Ethan Allen Interiors Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended September 30, 2016. Comparisons are with the three months ended September 30, 2015 unless noted. The company designs, manufactures, and sells home furnishings through wholesale and company-operated retail operations, as well as independent design centers.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $193.3 million | $190.4 million | Up 1.5% |
| Gross profit / gross margin | $108.5 million / 56.1% | $104.7 million / 55.0% | Margin up 1.1 percentage points |
| SG&A expenses | $90.1 million / 46.6% of sales | $83.8 million / 44.0% of sales | Up 7.6% |
| Operating income / margin | $18.3 million / 9.5% | $20.9 million / 11.0% | Down 12.3% |
| Net income | $11.5 million | $13.1 million | Down 12.3% |
| Diluted EPS | $0.41 | $0.46 | Down 10.9% |
| Operating cash flow | $27.5 million | $16.1 million | Up 71.4% |
Retail sales rose 4.3% to $152.3 million; wholesale sales declined 4.9% to $114.6 million. These segment figures include intercompany sales and are not additive to consolidated sales. Retail comparable design-center sales increased 5.7%, and comparable written orders increased 8.0%. Wholesale operating income fell 19.9% to $16.5 million; retail operating income fell 37.6% to $1.0 million.
The improved gross margin reflected a greater retail share of sales and less clearance activity, partly offset by weaker wholesale volume and manufacturing efficiency. SG&A increased due to advertising and product-launch spending, new design-center opening costs, and a loss on a retail real-estate sale, among other factors. The effective tax rate was 36.5%, versus 36.1%.
Cash, liquidity, and debt
- At September 30, cash and cash equivalents were $69.3 million; restricted cash and investments were $7.3 million. The company reported total cash and securities of $76.6 million.
- Working capital was $128.3 million, up from $124.9 million at June 30, 2016; the current ratio was 1.95, versus 2.01.
- Total debt was $41.1 million, including $25.0 million drawn on the revolving facility and $15.6 million on the term loan. The facility matures October 2019; available borrowing capacity was $89.9 million. The company reported compliance with facility covenants.
- Operating cash flow benefited from working-capital movements, particularly inventory. Investing activities used $5.6 million, including $7.4 million in capital expenditures; financing activities used $5.3 million, including $4.7 million of dividends.
- The quarterly dividend was $0.17 per share, compared with $0.14 a year earlier. The company repurchased 107,700 shares for approximately $3.4 million on a trade-date basis in September; settlement occurred in October.
Outlook, commentary, and risks
Management described itself as cautiously optimistic but provided no specific revenue, earnings, or margin guidance. It expects cash from operations and other available liquidity to fund debt service, anticipated capital expenditures, and working capital needs, and expects to continue dividends as economic conditions and liquidity permit.
The company said new product introductions were being well received. The Ethan Allen | Disney home line was planned for launch in November 2016; management noted that product transitions can disrupt manufacturing and retail operations. Expansion of the upholstery manufacturing facility in Mexico was expected to be completed within the next year. The company aims to refresh more than 70% of its products, with the current phase expected to conclude in November 2016.
Key disclosed risks include competitive and pricing pressures, changes in consumer demand, raw-material and transportation costs, labor and weather disruptions, supplier-related events, and interest-rate exposure. The company had $40.6 million of floating-rate debt and did not hedge interest-rate risk. U.S. tax audits covered 2009–2013; management did not expect changes in uncertain tax benefits to be significant. Routine litigation and environmental matters were disclosed, with management stating it did not expect existing matters to have a material adverse effect. No material risk-factor changes or subsequent events were reported.
Most important facts for investors to verify
- Whether retail sales and written-order growth continue, and whether wholesale volume and segment profitability recover.
- Whether higher launch, advertising, and design-center costs ease and operating margins improve.
- Cash-flow sustainability after the favorable working-capital contribution, alongside planned capital spending.
- Debt-facility availability, covenant status, and the effects of floating interest rates.
- Execution and costs of the Disney launch, product transition, and Mexico facility expansion; actual dividend and repurchase activity.