Q1 2023 Ethan Allen Interiors Inc Earnings Call

Good afternoon, and welcome to the Ethan Allen fiscal two.

2023 first 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.

Anyone should require operator assistance during this conference. Please press star zero on your telephone keypad.

Please note that this conference is being recorded.

It is now my pleasure to introduce your host Matt ELT Senior Vice President Chief Financial Officer, and Treasurer. Thank you you may begin.

Thank you Diego good afternoon, and thank you for joining us today to discuss the Ethan Allen fiscal 'twenty to 'twenty three first quarter results with me today is fruit category, our chairman President and CEO . Mr kept why will open and close our prepared remarks, well I will speak to our financial midway through <unk>.

After our prepared remarks, we will 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 will find a copy of our press release, which contains reconciliations of non-GAAP financial measures 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.

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.

During this call with that I'm pleased to now turn the call over to Mr. Katz y.

Thank you, Matt and and we are pleased and gratified with very strong results.

Our teams in our vertically integrated enterprise have done a good job in helping get a strong programs.

Our various areas from strengthening our interior design network.

Hang off product programs, and marketing and effective use of technology in all areas, including our marketing manufacturing and logistics.

After Matt's provides an overview of our financial results I will review will focus to continue to grow our enterprise met.

Thank you Mr kept for it as a reminder, we present our results on both 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, we believe the non-GAAP presentation better reflects underlying operating trends and performance of the business.

For the quarter consolidated net sales increased 17, 7% as a result of strong order backlog, along with improved manufacturing production inefficiency and higher receipt of offshore products previous constraints, including Covid related shutdown labor disruption supply chain challenges shipping delays and raw material availability.

<unk> have eased in recent quarters, which helped us reduce the time to convert written orders to delivered shipments.

Beginning about two quarters ago, we increased our manufacturing productivity as well I saw an uptick in receipt of imports and raw material from a higher volume of shipping container lessee, which led to strong sales growth during the first quarter.

Our wholesale backlog as of September 32022 was $106 million down 24, 4% from a year ago, but up 62, 1% from September 2019 in the near term. Our teams are effectively managing the business to work through that high order backlog and to service our clients.

A written our retail written orders were down eight 6% due to a strong prior year comparable however, when compared to the pre pandemic first quarter of fiscal 'twenty 'twenty retail written orders were up seven 4%.

Sales segment written orders were down seven 2% to last year, but nearly flat to Q1 of 2020.

Consolidated gross margin was 64% for the first quarter, primarily due to a change in sales mix with our retail segment, becoming a larger portion of favorable product mix previous product pricing actions that are now working their way through our delivered sales and higher manufacturing productivity and efficiency, partially offset by higher input.

Mark.

Retail sales growth of 18, 5% increased our retail sales mix from 85% of consolidated sales last year to 85, 6% in this year's first quarter, improving our consolidated gross margin.

We expect this higher percentage of retail sales to consolidated sales to moderate towards normalized levels as we increase deliveries at the Hyatt wholesale order backlog.

Yeah.

Our adjusted consolidated operating margin increased from 15, 2% last year to 17, 6% in the current year first quarter adjusted operating margin expansion was primarily from higher consolidated net sales.

Retail and wholesale gross margin expansion and strong cost containment measures, partially offset by higher selling expenses, including increased delivery and freight costs combined with higher marketing spend.

Our ability to maintain disciplined cost and expense controls, including strong cost containment measures.

Expense management within our G&A expenses continues to help drive operating income growth.

Our SG&A expenses when expressed as a percent of net sales decreased from 44, 7% last year to 42, 9% in this year's first quarter, reflecting our strong operating leverage.

This operating margin expansion combined with double digit delivered sales growth helped generate another quarter of strong profits with diluted EPS of $1 17 up 48, 1% to last year, our effective tax rate for the quarter was 25, 3% compared to 26, 3% a year ago now turning to liquidity.

And capital resources we.

We are committed to maintaining a strong balance sheet and continue to monitor our liquidity closely our sources of liquidity include cash and cash equivalent short term investments.

And amounts available under our credit facility.

As of September 30th we had cash and investments of $142 4 million and no debt outstanding our investments at quarter end or within short term U S. Treasury bills designed to enhance returns on cash, while ensuring capital preservation and liquidity.

We generated $38 4 million in cash from operating activities during the quarter, an increase from $17 million in the prior year period, primarily due to higher net income and an improvement in working capital.

Capital expenditures were $3 2 million for the quarter and included further investments in various areas, including manufacturing retail design centers and technology.

We continue to pay quarterly or special cash dividend in.

In August our board declared a special cash dividend of <unk> 50 cents per share. In addition to our regular quarterly dividend of 32 per share both paid on August 30th.

Since our IPO in March of 93, we have paid over $595 million in cash dividends to shareholders repurchased $625 million of our stock and invested over $856 million back into the business in the form of Capex and retail acquisitions.

To sum up our quarterly financial results, we delivered excellent results in this challenging trends within the global economy net delivered sales operating income and diluted EPS were all above expectation and our teams executed with excellence.

With that I will turn the call back over to Mr. Kessler.

Alright, thanks for that and a pretty good overview.

No we are pleased with the progress.

And as you have heard me in the past we are just getting started.

Crisis creates an opportunity.

For over 90 years of our history every major crisis gave us an opportunity to examine what we do and take steps to innovate.

And position us for growth in the next chapter of our long history.

Our focus.

Going forward is on the following areas.

First continued continued transitioning from a furniture store to an interior design destination.

This involves a number of key areas. Most importantly, having qualified and motivated India interior design talent.

Today, we have about 1200 interior design associates in our North American network compared to about 20 410 years doing more business.

The quality of talent is extremely important and most critical has been adding technology to enable the interior designers to work effectively with clients in our design centers and remotely.

Adding effective technology draw talented interior designers will remain a major focus.

Secondly, the repositioning of our design centers today over 70% of the 170 design centers in North America have been relocated in the last 25 years, all of which 48% had been relocated in the last 10 years and the process continues.

Currently many design centers are being relocated and building in Manhattan.

Chicago.

San Jose.

Northern Florida, and New Hampshire.

We will also continue to refresh our current locations to make them even more effective.

Has an interior design destination.

Third is continued strengthening of our product offerings.

While during the pandemic, we had to slow down our new product introductions. We are now in a position to exploration and introduce new products.

Both investing in our marketing we have substantially increased our digital marketing.

Which has expanded our reach and has been very cost effective.

In addition, during Covid, we did lower our advanced advertising expense as there was strong interest by consumers to redecorate. This past quarter, we increased our advertising spend.

<unk>, including on National TV, we will continue to strategically invest in marketing and utilizing that new digital mediums Ava.

Available to us today.

They are investing in technology will continue to be a priority.

This involves effective technology put all of our interior design network manufacturing logistics and marketing.

And continued focus about manufacturing and logistics.

About 75% of our products are made in our North American workshops.

We continue to make major investments in our manufacturing and logistics.

Thereby providing a great competitive advantage.

Logistics is a major advantage in providing good service to our clients lives managing over our overall costs.

Delivering product at one cost throughout North America to our net book was a challenge during the pandemic with major increases in face cost both internationally and in North America, However, a great competitive advantage.

Yeah.

Our continued focus on social responsibility is very important this.

This includes providing many benefits to our associates and building safe working environment and health care and other benefits.

Environmental responsibility is a key part of our focus and ensuring that we have proper compliance programs in place.

And finally continue to maintain strong cash returns to stockholders.

As Matt mentioned, we ended the quarter with $142 4 million in cash and investments.

During the last quarter, we paid $20 9 million in regular and special dividends.

Since our IPO in March 1993, we have paid or $595 million in cash dividends to our shareholders and invested.

Oh, what 856 million in capital expenditures to strengthen various areas of our vertically integrated enterprise with that brief overview. Please to answer any questions.

Thank you and ladies and gentlemen at this time, we will conduct our question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Information tone will indicate that your line is in the question queue.

You May press Star two if you would 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.

Once again to ask a question press star one on your telephone keypad will pause for a moment to pull for questions. Thank you.

Our first question comes from Cristina Fernandez with Telsey. Please state your question.

Yeah, Good afternoon, Hi, Farooq, a map and congratulations on a good result, I wanted to get your thoughts on that on the demand environment, how did demand progressed through the quarter.

And I guess, what is your outlook going forward.

As you know some of the the housing matrix L B Foster.

Foster.

Yes Christina.

Okay.

We are coming to the next stage.

Is there.

After having gone through a very high demand for all four all four in our industry, especially enough of our products. We see that there is obviously it is leveling off.

However, as Matt said, we are still.

Doing higher than the.

Our business prior to the Covid, So I I would.

I would see that we'll continue to do.

Well because of the various programs we have obviously this other.

Written business has moderated.

And.

Not as high as it was two years back but still it is there. So we can be we can we will continue to see.

Some growth going forward.

And then another question I had was on the gross margin. So it was very high this quarter 64, which is you know peak versus historical levels can.

Can you I understand a lot of it is like the higher.

It makes it a retail sale, but the.

The other drivers I guess, how structural are they should we see.

The gross margin still stay let's say you know like in the high Fifty's level is that a reasonable assumption.

Yeah, but if you get if you take a look at our gross margins in the last in the last year or so not even before you know we have been able to keep them at the high 50 fifties levels and I believe that is what our intention is.

And then last question is on on the supply chain you talked about seeing better flow products can you comment on the order to delivery times, where are those now and how long will they.

You know I will they take to get back to pre pandemic levels, if they're not there yet.

Of course Cristina our advantage has been that 75% of our products are made.

Our north American workshops.

And then about 75% of our total products are custom when we get the orders choices for somewhat of a unique.

Unique in a different structure than most.

Most most businesses what we have seen is that for instance are almost a 100% of our upholstered products their custom but made in North America, and we have caught up and all of our our lead times have gone to a very good levels of uneven have you know close to 88 weeks.

So less of a wood products, which are made.

Mostly in in North medical also and again discussed them. So keep in mind, it's a V.

Very different model than those folks whose chip products from stork that also is now close to a 10 to 12 weeks, which for custom it's still a pretty good.

Delivery period.

Thank you.

Thank you Christina.

Yeah.

Thank you and once again to ask a question press Star one.

Our next question comes from Zachary Donnelly with Keybanc. Please state your question.

Yeah all of that great.

Good how are you congratulations on the strong quarter.

Yeah exactly.

Yeah of course, I I was just wondering kind of looking at your your wholesale backlog.

Which was 106 million as of September 30th I know last quarter. You had stated the backlog was about 102 million. So kind of just seeing a little bit of an uptick in the backlog.

And you know kind of despite strong.

Strong delivered sales within the wholesale segment and are seeing written orders have declined year over year and.

Increased manufacturing efficiencies and deliveries.

It's kind of just wondering if you could maybe shored up you know how we got to.

An elevated backlog despite.

You know higher deliberate wholesale sales and.

Kind of written order trends coming down year over here.

Yeah. So good question you know as.

As you know that our wholesale backlog still is at about $106 million at 930 down from $192 million. It got very very high levels, but still at a good level.

The reason is based upon also we still have a business to deliver at our retail network and also our contract business has been strong. So that has resulted in the higher wholesale backlogs.

Okay.

Understood. Thank you.

If I could just a follow up.

Question on some of the margin inputs.

I know you've kind of mentioned with freight and raw material prices are kind of remaining elevated this quarter. I was wondering just some of the data we're looking at whether or not it's.

Inbound freight and containers or domestic transportation rates or no gas, we're seeing prices trends kind of come down year to date or throughout the year. So I was kind of just wondering.

Are you seeing any any any benefit associated with that year over year and do you kind of expect that to maybe be a tailwind moving forward as it relates to margins.

Well you know there is when you take a look at for instance, ocean freight coming from East Asia have gone, 50% don't they've gone out they had gone up from $567000 $30000 now they've gone from $30000 to about $16000, but still very high.

But at least going into going into right direction.

Similarly, our transportation cost domestically still on the higher side, but the trend is lower and.

So I believe that.

You know as I mentioned, we deliver our products at one cost nationally so real.

Despite these fortunately despite the increase in freight costs, we have been able to maintain high gross margins.

Hmm.

Across the board, which reflected a tremendous amount of efficiencies and of course higher volume, but as we go forward, we do see that.

Our domestic freight will also start moderating because of the wall because of the overall lower business.

Right.

Yeah.

Thank you I appreciate it.

Alright, Zachary take care.

Thank you Andrew.

And we see no further questions at this time I'll hand, the floor back over to Mr. Farouk cut tomorrow for closing remarks. Thank you.

All right well, thanks, very much and again, we're very I'm very very pleased and gratified that the work of our associates they have really done.

An amazing job in terms of positioning us, but we are just getting started as I started my compensation, although focused on.

More and more getting the message across of being an interior design destination is going to have a tremendous from major impact in benefits as we go forward and you're going to hear a lot about it.

In the future quarters. So thank you for all for attending and look forward to talking to you again next quarter.

Thank you and this concludes today's conference all parties may disconnect have a great evening.