Ethan Allen Interiors Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2019 (fiscal 2019 third quarter), compared with the corresponding 2018 periods. The filing is for 2019 Q3, notwithstanding the request metadata’s “2018 Q3” label. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context and results
Ethan Allen is a vertically integrated home furnishings designer, manufacturer and retailer, operating wholesale and company-owned retail segments. At March 31, 2019, it operated 142 design centers; independent retailers operated 161. The company said it manufactures approximately 75% of its products in North America.
| Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Nine months ended March 31, 2019 | Nine months ended March 31, 2018 |
|---|---|---|---|---|
| Net sales | $177.8 | $181.4 | $562.8 | $561.2 |
| Gross profit / margin | $98.4 / 55.3% | $96.7 / 53.3% | $308.7 / 54.9% | $304.8 / 54.3% |
| Operating income / margin | $10.7 / 6.0% | $3.9 / 2.1% | $38.6 / 6.9% | $33.0 / 5.9% |
| Net income | $8.0 | $2.6 | $29.0 | $24.9 |
| Diluted EPS | $0.30 | $0.09 | $1.08 | $0.90 |
| Cash from operations | $12.8 | $20.9 | $44.3 | $35.1 |
| Capital expenditures | $2.0 | $4.1 | $7.0 | $9.1 |
Financial position, liquidity and material changes
- At March 31, 2019, cash was $25.7, working capital was $97.7, and the current ratio was 1.77. Total assets were $532.8 and shareholders’ equity was $373.0.
- Total debt was $9.2, including $8.0 outstanding on the revolving facility and $1.2 in capital leases. The new five-year, $165 million secured facility matures December 21, 2023; available capacity was $150.8, after considering borrowing-base limits and letters of credit. The company reported covenant compliance.
- Nine-month operating cash flow increased $9.2 year over year, which management attributed to higher net income and improved working capital. Cash used in financing was $34.1, including $41.9 of dividends; the company borrowed $16.0 for a special dividend and repaid $8.0 by quarter-end.
- For the quarter, sales fell 2.0%: retail sales rose 1.5% while wholesale sales declined 8.9%. Gross margin increased 200 basis points, aided by a fiscal 2019 price increase, stronger segment margins and a higher retail share of sales. Operating expenses fell $5.1, primarily because national television advertising costs were lower by $6.4; the prior-year quarter also included a $1.5 incentive-compensation accrual reversal.
- For the nine months, sales rose 0.3%, with retail up 2.6% and wholesale down 4.1%. Operating income rose 17.1%; lower advertising costs and domestic retail gains were partly offset by lower wholesale sales and higher logistics costs.
- International sales decreased 30.2% in the quarter and 28.1% year to date, particularly reflecting lower China sales. Management linked the decline in part to uncertainty surrounding international trade disputes.
Outlook, risks and unusual items
- Management described its outlook as “cautiously optimistic,” with no numerical earnings or revenue guidance. Priorities include targeted marketing, product introductions, design-center repositioning, technology investment, and international expansion.
- On April 17, 2019, the company announced manufacturing and logistics changes: converting its Old Fort, North Carolina plant to a distribution center; consolidating case-goods production across other facilities; expanding its Maiden, North Carolina campus by 80,000 square feet; and moving distribution from Passaic, New Jersey, while outsourcing art framing. The filing does not quantify expected costs, savings or timing.
- The January 2019 payment included a $1.00-per-share special dividend and a $0.19 regular dividend. A further $0.19-per-share quarterly dividend was paid April 25, 2019. Future dividends remain subject to the board’s determination and the company’s financial condition.
- The company expects adoption of the lease accounting standard in fiscal 2020 to materially increase reported balance-sheet assets and liabilities, but does not expect a material income-statement or cash-flow effect.
- Risks highlighted include consumer demand and economic conditions, competition and import pricing, trade-policy changes, raw-material and labor costs, reliance on a limited number of manufacturing and logistics sites, technology and cybersecurity disruptions, and ability to sustain dividends. Management said unresolved legal matters were not expected to have a material adverse effect; the company was under U.S. tax audit for fiscal 2016 and did not anticipate significant changes from those audits.
- The consumer-credit program agreement was scheduled to terminate July 31, 2019, with a substitute program planned. The company’s potential guarantee exposure for participating independent retailers is indeterminable, though management expected no funding requirement based on retailer creditworthiness and noted recovery rights.
Investor facts to verify
- Whether retail growth and improved gross margin can offset continuing wholesale and international weakness.
- How the announced facility and distribution changes affect restructuring costs, production capacity, delivery performance and future margins.
- Whether operating cash generation can support dividends, capital spending and debt obligations, particularly after the special dividend.
- The eventual effect of lease-standard adoption on reported assets, liabilities and key balance-sheet measures.
- Developments in the fiscal 2016 tax audit, consumer-credit program transition, and any material litigation or warranty claims.