Matt.
He is available and I'm sure that he'll take a take your questions, but we look forward to continuing this very high the journey lots of lots of opportunities.
Of course challenges too, but I think we are well positioned so we because.
Because we we are in a good position to continue the positive growth that you've had.
Thanks very much.
Thank you. This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.