Ethan Allen Interiors Inc Q4 FY2025 Earnings Call

Good afternoon, and welcome to the Ethan Allen Fiscal 2025 Fourth Quarter Analysis Conference Call. Please note, this conference is being recorded. It is now my pleasure to introduce your host, Matt McNulty, Senior Vice President, Chief Financial Officer and Treasurer. Thank you. You may begin.

Thank you, operator. Good afternoon, and thank you for joining us today to discuss Ethan Allen's Fiscal 2025 Full Year and Fourth Quarter Results. With me today is Farooq Kathwari, our Chairman, President and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will then open the call up for your questions. Before we begin, I'd like to remind the audience that this call is being webcast live under the News and Events tab within our Investor Relations website. A replay and transcript of today's call will also be made available on our Investor Relations website. There, you'll find a copy of today's press release, which contains reconciliations of non-GAAP financial measures referred to on this call and in the press release. Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our most recent annual report on Form 10-K. 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. We are gratified at the hard work of our team and our unique vertically integrated structure, which continues to enable us to have strong results and position us for growth. After Matt provides a brief overview of our fourth quarter and fiscal 2025 financial results, I will discuss our initiatives to continue to position us for growth and strong financials. Matt?

Thank you, Mr. Kathwari. Our financial performance during fiscal 2025 was highlighted by strong margins, positive operating cash flow and a robust balance sheet. Despite operating in a challenging environment, our operations produced positive financial results, which I will now discuss. Our fiscal 2025 consolidated net sales were $614.6 million, which included fourth quarter sales of $160.4 million. Our sales reflect higher average ticket prices and fewer returns, offset by lower delivered unit volume, reduced backlog, less traffic and fewer contract sales. As noted in our earnings release, the home furnishings industry has been challenged. However, overall demand patterns began to show signs of improvement during the just-completed fourth quarter as Retail written orders rose by 1.6%, driven by the strength of new product introductions, promotional levels, elevated clearance and the pause of additional tariffs. Wholesale orders decreased by 6.8% during the quarter as the segment was impacted by our contract business. We ended the fiscal year with Wholesale backlog of $48.9 million, reflecting historical norms. A lower volume of contract orders, combined with improved customer lead times helped to reduce our backlog. For the full year, our consolidated gross margin was 60.5%, comparable to 60.8% last year. In the just-completed fourth quarter, our consolidated gross margin was 59.9%, which was impacted by fewer delivered orders, higher clearance sales, increased promotional activity and lower manufacturing production, partially offset by a change in sales mix, lower raw material input costs, reduced head count and a higher average ticket price. Our head count totaled 3,211 at fiscal year-end, a decrease of 5.7% from a year ago as we continue to identify operational efficiencies and streamline workflows. For the full year, our adjusted operating margin was 10.2%, while our fourth quarter operating margin was 9.7%. These strong operating margins reflect our ability to tightly manage expenses while increasing advertising spend. Compared to our pre-pandemic 2019 fourth quarter, adjusted operating margin has improved 110 basis points. On a full year basis, adjusted EPS was $2.04. Our fourth quarter adjusted EPS was $0.49. Our effective tax rate was 25.2% for the full year and 26.4% for the quarter, which varies from the 21% federal statutory rate due to state taxes and recording of valuation allowance on retail deferred tax assets. Now turning to our liquidity. We ended the year with a robust balance sheet, including cash and investments of $196.2 million and no outstanding debt. We generated $24.8 million in operating cash flow during the quarter, which brought our full year total to $61.7 million. We also reduced our inventory levels as clearance sales helped to offset new product introductions. Capital expenditures were $11.3 million, including $1.9 million during the just-completed fourth quarter as we invested capital into manufacturing, retail and technology. We are confident in the investments we are making for the future but recognize the need to remain cognizant of the uncertain economic environment. We continued our practice of paying quarterly cash dividends. In May, our Board declared a regular quarterly cash dividend of $0.39 per share, which was subsequently paid and brought our total annual dividend paid to $50.1 million. Also, as announced earlier today, our Board declared a special cash dividend of $0.25 per share in addition to a regular quarterly cash dividend of $0.39 per share, both of which will be paid in August. This recent action marks the fifth consecutive year we have paid a special cash dividend. In summary, our vertically integrated business delivered positive fiscal 2025 results. We are confident in the strength of our business model as Ethan Allen has successfully navigated challenging times to serve our clients and deliver value to our shareholders throughout its 93-year history. Looking ahead, we remain focused on executing our strategic initiatives in the face of ongoing macro uncertainty. Our robust balance sheet and financial stability provide a solid foundation and positions us well as we head into fiscal 2026. With that, I will now turn the call back over to Mr. Kathwari.

Thank you, Matt. As we have conveyed, the focus of our enterprise continues to strengthen the five key areas of talent, marketing, service, technology and social responsibility. Great talent, we are gratified to have a strong talent in our vertically integrated enterprise. We continue to make about 75% of our furniture in our North American workshops located in Vermont, North Carolina, Central Mexico and Honduras. Keep in mind, about 20 years back, we had 18 manufacturing locations. Also, our unique logistics operations deliver what we call white glove delivery at one cost to our clients in North America. This is unique. In national logistics, we have replaced 10 national locations with 2 locations and in Retail, reduced about 100 warehouses to about 20. In our Retail network, about 75% of our 160 Retail leaders have either been relocated or made smaller due to the impact of technology, customization and especially a strong interior design professional network. Technology continues to play a central role in all our operations from manufacturing, logistics and especially marketing. For example, about 15 years back, we spent major dollars in national television and today most of that has been replaced by digital and print magazines, including distributing about 10 million 36-page digital magazines every 2 weeks. We have also continued to strengthen our product programs and introduced new products on a planned basis. Financially, we have maintained strong results; as Matt mentioned, we have maintained gross margins of 59.9% for the quarter and 60.5% for the year. Our operating margins are at 9.7% for the quarter and 10.2% for the year. This is despite a lot of turmoil in the industry and, in fact, in the economy. We've also been able to maintain strong cash. We ended the year with $196 million and no debt. And as Matt said, we continue to give out very strong cash dividends. With this, I'm very happy to open up for any questions or comments.

Our first question comes from Brad Thomas with KeyBanc Capital Markets Inc.

My first question is about the industry trends and what you have been observing. Could you provide more details about your experiences throughout the quarter? It appears that your orders saw a notable increase from the first quarter. I would appreciate your insights on what you are observing in the market and the feedback you are getting from your customers.

Yes. As I had mentioned, these are challenging times, so many uncertainties with what's happening with the economy, the international conflicts, tariffs and everything else. But I think that having said all of those things, and Matt had also mentioned, we were very pleased that our written orders for the quarter were up 1.6% despite all these challenges. So I think our people did a good job increasing our written orders in our Retail division in a very tough environment.

That's great. And I was wondering if you could help us think about how tariffs have been affecting your business. I know that you are so important as a U.S. manufacturer, but if you could talk about how, if at all, that's affecting your business directly and how you think it maybe is affecting the competitive landscape in terms of price increases that you maybe have seen from the competition?

Yes. This has been really an interesting environment to operate. Fortunately, Brad, we have close to 70% of our furniture or more made in our North American operations in Vermont, Carolinas, Mexico, and Honduras. Obviously, there are no tariffs in the United States. And also because of the North American trade treaty, we are not impacted by tariffs in Mexico. There are smaller tariffs in Honduras. So then about 30% of the products in furniture come from overseas, in places like Indonesia, mostly for furniture, and some from Vietnam. And I think between the two countries, that's most likely some impact there. Our accessory products do come from all over the world. And there, of course, we have been impacted. But overall, because of the nature of our operations, our impact of this whole issue of tariffs has been very limited on us.

That's great. And then you all have done a lot to control costs in this difficult environment, Farooq. I was wondering if you could help us think about the operating costs of the business. And are there incremental areas where you think there's particular efficiencies and costs to go after? Or do you feel like this is a good level to hold at as we cross our fingers that we get a recovery on the horizon here?

No, I think these are very important issues. It relates to the technology, and our vertical integration has been crucial in managing our costs. Since 2019, we have reduced our headcount by about 35%. In the last fiscal year, we reduced our headcount by around 5% or 6%. This is all thanks to retaining strong talent, and technology has enabled this. It’s remarkable to realize that we have almost 30% to 35% fewer employees today compared to 2019, largely attributable to technology. This development also affects our marketing. We previously spent nearly $30 million distributing print magazines. Now, we handle all of that digitally, and most of our advertising is through digital channels instead of print. The changes in our expenditures are impressive. We’ve managed to maintain our gross margin, particularly because of our unique manufacturing structure in North America and strong overseas partners. We have consistently reduced our operating expenses, which has helped us sustain stronger gross margins, operating margins, and particularly good cash flow.

Our next question comes from the line of Cristina Fernandez with Telsey Advisory Group.

I had a follow-up question on the trends and also related to gross margin. On the prepared remarks, you talked about some clearance activity and promotions in the quarter. Can you expand on how you're using promotions to drive sales? Were they incremental year-over-year? And what's your approach for the remainder of the year?

Yes. As I said, fortunately, we did not have much excess inventory to sell. Because of that, we've been able to maintain our gross margins. Our gross margins for the quarter were at 60%, and they were 60.8% in the previous year. So we've been able to maintain strong gross margins. Our clearance and everything has been relatively small because close to 80% of our products are custom. Keep in mind, only 15 years back, 80% of our products were sold from stock. The customization is tremendously important. That also has implications for our national distribution. When I mentioned we had many major national distribution centers, we now have moved to one major one. This transition, going from roughly 70% inventory stock to 80% customization, has resulted in the reduction of not only inventory but all the space that we needed to stock it and to ship it.

And then my second question is regarding price increases. You took some earlier in the year. Are you seeing any impact on unit sales? And with the tariffs increasing for some countries like Vietnam, do you plan to have to make more price increases over the next 6 to 12 months?

Yes, we are watching it carefully. We have been able to maintain our pricing with only small increases. Again, because close to 80% is made right here in North America. If that was not the case, where some of our products are made in a country like Indonesia, we would be more vulnerable. We are aware of the tariffs announced recently and will monitor their impact. Fortunately, our partners also contribute to mitigating cost increases when these situations arise. Overall, even with a decrease in volume, we were able to maintain strong margins thanks to the efficiency of our operations.

And my last question, following on from Brad's question about trends for the quarter. When you look at the increase in Retail orders, the 1.6%, what do you attribute that? Was that better customer traffic as the quarter progressed, some of the new introductions? More details there would be helpful.

Yes, it was a combination of factors. One was the fact that as the quarter progressed, we saw more consumer positive attitudes. I think that helped. I think we have a very strong network of associates. They also maintain a very strong relationship with our clients. That also helped. We've gone through, as you know, somewhat of a challenging environment for our industry and for most companies. The reason we have been able to do well is because of our structure and vertical integration. It has been tremendously important to combine great personal service and technology. In fact, we slightly increased our marketing expenditures. Matt, we went from 2.8% to 3.4% of sales in advertising expenditures. We saw that increase bringing more traffic and sales.

And it appears we may have reached the end of the question-and-answer session. So therefore, I'll turn it back over to you for closing remarks.

Thank you very much. Again, I want to thank all of our team members for doing an amazing job in tough conditions. Fortunately, our positioning is such that it gives us our vertical integration, maintaining 80% manufacturing and having our design centers. Keep in mind also, we relocated many of our design centers, reducing our size by 30% or more in the last 2 to 3 years. Our design centers have been renovated and relocated where needed. We have also opened up a few new locations and have a few more coming up. Many of them are relocations, and we'll continue to do that. Again, thanks for everybody, and thanks to the support of our team and the work that they do, and I look forward to continuing our progress. Thank you again.

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