6 takeaways from Ethan Allen’s latest earnings call

Digital and other initiatives aimed at boosting efficiencies prepare company for growth in the coming year and beyond

DANBURY, Conn. — Like other home furnishings resources, retailers and wholesalers alike, Ethan Allen has faced big challenges over the past year, particularly diminished demand on the retail and wholesale sides of its business.

In summary, the company’s overall net sales of $168.6 million during the quarter were down 10%, factoring in a 7.1% decrease in retail sales and a 20.3% decrease on the wholesale side.

For the full year, the company’s consolidated sales of $646.2 million were down 18.3%, including an 18.4% decrease in retail net sales and a 17.5% drop in wholesale net sales.

Of course, these decreases are to be viewed against some of the breakneck pace of home furnishings sales during the pandemic when consumer demand for furniture was at near-record levels throughout the industry.

Farooq Kathwari

And despite these decreases, the company remains profitable, and ended the quarter with cash and investments totaling $195.8 million, up from $172.7 million last year and $20.8 million five years ago, according to company Chairman, President and CEO Farooq Kathwari. Its gross margins and operating margins of 60.8% and 13.1% respectively remain relatively strong as it also continues to pay dividends to its shareholders, totaling $50.3 million.

The question in the weeks and months ahead is whether the company will not only continue to maintain its margins, but also whether it will be able to grow its top-line sales accordingly. Much of this will depend on the strength of the housing market along with other issues constraining consumer demand for home furnishings, including personal income levels and perceived inflation.

But during its recent conference call, the company highlighted some key initiatives aimed at achieving sales growth throughout the coming months and quarters.

Here are several takeaways that offer an insight into where the company is headed.

+ Rightsizing the number and size of its design centers. According to Kathwari, the company will limit the number of design centers moving forward to three to five per year and keep these to a maximum of 12,500 square feet, compared with 20,000 previously. Newer locations, he added, are anywhere from 6,000 to 9,000 square feet. Another key goal is to make sure the look is consistent between these locations, regardless of whether they are in Long Island, California or Florida.

+ Continue its focus on product development. As a manufacturer, the company has the advantage of knowing what sells through its own retail stores, which thus guides what products it brings to the marketplace, including its 172 design centers. With this data-driven approach, another key advantage is speed to market, which flows the product directly to those floors from its domestic operations. According to Kathwari, the company is now developing its next major introduction for the spring of 2025.

+ Technology remains a critical ingredient to the success of its manufacturing and retail operations. As part of its latest financial earnings release, the company noted that it ended the year with 3,404 total associates, down 9.2% from a year ago and 28.1% less than June 2019. While Kathwari said that human talent is key to its success throughout the organization, investments in technology have made the company more nimble and efficient as a vertically integrated manufacturer. That said, the company continues to produce 75% of its product mix in its North American facilities.

+ Investments in technology have also reduced marketing expenses from 4% of overall sales five years ago to 2.8% today. Kathwari also noted that the company reaches some 9 million households every two weeks with its 36-page digital magazine. And while it also continues to publish a printed magazine, and an annual Style Book, much of its message is also communicated by its team of interior designers on social media. “The ability to utilize technology in marketing is a game changer,” Kathwari said.

+ Shoring up its balance sheet helps ensure a path to long-term success. During the call, Matt McNulty, chief financial officer and senior vice president, noted that the company ended the quarter with cash and investments of $195.8 million and no outstanding debt. He added that the company generated $26.2 million in cash from operating activities during the fourth quarter bringing the total for the year to $80.2 million. In addition, the company reduced its inventory levels by $7.2 million and had capital expenditures of $9.6 million for the full year, including $2.1 million in the fourth quarter, “as we continue to invest capital in manufacturing, retail technology and infrastructure.”

+ Wholesale backlogs of $53.5 million have also reached more historical levels, meaning that the company is able to deliver product to its stores and consumers more quickly. Note: In response to a question from Budd Bugatch, of Water Tower Research, the company said it does not historically provide retail backlogs, but noted that they are typically a little under two times customer deposits on its balance sheets.

Thus, while the company’s sales and profits are down compared to the same period last year, the company appears poised to grow and rebound in the months and years ahead. Now if only the economy, including interest rates and the housing market, would cooperate. Ethan Allen isn’t the only one in the industry waiting for that to happen.

Thomas Russell

Home News Now Editor-in-Chief Thomas Russell has covered the furniture industry for 25 years at various daily and weekly consumer and trade publications. He can be reached at tom@homenewsnow.com and at 336-508-4616.

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