Ethan Allen Interiors Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2020, ended March 31, 2020; filed May 11, 2020. The filing describes Ethan Allen as a vertically integrated home furnishings designer, manufacturer and retailer, with Wholesale and Retail segments and approximately 300 design centers. The results were affected by the transition to a paid membership model and the emerging COVID-19 disruption.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended March 31, 2020 | Prior-year quarter | Nine months ended March 31, 2020 | Prior-year period |
|---|---|---|---|---|
| Net sales | $149.8 | $177.8 | $498.3 | $562.8 |
| Gross profit / margin | $83.9 / 56.1% | $98.4 / 55.3% | $275.3 / 55.2% | $308.7 / 54.9% |
| Operating income (loss) | $(0.8) | $10.7 | $27.1 | $38.6 |
| Net income (loss) | $(0.2) | $8.0 | $21.0 | $29.0 |
| Diluted EPS | $(0.01) | $0.30 | $0.80 | $1.08 |
| Operating cash flow | $15.3 | $12.8 | $38.7 | $44.3 |
- Quarterly sales and segments: Consolidated sales fell 15.8%; Wholesale sales declined 14.1% and Retail sales declined 16.7%. Retail produced an $8.8 million operating loss, while Wholesale operating income was $8.9 million.
- Margins and adjusted results: Quarterly gross margin improved 0.8 percentage points, primarily on stronger Retail pricing, but operating expenses rose to 56.6% of sales from 49.3% a year earlier. Adjusted operating income was $0.4 million and adjusted diluted EPS was $0.02. For nine months, adjusted diluted EPS was $0.65. These are company-defined non-GAAP measures.
- Cash flow and liquidity: Cash and cash equivalents were $116.9 million at March 31, versus $20.8 million at June 30, 2019. The increase included $100.0 million borrowed on the revolving facility and $12.4 million in proceeds from property and equipment sales. Nine-month operating cash flow decreased to $38.7 million from $44.3 million.
- Debt and balance sheet: Revolver borrowings were $100.0 million, compared with no revolver borrowings at June 30, 2019. The company reported $23.9 million of remaining borrowing availability and was in covenant compliance. Current assets were $287.3 million and current liabilities were $146.9 million. Operating lease liabilities totaled approximately $146.5 million, recognized following adoption of the new lease standard.
Changes, unusual items and management commentary
- Management attributed lower sales to the membership-model transition, a lower opening order backlog, softer consumer demand, and COVID-19-related closures and disruption. Wholesale orders booked fell 21.9% in the quarter; March orders were down 37.3% year over year.
- The nine-month operating results included an $11.5 million gain on sale of the Passaic property, partly offset by $3.2 million of inventory write-downs and restructuring and other charges. The gain and charges contributed a net benefit to reported results; adjusted measures exclude specified items.
- The company adopted lease accounting guidance on July 1, 2019, recording operating right-of-use assets and lease liabilities. The adoption reduced opening retained earnings by $1.6 million and did not materially affect reported operations or cash flows.
- After quarter-end, the company temporarily closed design centers and most manufacturing facilities, furloughed about 70% of its global workforce, reduced certain compensation, halted share repurchases and suspended its regular quarterly dividend. It reported beginning to reopen some U.S. design centers and increase production at some North American plants in May.
- Management expected COVID-19 to significantly adversely affect fiscal fourth-quarter 2020 results and possibly later periods, but said the financial impact could not be reasonably estimated. It cited cash, borrowing availability and the absence of near-term debt maturities as liquidity support, while cautioning that extended closures or material revenue declines could require additional funding.
- Goodwill and trade name impairment tests were triggered by falling sales, share price and the pandemic; no impairment was recorded at March 31. Management warned that further declines in market value or Wholesale results could lead to a future impairment charge.
Outlook, risks and contingencies
No quantified earnings or sales guidance was provided. Management planned to reopen locations and resume operations as conditions allowed, invest further in digital channels and continue new product launches. Principal risks include the uncertain duration and effects of COVID-19 on demand, store traffic, employees, supply chains and liquidity; the performance of the new membership program; consumer and economic weakness; and possible impairment charges. The filing states that ordinary-course legal matters were not expected to have a material adverse effect. It also identifies LIBOR transition risk for floating-rate borrowings.
Important facts for investors to verify
- Track reopening progress, order trends, customer demand and the degree to which COVID-19 and the membership transition affect sales and margins.
- Assess liquidity after the $100 million facility draw, including cash use, borrowing-base availability, covenant headroom and the effect of any extended operating disruption.
- Confirm the facility maturity date: the credit-agreement note and other disclosures state December 21, 2023, while one MD&A passage says December 2021.
- Monitor the status of the suspended dividend and share-repurchase program, and whether management resumes either.
- Review the assumptions behind the goodwill and trade name valuations, and the treatment of the Passaic gain, inventory write-downs and restructuring charges in adjusted results.