Ethan Allen Interiors Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended June 30, 2017 (filed August 2, 2017). The request metadata says “2016 Q4,” but the filing is an annual report for FY2017; the quarter ended June 30, 2017 is included in the quarterly data.
Business context
Ethan Allen is a vertically integrated home furnishings designer, manufacturer and retailer, offering complimentary interior design services. It operated 148 design centers and independent retailers operated 155, for 303 locations worldwide. Approximately 75% of products sold were made in North American facilities. Retail accounted for about 79% of consolidated sales.
Key financial results
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $763.4 million | $794.2 million | Down 3.9% |
| Gross profit / margin | $419.7 million / 55.0% | $442.2 million / 55.7% | Margin down 0.7 percentage points |
| Operating income / margin | $58.0 million / 7.6% | $89.2 million / 11.2% | Down 35.0% |
| Net income | $36.2 million | $56.6 million | Down 36.1% |
| Diluted EPS | $1.29 | $2.00 | Down 35.5% |
| Operating cash flow | $78.6 million | $58.4 million | Up $20.2 million |
- Segments: Wholesale sales declined 7.8% to $453.3 million, with operating income falling to $53.5 million from $74.4 million. Retail sales declined 3.6% to $603.7 million; comparable design-center revenue declined 4.6%. Retail operating income was $1.2 million, versus $16.5 million.
- Liquidity: Cash and cash equivalents were $57.7 million; restricted cash and investments were $7.3 million, or $65.0 million combined. Working capital was $116.7 million (versus $124.9 million) and the current ratio was 1.92.
- Debt: Total debt, including capital leases, was $14.3 million net of issuance costs, versus $41.8 million a year earlier. The company repaid $25.0 million on its revolver; reported facility availability was $114.9 million. Shareholders’ equity was $400.9 million.
- Capital returns and investment: The company repurchased 357,363 shares for $10.2 million and paid $20.0 million in cash dividends. Capital expenditures and acquisitions totaled $18.3 million.
Material changes and unusual items
- Sales declined after three years of growth. Management cited a difficult U.S. retail consumer market and disrupted consumer spending, particularly around the election cycle.
- A $6.4 million inventory write-down in the third quarter reduced gross profit. Management linked it to a decision to reduce clearance and discontinued inventory through donations.
- SG&A increased 2.5% to $361.8 million and rose to 47.4% of sales from 44.5%. Advertising expense increased 16.5%, to $39.7 million; other factors included a real-estate disposal loss versus a gain in the prior year and higher retail occupancy costs. Reduced incentive compensation partly offset these items.
- Wholesale backlog was approximately $47.4 million, up from $40.3 million. The company cautions that backlog is not necessarily predictive of future revenue.
Outlook, risks and contingencies
- No numerical earnings or sales guidance is provided. Management described itself as “cautiously optimistic,” citing product refreshes covering more than 70% of the line, new marketing channels and plans to reposition or open design centers, expand ecommerce and pursue international growth.
- The company entered a Department of State worldwide residential furniture program and agreements to sell through DisneyStore.com and Amazon during FY2017. Management expects to leverage these initiatives but gave no quantified sales outlook.
- Key risks include intense import and retail competition; shifts in consumer tastes and discretionary spending; raw-material, freight and labor cost increases; trade-policy or tariff changes; dependence on a limited number of manufacturing and logistics sites; and potential technology, cybersecurity, environmental, product-safety and personnel disruptions.
- Operating lease commitments totaled $197.1 million, before $6.0 million of expected sublease rentals. The company reported $14.9 million of scheduled debt payments and $36 million of open purchase orders; it said it had no significant long-term supply contracts.
- Product warranty liability was $1.3 million. The company disclosed routine litigation and environmental matters, but management did not expect existing matters to have a material adverse effect. It also provided limited performance-related support for participating independent retailers under its consumer-credit program; no collateral was required at year-end.
- The company expected cash from operations and other available liquidity to cover debt service, capital expenditures and working-capital needs. Quarterly dividends were expected to continue, business conditions permitting. The credit facility matures in October 2019; the company was in covenant compliance and exempt from its fixed-charge-coverage covenant at year-end.
Investor verification points
- Determine whether sales and comparable-store order trends stabilized after FY2017’s declines, and whether the new sales channels contribute meaningful revenue.
- Assess the recurrence and cash-flow implications of inventory write-downs, clearance activity and real-estate disposition gains or losses.
- Review retail and wholesale segment margins, advertising effectiveness and the drivers of materially lower retail operating income.
- Verify facility availability, debt maturities, lease obligations and the company’s capacity to sustain dividends and share repurchases if operating cash flow weakens.
- Monitor sourcing, tariffs, input costs and concentration risks in manufacturing and logistics, along with consumer-credit program exposure.
KPMG issued an unqualified opinion on the financial statements and internal control over financial reporting as of June 30, 2017.