Ethan Allen Interiors Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2017; comparisons are with the three months ended September 30, 2016, unless noted. The company designs, manufactures, and sells home furnishings through wholesale and company-operated retail channels, as well as independent design centers and online.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $181.3 million | $193.3 million | Down 6.2% |
| Gross profit / margin | $100.3 million / 55.3% | $108.5 million / 56.1% | Margin down 0.8 percentage points |
| Operating income / margin | $11.5 million / 6.4% | $18.3 million / 9.5% | Down 37.0% |
| Net income | $7.4 million | $11.5 million | Down 35.7% |
| Diluted EPS | $0.27 | $0.41 | Down 34.1% |
| Cash from operating activities | $17.6 million | $27.5 million | Down $9.9 million |
Net sales comprised $111.6 million of wholesale segment sales and $141.6 million of retail segment sales before $71.9 million of intersegment eliminations. Wholesale operating income was $13.5 million versus $16.5 million; retail recorded an operating loss of $2.8 million versus income of $1.0 million.
Cash, debt, and liquidity
- September 30 cash and cash equivalents were $52.7 million, versus $57.7 million at June 30; restricted cash and investments were $7.0 million.
- Total debt was $0.6 million, down from $14.3 million at June 30, following repayment of the remaining $13.2 million term-loan balance during the quarter. Capital leases accounted for the remaining debt.
- The $150 million revolving credit facility had $114.9 million available, with $0.1 million of standby letters of credit outstanding. The company reported compliance with facility covenants and exemption from the fixed-charge coverage covenant.
- Working capital was $106.4 million, down from $116.7 million at June 30; the current ratio was 1.78, versus 1.92.
- Investing activities used $2.3 million, including $2.7 million of capital expenditures. Financing activities used $20.4 million, including debt payments, $5.2 million of dividends, and $1.1 million for stock purchases/retirements. Cash declined by $5.0 million during the quarter.
Material changes and operating factors
- Management attributed weaker sales and profitability to Hurricanes Harvey and Irma, which disrupted design centers, deliveries, manufacturing logistics, and Houston-area shipping.
- First production runs for the Passport collection and Department of State furniture program also affected production capacity and delayed shipments. Both retail and wholesale undelivered-order backlogs increased from June 30.
- Retail comparable net sales declined 8.8%; total written business increased 1.7%, while comparable design-center written business increased 0.5%.
- Lower sales reduced gross profit; retail’s share of consolidated sales also declined, which management said adversely affected consolidated gross margin. SG&A fell by $1.4 million but rose as a percentage of sales, to 49.0% from 46.6%.
- International sales were 11.0% of consolidated sales, compared with 10.9% a year earlier. The company operated 150 design centers and independent retailers operated 156 at quarter-end.
Outlook, risks, and contingencies
Management said it remained “cautiously optimistic,” citing existing programs and planned introductions, and expects operating cash flow to fund anticipated capital expenditures. It provided no quantified revenue, earnings, or margin guidance. The company expects continued intense competition and pricing pressure, particularly from imports, while emphasizing its North American manufacturing base and vertically integrated model.
- Near-term execution risks include recovering from hurricane and logistics disruption, clearing production and shipping delays, and ramping new products and the Department of State program.
- Other disclosed risks include consumer demand and economic conditions, competition and pricing, raw-material availability and costs, labor retention and costs, manufacturing-site concentration, product safety, environmental requirements, cyber disruption, and access to consumer credit.
- The company described ordinary-course litigation and environmental matters, but said it did not expect existing claims to have a material adverse effect. It reported a $1.3 million product-warranty liability.
- A consumer-credit program includes contingent obligations related to participating independent retailers; management believes the obligation will expire without requiring company funding. No collateral was required at quarter-end.
- U.S. tax audits for 2012–2014 were ongoing; the company did not anticipate significant changes in uncertain tax benefits within the next 12 months, though resolutions may affect the effective tax rate.
- The company adopted accounting updates for inventory measurement, deferred tax presentation, and share-based payment accounting; it reported no material financial-statement impact from the adoptions described.
Important facts for investors to verify
- Whether increased order backlogs convert to delivered sales and margins as hurricane and production disruptions ease.
- Whether retail profitability recovers from the quarterly operating loss and whether comparable sales stabilize.
- Cash generation, working-capital needs, capital spending, dividends, and the continued availability and terms of the revolving facility.
- Performance and capacity demands of the Passport launch and Department of State program, including any further shipment delays.
- Developments in tax audits, litigation, environmental matters, and contingent consumer-credit obligations.