Ethan Allen Interiors Inc. — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended March 31, 2022; comparisons are with the periods ended March 31, 2021. Amounts below are in U.S. dollars. Ethan Allen is a vertically integrated home furnishings designer, manufacturer and retailer; approximately 75% of its products are manufactured or assembled in North America.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $197.7 million, up 11.7% | $588.1 million, up 16.0% |
| Gross profit / margin | $119.5 million / 60.4%, versus 57.3% | $350.9 million / 59.7%, versus 56.9% |
| Operating income / margin | $32.7 million / 16.5%, versus $19.0 million / 10.7% | $96.3 million / 16.4%, versus $53.2 million / 10.5% |
| Net income | $24.7 million, versus $15.6 million | $71.8 million, versus $41.8 million |
| Diluted EPS | $0.97, versus $0.61 | $2.81, versus $1.65 |
| Cash from operating activities | $17.3 million, versus $36.2 million | $40.0 million, versus $102.1 million |
Adjusted diluted EPS, a non-GAAP measure, was $0.93 for the quarter and $2.68 for the nine months. The company attributed earnings growth to higher sales, retail margin expansion, pricing actions, productivity and expense controls. Higher raw-material, freight and labor costs pressured wholesale margins.
Liquidity, debt and capital returns
- At March 31, cash and cash equivalents were $95.0 million and short-term investments were $9.5 million, or $104.6 million combined. Working capital was $110.4 million; the current ratio was 1.48.
- No bank borrowings were outstanding. The company had $121.0 million of borrowing-base availability under its $125 million revolving facility, which matures January 26, 2027; an additional $60 million facility increase is optional. The company reported covenant compliance.
- Nine-month operating cash flow fell to $40.0 million from $102.1 million, primarily because of working-capital investment, including a $38.7 million increase in inventory and a smaller contribution from customer deposits than in the prior year.
- Nine-month capital expenditures were $9.0 million. The company expects fiscal 2022 capital expenditures of $12–14 million.
- Nine-month dividends paid totaled $40.1 million, including a $0.75-per-share special dividend. The regular quarterly dividend was increased 16% to $0.29 per share. No shares were repurchased during the first nine months.
- Operating lease liabilities totaled $117.4 million and financing lease liabilities $0.9 million at March 31.
Material changes and unusual items
- Quarterly retail sales rose 17.9%; wholesale segment sales rose 12.3%. Nine-month retail sales rose 24.0% and wholesale segment sales 12.9%. The retail segment accounted for 85.2% of consolidated sales in the first nine months, compared with 79.8% a year earlier.
- Written orders were slightly lower year over year in Q3: retail down 3.0% and wholesale down 0.2%. Management said both remained above pre-pandemic levels. Order backlog was approximately 25% higher than a year earlier.
- Cash flow was affected by inventory buildup to support production and demand. Inventory increased to $182.7 million from $144.0 million at June 30, 2021.
- Restructuring and impairment activities produced a $1.5 million net gain in Q3 and a $4.8 million net gain for the nine months, primarily from property sales. The nine-month property-sale gains were $5.4 million before severance and other charges.
- The company entered a new revolving credit agreement in January 2022. It also acquired property, plant and equipment from Dimension Wood Products during the quarter.
Outlook, management commentary and risks
- Management expects near-term consolidated gross margin of approximately 57.5%–58.5%, below Q3’s 60.4%, citing higher raw-material, labor and freight costs and a return toward more typical sales mix.
- Management expects elevated delivery lead times to continue in the near term and said it could take several quarters to work through the backlog. It did not provide a specific sales or earnings forecast.
- Fiscal 2022 advertising expense is expected to be 2%–3% of sales. Management expects consumer interest in home furnishings to soften and is emphasizing digital design, product repositioning and its vertically integrated model.
- Risks include supply-chain and shipping disruptions, inflation in materials and wages, labor shortages, possible consumer-demand weakness, and potential effects of COVID-19. Management said the Ukraine/Russia conflict could affect sourcing and costs but did not anticipate a significant impact at that time.
- The company said liquidity should be sufficient for at least the next 12 months. Its forward-looking statements remain subject to economic, operational and other risks; no assurance is given that demand, margins or backlog conversion will meet management expectations.
Most important facts for investors to verify
- Whether backlog converts into deliveries and revenue, and whether lead times improve.
- Whether pricing and productivity can offset inflation in materials, freight and labor as margins move toward management’s indicated range.
- Whether operating cash flow recovers as inventory and other working-capital needs change.
- Whether consumer demand, written orders and international sales—particularly in China—remain resilient.
- Whether cash returns, capital spending and lease obligations remain supportable without drawing on the revolving facility.
- How to interpret adjusted results: they are non-GAAP measures and exclude specified items; reported GAAP results include property-sale gains and other restructuring items.