Ethan Allen Interiors Inc. — Fiscal 2023 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended March 31, 2023; filed April 26, 2023. Ethan Allen is a vertically integrated luxury home furnishings designer, manufacturer and retailer, with Wholesale and Retail reporting segments.
Financial performance
- Quarter: Net sales were $186.3 million, down 5.7% year over year. Gross profit was $111.6 million and gross margin was 59.9%, versus 60.4%. Operating income was $28.8 million (15.5% margin), versus $32.7 million (16.5%). Net income was $22.4 million, down 9.5%; diluted EPS was $0.87, versus $0.97. Adjusted diluted EPS, a non-GAAP measure, was $0.86 versus $0.93.
- Nine months: Net sales were $604.0 million, up 2.7%. Gross profit was $365.2 million and gross margin was 60.5%, versus 59.7%. Operating income was $105.5 million (17.5% margin), versus $96.3 million (16.4%). Net income was $80.4 million, up 12.0%; diluted EPS was $3.14, versus $2.81. Adjusted diluted EPS was $3.07 versus $2.68.
- Segments and demand: Quarterly Retail sales fell 9.5% to $150.9 million; Wholesale segment sales, including intersegment sales, fell 5.7% to $114.2 million. Wholesale operating income rose to $18.8 million, while Retail operating income fell to $12.6 million. Retail written orders declined 12.3% year over year but were 3.6% above fiscal 2019’s third quarter. Wholesale backlog was $73.3 million, down 42.2% year over year but approximately 40% above pre-pandemic levels.
- Cash flow: Operating cash flow was $33.4 million in the quarter, versus $17.3 million a year earlier; for nine months it was $74.4 million, versus $40.0 million. Nine-month capital expenditures were $10.7 million. Cash and cash equivalents totaled $61.0 million at March 31, 2023, down from $109.9 million at June 30, 2022; short-term investments rose to $95.2 million from $11.2 million.
- Margins and costs: Quarterly adjusted operating margin was 15.2%, down from 15.8%; nine-month adjusted margin was 17.0%, up from 15.6%. Management attributed quarter margin pressure mainly to sales mix, partly offset by pricing and lower freight and material costs. SG&A was $83.2 million in the quarter, down 5.7% year over year.
- Debt and liquidity: No borrowings were outstanding under the $125 million revolving credit facility; borrowing availability was $121.0 million, with $4.0 million of standby letters of credit outstanding. Total available liquidity, including cash and investments, was $277.2 million. Working capital was $177.6 million and the current ratio was 2.0. The company reported compliance with its credit agreement covenants.
- Capital returns: The company paid $37.2 million of dividends during the nine months, including a $0.50-per-share special dividend and regular quarterly dividends of $0.32 per share. No shares were repurchased during the period.
Material changes and unusual items
- Nine-month sales and earnings increased, with improved gross margins, cost controls and higher Wholesale profitability. The latest quarter weakened as sales and written orders slowed against strong prior-year comparisons; Retail profitability declined more sharply than Wholesale profitability.
- Inventories declined $24.8 million from June 30, 2022, while customer deposits declined $28.3 million, reflecting shipments outpacing written orders as the company worked down backlog.
- An August 2022 sale-leaseback of a retail design center generated $8.1 million of proceeds. The company recognized $3.6 million in net gains over the nine-month period, including amortization of deferred gain; $3.5 million remained deferred at March 31, 2023. Restructuring and other impairment activity was a net gain of $2.7 million for the nine months.
- Foreign currency translation contributed to other comprehensive income. The filing reports no material investment impairments or material changes to risk factors.
Outlook, risks and contingencies
- Management described itself as cautiously optimistic but noted inflation, rising interest rates, recession concerns, global financial uncertainty and softer consumer demand. It provided no specific sales or earnings guidance in the supplied filing text.
- The company expected fiscal 2023 capital expenditures to be marginally above fiscal 2022 levels, for manufacturing efficiency, technology and design-center openings, relocations and renovations. Management expected liquidity and operating cash flow to be adequate for operating needs, investment and contractual obligations.
- Management said it expected to continue comparable quarterly dividends for the foreseeable future, subject to Board discretion, business conditions and credit-agreement restrictions.
- Risks include discretionary consumer spending, supply-chain and input-cost volatility, competition, labor availability, tariffs, cybersecurity and technology disruption, foreign operations, and possible impairment of retail real estate and lease assets. The company noted no identified material customer or supplier impact from 2023 bank failures.
- Management assessed the likelihood of existing legal claims or proceedings causing a material adverse effect as remote. The filing reports $3.3 million in unrecognized tax benefits; approximately $0.5 million could be resolved within 12 months.
Important facts for investors to verify
- Whether order trends and backlog continue to normalize, and whether shipments can convert remaining backlog without further weakening demand.
- Whether Retail sales and margins stabilize, and whether Wholesale margin gains persist as freight, materials and production conditions change.
- The composition and liquidity of the $95.2 million investment portfolio, alongside cash balances and the $121.0 million credit availability.
- The sustainability of dividends and planned capital spending if operating cash flow or consumer demand deteriorates.
- The effect of sale-leaseback gains and other adjustments when comparing GAAP results with management’s non-GAAP measures.