Q4 2022 Ethan Allen Interiors Inc Earnings Call

Good afternoon, and welcome to the Ethan Allen fiscal 2022 fourth quarter Analyst Conference call. At this time all participants are in a listen only mode. A 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. Please note. This conference is being recorded it is now my pleasure to introduce your host Matt Mcnulty Vice Senior Vice President CFO and Treasurer. Thank you you may begin.

Thank you Hector and good afternoon, everyone and welcome to Ethan Allen's Analyst conference call for fiscal 2022 fourth quarter and full year results. Joining me today is fruit category, our chairman President and CEO, Mr. Katz, Alright, well open and close our prepared remarks, well I will speak to the financials midway through after our prepared remarks, we will.

And then open the call for your questions before I begin I'd like to remind the audience that this call is being recorded and webcast live under the news and events tab on the Investor Relations page of our Ethan Allen Dotcom website. There you'll also 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 today's 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 am pleased to now turn the call over to Mr. Kent for it.

Thank you, Matt and good to have you all participate in our conference call.

We are pleased and gratified to report very strong.

Financial results for the quarter and the year ended June 32022.

For the quarter, our sales of $2 $29 7 million increased 28, 8%.

And for the fiscal year sales of $817 8 million increased 19, 4%.

Our operating margin for the quarter increased 18, 3% and for the fiscal year increased to 16.9%.

Our diluted EPS for the quarter was $1.23, an increase of 73, 2% and for the fiscal yeah. It was $4.05.

An increase of 79%.

Reflecting strength of our vertically integrated structure and a strong team now back to Matt to provide more details on our financials and after that I will provide a brief overview of our areas of focus to continue our progress Matt. Thank you Mr. Kent Fine as a reminder, we present our results both on a.

GAAP and non-GAAP basis non-GAAP results include restructuring initiatives asset impairments and other corporate actions and are further detailed in our press release.

For the quarter consolidated net sales increased 28, 8% as a result of strong backlog increased levels of manufacturing production that led to higher delivery and increasing receipt of offshore products for the full fiscal 2022 year sales rose 19, 4% to $817 8 million wholesale segment written orders were down.

10, 7% to last year's fourth quarter, but were up 14, 2% compared to the fourth quarter of 2019 for the full year wholesale written orders were lower by 5%, but up seven 6% compared with the full 2019 year. Our retail written orders were down 19, 5% for the quarter and four 6%.

For the full fiscal year, primarily due to a very strong prior year comparable however, when compared to 2019 retail orders were up 12, 9% in the quarter and up 14, 9% for the full year.

The higher level of manufacturing productivity and related shipments of product helped reduce our backlog and improve delivery times during the year. Our wholesale backlog as of June 32022 was $102 million down 14, 7% from a year ago, but still at $56 $56 million or 128%.

On June 32019 in the near term our teams are effectively managing the business to work through this higher order backlog and to service our customers.

Consolidated gross margin was 58, 2% in the just completed fourth quarter and 59, 3% for the full 2022 year, primarily due to strong retail segment sales previous product pricing actions that are now working their way through our delivered sales and higher manufacturing productivity, partially offset by higher input.

And freight costs.

Increased wholesale contract business shipments lowered our retail sales mix from 84, 5% of consolidated sales last year to 82, 1% in this year's fourth quarter, reducing our quarterly consolidated gross margin, while helping increase our operating margin.

Our consolidated operating margin increased from 13, 5% in the year ago fourth quarter to 18, 3% in the current year fourth quarter.

For the 2022 full year consolidated operating margin improved to 16, 9% operating margin expansion over last year was primarily due to fixed cost leverage on the higher sales volumes wholesale and retail gross margin improvement and cost containment measures, including lower marketing costs and reduced <unk>.

Compensation expense as we operate more efficiently our SG&A expenses when expressed as a percentage of sales decreased from 44, 7% last year to 39, 8% in this year's fourth quarter, reflecting our strong operating leverage for the full year SG&A expenses decreased from 45, 7%.

242, 9% in 2022.

This operating margin expansion combined with double digit delivered sales growth helped generate record profits as diluted EPS for the fourth quarter was $1 23 up 73, 2% to last year on a full year basis diluted EPS rose, 79% to $4 five and 2022 now.

Now turning to our liquidity and capital resources, we ended the fourth quarter with a strong balance sheet, including cash and investments of $121 1 million as of June 30th and no debt.

We generated $29 $4 million of cash from operating activities in the quarter due to strong net income and the conversion of inventory into delivered sales by increasing our manufacturing productivity cap.

Capital expenditures were $4 4 million for the quarter and $13 4 million for the full year, we continue to invest capital in manufacturing plant upgrades, including additional machinery and equipment to further increase capacity safety and efficiency construction of new retail design centers updating the projection of many existing design centers and in tech.

<unk> and infrastructure.

We have continued to pay and increase our cash dividend in April our board of directors increased the regular quarterly cash dividend by 10% to 32 cents per share which was subsequently paid in may and brought our full year 2022 year total to $48 3 million.

Also as just announced yesterday, our board declared a special cash dividend of <unk> 50 per share. In addition to our regular quarterly dividend of 32 says both of which will be paid on August 30th.

And these are great financial results in a volatile environment with that I will turn the call back over to Mr. Katz y.

Alright, Thank you Matt.

Our strong financial results, our fiscal 'twenty two benefited from many internal initiatives and external factors.

Strengthening of our team at various levels and our vertically integrated structure.

Including strengthening our board of directors.

Continued strengthening of our product offerings under the umbrella of classics with a modern perspective.

Focus on oncology, we maintain our high level of quality standards across.

<unk> product offerings as about 75% I've made in our North American workshops. This is a great advantage with many disruptions cost increases and the challenges associated with offshore manufacturing.

Focus on interior design services through our over 1500 in house interior designers.

Combining technology to the to this service is a game changer, yet inefficiency and service.

Renewed expansion of our design centers and investments in existing design centers. During fiscal 2022, we opened a new state of the our design centers in Westport, Connecticut, and Walnut Creek, California in the U S and two new locations in South Korea for some of them will delay.

<unk> because of availability of air conditioning, and all kinds of stuff, but the good news is we are going to have we plan to open many more in this fiscal 2023 and at this very stage. We are in the process of opening six new design centers. One is the replacement in Manhattan.

One is in Skokie, Illinois, which is near Chicago, the villages, which is northern Florida, Syracuse New York.

San Jose, California.

And Blessed all New Hampshire.

All of these are.

Our under our control and we added most of scheduled to open by the end, but certainly before the end of this calendar year and perhaps some early in 2023 again, depending upon availability of some materials.

For construction.

No continued investments in North American manufacturing has been critical.

Our upholstery products are made in our operations in North Carolina, and Mexico, and a wood products are made in our operations in Vermont and Honduras, we have continued to make them more efficient more productive and we have a very strong talented workforce both in the United.

States and south of the border.

Now continued investments in our North American logistics.

We continue to invest in our major national distribution operations, which is look which are located in Virginia, and North Carolina and over 30 retail service centers all over North America.

We have continued to deliver our products to our retail networks at one delivered cost despite major increases in transportation and other costs.

Continued strong growth in our contract business, especially with the U S government.

This is what helped us increase our wholesale business and our margins as Matt just mentioned.

So strengthening our marketing initiatives has been key and has involved both internal and external marketing.

Utilizing technology and digital mediums.

Getting our message across has helped us to increase our exposure, while reducing overall marketing costs, and importantly, providing technology tools and advertising to our 1500 interior designers has helped us in our communications with clients at the local level with this very brief.

Oh, well I am now pleased to open for any questions or comments.

Thank you at this time, we'll be conducting 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 your line is in the question queue. You May press star two if you'd like to remove your question from the queue 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.

Your first question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please proceed with your question.

I get asked me.

Hello, and good afternoon, I'm doing good good afternoon, probably convert one to start with the demand environment can you talk about how the quarter progressed.

In July you know any change from your customers, what you're seeing there in behavior.

Yours talk about the ability to maintain them.

The email demand at both pre pandemic levels as we look forward over the next couple of quarters, Yes, Christina very important subject.

I'm pleased to say that in July although you know we have not of course, I'm I'm I'm, making this information available normally if you do not do this but in July .

All of this is last month, we were able to a little bit more than what we did in the previous year, which is good news.

It's just part of this was the result of a number of factors one is somewhat farm.

Marketing initiatives.

<unk> from <unk>.

June to July which helped us. So that also had an impact of in fact to give you a perspective, we normally and our.

Promotions at the end of June .

And then there was a month that was June 30th but this year, we decided to extend them right. After the independence day that cause I think July seven. So we took some business away from June into July and then having the July and strongly.

Okay.

So I guess as a follow up on that topic of promotions do you do you expect to be more promotional year over year going forward, just given that the industry at least you know more towards the middle.

Oh, the price point seems to be getting more promotional.

You know Christy we havent been retained a very strong.

<unk> offers to our clients throughout this period this even with very strong demand in this last year, we did not change much of our offerings in terms of the savings to our clients in the last two or three years and our objective is to continue its already very strong.

Continue we'll continue to do that obviously as you mentioned, we keep in mind, we take a look at what's happening in terms of consumer interest.

Traffic, but at this stage, we are going to continue with a very strong programs as you maintained in the last few years.

And then one other question on the gross margin I wanted to understand better.

Higher input costs that you are seeing that led to the gross margin decline year over year, even with the volumes being not that much higher than what we saw what we've seen in the past couple of quarters. Yeah. There's a number of factors. Matt mentioned first is the fact that the costs have increased.

Last quarter, we did see them stabilize even starts coming down but for the three quarters before that the year before that.

Loss of.

Of materials, Oh, transportation, taking bringing our lumber to to mills, bringing fabrics to our mills and all of that has increased it is somewhat.

Somewhat slowly slowly started coming down because of the fact of demand and all the pressures. So I think from a perspective of a raw materials perspective, our labor I think it has somewhat stabilized right now for us.

Thank you.

Oh, that's cristina thank you.

Your next question comes from Zach Donnelly with Keybanc capital markets. Please proceed with your question.

Hello Zack.

Hello, Congrats on the really strong quarter.

I had a question kind of regarding international performance I know last quarter, you had touched on kind of weaker in <unk>.

We'll sell trends from China kind of with the rolling sort of Covid.

Lockdowns over there I was wondering if you can kind of touch on any trends you might be seeing over there and whether or not that's that's been improving or not.

No I think that there had been and continues to be lots of challenges.

Especially China we.

We have maintained actually interestingly decent business.

In Korea, we just opened up two new design centers in South Korea.

We have continued to do reasonably good business. It was slower but has made some improvement in other international markets. The biggest international market. We have is the fact that we have supply and we are involved with finishing all of the American.

Homes diplomat's homes, all over the World, that's our biggest international business and that has been very strong and that also.

Matt had mentioned that when.

When we have a very strong wholesale business it tends to reduce the percentage of gross margins, but it increases at operating margin, which is where we get good news for us.

Got it understood and then kind of as a follow up to that so regarding any of the imports.

Imports or input costs, you guys are seeing I know you kind of touched on that last quarter or two with.

With freight.

Fixed costs kind of increasing or are you still sort of seeing that or.

In terms of you know goods being imported or are you seeing any sort of benefit from a stronger dollar at this point.

Yeah, actually I would say that for us we have the worst is over in the last few months if anything.

Costs are coming down keep in mind, 75% of the products. We make are in North America, where we had major increases in transportation costs.

Transportation cost take going from other central warehouses in Virginia, and North Carolina to California to.

Maine to Florida, They all increased.

Not to the same level as for instance, the container cost going from two to $3000 to $28000 from essentially those costs are coming down but still very high.

But they are coming down and the good news is as we said we have a relatively smaller exposure in a bit.

Cause of imports and we look forward to even reducing this.

Costs that have taken place in North America of transportation costs.

Yeah.

Understood. Thank you.

Alright.

Any other questions or comments.

As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad will.

We will give it a moment, while we poll for more questions.

Ladies and gentlemen, there are no further questions at this time and I would like to turn the call to Mr category for closing remarks.

Thank you and.

I'd like to again.

Thank all of our associates is great performance.

It is extremely great we know that.

Going forward there'll be some challenges, but the good news is that we have a strong base manufacturing. Our interior designers are doing an amazing job and I believe that we will have an opportunity to continue to make progress as you move forward. So thanks to all for joining and thanks to all our teams.

This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.

Okay. Thank you.

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