Ethan Allen Interiors Inc Q4 FY2022 Earnings Call

Good afternoon, and welcome to the Ethan Allen Fiscal 2022 Fourth Quarter Analyst Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. It is now my pleasure to introduce your host, Matt McNulty, Senior Vice President, CFO, and Treasurer. Thank you. You may begin.

Thank you, Hector. Good afternoon, everyone, and welcome to Ethan Allen's Analyst Conference Call for our fiscal 2022 fourth quarter and full-year results. Joining me today is Farooq Kathwari, our Chairman, President, and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to the financials midway through. 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 recorded and webcast live under the News & Events tab on the Investor Relations page of our ethanallen.com website. There, you will also find a copy of our press release, which contains reconciliations of non-GAAP financial measures referred to in this release and on this call. A replay of today's call will also be made available via phone and on our website. As a reminder, our comments today will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. 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 am pleased to now turn the call over to Mr. Kathwari.

Thank you, Matt, and good to have you all participate in our conference call. We are pleased and gratified to report very strong financial results for the quarter and the year ended June 30, 2022. For the quarter, our sales of $229.7 million increased 28.8%. And for the fiscal year, sales of $817.8 million increased 19.4%. Our operating margin for the quarter increased to 18.3%, and for the fiscal year increased to 16.9%. Our diluted EPS for the quarter was $1.23, an increase of 73.2%. And for the fiscal year, it was $4.05, an increase of 70.9%, all reflecting the strength of our vertically integrated structure and a strong team. Now back to Matt to provide more details on our financials, and after that, I will provide a brief overview of our areas of focus to continue our progress.

Thank you, Mr. Kathwari. As a reminder, we present our results both on a GAAP and non-GAAP basis. Non-GAAP results include restructuring initiatives, asset impairments, and other corporate actions and are further detailed in our press release. For the quarter, consolidated net sales increased 28.8% as a result of strong backlog, increased levels of manufacturing production that led to higher deliveries, and increasing receipt of offshore products. For the full fiscal 2022 year, sales rose 19.4% to $817.8 million. Wholesale segment written orders were down 10.7% compared to last year's fourth quarter, but were up 14.2% compared to the fourth quarter of 2019. For the full year, wholesale written orders were lower by 0.5%, but up 7.6% compared with the full 2019 year. Our retail written orders were down 19.5% for the quarter and 4.6% lower for the full fiscal year, primarily due to a very strong prior year comparable. However, when compared to 2019, retail orders were up 12.9% in the quarter and up 14.9% for the full year. The higher level of manufacturing productivity and related shipments of products helped reduce our backlog and improve delivery times during the year. Our wholesale backlog as of June 30, 2022, was $102 million, down 14.7% from a year ago, but still up $56 million or 120.8% from June 30, 2019. In the near term, our teams are effectively managing the business to work through this higher order backlog and to service our customers. Consolidated gross margin was 58.2% in the just completed fourth quarter and 59.3% for the full 2022 year, primarily due to strong retail segment sales, previous product pricing actions that are now working their way through our delivered sales, and higher manufacturing productivity, partially offset by higher input and freight costs. Increased wholesale contract business shipments lowered our retail sales mix from 84.5% of consolidated sales last year to 82.1% in this year's fourth quarter, reducing our quarterly consolidated gross margin while helping increase our operating margin. Our consolidated operating margin increased from 13.5% in the year-ago fourth quarter to 18.3% in the current year fourth quarter. For the 2022 full year, consolidated operating margin improved to 16.9%. Operating margin expansion over last year was primarily due to fixed-cost leverage on the higher sales volume, wholesale and retail gross margin improvements, and cost containment measures, including lower marketing costs and reduced G&A compensation expense as we operate more efficiently. Our SG&A expenses, when expressed as a percentage of sales, decreased from 44.7% last year to 39.8% in this year's fourth quarter, reflecting our strong operating leverage. For the full year, SG&A expenses decreased from 45.7% to 42.9% in 2022. This operating margin expansion, combined with double-digit delivered sales growth, helped generate record profits as diluted EPS for the fourth quarter was $1.23, up 73.2% from last year. On a full-year basis, diluted EPS rose 70.9% to $4.05 in 2022. Now turning to our liquidity and capital resources. We ended the fourth quarter with a strong balance sheet, including cash and investments of $121.1 million as of June 30 and no debt. We generated $29.4 million of cash from operating activities in the quarter due to strong net income and the conversion of inventory into delivered sales by increasing our manufacturing productivity. Capital expenditures were $4.4 million for the quarter and $13.4 million for the full year. We continue to invest capital in manufacturing plant upgrades, including additional machinery and equipment to further increase capacity, safety, and efficiency, construction of new retail design centers, updating the projections of many existing design centers, and in technology and infrastructure. We have continued to pay and increase our cash dividend. In April, our Board of Directors increased the regular quarterly cash dividend by 10% to $0.32 per share, which was subsequently paid in May, bringing our full-year 2022 total to $48.3 million. Also, as just announced yesterday, our Board declared a special cash dividend of $0.50 per share in addition to our regular quarterly dividend of $0.32, both of which will be paid on August 30. All in, these are great financial results in a volatile environment. With that, I will turn the call back over to Mr. Kathwari.

All right. Thank you, Matt. Our strong financial results of fiscal '22 benefited from many internal initiatives and external factors, strengthening our team at various levels in our vertically integrated structure, including strengthening our Board of Directors and the continued enhancement of our product offerings under the umbrella of Classics with a modern perspective. Our focus on quality has maintained our high level of standards across our product offerings, as about 75% are made in our North American workshops. This is a great advantage with many disruptions, cost increases, and challenges associated with offshore manufacturing. We are focusing on interior design services through our over 1,500 in-house interior designers. Combining technology with this service is a game changer in efficiency and service. We will continue the expansion of our design centers and investments in existing design centers. During fiscal 2022, we opened new state-of-the-art design centers in Westport, Connecticut and Walnut Creek, California in the U.S., as well as two new locations in South Korea. Some of these openings were delayed due to the availability of air conditioning and other materials. However, the good news is that we plan to open many more in fiscal 2023. At this very stage, we are in the process of opening six new design centers: one is a replacement in Manhattan, one is in Skokie, Illinois, which is near Chicago, another in the Villages, which is in Northern Florida, Syracuse, New York, San Jose, California, and Plaistow, New Hampshire. All of these are under our control and most are scheduled to open by the end—certainly before the end of this calendar year and perhaps some early in 2023, again depending upon the availability of materials for construction. Our continued investments in North American manufacturing have been critical. Our upholstery products are made in our operations in North Carolina and Mexico, while our wood products are made in our operations in Vermont and Honduras. We have continued to make them more efficient and productive, and we have a very strong, talented workforce, both in the United States and south of the border. Continued investments in our North American logistics have been ongoing. We continue to invest in our major national distribution operations, which are located in Virginia and North Carolina, as well as over 30 retail service centers across North America. We have maintained our ability to deliver our products to our retail network at one delivered cost despite significant increases in transportation and other costs. There has been continued strong growth in our contract business, especially with the U.S. government. This is what helped us increase our wholesale business and our margins, as Matt just mentioned. Strengthening our marketing initiatives has been key and has involved both internal and external marketing. Utilizing technology and digital mediums has helped us increase our exposure while reducing overall marketing costs and providing technology tools and advertising to our 1,500 interior designers, aiding our communications to clients at the local level. With this brief overview, I am now pleased to open for any questions or comments.

Thank you. At this time, we will be conducting a question-and-answer session. Your first question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please proceed with your question.

Yes. Hello, Cristina. How are you?

Hey, good afternoon. I’m doing well. Good afternoon, Farooq and Matt. I wanted to start with the demand environment. Can you talk about how the quarter progressed into July? Any change from your customers, what you're seeing there in behavior and your thoughts about the ability to maintain demand above pre-pandemic levels as we look forward over the next couple of quarters?

Yes, Cristina, it's a very important subject. Pleased to say that in July, although we have not—of course, I'm making this information available. Normally, we do not do this. But in July of this past month, we were able to do a little bit more than what we did in the previous year, which was good news. It was part of—it was a result of a number of factors. One is some of our marketing initiatives went from June to July, which helped us. So that also has an impact. In fact, to give you a perspective, we normally end our promotions at the end of the month, which was June 30. But this year, we decided to extend them right after Independence Day, around July 7. So we took some business away from June and brought it into July, ending with a strong July.

So I guess as a follow-up on the topic of promotions, do you expect to be more promotional year-over-year going forward just given that the industry, at least more towards the middle and low end of the price point, seems to be getting more promotional?

Cristina, we have maintained very strong offers to our clients throughout this period. Even with very strong demand last year, we did not change much of our offerings in terms of the savings to our clients in the last two or three years. Our objective is to continue; it's already very strong, and we will continue to do that. Obviously, as you mentioned, we keep in mind and take a look at what's happening in terms of consumer interest and traffic. But at this stage, we will keep our very strong programs which we have maintained for the last few years.

And then one other question. On the gross margin, I wanted to understand better the higher input costs that you are seeing that led to the gross margin decline year-over-year even with the volumes being much higher than what we've seen in the past couple of quarters?

Yes. A number of factors Matt mentioned. First is the fact that the costs have increased. Last quarter, we did see them stabilize, even start coming down. But for the three quarters before that, the costs of materials and transportation—bringing our lumber to our mills and bringing fabrics to our mills—have increased. It is slowly starting to come down, due to the factors of demand and all the pressures. So I think from a perspective of raw materials and labor, it has somewhat stabilized right now for us.

Thank you.

All right, Cristina. Thank you.

Your next question comes from Zach Donnelly with KeyBanc Capital Markets. Please proceed with your question.

Yes. Hello, Zach.

Well, congrats on the really strong quarter. I had a question regarding international performance. I know last quarter you had touched on, kind of, weaker written wholesale trends from China due to the rolling COVID lockdowns there. I was wondering if you can touch on any trends you might be seeing over there, if they are improving or not.

No, I think there have been and continue to be lots of challenges, especially in China. Interestingly, we have maintained a decent business in Korea, since we just opened up two new design centers there. We have continued to do reasonably good business. It was slower, but has made some improvement in other international markets. The biggest international market we have is furnishing American diplomats' homes all over the world. That's our biggest international business, and that has been very strong. As Matt mentioned, we have a very strong wholesale business, which tends to reduce the percentage of gross margins, but increases our operating margin, which is good news for us.

Got it. Understood, and then kind of as a follow-up to that. Regarding any of the imports or import costs you guys are seeing, I know you had touched on that last quarter, too, with freight and logistics costs increasing. Are you still seeing that? Or in terms of goods being imported, are you seeing any benefit from a stronger dollar at this point?

Yes. Actually, I would say that for us, the worst is over. In the last few months, if anything, costs are coming down. Keep in mind that 75% of the products we make are in North America, where we had major increases in transportation costs. Transportation costs take place going from our central warehouses in Virginia and North Carolina to California, Maine, and Florida, which all increased, but not to the same level as, for instance, a container cost going from $2,000 or $3,000 to $28,000 from East Asia. Those costs are coming down—still very high, but they are coming down. The good news is, as we said, we have relatively smaller exposure because of imports. We look forward to even reducing those costs that have taken place in North America.

Understood. Thank you.

All right. Any other questions or comments?

Ladies and gentlemen, there are no further questions at this time. I would like to turn the call over to Mr. Kathwari for closing remarks.

Well, thank you, and I'd like to again thank all our associates for their great performance. This is extremely encouraging. We know that going forward, there will be some challenges, but the good news is that we have a strong base manufacturing. Our interior designers are doing an amazing job, and I believe that we will have an opportunity to continue to make progress as we move forward. So thanks to all for joining, and thanks to all our teams.

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