Ethan Allen Interiors Q2 2024 Earnings Call Transcript

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Provided by Quartr
January 24, 2024

There are 6 speakers on the call.

Operator

Good afternoon, and welcome to the Ethan Allen Fiscal 20 24 Second Quarter Analyst Conference Call. Please note this conference is being recorded. It is now my pleasure to introduce you to your host, Mac McNulty, Senior Vice President, Chief Financial Officer and Treasurer. Thank you. You may begin.

Speaker 1

Thank you, Alicia. Good afternoon, and thank you for joining us today to discuss Ethan Allen's fiscal 2024 Second Quarter Results. With me today is Parooq Kefwari, our Chairman, President and CEO. Mr. Kefwari will open and close our prepared remarks, while I will speak to our financial performance midway through.

Speaker 1

After our prepared remarks, we will then open the call for your questions. Before we begin, I'd like to remind the audience that this call is being transcribed and webcast live under the News and Events tab on the Investor Relations page of our website. There, you will also find a copy of our press release, which contains reconciliations of non GAAP financial measures referred to on this call and in the press release. A replay of today's call will also be made available on our Investor Relations website. Our comments today may include forward looking statements that are subject to risks and uncertainties could cause actual results to differ materially.

Speaker 1

The most significant risk factors that could affect our future results are described in our annual report on Form 10 ks. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward looking matters discussed during this call. With that, I'm pleased to now turn the call over to Mr. Kapwari.

Speaker 2

Thanks, Matt, and good to have you all join. We are pleased to review our 2nd quarter results and our initiatives to continue to strengthen our enterprise and our strong financial results. We are very well positioned and after Matt provides a brief overview of our financial results For the Q2 ended December 31, 2023, I will review our initiatives and focus to continue to strengthen our enterprise and maintain strong financial performance. Matt?

Speaker 1

Thank you, Mr. Kathuari. As a reminder, we present our financial results on both the GAAP and non GAAP basis. Non GAAP results exclude restructuring initiatives, impairments and other corporate actions. We believe the non GAAP presentation better reflects underlying operating trends and performance of the business.

Speaker 1

Our financial results in the just completed second quarter are highlighted by strong margins, lower sales and a robust balance sheet. Despite operating in a softening economy, our operations produced positive financial results, which I will now discuss. Our consolidated net sales totaled 167 $300,000 reflecting lower delivered unit volume, reduced manufacturing from lower backlogs and a strong prior year comparable. Written order trends in the quarter were impacted by continued softening of the home furnishings market, reduced design center traffic and strong prior year demand. Wholesale segment written orders decreased 10.9% compared to last year, while Retail segment written orders were down 9.4%.

Speaker 1

We ended the quarter with wholesale backlog of $54,900,000 which is near pre pandemic levels. We improved customer lead times and reduce the number of weeks of backlog, bringing it more current, helping to reduce lead times within case goods with increased production in Vermont we recover from significant flooding that occurred in July 2023. Our Vermont Wood Furniture Plant has resumed operations and operated at approximately 75% capacity during the just completed quarter. Consolidated gross margin was 60.2%, Our 11th consecutive quarter that consolidated gross margin exceeded 58%. Our current quarter consolidated gross margin was impacted by deleveraging from lower unit volumes combined with a change in the sales and product mix, partially offset by lower input costs and headcount.

Speaker 1

Adjusted operating margin of 12.8 percent reflects lower sales, gross margin erosion and incremental costs from our design center refresh These costs were partially offset by lower headcount and our ability to maintain a disciplined approach to cost savings and expense control. Our SG and A expenses decreased 9.1% and equaled 47.3% of net sales, up from 42.9% last year due to fixed cost deleveraging. On a sequential basis, our adjusted operating margin improved 70 basis points as we increased sales by 2.1%, while reducing SG and A expenses by 1.4%. And when compared to our pre pandemic 2018 Q2, our operating margin has improved even more, up 4 basis points. Adjusted diluted EPS was $0.67 Our effective tax rate for the quarter was 25.5 percent comparable to 25.7 percent a year ago.

Speaker 1

Now turning to our liquidity. We ended the quarter with a robust balance sheet, including cash and investments of $167,800,000 and no outstanding debt. We generated $13,600,000 of cash from operating activities during the quarter, driven by strong profits, improved cash collections and lower inventory levels. In November 2023, we paid a regular quarterly cash dividend of $9,200,000 or $0.36 per share. Also, as just announced yesterday, our Board of Directors declared a regular quarterly cash dividend of $0.36 per share, which will be paid in February.

Speaker 1

We are also pleased to pay cash dividends while maintaining a strong cash position. In summary, our vertically integrated enterprise was able to produce a double digit operating margin during this post pandemic period marked by industry wide softening demand. Our business model generated strong positive cash flow and protected our operating margin as we remain committed to disciplined investments and strong expense management. With that, I will now turn the call back over to Mr. Kebware.

Speaker 2

Well, thank you, Matt. As we mentioned in our press release, we are now entering the post pandemic period. The pandemic period defined as fiscal years 2021 through 2023 reflected strong consumer focus on home, high demand and major increase in sales. We had record high backlogs, which are now returning to pre pandemic levels. For the Q2 ended December 31, 2023, Gross margins increased to 60.2% compared to 55.2% for the quarter ending December 31, 2018, that is a pre pandemic period.

Speaker 2

Cash and investments of 167.8 $1,000,000 increased from $38,800,000 5 years ago. During this period, we have returned $137,900,000 to shareholders in the form of cash dividends, an increase of 41 point $4,000,000 or 42.9 percent during the 3 year period leading up to the pandemic. Our inventory was reduced 11.5% and headcount reduced 31.1% from the pre pandemic levels of December 2018. Now going forward, we are well positioned. We continue to strengthen our offerings.

Speaker 2

And now that our supply chain has improved, we plan to start introducing new products. Our retail network continues to be strengthened. The repositioning of our design centers throughout North America has been a major undertaking and has placed us strongly. The interior design destination focus is very important to position us for growth. We have also reduced the space of our interior design centers, which reflected selling of large amounts of floor samples.

Speaker 2

This resulted in lower customer orders, which is a core of our North American manufacturing reflected in lower production. We have completed most of the repositioning of our design centers. Our marketing has been greatly enhanced, while major reduction of costs, Advertising expenses equal to 2% of net sales as compared to 4% prior to the pandemic. Despite lowered delivered sales, maintained gross margin of 60.2% and an operating margin of 12.8%. We have strengthened our talent in many areas of our vertically integrated enterprise.

Speaker 2

While the post pandemic period has seen consumer focus on other areas such as traveling, We believe that now consumers have again started to focus on their homes, which gives us an opportunity to continue our progress. We are positioned well and remain cautiously optimistic and very happy to open for any questions or comments.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Budd with Water Tower Research. Please proceed with your question.

Speaker 2

Yes. Hello, Budd. How are you?

Speaker 3

I'm good, Farooq. Hope you are as well.

Speaker 2

Yes. Thank you.

Speaker 3

A couple of questions, if I might. First, on just can you talk a little bit about any variance across the country in terms of The volume and the results geographically that you can point to?

Speaker 2

Yes, Budd. I don't think so. I think that there has been pretty consistent Across the country, if there were differences, it was more reflecting our strengths Our positioning in the market, but I cannot say that somehow that West East or South is doing better. I think this is pretty consistent.

Speaker 3

Okay. And you mentioned that the consumer is starting to refocus on the home, which implies that or I infer from that, that there might have been some difference in the quarter As you saw the cadence of orders or cadence of traffic to the website or the traffic in the stores, any comment or any color you can give on that?

Speaker 2

Yes, I would say that in most of 2023, especially the last 6 or 7 months, consumers were focused on other areas. They had already purchased a lot of home furnishings And their interest in other areas was evident. But what we saw actually in December is the month where we saw somewhat more of a, you might say, greater trends in traffic and interest in the home. So we believe that after 6 or 7 months of not having that focus, consumers are getting back into the home.

Speaker 3

So if I ask you if the quantitative question was December a positive month from a written order business at the retail network?

Speaker 2

Yes, it was.

Speaker 3

And do you want to put any more color to that like a number?

Speaker 2

No, Budd, it's still too early. I think as I said that we are in January and we also see positives and also there are challenge in some areas, but overall the perception is that consumers are now starting to get back in furnishing their homes. It's still early, but we are starting in a positive direction.

Speaker 3

Okay. And I noticed, of course, that the operating margin differential was significant quarter over quarter in both segments. You mentioned some deleverage In the which would imply from the manufacturing segment, I would think. Can you talk to What might have been other than volume? Were there any other issues other than unit volume going through that might have impacted that?

Speaker 2

No, I think margin went from 55.2 percent to 60.2 percent and that our operating margins went from 8.3% to 12.8%. Obviously, the year before, our operating margins were 18.1%, reflecting extremely high sales. But when you take a look at historically, this 12.8% is a pretty good operating margin.

Speaker 3

No doubt. And my last question, just talking you talked about floor sample sales that has an impact on both revenue and Margin, can you maybe help us get a feel of the color at the margin side and how much impact that might have had on the gross margin and the Freddie Margin on the Retail segment?

Speaker 2

Yes. I think there were a number of impacts it had. As I mentioned in my comments that substantial actually all of our North American manufacturing, almost all of it is custom. And when we decided to reposition ourselves as an interior design destination, one of the things we did just developed and implemented was reducing the floor space. Today, with our strong interior designers, With our technology, we don't need 20,000 square foot design centers.

Speaker 2

So we started we decided early last year, in 2023 calendar year, that we will start repositioning and we would then reduce the size from, let us say, many of them from 20,000 to 12,000 and the rest of that product, we called it designer floor samples and it was it helped us sell the products. Obviously, the margins were lower, but it also had another impact, it was on our manufacturing, because when we were selling Existing inventory, we were not making custom product. So good news is that most of that is over.

Speaker 3

Thank you. Well, thank you. Thank you very much. Good luck on the next upcoming quarters and the year.

Speaker 2

Thanks very much.

Operator

Thank you. Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Speaker 2

Hello, Brad. Is that you?

Speaker 3

Good afternoon.

Speaker 4

It's me. Good afternoon, Farooq. Good afternoon, Matt.

Speaker 2

Good afternoon and good to have you, Brad.

Speaker 4

Always a pleasure. Thanks for having us. I was first going to ask Farooq maybe if you could talk a little bit more about new products and the degree of the broader assortment that you expect to change in the year ahead and the degree of products on the floor in your galleries that you're expecting to change? Yes.

Speaker 2

I mean, this is a good question, Brad, because we are now in a very different environment than we were a year back, which is that The interior design destination created a situation where we had the same product, Almost the same product in all our design centers. So when we now introduce new products, We have to determine how much of that will go on the floor of our design centers and how much will be available for our interior designers to sell. Now we have just finished repositioning our design centers all over the country with the products. And what we are now going to do is this, we are going to utilize the new products to a great degree by making them available to our interior designers, Today, our interior designers are operating from smaller spaces and they are able to utilize Technology in creating room environments, designs with products that they don't have in their design centers. 10, 15 years back, we couldn't have done it.

Speaker 2

Had to put it in the stores or design centers. Today, this new product, I think at this stage, relatively small, we get into our floors, The rest will be available to our designers to use with customers because through our technology, They are digital technology. They are able to place that product in their designs with the customers.

Speaker 4

That's helpful. Thanks, Farooq. A couple of other questions if I could. Sometimes you all will give us some details About trends quarter to date, some of the data and feedback that we've been getting of late is that the trends have been a little bit softer in January, Somewhat impacted by the weather. Curious if you have any color you could share about recent trends?

Speaker 2

Yes, I think Brad that is important. We have the weather has been a major factor. And the good news is this, those areas where weather was not a major factor, we did okay. But in areas where weather was really bad, Sales have been down. So I would say that the weather impacted it, but I would believe that as we come out of this and especially we can see the difference actually between the first 12, 15 days of this month and the interest that is taking place now.

Speaker 2

So I think there will be much more interest, but the weather did impact our sales in those areas where the weather was very bad.

Speaker 4

That's helpful to hear and nice to hear that the Non weather affected regions have been stronger. And then I guess, Matt, occasionally you'll give us some Commentary on kind of the Q1 in terms of how to think about perhaps where revenues or margins may shape up. Anything for us to keep in mind as we're modeling this March quarter?

Speaker 2

Matt, what do you give them?

Speaker 1

I think the trends will stay relatively consistent with the past couple of quarters. The puts and takes that we're seeing would lead us to similar projection. Now we don't give guidance out there for Q3 or beyond, But I would anticipate it to be somewhat similar to what we the quarter we just ended up in.

Speaker 2

Yes. Brad, as you can see that even with Some decline in sales, we did relatively we had decent gross margins and operating margins. Obviously, when you compare it to the previous year when we had the benefits of all the pandemic sales, they were high. We have been able to maintain decent margins.

Speaker 4

Very helpful. Thanks so much and good luck this quarter.

Speaker 2

Thanks very much, Brad.

Operator

Thank you. Our next question comes from the line of Christina Fernandez with Telsey Advisory Group. Please proceed with your question.

Speaker 2

Hello, Christina. How are you?

Speaker 5

Hi, Farooq and Matt. Thank you for taking my questions. I just have a couple. I wanted to ask Of the $15,000,000 in delayed sales due to the flood in the summer that you had call out on the last call, How much of that were you able to deliver in the December quarter? And how should we think about the remaining amount?

Speaker 5

When is that going to flow through the income statement?

Speaker 2

Yes. Matt, you have been working on it very closely. What do you say?

Speaker 1

Yes. So to give a little background, we're pleased that the plant was able to get up to over 75% capacity in the quarter. As you recall back in July, it was shut down for quite a while. So we ramped up. We're in good shape now.

Speaker 1

We were able to deliver a portion of that amount, I would say roughly 25% to 35% of that amount we were delivering. Now what that does is it keeps our plants running efficiently up in Vermont. Given the softening of the demand, it was able to keep us continue going. So we're about a third of the way through and we'll deliver the rest of it in this upcoming quarter.

Speaker 2

Yes, Christina, this the Vermont situation had a number of implications because when in the last few years, we brought in a lot of technology. And we didn't think of the fact of what this climate change is going to do. So a lot of the technology was put on the 1st floor. It's a multi story. Then number of that equipment we had to repair, replace, it took time.

Speaker 2

And now some of that equipment is going on the 2nd floor we don't know what's going to happen. So most of that equipment is in. And I think that as we continue, we had to purchase new equipment and also to repair. But I think in the next few weeks, more or less, they'll be back to normal.

Speaker 5

And then the second question I had, was there any specific amount as far as the store refreshes that was one time or that was expensed this quarter that will not repeat going forward?

Speaker 2

Yes. I mean, Matt, I mean, we are really talking in terms of Almost what is $1,000,000 About half that number, about $400,000 $500,000 or so because it was really paint And some minor changes, some flooring and things of that nature. The rest of course was products. And the impact really was selling of the floor products, which had an impact, certainly it increased sales, but it had an impact on our gross margins, it also has an impact, as I said earlier, on our manufacturing. But $500,000 or so was used mostly on paint.

Speaker 5

Okay. And then the last question I had, anything, any updates as far as what you're seeing from a cost Whether it's input costs, materials or freight that we should be aware as we move through 2024?

Speaker 2

Yes, Christina, look at what's happening right now in the transportation in the Suez Canal. Now, fortunately for us, so that is going to have some impact. But because of the fact that 75% of our products are made in North America, We are going to be less impacted, but if we had most of our products coming through from offshore, it would be an issue. We did see overall container rates had come down from, let's say, From East Asia to North America, they have gone up to $30,000 From $4,000 $5,000 They came down to 5000, 6000, but now you can start seeing they're starting to increase. Our exposure is limited because of the fact that we are involved with making our products in North America.

Speaker 2

And then we ship our products through our own network at one delivered price nationally. That also had an impact. During the COVID, we did not change any power prices. I mean, we did not change any, what I would say, any special charges. We maintained and it was absorbed all those increased costs, whether it was international costs or our domestic costs, Our high volumes helped us, but now most of those costs are back to normal, they've come down quite a bit And we will see some impact of what is taking place internationally.

Speaker 2

For us, it is somewhat smaller than most likely others.

Speaker 5

Thank you. Those are all the questions I had.

Speaker 2

All right. Thanks very much. And Alisa, anybody else?

Operator

No, there is nobody else in the queue at this time.

Speaker 2

All right. Well, thanks for joining and look forward to continuing Our progress in terms of repositioning our brand is very excited. In fact, today I have Twelve senior members of our retail division here are discussing our programs and how we need to position ourselves And they are very much involved in making sure that we take all these great advantages we have of repositioning and that we continue our growth. So thank you very much for participating.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Ethan Allen Interiors Q2 2024
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