Ethan Allen Interiors Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended September 30, 2018. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. Ethan Allen is a vertically integrated home furnishings designer, manufacturer, wholesaler and retailer.
Financial performance
| Metric | Quarter ended Sep. 30, 2018 | Prior-year quarter |
|---|---|---|
| Net sales | $187.8 | $181.3 |
| Gross profit / margin | $101.5 / 54.0% | $100.3 / 55.3% |
| Operating income / margin | $11.8 / 6.3% | $11.5 / 6.4% |
| Net income | $8.8 | $7.4 |
| Diluted EPS | $0.33 | $0.27 |
| Operating cash flow | $24.4 | $17.6 |
- Sales rose 3.6%; wholesale revenue increased 5.8%, primarily from government contract orders, while retail revenue rose 2.6%. Comparable design-center sales increased 0.8%.
- Gross margin contracted 1.3 percentage points. Management cited higher raw-material costs and a lower retail share of consolidated sales; raw-material cost increases reduced gross profit by approximately $0.8 million.
- SG&A increased to $89.7 million from $88.8 million, but declined to 47.7% of sales from 49.0%. Higher freight, distribution, warehouse and advertising expenses were partly offset by prior-year organizational and exit costs that did not recur.
- Net income increased 19.2% and diluted EPS increased 22.2%, helped by a lower effective tax rate of 24.9%, versus 35.1% in the prior-year quarter. Management attributed the lower rate mainly to the Tax Cuts and Jobs Act.
- Cash from operations increased by $6.8 million, with working-capital items providing $10.2 million. Capital expenditures were $2.8 million; dividends paid were $5.1 million, or $0.19 per share.
Liquidity, debt and balance sheet
- At September 30, 2018, cash was $39.6 million, up from $22.4 million at June 30, 2018. Working capital was $100.2 million; the current ratio was 1.74:1.
- Total debt was $1.5 million, consisting of capital leases. The revolving credit facility had $108.8 million available, after $6.2 million of standby letters of credit. The facility expires October 21, 2019; the company reported covenant compliance and exemption from the fixed-charge coverage covenant.
- Inventories were $165.7 million, up from $163.0 million at June 30. Customer deposits were $67.6 million, versus $61.2 million.
- No shares were repurchased during the quarter. The remaining repurchase authorization was 2,518,046 shares.
Material changes, outlook and risks
- Wholesale operating income rose to $14.3 million from $13.5 million. Retail remained loss-making, with an operating loss of $1.6 million, improved from $2.8 million.
- Wholesale backlog declined 21.6% year over year; retail backlog declined 4.7%. Total written orders were down 0.2%, and comparable design-center written orders fell 2.1%. Canadian design-center sales decreased 28.0%; management cited uncertainty related to international trade disputes.
- Management described its outlook as “cautiously optimistic.” It plans to continue broadening advertising during fiscal 2019, developing products and design centers, and leveraging North American manufacturing. No specific revenue or earnings guidance was provided.
- Key risks cited include competitive pricing and imports, changes in consumer demand and tastes, trade and tax policy, raw-material availability and costs, labor pressures, dependence on manufacturing and logistics sites, technology disruption or cyberattacks, and access to financing and consumer credit. Results for this quarter are not necessarily indicative of full-year results.
- The company adopted ASC 606 in the quarter; adoption did not materially change revenue amounts or timing, but expanded disclosures. Routine litigation and environmental matters were described; management does not expect existing proceedings to have a material adverse effect. No subsequent events were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether order and backlog declines—especially in wholesale and Canada—persist or translate into weaker shipments and sales.
- Whether sales growth can offset raw-material, freight and distribution cost pressure and stabilize gross margin.
- Whether the lower effective tax rate is sustainable; the filing notes quarterly tax rates may vary with discrete items and other factors.
- The company’s liquidity and refinancing plans ahead of the October 2019 facility expiration, and the conditions supporting continued dividends.
- How planned fiscal 2019 advertising expansion and product and retail initiatives affect expenses and returns.