Ethan Allen Interiors Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the three months ended September 30, 2020, the first quarter of fiscal 2021. Ethan Allen is a vertically integrated home furnishings designer, manufacturer and retailer, operating 144 company-owned design centers and nine manufacturing facilities; approximately 75% of products are made in North American plants. Comparisons below are with the three months ended September 30, 2019 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $151.1 million | $173.9 million | Down 13.1% |
| Gross profit / reported gross margin | $85.8 million / 56.8% | $93.8 million / 53.9% | Profit down 8.6% |
| Operating income / margin | $11.7 million / 7.7% | $18.6 million / 10.7% | Down 37.3% |
| Net income | $9.4 million | $14.1 million | Down 33.7% |
| Diluted EPS | $0.37 | $0.53 | Down 30.2% |
| Operating cash flow | $42.2 million | $23.4 million | Up 80.3% |
| Capital expenditures | $2.4 million | $3.4 million |
- Adjusted, non-GAAP results: Adjusted gross margin was 56.8%, versus 56.3%; adjusted operating income was $12.3 million, up 0.7%, with an 8.1% margin versus 7.0%; adjusted net income was $9.0 million, down 3.2%; adjusted diluted EPS was $0.36, up 2.9%. The company cautions that adjusted measures are not substitutes for GAAP results.
- Cash, debt and liquidity: Cash was $62.0 million at September 30, down from $72.3 million at June 30. The company repaid its remaining $50.0 million revolving-credit borrowing during the quarter and had no debt outstanding at quarter-end. Revolver availability was $104.5 million, subject to borrowing-base limits; the company reported covenant compliance. Management said liquidity should be sufficient for operations and obligations for at least the next 12 months.
- Working capital and obligations: Current assets were $232.5 million and current liabilities were $187.9 million. Inventory was $127.0 million. Customer deposits and deferred revenue were $89.9 million, including $89.3 million of customer deposits. Operating lease liabilities totaled $126.9 million.
- Operating cash flow benefited from working-capital changes, particularly increased customer deposits and accounts payable timing, partly offset by lower receivable collections and prepaid expenses. Cash used in financing included the $50.0 million debt repayment. The quarter-end cash decline was $10.3 million.
Material changes versus the prior period
- Sales fell in both segments: wholesale was $97.3 million, down 3.9%; retail was $118.1 million, down 14.0%. Management attributed lower reported shipments to COVID-related closures, reduced production, supply-chain disruption and delivery constraints.
- Reported gross margin improved to 56.8% from 53.9%. The prior-year margin included $4.1 million of inventory write-downs and manufacturing costs; on an adjusted basis, prior-year margin was 56.3%. Management cited improved wholesale and retail margins, partly offset by sales mix and COVID-related disruption.
- Reported operating income comparisons were affected by the prior-year $11.5 million gain on sale of the Passaic property and other restructuring items. The current quarter included a $0.6 million non-cash impairment charge for one retail design center.
- The effective tax rate was 16.8%, versus 24.4%, primarily reflecting a $0.9 million reduction in the valuation allowance on deferred tax assets.
- After suspending dividends during the COVID response, the board reinstated the $0.21-per-share quarterly dividend on August 4; it was paid October 22, after quarter-end. No share repurchases occurred during the quarter.
Outlook, management commentary and risks
- Management reported double-digit retail written-order and backlog growth versus the prior year. Retail written orders rose 10.8%, including 112% growth in e-commerce business orders. Wholesale orders excluding GSA and other government orders rose 9.2%; those government orders were delayed and expected by management to be issued in coming months. Overall wholesale written orders were down 0.4%.
- Manufacturing ramped up to near full production by September-end. Management expected higher production to help work through backlogs and reduce delivery lead times, while noting that strong order flow had lengthened the order-to-delivery interval.
- The filing provides no quantified earnings or sales guidance. Management said the duration and effects of COVID-19 remained uncertain and could adversely affect demand, operations, supply chains and fiscal 2021 results. Risks also include consumer spending and preferences, raw-material availability and costs, competition, cyber and technology disruption, and design-center costs and locations.
- The company reported routine legal matters and environmental compliance matters; management considered a material adverse outcome from pending legal claims remote. It recorded the retail asset impairment noted above. The filing disclosed no material changes to previously reported risk factors.
Important facts for investors to verify
- Whether written-order growth converts into delivered sales and whether production and supply-chain recovery shortens delivery lead times.
- The durability of retail demand and e-commerce growth, and the timing and value of delayed government orders.
- Whether operating cash flow remains strong when customer deposits and other working-capital timing effects normalize.
- Available revolver capacity, borrowing-base constraints, lease obligations and the company’s ability to sustain dividends if COVID-related conditions worsen.
- The composition and comparability of adjusted results, especially the effects of the prior-year property-sale gain and restructuring items.