Q2 2024 Ethan Allen Interiors Inc Earnings Call

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Good afternoon, and welcome to the Ethan Allen fiscal 'twenty 'twenty four second quarter Analyst Conference call. 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.

Now my pleasure to introduce you to your host Matt Mcnulty Senior Vice President Chief Financial Officer, and Treasurer. Thank you you may begin.

Thank you Alicia good afternoon, and thank you for joining us today to discuss the Ethan Allen fiscal 'twenty 'twenty four second quarter results with me today is Peru kept Laurie our chairman President and CEO, Mr Cat, Florida will open and close our prepared remarks, while I will speak to our financial performance midway through after our prepared.

Remarks, we'll then open the call for your questions before we begin I'd like to remind the audience that this call is being transcribed in webcast live under the news and events tab on the Investor Relations page of our website. There you will also find a copy of our press release, which contains reconciliations of non-GAAP financial measures referred to on this call.

In the press release.

A replay of today's call will also be made available on our Investor Relations website. Our comments. Today may include forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our annual report on Form 10-K, please refer to our S.

T 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 Laurie.

Mr. Laurie: Thanks, Matt and good to have you all join.

Mr. Laurie: We are pleased to review, our second quarter results and our initiatives to continue to strengthen our enterprise and and I'm a strong financial results.

Mr. Laurie: We are well very well positioned and after map provides a brief overview of our financial results for the second quarter ended December 31, 2023, IV V Y initiatives and focus to continue to strengthen our enterprise and maintained strong financial performance met.

Mr. Laurie: Mr. Katz why as a reminder, we present our financial results on both a GAAP and non-GAAP basis non-GAAP results exclude restructuring initiatives impairments and other corporate actions. We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business.

Mr. Laurie: Our financial results in the just completed second quarter are highlighted by strong margins lower sales and a robust balance sheet. Despite operating in a softening economy. Our operations produce positive financial result, which I will now discuss our consolidated net sales totaled $167 3 million, reflecting lower delivered unit volume reduced.

Mr. Laurie: Manufacturing from lower backlog and a strong prior year comparable written order trends in the quarter were impacted by continued softening of the home furnishings market reduce design center traffic and price and strong prior year demand.

Mr. Laurie: Wholesale segment written orders decreased 10, 9% compared to last year, while retail segment written orders were down 9.4%. We ended the quarter with wholesale backlog of $54 9 million, which is near pre pandemic levels, we improved customer lead times and reduced the number of weeks of backlog, bringing it marker helping.

Mr. Laurie: To reduce lead times within case goods with increased production in Vermont as we recover from significant flooding that occurred in July 2023.

Vermont Wood furniture plant has resumed operations and operated at approximately 75% capacity during the just completed quarter.

The holiday to gross margin was 62% our 11th consecutive quarter that consolidated gross margin exceeded 58%. Our current quarter consolidated gross margin was impacted by deleveraging from lower unit volumes combined with a change in our sales and product mix, partially offset by lower input costs and head count.

Mr. Laurie: Adjusted operating margin of 12, 8% reflects lower sales gross margin erosion and incremental costs from our design center refresh and Grand reopening. These costs were partially offset by lower head count and our ability to maintain a disciplined approach to cost savings and expense control our SG&A expenses decreased.

Mr. Laurie: Nine, 1% and equaled 47, 3% of net sales up from 42, 9% last year due to fixed cost deleveraging on a sequential basis, our adjusted operating margin improved 70 basis points as we increased sales by two 1%, while reducing SG&A expenses by 1.4%.

And when compared to our pre pandemic 2018 second quarter, our operating margin has improved even more up 460 basis points.

Mr. Laurie: Adjusted diluted EPS was <unk> 67 cents, our effective tax rate for the quarter was 25, 5% comparable to 25, 7% a year ago.

Mr. Laurie: Now turning to our liquidity, we ended the quarter with a robust balance sheet, including cash and investments of $167 8 million.

Mr. Laurie: And no outstanding debt, we generated $13 6 million of cash from operating activities during the quarter driven by strong profit improved cash collections and lower inventory levels.

Mr. Laurie: And November 2023 we paid a regular quarterly cash dividend of $9 2 million or <unk> 36 cents per share also as just announced yesterday our board of directors declared a regular quarterly cash dividend of 36 cents per share which will be paid in February. We are also pleased to pay cash dividends, while maintaining a strong cash.

Mr. Laurie: Sure.

Mr. Laurie: In summary, our vertically integrated enterprise was able to produce a double digit operating margins. During this post pandemic period marked by industry wide softening demand or business model generated strong positive cash flow and protected our operating margin as we remain committed to disciplined investments and strong expense management with that I will now.

Mr. Laurie: I'll turn the call back over to Mr Cat four.

Mr. Laurie: Well, thank you Matt.

Mr. Laurie: As we mentioned in our press release, we are now entering the post pandemic period.

Mr. Laurie: The pandemic period defined as fiscal year 2021 through 2023 reflected strong consumer focus on home high demand and major increase in sales.

Mr. Laurie: We had record high backlogs, which are now returning to pre pandemic levels.

Mr. Laurie: While the second quarter ended December 31, 2023 gross margins increased to 62%.

Mr. Laurie: Compared to 50, 552% for the quarter ending December 31, 'twenty, a tea that is a pre pre.

Mr. Laurie: Pre pandemic period.

Mr. Laurie: Cash and investments of 167.8 million increased from 38.8 million five years ago.

During this period, we have returned 137 9 million to shareholders in the form of cash dividends.

Mr. Laurie: An increase of 41 4 million or 42, 9% during the three year period, leading up to the pandemic.

Mr. Laurie: Our inventory was reduced to 11, 5%.

Mr. Laurie: And head count reduced how do you 1.1% from the pre pandemic levels of December 2018.

Mr. Laurie: Now going forward, we are well positioned.

Mr. Laurie: We continue to strengthen our offerings.

Mr. Laurie: And now that our supply chain has improved we plan to start introducing new products.

Mr. Laurie: Our retail network continues to be strengthened.

Mr. Laurie: The repositioning of our design centers throughout North America has been a major undertaking and has placed a strongly.

Mr. Laurie: The interior design destination focus is very important to position us for growth.

Mr. Laurie: We have also reduced the space of our interior design centers, which reflected selling of large amounts of floor samples.

Mr. Laurie: This resulted in lower customer orders, which is a core of our north American manufacturing.

Mr. Laurie: Selected and lower production.

Mr. Laurie: We have completed most of the repositioning of our design centers.

Mr. Laurie: Our marketing has been greatly enhanced while major reduction of costs advertising expenses equal to 2% of net sales as compared to 4% prior to the pandemic.

Mr. Laurie: Just fight lower delivered sales maintained gross margins of 62% and an operating margin of 12, 8%.

Mr. Laurie: Yes, we have strengthened our talent in many areas of our vertically integrated enterprise.

While the post pandemic period has seen consumer focus on other areas such as traveling we believe that now consumers have again started to focus on their homes, which gives us an opportunity to continue our progress.

Mr. Laurie: We are positioned well.

Mr. Laurie: We remain cautiously optimistic and very happy to open for any questions or comments.

Mr. Laurie: Yeah.

Mr. Laurie: Thank you.

Mr. Laurie: We will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Mr. Laurie: A confirmation tone will indicate your line is in the question queue.

<unk>, if you would like to remove your question from the queue.

Mr. Laurie: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Mr. Laurie: One moment, please pull for questions.

Mr. Laurie: Thank you.

Mr. Laurie: First question comes from the line of Budd got with water Tower Research. Please proceed with your question.

Mr. Laurie: Yeah, Hello, how are you.

Mr. Laurie: Good food hope you are as well.

Mr. Laurie: Thank you.

Mr. Laurie: Yeah, a couple of questions. Just my first one just can you talk a little bit about any variance across the country in terms of the volume and the results geographically that you can point to.

Yes, but.

Mr. Laurie: I don't think so I think that there has been pretty consistent.

Mr. Laurie: Across the country is if there were differences it was more reflecting of our all of our strengths are.

Mr. Laurie: Our positioning that you often in the market, but I cannot say that somehow that that's our east South is doing better I think it was pretty consistent.

Mr. Laurie: Okay.

Mr. Laurie: And Don you mentioned that the consumer starting to refocus on their home, which which implies that Oh I infer from that that there might have been some difference in the quarter.

Don: As you saw the cadence of orders or cadence of traffic to the website of the traffic in the stores any comment or any color you can give on that.

Don: Yes, I would say that.

Don: Well, it's India and most of that 10 to 23, especially the last six or seven months. The consumers were focused on other areas. They had already purchased a lot of home furnishings, there and their interest in other areas was evident and but what we saw actually in December.

Is the month, where we saw somewhat more of a you might say greater trends in traffic and interest in the home. So I will leave that up to six or seven months of not having that focus because he was at getting back into the home.

Don: So if I asked you if you quantitate.

Mr. Laurie: Quantitative question was December a positive month from a written order business at the retail network.

Mr. Laurie: It was.

Mr. Laurie: Yeah.

Mr. Laurie: You want to put any more color to that number.

Mr. Laurie: But it's still too early you know I think as I said that.

Mr. Laurie: We are in January and we also see.

Mr. Laurie: Positives and also there are challenges in some areas, but overall the added the perception is that consumers are now.

Mr. Laurie: Starting to get back.

Mr. Laurie: In and are in full in finishing their homes. Its still early but we are starting in a positive direction.

Mr. Laurie: Okay, and I noticed of course with the operating margin.

Mr. Laurie: Differential was significant quarter over quarter in both segments.

You mentioned some deleverage in the in the which would imply from the manufacturing segment I would think.

Mr. Laurie: Can you talk to you about my what might've been to other than volume was there any other issues other than unit volume going through that might have impacted that.

No I think its substantially volume because if you take a look at it we still had a.

Strong margin, that's why I compared it to the pre pandemic levels that our margins were higher than the pre pandemic levels, then I said that our gross margin.

Mr. Laurie: It went from 55, 2% to 62% and that our operating margins went from eight 3% a 12.8% obviously the year before our operating margins were 18, 1%, reflecting extremely high sales, but you know when you take a look at history.

Mr. Laurie: Currently this calpine to 8% is a pretty good operating margin.

Mr. Laurie: Yeah, and my last question, just talking you're talking about floor sample sales that has an impact on both our revenue and.

Margin can you maybe help us get a feel of the color.

Mr. Laurie: The margin inside of them.

Mr. Laurie: How much impact that might've had on the gross margin and the operating margin on the retail segment.

Mr. Laurie: Yeah, I think there are a number of them.

Mr. Laurie: Impact attack.

Mr. Laurie: As I mentioned in my comments that.

Substantial actually all of our North American manufacturing for almost all of it is custom.

Mr. Laurie: And then we decided to reposition ourselves as an interior design destination one of the things we did this.

Mr. Laurie: Galloped and implemented was reducing the floor space today with a strong interior designers right.

Mr. Laurie: All of our technology, we don't need 20000 square foot design centers. So we started we decided.

Mr. Laurie: Early last year.

Mr. Laurie: In 2023 calendar year that we will start repositioning and we would then reduce the size problem, let us say many of them from 20000 to tell and the rest of that product. We called it just floor clause design of floor samples and it did was it helped us.

<unk> sell the products.

Mr. Laurie: Obviously, the margins were lower but it also had under the impact it has on our manufacturing because when we were selling existing inventory, we were not making custom product. So good news is that most of that is over.

Mr. Laurie: Okay well. Thank you. Thank you very much good luck on Oh.

Mr. Laurie: On the next upcoming quarters and the year.

Thanks very much.

Mr. Laurie: Thank you.

Mr. Laurie: Our next question comes from the line of Brad Thomas with Keybanc Capital markets. Please proceed with your question.

Mr. Laurie: Hello, Brad is that again, it's it's me good afternoon Farooq.

Mr. Laurie: Matt.

Farooq: Yeah, good afternoon, and good to have you Brad.

Oh, I'll always a pleasure thanks for having us.

Farooq: I wish I was first can I ask maybe if you could talk a little bit more about.

Farooq: New products and.

Brad: The degree of the broader assortment that you expect to change in the year ahead.

Brad: And the degree of products on the floor in your in your galleries that youre expecting to change.

Mr. Laurie: Yes that means it's a good question Brad because you know we are now in a very different environment than we were a year back the picture is that the.

Mr. Laurie: The interior design destination.

Mr. Laurie: Created in a situation, where we had the same product.

Mr. Laurie: Almost the same products in all our design centers.

Mr. Laurie: So when we now introduce new products, we have to determine how much of that will go on the floor of our design centers and how much it will be available for our interior designers to set now we have just finished.

Repositioning our design centers all over the country with the products and what's the what do we are not going to do is this we are going to utilize the new products to great degree by making them available to our interior designers because today, our interior designers are operating from smaller spaces.

And that'll be able to utilize our technology in creating a room in vitamins designs with products that they don't have the design centers. You know 10 15 years that we couldnt have done it if we had to put it in the stores or design centers today or this new product I think at this stage.

Mr. Laurie: Relatively small it gets into all throws the rest will be available to our designers to use customers because to our technology digital technology.

Mr. Laurie: It was to place that product in their designs with our customers.

Yeah.

That's helpful. Thanks, Thanks, Farooq a couple of the other questions if I could sometimes.

Farooq: Sometimes you all give us some details about trends quarter to date some of the data and feedback we've been getting a blade is the trends have been a little bit softer in January.

Farooq: Somewhat impacted by the weather, but curious if you have any color you could share about recent trends.

Farooq: Yes, I think Brad that is important to be have the weather has been a major factor and the good news is this in those areas where weather was not a major factor we did okay.

Brad: But in areas, where the weather was really bad bad sales have been down so I would I would say that they do that the better.

Mr. Laurie: Impacted it but I would I would I would leave that as we come out of this and especially if you can see the difference actually between the first Ah.

Mr. Laurie: 12, 15 days this month and the interest that is taking place now so I think there'll be much more interest, but the weather did impact our sales in those areas, where the weather was very bad.

Mr. Laurie: That's that's that's helpful to hear and nice to hear that that non weather affected regions have been had been stronger and then I guess, Matt occasionally you'll give us some.

Matt: Commentary on kind of the first quarter in terms of how to think about perhaps where revenues or margins may shape up anything for us to keep in mind is where.

Matt: Modeling this march quarter.

Matt: Matt what do you give them yeah, I think the trends will stay relatively consistent with the past couple of quarters. The puts and takes that we're seeing you know what would leave.

Matt: Lead us to similar a projection now we don't give guidance out there for Q3 or beyond but I would anticipate it to be somewhat similar to what we the quarter. We just ended up in.

Matt: Yeah, Brad as you can see that even with the.

Brad: Some decline in sales, we did relatively we had decent.

Gross margins and operating margins.

Brad: Obviously, when you compare it to the previous year, when we had the benefit of all of the pandemic sales. They were high so we have been able to maintain decent margins.

Brad: Very helpful. Thanks, so much and good luck this quarter.

Brad: Thanks, very much Brad.

Brad: Thank you. Our next question comes from the line of Cristina Fernandez with Telsey Advisory group.

Cristina Fernandez: Yeah, Hello, Cristina how about you.

Cristina Fernandez: Hi, Matt. Thank you for taking my questions just how about a couple I wanted to ask of the of the 15 million in la and delayed sales due to the flood and there's somebody that you had called out on the last call how much of that were you able.

Cristina Fernandez: To the library in the December quarter.

Cristina Fernandez: How should we think about that remaining amount when is that kind of pull.

Matt: Pull through the income statement.

Matthew you have been working on it very closely what is what do you say yeah. So.

Matthew: To give a little background. We're pleased that the plant was able to get up to over 75% capacity in the quarter as you recall back in July it was shut down for us for for quite a while so we ramped up where we're in good shape now we weren't able to deliver a portion of that amount I would say roughly 25% to 35% of that.

Matthew: We are delivering now what that does is it keeps our plants running it efficiently up in Vermont.

Kristina: Given the softening of the demand it was able to keep us continuing going so we're we're about a third of the way through and we'll deliver the rest of it in this upcoming quarter, Yeah. Kristina This Vermont situation had.

Kristina: Number of implications because then in the last few years, we brought in a lot of technology.

Kristina: And you know we didn't think of the fact that how about this.

Cristina Fernandez: Climate change is going to do a lot of the technology was put on the first floor. It's a multi story than number of that equipment. We have we had to repair replace it took time and now some of that equipment is going to the second floor, because we don't know what's going to happen. So most of that equipment is in and I think that is it.

Cristina Fernandez: We continue as we have to purchase new equipment, and we have and also to repair, but I think in the next few weeks more or less they'll get they'll be back to normal.

Cristina Fernandez: And then the second question I had what was there any.

Cristina Fernandez: Specific amount as far as the store refreshes that was one time that was expense this quarter that will not repeat going forward.

Mr. Laurie: Oh, yes.

But I mean do we I really don't think in terms of the.

Mr. Laurie: Almost 100.

Mr. Laurie: About half that number of about 400000, like you know half a million dollars or so because it was really paint.

Mr. Laurie: And some some minor changes some flooring and things of that nature. The rest of course, those products and the impact really was selling of the fraud products, which had an impact suddenly increased sales, but it had an impact on our gross margins. It also has an impact as I said earlier on our manufacturing.

But but half a million dollars of Shaw was used mostly on paint.

Okay.

Mr. Laurie: And then the last question I had any seen any updates as far as what you're seeing from a cost perspective, whether it's input costs, you know materials or freight that we shoot out.

Where its we've looked to 2024.

Cristina Fernndez: Yes, Kristina look at what's happening right, now and and the transportation and the Suez Canal.

Cristina Fernndez: Fortunately for us so that is going to have some impact, but because of the fact that 75% of our products are made in North America, we are going to be less impacted but if we had most of our projects coming through truecar.

Kristina: Luca from offshore it would be an issue.

We did see overall container rates had come down from you know from let's say from East East Asia to North America. They had gone up to $30000 from $45000. They came down to five 6000, but now you can start seeing they're starting to increase our exposure to them.

Kristina: Is it because of the fact that we are involved with making our products in North America, and then we ship our products.

Kristina: Through our own network.

Kristina: One delivered price nationally.

That also had an impact during the Covid, we did not change any power prices I mean, we cannot change any yeah, what I would say any special charges.

Kristina: We maintained and it was absorbed all of those increased costs, whether it was international costs are our domestic costs are high volumes helped us, but now most of those costs are back to normal, but they've come down quite a bit.

Kristina: And we will see some impact of what is taking place internationally for us it is somewhat smaller than most likely others.

Kristina: Thank you those are all the questions I had.

Kristina: All right, thanks, very much and at least not anybody else.

Kristina: There's nobody else in the queue at this time.

Alright, well, thanks for joining and I look forward to continuing our progress in terms of repositioning our brand is very very excited in fact today I have Ah trial members of senior members of our retail division here discussing our programs.

All we need to position ourselves.

Kristina: And so they are very much involved in making sure that we take all of these great advantages, we have of repositioning and that could continue.

Kristina: Our growth so thank you very much for participating.

Kristina: This concludes today's teleconference.

May disconnect your lines at this time, thank you for your participation.

Kristina: Our Appalachia tanks.

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