Q3 2023 Ethan Allen Interiors Inc. Earnings Call
Speaker 1: And.
Speaker 1: It.
Speaker 2: Good afternoon and welcome to the Ethan Allen Fiscal 2023 Third Quarter Analyst Conference Call.
Speaker 2: At this time, all participants are in a listen-only mode. A question and answer session will follow the form of presentation.
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Speaker 2: Please note this conference is being recorded.
Speaker 2: It is now my pleasure to introduce your host, Mac McNulty, Senior Vice President, Chief Financial Officer and Treasurer. Thank you, you may begin.
Speaker 3: Thank you operator. Good afternoon and thank you for joining us today to discuss Ethan Allen's fiscal 2023 third quarter results. With me today's Feroute Kessuari, our chairman, president and CEO . Mr. Kessuari will open and close our prepared remarks while I will speak to our financial performance midway through. After our prepared remarks we will then open the call for your questions.
Speaker 3: Before we begin, I'd like to remind the audience that this call is being recorded in WebCats live under the News and Events tab on the Investor Relations page of our ethanalyn.com website. There you also find a copy of our press release, which contains recommendations of non- GAAP financial measures referred to in the release and on this call.
Speaker 3: 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 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 the call.
Speaker 3: With that, I'm pleased to now turn the call over to Mr. Kethwary.
Speaker 4: Thank you Matt.
Speaker 4: We are pleased with our strong financial performance for the quarter-ended March 31, 2023.
Speaker 4: especially compared to strong results for the previous period.
Speaker 4: Math will review in detail our financials for quarter-ended March 31st.
Speaker 4: We had sales of 186.3 million strong growth and operating margins of of 59.9% and 15.5% respectively.
Speaker 4: Our diluted earnings of 86 cents remain strong.
Speaker 4: And importantly, we added a quarter with cash of 156.2 million and no debt.
Speaker 4: Also pleased.
Speaker 4: Yesterday we announced that our regular dividend, cash dividend has been increased by 30% to 36 cents.
Speaker 4: Last week we had a in-person convention with 300 of our leaders from retail, manufacturing, logistics and our corporate teams.
Speaker 4: We launched with a grand opening of our interior design destination initiative at our flagship Danvery Design Center.
Speaker 4: also keeping in view the softening of the economy. After Matt provides the detailed financial overview, I will review our initiatives to maintain a strong operational and financial position. Matt...
Speaker 3: Thank you, Mr. Kefwar. 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.
Speaker 3: We believe the non-GAF presentation better reflects underlying operating trends and performance of the business.
Speaker 3: Our financial results in the just completed third quarter
Speaker 3: were highlighted by strong growth in operating margins, shorter lead times from decreasing backlog, discipline costs and expense controls, and a robust balance sheet, including 156.2 million in cash and investments and lower inventories.
Speaker 3: As we began to revert back to pre-pandemic conditions, our operations produced strong financial results, which I will now discuss. Our consolidated net sales totaled $186.3 million and were helped by high backlogs, pricing actions taken, and the positive effects of product mix, partially offset by lower delivered unit volume.
Speaker 3: Sales and fiscal 2022 set a near record pace leading to a difficult comparison.
Speaker 3: Compared to the third quarter of fiscal 2019, which is pre-pandemic and more reflective of historical norms, our consolidated net sales were up 4.8%.
Speaker 3: wholesale segment written order is decreased 9.3% compared with last year and we're down 5.9% to the pre-pandemic third quarter of 2019.
Speaker 3: Our retail written orders declined 12.3% due to a strong prior year comparable. However, when compared to the third quarter of 2019, our retail orders were up 3.6%. We ended the quarter with wholesale backlog of $73.3 million, down 42.2% from a year ago.
Speaker 3: However, our wholesale backlog remains approximately 30% higher than pre-pandemic levels.
Speaker 3: Consolidated gross margin was 59.9%, which marked our eighth consecutive quarter that our consolidated gross margin exceeded 58%. A metric previously not seen before the onset of the COVID-19 pandemic. When compared to last year, our consolidated gross margin was down 50 basis points.
Speaker 3: due to a change in the sales mix partially offset by lower input costs such as inbound freight and raw materials. We had expected the percentage of retail sales to consolidate sales to moderate towards normalized levels and this materialized in Q3. Retail sales were 81% of consolidated sales.
Speaker 3: down from 84.4% last year as we delivered out more of our wholesale backlog, including a greater percentage of contract business backlog.
Speaker 3: Adjusted operating margin was 15.2%, down from 15.8% last year due to lower consolidated net sales, a gross margin reduction, and higher retail delivery costs partially offset by our ability to maintain a disciplined approach to cost savings and expense controls.
Speaker 3: Our S-GNA expenses decrease 5.7% and equaled 44.7% of net sales the same as last year, as we carefully managed expenses in a declining net sales environment.
Speaker 3: Adjusted diluted EPS with 86 cents per share compared to 93 cents last year. Our effective tax rate for the quarter was 25.1% up from 24.2% last year. Now turning to our liquidity and capital resources.
Speaker 3: As of March 31, 2023, we had cash and investments of 156.2 million with no outstanding debt.
Speaker 3: We generated $33.4 million in cash from operating activities during the quarter, bringing our total year-to-date amount up to $74.4 million in fiscal 23, an 85.9% increase over last year due to higher net income and an improvement in working capital.
Speaker 3: Our inventory levels decrease 24.8 million since the start of the fiscal year as we restore our operating inventory levels to more historical norms as backlog decreases while also ensuring appropriate amounts of inventory are on hand to service our customers.
Speaker 3: Capital expenditures were 2.2 million for the quarter and included investments in various areas within manufacturing, technology and retail.
Speaker 3: We continued our practice of returning capital to shareholders as their board declared a regular quarterly cash dividend of $0.32 per share in January , which was subsequently paid in February . Our total year-to-date dividends paid were $0.37.2 million. Also, as just announced in our earnings release, our board increased the regular quarterly cash dividend by 13% to $0.36 per share, which will be paid in May.
Speaker 3: We have paid a cash dividend every year since 1996 and have now increased our regular quarterly cash dividend in each of the past five years. In summary, we produced strong growth in operating margins while managing our expenses in a challenging environment. As we move through 2023. Ok
Speaker 3: We are carefully managing our expense structure while investing in growth initiatives that we believe will further our business. With that, I will now turn the call back over to Mr. Keffwari.
Speaker 4: Thank you, Matt. As I mentioned last week we had in-person convention at our Danbury Connecticut headquarters with about 300 of our leadership.
Speaker 4: from retail, manufacturing, logistics and corporate.
Speaker 4: We reviewed many areas of our enterprise, including the following.
Speaker 4: Introduction of the Interior Design Destination Initiative.
Speaker 4: The Dan Reacon-Educated Design Center reflected our strength and offerings.
Speaker 4: and projection
Speaker 4: of classic designs with a modern perspective, the projection and...
Speaker 4: of classic designs with a modern perspective. The projection and our new offerings were extremely well received.
Speaker 4: And our plan is to have this projection reflected in over 172 design centers across North America during the next nine months.
Speaker 4: This is an extremely important initiative for several reasons, including our design centers across North America will project the perspective, creating excitement with our interior design teams and also our clients.
Speaker 4: Weblee will help us in driving traffic to our design centres.
Speaker 4: We believe will help us in driving traffic to our design centres during the time of softening economy.
Speaker 4: Our manufacturing is in great position to service our clients.
Speaker 4: During the last few years had to manage very strong backlogs of orders.
Speaker 4: During the last few years had to manage very strong backlogs of orders. As you know,
Speaker 4: About 75% of our products are made on the receipt of orders in our North American workshops.
Speaker 4: While we had developed new products, we decided to hold introductions until most of the backlog was delivered and we were in a better position to service our clients.
Speaker 4: We started to introduce some new products during the last year or two, but now we have continued to invest in strong product introductions.
Speaker 4: We also continue to improve and invest in our manufacturing.
Speaker 4: Keep in mind, 20 years back we operated about 30 manufacturing plants in the United States.
Speaker 4: Today we operate 10 very strong turns in North America.
Speaker 4: making, as I said, about 75% of our products. We have strengthened our logistics.
Speaker 4: both at the national level and at the retail level.
Speaker 4: We deliver our products at one cost nationally. During COVID we had to absorb very high freight costs.
Speaker 4: investment technology in all areas for enterprise.
Speaker 4: talented, motivated associates and technology has resulted.
Speaker 4: With our many initiatives, especially
Speaker 4: Some from fiscal 29 we have made major efficiencies in getting stronger talent.
Speaker 4: reducing overall headcount while major increases in sales. For example, since fiscal 2019, we have reduced headcounts both in retailer network.
Speaker 4: and our manufacturing logistics by 12% while increasing sales substantially.
Speaker 4: We have also reduced our overall inventory. As Matt mentioned, we have worked hard to service our clients and while our backlog is down substantially from fiscal 2019, it still remains at healthy levels.
Speaker 4: With that, I'm very happy to open it up on any questions or comments that you might have. At this time, we'll be conducting a question and answer session.
Speaker 2: If you'd like to ask a question, please press star 1 or your telephone keypad. A confirmation tone will indicate aligners in the question queue. You may press star 2 if you'd like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker 2: Our first question comes from the line of Christina Fernandez with TLC advisory group. Please we'll see which are questions.
Speaker 4: Hello Christina.
Speaker 5: Hello, Ferruc and Maddick. Good, resolved on the operating side. I wanted to start with the S.U.N. expenses are being, you know, very well controlled. You know, where does reductions coming from and...
Speaker 5: Do you think you can manage these from quarter to quarter or as we look at an environment of softening sales, there needs to be more structural changes to your expense levels?
Speaker 5: think you can manage these from quarter to quarter or as we look at an environment of softening sales there they need to be more you know more structural changes to your expense levels.
Speaker 4: Our, you know, is interesting since when you look at from 2019 that is the peak COVID, we have reduced our inventories, we have reduced our operating expenses while our sales have gone up.
Speaker 4: A lot of it is due to the number of factors. First is on the retail side.
Speaker 4: Technology and stronger interior designers have played a very important role.
Speaker 4: We have today less people in our retail bring more business.
Speaker 4: Today our designers are able to work virtually with clients, of course, you know, with the COVID that was tremendously important.
Speaker 4: that resulted in reduction of people, but more stronger interior designers, and I think that will continue. Our designers are doing well. Similarly in manufacturing. If you take a look at our manufacturing and all the justices, we have less people today than we had 2019 with higher sales. And as we go forward, that will continue and will give us benefit and continue to become.
Speaker 4: continue to become more efficient. So this question of making sure that our operation is more efficient has been a very important part of our initiatives, and I think that will continue.
Speaker 5: I also wanted to ask about demand, the down 9% in wholesale for the quarter, 12% in retail. How did demand progress during the quarter? Is it even or are you seeing a lot of volatility, any color by regions that you can share? Any relationship there, anything, anything else you want to share? Just
Speaker 5: you know, major differences. And how is demand trending so far in April ? Any color there would be helpful.
Speaker 4: Well, we are of course comparing to high, very high numbers in the previous years.
Speaker 4: you know when we take a look at our business even compared to 2019 our backlogs are still higher as Matt just mentioned compared to even 2019 but we do know that we were operating at very high demands that is softening
Speaker 4: And we saw that most of it really during the quarter and in April also I think that people are more cautious and obviously it's still early. We, as you know, we look at the whole quarter before we make any determination, but we are prepared. We need to understand.
Speaker 4: that people are more cautious and that we have to be more effective, efficient, both in marketing and in terms of our operating expenses and we are looking at both very carefully.
Speaker 5: And as a follow-up to the backlog comment, you mentioned backlog is up about 30% versus pre-pandemic and orders for the quarter I think are down like 3%. So do you expect that backlog to normalize versus the pre-pandemic level or anything has changed?
Speaker 4: they're still high compared to the pre...
Speaker 4: caught up very, very well. And I think by this quarter, we'll have completely caught up, which is good news that we will have even faster deliveries. And one last question I had, was on the dividend increase.
Speaker 5: As you thought about increasing the dividend, is there a payout target you're working towards that you wanted to hit with the level of where you took the dividend?
Speaker 4: Well, you know, as you know, we have been giving over the last...
Speaker 4: As Matt just mentioned, we have continuously had regular dividends and we have also had special dividends. When I take a look at it, just before we increase this dividend now, I think our yield on the regular dividend seems so good that we have Vintage
Speaker 4: was close to I think 4.7, 4.8, right? My math. That is correct. It will now go over 5%. But then if you include, which I do not know, then the financial markets do not include our special dividends. That would also, you know, that makes it closer to 5.5 to 6%. So I think having...
Speaker 4: dividend between 5 and 6% yield is a pretty good and that's our intention. Thank you. All right Christina, thanks very much.
Speaker 2: Our next question comes from the line of Brad Thomas with Key Bank Capital Markets Inc. Please proceed with your question.
Speaker 6: All right now, this is not Brad is it? This is Zach Donnelly, I'm for Brad, how are you Farouk? Very good, good to hear your voice, go ahead please.
Speaker 6: Sure, so I wanted to touch on the backlog as well. I know you had mentioned that you were working down the contract portion of the backlog specifically for this quarter. So I was wondering if you could provide us with details on what portion is contract versus not contract.
Speaker 4: Yeah, yeah, as you know, most of our business comes from our own retail network, the retail network which is operated by our own retail division and then our independence. So we have what we call retail backlog and wholesale backlog.
Speaker 4: And I think at this stage, math could give you perhaps a little bit more information, but if you compare it, for instance, to let us say the pre, let's say even 630 2020.
Speaker 4: going back to three years. Our backlog is still approximately at the retail level, retail level is still higher by about close to 30 to 40%.
Speaker 4: That is correct. It is up 41%. Okay, 41% and a wholesale backlog is up even with all the business we've done, we've delivered is approximately about 12 to 15%.
Speaker 3: The wholesale backlog is up 30%.
Speaker 4: And retail is up about 40%. Why, see. From just 630, 2020 to now. From pre-pandemic levels, actually, I was looking at. Yeah. 10 million over 63 million is what, yeah. And that's...
Speaker 4: and retail is up about 40%. Oh, I see. From 6-30-20-20 to now. Yeah, from pre-pandemic levels, actually, I was looking at. Yep. 10 million over 63 million is what, yeah? That's okay, yep.
Speaker 4: From June 30, yes you are correct, it's down about 15%. Alright, yeah. So our backlogs are still high, but again both at the contract level, which is our government contract, and at the retail. So our backlogs are still high, but again both at the retail.
Speaker 6: but retail is higher. Understood, thank you. And then I also wanted to touch on unit volume trends. So I know that the negative unit volume trends you've been kind of seeing have been negatively impacting gross margins.
Speaker 6: You know, we've been hearing from different industry participants that, that, you know, volume trends might be down somewhere in a mid-single digit, a high single-digit range for this quarter, but I was wondering if you could provide any additional detail on that. And then maybe, you know, touch on whether or not...
Speaker 7: you know, you think Ethan needs to become...
Speaker 6: Perhaps more promotional in order to drive unit volumes in the next couple of quarters.
Speaker 4: I understand as we just disclosed our gross margin for this quarter, this ending was about almost 60%.
Speaker 4: and 59.9%. And if you take a look at going back to our pre-pandemic levels, it was about 56%. So we have maintained a high gross margin. And now as we go forward, obviously we have to take a look at the economy, we've got to take a look at the economy.
Speaker 4: whether we have to be more aggressive in our marketing, but we have these gross margins are a result of a number of factors. First is the fact that...
Speaker 4: Volumes are a very important factor in terms of having an impact of gross margins, especially at a manufacturing level because our manufacturing is impacted by volumes that have a tremendous impact on our gross margins.
Speaker 4: So I think at this stage we operated at a very high level of 59.9% and a pre-economic level was 55%. So I think we can 55 and 60. That is something in between the two I think we'll continue to have. We expect that to be our gross margins.
Speaker 6: Understood, sounds good. And just one last question for me. I think the last time we spoke, you had reminded me and our team that the last set of pricing actions you had taken were passed maybe in January to March of the previous year.
Speaker 6: Can you just remind us if that's correct or if you've passed along any additional pricing actions since then? And then if not, how do you expect the fact that we're now lapping those pricing actions to impact revenue and margins moving forward?
Speaker 4: Maybe Matt can perhaps give you somewhat more details, but our objective has not taken price increases across the board. Our focus has been in the last few years to be very selective in our price increases depending upon where the product is coming from. In fact, our focus has been in the last few years to be very selective in our price increases
Speaker 4: Some of the price increases that we took in the last two years also reflected extremely high freight costs 25% of our product for instance is coming from offshore in East Asia The cost of a container went from $3,000 to $30,000. Now it's coming back to close to $3,000
Speaker 4: Similarly, our, for instance, our forwarding of container from the east coast to the west coast also increased by almost doubled.
Speaker 4: Now it has come down. So our price increase is reflected to a great degree the impact of freight. That's why we have not taken many price increases because the freight is coming down.
Speaker 3: And just to clarify, the last price increases were done in January , February of last year, of 2022. But do remember, though, due to the backlog and the nature of our business, those price increases do not impact our P&L until it actually gets delivered. So there is a lag of anywhere between two to four months on that.
Speaker 4: Yeah, and that's important but also as I said the freight factor was a very important factor. It's still not completely down but major factor. Look at this as I said from East Asia from 3,000 to 30,000 now it's down to 3,000 or 4,000. So we did take price increases. Another price increase that came in having absorbed because by the reduction of freight.
Speaker 4: International and domestic.
Speaker 6: Got it. Got it. Yeah, that's really helpful. And just to kind of clarify as a last point with the kind of lagged impact of those pricing actions, I guess it sounds like we won't really or truly kind of lap those pricing actions until maybe the end of next quarter. Is that kind of... Good.
Speaker 4: Generally correct in that thinking. At this stage, we don't have any plans of increasing prices at this stage. Got it. Thank you. That's it for me. All right. Thanks very much. Any other questions? Our last time isauna.
Speaker 4: generally correct in that thinking. At this stage we don't have any plans of increasing prices at this stage. Got it. Thank you. That's it from me. All right. Thanks very much. And any other questions? No.
Speaker 4: We reached the end of the question and answer session. So therefore I'll hand it back over to you for a quote right now. Thanks very much. Well, we're very, as I said, we are pleased with the performance. We are also, of course, cautiously optimistic, as I said in our press release.
Speaker 4: that we have to watch what is taking place in the economy. We have to take a place, we have to take a look at...
Speaker 4: The demand factors are so far, we are positioned extremely well. Keep in mind, as I said, our operating expenses are lower, our inventories are lower, we have managed our costs quite well, and we have strengthened our teams. And this launch of the interior design destination is a very important initiative. We were going to do that too, but it just so happened that the softening of the economy came with theFatheriant keys.
Speaker 4: gives us an opportunity of having a strong marketing to get a message across. Thanks everybody for joining and look forward.
Speaker 2: to continue in our progress and talking next quarter. And this concludes today's conference and you made this connection line at this time. Thank you for your participation. Thank you.