Q2 2025 Ethan Allen Interiors Inc Earnings Call

Good afternoon and welcome to the Ethan Allen Fiscal 2025 Second 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, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

Speaker Change: It is now my pleasure to introduce our host, Matt McNulty, Senior Vice President, Chief Financial Officer, and Treasurer. Thank you. You may begin.

Matt Mcnulty: Thank you, operator. Good afternoon, and thank you for joining us today to discuss Ethan Allen's fiscal 2025 second quarter results.

Matt Mcnulty: With me today is Farooq Kathwari, our Chairman, President, and CEO. Mr. Kathwari 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.

Matt Mcnulty: There, you will find a copy of our press release, which contains reconciliations of non-GAAP financial measures referred to on this call and in the press release. We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business.

Matt Mcnulty: Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially.

Matt Mcnulty: The most significant risk factors that could affect our future results are described in our quarterly report on Form 10-Q.

Speaker Change: 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 turn the call over to Mr. Kathwari.

Kathwari: Thank you, Matt, and thanks for participating in our second quarter results ended December 31, 2024.

Mr. Kathwari: I would like to start with the devastating effects of wildfires in Southern California, which have resulted in loss of life and devastated many communities.

Mr. Kathwari: Our team members and our clients have been impacted and we pray for their safety.

Mr. Kathwari: Fortunately our design center in Pasadena closes to the fires, escaped the fire and is back in operations along with all of our six design centers and a major retail service center in the area.

Mr. Kathwari: As we mentioned in our press release, despite a challenging political and economic environment, we had strong financial results in our second quarter, especially in our book orders.

Mr. Kathwari: We reported consolidated net sales of $157.3 million, gross margin of 60.3%,

Mr. Kathwari: operating income of 18.2 million operating margin of 11.5% and diluted EPS of 59 cents

Mr. Kathwari: We had strong operating cash flow and ended with $184.2 million, an increase of $16.4 million from a year ago.

Mr. Kathwari: We pay $10 million in cash dividends and pleased that yesterday our board approved a regular cash dividend of $0.39 per share available on February 26, 2025.

Mr. Kathwari: After Matt presents more detailed financial information, I will review our ongoing initiatives to continue our progress. Matt.

Matt Mcnulty: Thank you, Mr. Kathwari. Our financial results in the just-completed second quarter were highlighted by strong demand, margins, and operating cash flow.

Matt Mcnulty: Our consolidated net sales were $157.3 million, compared with $167.3 million a year ago, and the higher average retail ticket price and lower sales helped to offset lower backlogs, fewer contract sales, and a lower delivered unit volume.

Matt Mcnulty: Demand levels improved sequentially throughout the quarter and concluded with a strong December aided by our special promotion.

Matt Mcnulty: Retail segment orders grew by 15.8% while wholesale segment orders were up 14.3%.

Matt Mcnulty: Written order improvement was driven by increased promotional activity, strong financing programs, and elevated interest in the home post the U.S. elections held in early November.

Matt Mcnulty: We ended the quarter with 172 Ethan Allen Retail Design Centers in North America, including 141 company-operated and 31 independently-owned and operated locations.

Matt Mcnulty: Wholesale backlog at December 31st totaled $57.7 million, up 5% from a year ago.

Matt Mcnulty: As expected, our wholesale backlog declined in the past three months as our State Department delivered sales outpaced incoming orders. Our distribution center in North Carolina that previously sustained flooding from Hurricane Helene in September resumed operations and we are thankful to those who helped us recover.

Matt Mcnulty: Strong consolidated gross margin of 60.3% was driven by a favorable change in the sales mix, lower headcount, selective price increases, lower raw material input costs, and a higher retail average ticket price.

Matt Mcnulty: Our consolidated headcount totaled 3,318 associates at December 31st, 2024, a decrease of 6.9% from a year ago, as we continue to identify operational efficiencies and leverage the use of technology to streamline workflows throughout our vertically integrated enterprise.

Matt Mcnulty: Adjusted operating margin was 11.5% compared with 12.8% a year ago. Our double-digit operating margin reflects our ability to tightly manage expenses.

Compared to our pre-pandemic quarter ended December 31, 2019.

Matt Mcnulty: Our adjusted operating margin has improved 610 basis points due to streamlining our vertically integrated enterprise.

Matt Mcnulty: Adjusted diluted EPS was $0.59 compared with $0.68 a year ago. For historical context, adjusted diluted EPS for the three months ended December 31, 2019 was $0.27.

Matt Mcnulty: Our effective tax rate was 25.4% for the quarter, which varies from the 21% federal statutory rate primarily due to state taxes.

Matt Mcnulty: Now turning to our liquidity. We ended the quarter with a robust balance sheet, including cash and investments of $184.2 million and no outstanding debt. We generated $11.6 million of cash from operating activities and kept inventory levels consistent with a year ago.

Matt Mcnulty: Capital expenditures were $3.8 million and included additional investments in technology, retail design center relocations and improvements, and remodeling costs associated with our hotel.

Matt Mcnulty: Also, as just announced in our earnings release, our board declared a regular quarterly cash dividend of $0.39 per share, which will be paid this February.

Matt Mcnulty: In summary, we are pleased with our performance that saw incremental consumer interest return back to the home.

Disciplined investment and solid execution throughout our vertically integrated business.

Speaker Change: produced strong written demand, positive operating cash flow, and a double-digit operating margin. Our robust balance sheet has us well positioned as we continue to move through the calendar year. With that, I will now turn the call back over to Mr. Kathwari.

Well, thank you, Matt.

Speaker Change: We are positioned well as a vertically integrated enterprise, which includes

a very strong and dedicated team

The ability to provide interior design services with state-of-the-art technology.

Speaker Change: offering relevant high-quality products that offer both a modern design with a classic perspective and a classic design with a modern perspective and this is very important these two attitudes.

Speaker Change: Seventy-five percent of our furniture is made in our North American facilities.

Speaker Change: Our national and retail logistics is unique and a great competitive advantage enabling us to deliver our products with what we say white glove delivery at one cost in North America to our clients.

Speaker Change: Our retail network of 172 design centers in North America and additional design centers internationally are well positioned.

Speaker Change: During the last two years we have continued to strengthen our network with new and relocated design centers and especially with freshening the interiors of all with our products and attitudes.

Speaker Change: We continue to relocate to stronger locations and add new design centers.

Speaker Change: After the pause due to COVID, we have been introducing new products to strengthen our offerings.

Speaker Change: Our marketing initiatives continue to get our message across. This includes direct mail magazines, digital magazines, our website, local and regional advertising.

Speaker Change: During the last few years, while strengthening our offerings, our retail network, our manufacturing, our logistics, marketing and technologies, we have been able to also reduce our headcount.

Technology has played a very important role in that.

Speaker Change: December 31, 2024 was 3,318, down 7% from a year ago, and 27% less than December 2019.

Speaker Change: During this period we also repositioned our manufacturing, our national logistics and our retail network.

Speaker Change: In summary, we continue to strengthen the various areas of our vertically integrated enterprise and are well positioned to meet the opportunities and challenges ahead. With this, I would like to open it up for any questions or comments.

Speaker Change: Great, thank you so much. We will now be conducting a question and answer session.

Speaker Change: If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key.

One moment please, we'll report for questions.

Brad Thomas: First question is from Brad Thomas from Key Bank Capital Markets. Please go ahead.

Hello, Brad.

Brad Thomas: Hi, good afternoon Farooq, good afternoon Matt, and first and foremost congratulations on the very strong end of the year, end of the quarter I should say, end of the calendar year on the order front.

Farooq Kathwari: yes thank you that it was it is very encouraging to see that

Speaker Change: It really is. We've all been waiting for a turn in the industry and I think we're hopeful that that is what's coming to fruition here. I guess that was going to be my first question, was what's the degree of confidence that you have, Farooq, that this is the turning point here for the company and for the industry?

Well, I can also...

Speaker Change: mentioned that there are factors that led to this as well.

Speaker Change: Certainly, obviously, it reflected our enterprise, our strong product programs, our network, but it also reflected the fact that we did give a special savings during this quarter which helped.

Speaker Change: Now, so, but it would not have happened without all the other factions.

Speaker Change: So I think that all of those factors helped make this quarter, especially on the written business, very very strong.

Speaker Change: Now, your next question about, as we move forward, we are positioned very, very well.

Speaker Change: January did start mostly because of the weather. We had very tough weather in many parts of the country for the first three weeks, but when the weather improved in the last week or so, we can see more robust activity.

Speaker Change: We have been able to do all of this while making it extremely efficient.

So I think...

Speaker Change: The opportunity of having strong product programs, the opportunity of the efficiency that we have brought in, and really a strong designer network.

Speaker Change: and combine with technology. As I mentioned, this major decrease in our headcount is mostly due to the fact of combining good talent with technology. And I think as we do that, we feel confident that we'll continue with the progress.

Speaker Change: as opportunities take place, as there is certain opportunities of timing.

Speaker Change: timing of holidays, events, gives us an opportunity to do that. So we'll combine both as as we go forward.

Speaker Change: Great. And maybe just one more last one for me here, Farooq. It was such a, again, impressive acceleration from your September quarter to your December quarter in terms of orders. Any other nuances that you might highlight? Is this all?

Speaker Change: new customers or incremental customers coming in? Or is there anything different happening in terms of the average ticket or the types of customers or the types of products? Just any other detail would be really interesting. Yeah, I would say that

in the last.

year or so we have also been introducing new product.

Speaker Change: We will continue to do that because again before prior to that we were cautious

Speaker Change: cautious because we had very high backlogs and we didn't want to introduce new products because of service. Our service position is very good right now so that we are now being more aggressive introducing new products. The other one is that we are also

increasing our marketing.

Speaker Change: In fact, in this last quarter, we increased our marketing spend.

Speaker Change: and a lot of that we are doing is in terms of marketing, in terms of getting...

which was what, about 0.5%?

Speaker Change: 15% higher. Yeah, but 2.5% from 2% to 2.5%, 15% higher, Brad. So we will continue to do that also, but by continuing to utilize more innovative ways of marketing than the old traditional ways we used to do.

Speaker Change: That's great. Well, we've certainly heard some good data points out of the industry, but this really exceeded anything that we'd heard out of anybody else here of late. So congratulations, and I'll turn it over to others.

Thanks very much.

Speaker Change: The next question is from Christina Fernandez from Chelsea Advisory Group. Please go ahead.

Hello Christina, how are you?

Speaker Change: You talked about progression through the quarter. How were trends in October and November? I guess what I'm trying to get through was how much did that special promotion in December help or have you already started to see an improvement in the prior months?

Speaker Change: you know Christina I think that there was improvement but a major improvement did take place in December because of the special and you know look it was not that a major promotion it was a 5% more savings

Speaker Change: And, you know, so it was the combination of all factors that made it happen.

Speaker Change: And then, I guess, what was the impetus for increasing the promotions? I feel like you've been pretty steady over the past.

Speaker Change: couple of years, usually like 20, 15, 20% off. With it, is it a response to competition that you saw out there, just wanting to?

Speaker Change: accelerate the order intake, maybe walk us through, I guess, that decision that you haven't done too much of that before.

Speaker Change: Well, it's a combination of a number of factors. It is the fact that we felt that because we were in a much better service position, that we would be able to deliver the products. That was a very important factor.

Speaker Change: because I didn't want to spend a lot of money and we had delays of service because of the backlogs. So that was an important factor. We felt we are ready and that's why that was a major factor in investing in marketing.

Speaker Change: And with the higher promotions, should we expect an impact to the gross margin, which has been very high the past couple of quarters going forward?

Speaker Change: Yeah, keep in mind, you know, that if you take a look at historically, it was not that many years back, we used to spend close to 5% of sales on our marketing.

Speaker Change: Now, with all the technology and other elements, we took it to half of that. So keep in mind, we have reduced our total marketing by almost 50 percent as a percentage of sales than what we used to do. We increased this time by about 0.5 percent.

and so we'll continue with that kind of a rate.

And then another topic I wanted to talk about was

Speaker Change: Your exposure to Mexico, you've always talked about 75% of manufacturing in North America. Obviously, we are all aware of potential tariffs.

Speaker Change: How much of that 75% is manufactured in Mexico, and if there were to be tariffs?

Speaker Change: on imports from that country. Would you look to move it to the U.S. or Honduras? Or I guess, how are you planning for the different outcomes? Yeah, this is an important issue. And in fact, we were having a discussion with our team.

Speaker Change: on that today, that Mexicos are upholstery products that are made in Mexico.

Speaker Change: We have two major operations one in Mexico and one in North Carolina and the Mexico operation makes and cuts fabrics for our operation in North Carolina, and then it also makes

Speaker Change: So we have some flexibility as we go forward. There's a possibility we could consider raising prices. There's a possibility that more of that product could be made in North Carolina because we are manufacturing in both places.

Thank you and best of luck here this quarter.

All right, well, thank you very much.

Speaker Change: We look forward, we've got our team members, you know, they're really motivated, they're working hard. A lot of, we're looking at all these uncertainties, but the good news is, as I said, we are well positioned based upon our manufacturing in North America, which includes

Speaker Change: United States, Mexico, Honduras and we do have some manufacturing comes out of countries like Indonesia and Vietnam that's for furniture. We do make some accessories and other products in many other places from Italy to China but most of it is right here in North America.

Speaker Change: And as a final reminder, if you'd like to ask a question, it is star 1.

Speaker Change: And if there are no further questions, I'd like to turn the floor back to Mr. Kathwari for any closing comments.

Thank you very much.

Farooq Kathwari: Thank you for attending. Our teams are working very, very hard. We are looking at all the events in the world. And the good news is we are well positioned and we are also positioned to take

Farooq Kathwari: steps based upon whatever happens and whether it's a question about

Thanks very much for participating.

Farooq Kathwari: This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.