Ethan Allen Interiors Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2017; comparisons are with the corresponding 2016 periods. Amounts are in millions except per-share data.
Business context
Ethan Allen designs, manufactures, sources, and sells home furnishings through wholesale and Company-operated retail operations, its website, and a network of about 300 design centers. The company says it manufactures approximately 75% of its products in North America and completed a major product-line transformation through November 2016.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $180.5 | $190.6 | $568.5 | $588.5 |
| Gross profit / margin | $94.7 / 52.5% | $105.7 / 55.5% | $311.3 / 54.8% | $326.4 / 55.5% |
| Operating income / margin | $3.9 / 2.2% | $16.0 / 8.4% | $39.4 / 6.9% | $63.4 / 10.8% |
| Net income / margin | $2.3 / 1.2% | $10.2 / 5.3% | $24.5 / 4.3% | $39.9 / 6.8% |
| Diluted EPS | $0.08 | $0.36 | $0.88 | $1.40 |
- Quarterly sales fell 5.3%; nine-month sales fell 3.4%. Management attributed weakness mainly to lower retail and wholesale sales, challenging U.S. retail conditions, and comparison with a strong prior-year quarter. Internet and international sales provided partial offsets.
- Quarterly retail sales declined 6.7%, with comparable retail sales down 8.2%; written business decreased 7.7% overall and 10.9% at comparable design centers. Wholesale sales fell 5.4%. For the nine months, retail sales declined 2.7% and wholesale sales 6.9%.
- Quarterly SG&A rose 1.2% to $90.8 million, or 50.3% of sales versus 47.1%. Nine-month SG&A rose 3.4% to $272.0 million, or 47.8% of sales versus 44.7%.
- Retail segment operating loss was $7.3 million for the quarter and $4.1 million for the nine months, versus prior-period income of $0.6 million and $9.0 million. Wholesale operating income was $9.7 million for the quarter and $40.4 million year to date, both lower than the prior year.
Cash flow, liquidity, and debt
- For the nine months, operating cash flow was $53.8 million, up from $38.6 million. Investing used $13.2 million, including $15.1 million of capital expenditures; financing used $29.5 million.
- Cash and cash equivalents were $63.7 million at March 31, 2017, versus $52.7 million at June 30, 2016. Restricted cash and investments were $7.3 million. Working capital was $130.2 million; the current ratio was 2.06.
- Total debt obligations, including capital leases, were $30.7 million; reported debt net of unamortized issuance costs was $30.1 million. The company repaid $10.0 million on its revolver in February. Facility availability was $99.9 million; the facility expires October 2019. The company reported covenant compliance and exemption from its fixed-charge coverage covenant.
- Nine-month dividends paid were $14.7 million ($0.53 per share), compared with $11.9 million ($0.42 per share). It repurchased 107,700 shares for $3.4 million; no shares were repurchased during the quarter.
Material changes, outlook, and risks
- A $6.4 million charge related to clearance and discontinued inventory intended for donation reduced quarterly gross margin by 3.5 percentage points, according to management. The charge, lower sales, and higher expenses contributed to the sharp decline in operating and net income.
- Management cited higher advertising costs, costs for new design centers, and Ethan Allen | Disney launch expenses; prior-year real-estate gains also affected comparisons. Year-to-date, the net increase of five design centers added occupancy and warehouse costs.
- No numerical earnings or sales guidance was provided. Management described its outlook as “cautiously optimistic,” citing product and marketing programs, retail-network repositioning, online and international expansion, and its vertically integrated model. The planned doubling of the upholstery facility in Mexico was expected to be completed by the end of calendar 2017.
- Risks identified include consumer spending and furniture demand, competition and pricing pressure, raw-material and transportation costs, interest rates, financing availability, and execution of marketing and design-center plans. The company has $29.4 million of floating-rate debt and does not hedge interest-rate exposure.
- Management said routine litigation and environmental matters were not expected to have a material adverse effect. The consumer-credit program includes contingent obligations relating to participating independent retailers, but no collateral was required at quarter-end. Tax audits covering U.S. years 2012–2014 were ongoing; management did not expect significant changes in uncertain tax benefits over the next year.
Important facts for investors to verify
- Whether weaker comparable retail sales and written orders persist, and whether online and international growth can offset the decline.
- Whether margins recover after the $6.4 million inventory charge and as advertising, new-center, and product-launch costs evolve.
- Execution, cost, and expected benefits of the Mexico upholstery-capacity expansion and other capital spending.
- Cash generation and the company’s ability to sustain dividends and other capital returns amid lower earnings and floating-rate debt.
- Final effects, if any, of tax audits and the consumer-credit program’s contingent obligations.