Q2 2023 Ethan Allen Interiors Inc Earnings Call

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Good afternoon, and welcome to the Ethan Allen fiscal 2023 second quarter Analyst Conference call. At this time, all participants are in a listen only mode a.

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.

Please note that this conference is being recorded it is now my pleasure to introduce your host Matt Mcnulty Senior Vice President Chief Financial Officer, and Treasurer. Thank you.

You may begin.

Thank you Camilla good afternoon, and thank you for joining us today to discuss the Ethan Allen fiscal 2023 second quarter results with me today is fruit category, our chairman President and CEO . Mr. Katz worry will open and close our prepared remarks, well I will speak to our financial performance midway through after our prepared remarks.

We will then open the call for your questions before we 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 that release.

On this call a replay of today's call will also be made available via phone and on our website. Our comments. Today may include forward looking statements that are 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 Mr kept for it.

Thank you, Matt and welcome to our second quarter fiscal 2023 earnings call.

We are pleased with our results.

Although sales up $203 2 million was the result of many factors, including strong offerings.

An interior design destination.

75% products made in our North American workshops.

Our unique logistics network, maybe provide personal in home delivery at one delivered price to our clients in North America.

Combining the personal service of our interior designers with technology has been a game changer.

We were also helped by a stronger backlog of photos.

Our gross margin increased to 61% and operating income margin increased to 18, 2%.

Our adjusted earnings per share of.

$1.10 grew by 15, 8%.

We ended with strong cash of $140 4 million and no debt.

Our unique vertically integrated structure continues to be strengthened it off to Matt provides a brief overview of the financials I will review, all our focus and opportunity going forward Matt. Thank.

Thank you Mr. Kent for it as a reminder, we present our financial results on both a GAAP and non-GAAP basis. non-GAAP results include restructuring initiatives impairments and other corporate actions and are further detailed in our press release, we believe that these non-GAAP presentation better reflects underlying operating trends and performance of the business Arkansas.

Alidade had net sales of $203 2 million were helped by strong backlog pricing actions, taking in the positive effects of product mix, partially offset by lower unit volume. The prior year second quarter was one of the largest historical second quarters for net sales, which led to a difficult comparison compared to the second quarter of fiscal 2019, which.

As pre pandemic and more reflective of historical norms, our consolidated net sales were up 3%.

We ended the quarter with wholesale backlog of $78 5 million down 36% from a year ago as we were able to reduce the number of weeks of backlog, bringing it more current we remain 57% higher than pre pandemic wholesale backlog level.

Wholesale segment written orders were down 22% to last year and down 18.6% to the pre pandemic second quarter of fiscal 2019, primarily due to lower international orders and the timing of incoming GSA orders.

Our retail orders were down 16, 3% due to a strong prior year comparable however, when compared to Q2 of 2019 retail orders were only down 1.5% consolidated gross margin grew 220 basis points to 61% in the quarter from product pricing actions and a favorable product mix.

Disciplined promotional activity and lower inbound freight costs, partially offset by a change in our retail wholesale sales mix and a decrease in unit volume. We had expected this percentage of retail sales to consolidated sales to moderate towards normalized levels and this began to take shape in Q2 retail sales were $84 five per cent of.

Ed itself down from 86, 3% last year as we delivered out more of our wholesale order backlog.

Adjusted operating margin increased from 15, 7% last year to 18, 1% in the current year second quarter due to a wholesale gross margin improvement and maintaining a disciplined approach to cost savings and expense control, partially offset by lower net sales and high retail delivery costs.

Our SG&A expenses decreased from 43, 1% of net sales last year to 42, 9% this year, reflecting our ongoing operating leverage despite a declining net sales environment.

Adjusted diluted earnings per share was up 15, 8% to $1.10 due to improved gross margins and a reduced expense base.

Our effective tax rate for the quarter was 25, 7% the same as last year now turning to our liquidity and capital resources as of December 31, 2022 we had cash and investments of $144 million with no outstanding debt. Our sources of liquidity include cash and cash equivalents short term investments and amounts of.

Bailable under our credit facility, we generated $2 5 million in cash from operating activities during the quarter, bringing our total up to $40 9 million. During the first half of 2023, an increase from $22 7 million in the prior year period due to higher net income and an improvement in working capital cap.

Capital expenditures were $5 3 million for the quarter and included investments in various areas within manufacturing technology and retail.

In November our board declared a regular quarterly dividend of <unk> 32 cents per share, which was paid on January four and just yesterday as announced we.

We declared another regular quarterly dividend of 32 cents per share payable on February 21st.

In summary, we increased gross margin operating margin operating income net income and diluted EPS. During our just completed second quarter. Despite operating in the current environment with that I'll turn the call back over to Mr. Kent for it.

Yeah.

Alright, Matt tanks.

We have substantially strengthened our offerings.

New products will be introduced in the following six months.

During the last three years, while we introduced only limited new products. The good news is we were busy developing strong new products.

We have also greatly enhanced our marketing combining the traditional mediums increasingly with digital mediums.

Our supply side is stronger about 75% of our products are made in our north American workshops, and about 75% made custom on receipt of autos.

Our production capacity in North America has been increased with two very important factors.

First edition of qualified workforce and continued investments in technology.

We are in a good position to service our clients.

Yeah.

Our design centers are being refreshed and reintroduced as an interior design destination.

We had very talented interior designers.

We are reinventing the projection of our design centers with more fashionable and relevant projections.

Our plan is to convert most of the 173 design centers in North America in the next 12 months to this very exciting projection.

We also plan to review the projection with our international partners.

Combining technology with personal service of our crafts persons in our manufacturing and interior designers in our retail network has been a game changer.

We are in a good position to continue our progress and maintained strong financial results with this.

We used to open for questions or comments.

Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

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

Press Star two if he would like to remove your question from the queue.

So participants using speaker equipment, it may be necessary to pick up your handset before pressing the star one.

One moment, please while we poll for question.

And our first question will come from Brad Thomas with Keybanc Capital markets. Please proceed with your question.

Hello, Brad.

Hi, Good afternoon Farooq. Good afternoon, Matt how are you doing good good to hear your voice Brad.

Likewise, good good to hear your voice Farooq alright.

Yeah, congratulations on the strong earnings here for this quarter.

Gross margins were particularly impressive I was hoping you could talk a little bit more about how youre thinking about gross.

Gross margins going forward and if you feel like the industry is getting more competitive and if that's a risk for you.

Yes, Brad.

Had to as you said very strong gross margins.

Which is of course, a combination of higher volume.

And also reflects the improvements that we have made through technology in.

In terms of for instance, at our manufacturing just to give you a perspective just from 2019.

Two now.

We have increased our sales are actually over 7%, while our head count overall has gone down by about 24% very important which is a result of having better quality people and technology and manufacturing at our region. So those are the factors.

That has helped us.

Become more.

Then of course, all showed higher volumes do benefit our gross margins.

Especially from the manufacturing side, but I think going forward I think where we are in gross margin. Our objective is to continue with that.

That's great.

And Farooq with you know the orders starting to slow a bit you know of course, the whole industry benefit from from volume during the during the pandemic and the orders have slowed a bit how do you think about the cost structure of the business and the levers that you might pull if if if we see sales decline.

And going forward here.

Oh, yes.

Backlogs are of course, very very high but the good news is that while we have been able to increase our production.

They were the projects reduce our backlogs our backlogs are still decent that's to start with however.

Yes.

We're watching very carefully the business, they're watching very carefully the environment.

And and we always have operate Jade as you know you might say lean will continue to do that.

But at this stage with a structure in place both in terms of much fine tuned manufacturing fine tune retail network of logistics and just keep in mind. It was not that many years back we used to have.

Turkey manufacturing plants.

No we have.

North Carolina, Mexico, and Honduras that that's and that is producing twice as much. The 30 did in North America. Similarly on logistics, we have 10 major national distribution centers now we have to so we have done a lot of work in terms of.

More efficient, which is going to help us read as we go forward, but however, we are watching very carefully the markets. The sale of the consumer attitudes and so we will have to make some adjustments of if sales don't hold up.

That's great. Thanks, so much farooq.

Alright, Brad Thanks.

As a reminder, it is star one to ask a question.

Our next question will come from Cristina Fernandez with Telsey Advisory Group. Please proceed with your question, Yes, Hello, Cristina Hi, Good afternoon, Farooq and match I had a couple of questions can you provide more color on what you saw.

Around demand and order intake for the quarter how did it progress.

Were there any categories or product lines that were more affected than others or any regions any callouts would be helpful.

Oh, Yes of course, you know when we compare this lost in terms of.

The written business compared to the previous year. The business of course was down from very very high levels, we had in the previous year, but overall no.

We have had a very strong business in our upholstery business, our upholstery has held up quite well.

But also we saw an increase in our accident programs to support the work that our interior designers are doing.

And where of course, the major factor has been the interior designers ability to utilize technology to help.

That has really been a very important factor and when they do that they then are able to provide a much don't you might see a more total solution rather than selling items and projects because of that we have seen a.

We have maintained a good business in our various categories from our you might say our living room to a dining room bedroom and actions. So we can do I think we're going to continue to see that because our business has more and more going towards interior design. That's why Kristina I said and in fact I'm sure you've seen.

All of our marketing and communication.

Messages.

We are an interior design destination, because we have today.

But.

When you look at our reached our designers we have about 30, 30% less designers and we had four or five years back, but more qualified more talented and in the last two to three years, we have invested a great deal and we got to continue to invest a great deal in providing technology to them and we have been doing in the manufacturing that's what we see.

Christina going forward.

That's helpful.

I had a second question, which is a follow up on Brad's question about this truck the cost structure.

If orders were to remain at this level and failed eventually go back to the pre pandemic level that was around 750 <unk> tell me annually what level of operating margin do you think you can achieve in this scenario, where the changes you've made the cost structure.

Well that's a good quick question and I think that when you take a look at our gross margins for instance, even when you go back to the pre pandemic levels.

Well, that's about 50, 556%.

When you look at our operating margins and operating margins were also do you know at that time 11, 12%. So Vietnam of course, comparing 11, 12% to 18% I think we have an opportunity those those are really.

On the lower side, which of course, when you look at the industry. Even at 11% is a pretty high margin. So I think we have an opportunity of maintaining higher margins, whether you can maintain it at 18% or so it will depend upon our sales and how much we're able to deliver but we have a good opportunity of maintaining stronger margins.

Because of the effect of strengthening our retail network strengthening our operations on manufacturing. We just had a lot of time on logistics. So our cost structure today is lower with higher volume than it was four or five years back but of course. It will also depend upon sales going forward.

Okay. That's helpful and then the last one was on them.

The refresh is for them to the interior design centers that you talked about can you provide more specifics exactly what will be new or or refresh it at that.

And in the stores, yes, I think that's a very important.

Development in fact in March.

We are going to have.

Have our Danbury design Center and also one in Manhattan, which would be a new one that'll open up will rarely project. What we are talking about the next the next Ethan Allen rejection of design centers, we've been working on it.

And that projection is going to be stylish, it's going to be more designer oriented.

And that.

We'll then off as we did during January we also right now planning that in the next one yeah.

Almost all of our 174 design centers in the country, that's our plan.

To renovate them to the new projection that projection is higher and the projection the style color and I'm sure that we're already doing a lot of it and if you take a look at our advertising I don't know if youre getting our printed magazine and in fact today I didn't talk.

Much of marketing, but we are sending out.

Nine.

Millions.

Digital magazines every two weeks it was impossible to think five years back it used to take US two months to make up about 32 page magazine, but today with digital advertising, we have a very strong photo studio here and there were also fortunately been able to use one in Ukraine, which does an amazing job in term.

Ah providing us with a digital photography. So digital is tremendously important our designers today are able to work with clients rather than their homes, rather than the design center. So combining personal service and technology is tremendously important and that's what we see.

Kristina and the next year or so that is our design centers are going to be more a design center rather than a furniture store.

And sorry, one last one is there a capex increase or like how much you see investment you need to make to refresh Oh the design centers.

It is not going to be major because most of the book, but I've been not design centers in good position most of it the refreshing its going to be paint color and new products.

Okay helpful. Thank you so much and best of luck this quarter alright, Thank you very much.

As a reminder, it is star one if you would like to ask a question.

There are no further questions at this time I would like to turn the floor back over to Mr. Wang for closing comments.

All right well. Thank you very much look forward to continuing our journey you know.

I was just mentioning to match that.

I was mentioning to me that this is all about and mine 108th consecutive quarterly meeting. So it's great to see you all to talk to you and we have and I always say, we're just getting started so thanks very much and look forward to talking to you soon.

And camilo. Thanks.

Thank you and this concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

Yeah.

Yeah.

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