Good afternoon and welcome to the Ethan Allen Fiscal 2026 Second Quarter Analyst Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. It is now my pleasure to introduce you to our host, Matt McNulty, Senior your Vice President, Chief Financial Officer, and Treasurer. Thank you. You may begin.
Thank you, Operator. Good afternoon, and thank you all for joining us today to discuss Ethan Allen's Fiscal 2026 Second Quarter Results. With me today is Baruch 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 I 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 the 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 quarterly report on Form 10-Q. 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. Cathwaris. Well, thank you, Matt,
and thank you for joining our second quarter ending December 31 2025 earnings call by the government shutdown resulting in lower consumer confidence centers and lower orders at retail and especially from the U.S. government by a very strong previous year comparison. The good news is that we have started the third quarter and positive written sales in January As we mentioned in our press release, major changes to our vertically integrated structure, including our retail network, manufacturing, marketing, logistics, second quarter financial results. I will provide more details of our business, of our initiative to grow our business, and then we'll open up for any questions or comments. Matt, please proceed.
Thank you, Mr. Kefwari. Our financial performance in the just-completed second quarter was highlighted by a robust balance sheet and strong margins despite a challenging environment. Our consolidated net sales of $149.9 million benefited from a higher starting retail backlog, a higher average ticket price, incremental clearance sales, and fewer returns. These increases were offset by fewer contract sales and lower demand. Retail written orders declined 17.9%, while wholesale orders were 19.3% lower than a year ago, with both metrics declining sequentially throughout the quarter as our prior year comparables got tougher. Our demand trends reflect a combination of macroeconomic challenges and a difficult prior year comparison, as well as an 11% decline in design center traffic. With that said, we are pleased to see positive written order growth in January. We ended the quarter with wholesale backlog of $49.8 million, a lower volume of contract orders combined with improved customer lead times to help reduce our backlog. Our consolidated gross margin was 60.9%, up 60 basis points from a year ago due to a change in sales mix, reduced headcount, a higher average ticket price, and lower inbound rate, partially offset by increased promotional activity, incremental tariffs, and elevated clearance sales. Our adjusted operating income was $13.5 million with an operating margin of 9%. For historical context, adjusted operating margin during the pre-pandemic 2019 second quarter was 5.4%, or 360 points lower than it is today. Our current year operating margin was impacted by fixed cost deleveraging from lower sales, combined with delivering out orders with higher promotions, additional marketing, higher occupancy costs from new design centers, increased employee benefit costs, as well as incremental tariffs. These increases were partially offset by disciplined approach to controlling operating expenses, including reduced headcount. At quarter end, we had 3,149 total associates, a decrease of 5.1% from a year ago. A juxted diluted EPS was $0.44. Our effective tax rate was 25.3%, which varies from the 21% federal statutory rate, primarily due to state taxes. Now turning to our liquidity. We ended the quarter with a robust balance sheet, including total cash and investments of $179.3 million with no debt. Our liquidity position remained strong, although we generated an operating cash flow deficit of $1.8 million during the quarter due to changes in working capital, including lower customer deposits and the timing of our biweekly payroll. In November, we paid a regular quarterly cash dividend of $10 million, or $0.39 per share. Also, as just announced in our earnings release, our board declared a regular quarterly cash dividend of $0.39 per share, which will be paid in February. We are pleased to continue to pay cash dividends while maintaining a strong cash position. Before closing, I'd like to spend a few moments on tariffs. We are exposed to tariffs that's on raw materials and finished goods we import into the U.S. Recently enacted Section 232 tariffs made effective in mid-October have resulted in manufactured upholstered wood products being subject to a 25% tariff. Our non-U.S. manufactured case goods are currently subject to a 10% tariff that is partially reduced based on the consumption of U.S. source materials. With regards to imports, our exposure is primarily concentrated on imported case goods from Indonesia, black fabrics from Asia, and imported accents consisting of lighting and area rugs. To help offset some of the tariff impacts, we worked with our vendors on cost sharing, performed additional sourcing diversification, and recently pushed through selective retail price increases, which averaged 5%. These carefully measured price increases were applied strategically across select SKUs rather than broadly. We will continue to review pricing and will respond quickly and thoughtfully as conditions evolve. We believe our North American manufacturing, which represents approximately 75% of the furniture we sell, provides us with a strategic advantage. By controlling more aspects of the production process within North America, we believe we can mitigate some of our tariff exposure. As I conclude my prepared remarks, we are pleased that our disciplined investments and strong expense management are helping to build a fundamentally stronger company. We delivered another strong quarter and entered the 2026 calendar year with a debt-free balance sheet, strong liquidity, and a proven ability to provide clients with custom furniture and complementary design services. With that, I will now turn the call back over to Mr. Kefwaris.
Well, thank you, Matt. I'm pleased to share our initiative. Our key focus remains to continue to strengthen our unique vertically integrated structure, including continue to strengthen our new products introduced in the fall of last year. Our products continue to be developed under the umbrella of classics made in our manufacturing workshops in North America. All products made in North America, I'm talking about furniture, are manufacturing and provides strong. We continue to utilize including direct mail and digital advertising by 25%, mostly in digital mediums. While we did not get the full benefit in our second quarter of this increased marketing spend due to economic slowdown, we feel it will benefit us in the future. The 72 design centers in North America with a modern project. The production of the sites due to strong interior design talent and digital technology. The furniture is made in our North American facilities. Combination of strong productivity. Again, I repeat that all our manufacturing in North America You know 20 years back 80% was in stock that that we sold furniture Especially what we call case goods used to be a very important initiative We deliver our thank you
What that will now be conducting a question and answer session if you'd like to ask a question
Please press star one on your telephone keypad Confirmation to indicate that your line is in the question queue you may press star two to remove yourself from the queue for participants using speaker equipment and may be necessary to pick up the handset before
pressing the star keys. One moment while we poll for questions. And our first question comes from
the line of Taylor Zick with KeyBank Capital Markets. Please proceed with your question.
Hi, Farouk. I'm doing well. How are you doing? Good. I just wanted to ask about the retail written orders during the quarter. You noted that the monthly trends decelerated um during the quarter just due to difficult comparisons but as you kind of look through that do you have any sense of what the underlying trends were during
the second quarter yes i think matt can give you the exact numbers of the retail i've been from our retail uh business in the quarter was somewhat impacted but matt what are the numbers
yes each sequential month during q2 uh decreased by a higher higher percentage we don't typically disclosed the breakdown on a month-to-month basis, but it did blend to an average decrease of 18%. But we started out stronger in October, and it decelerated more so for the government shutdown combined with the prior year comparison. If you recall, November, December last year were very strong, so it was a difficult prior year comparison. If we go back two years to fiscal 24, December, that calendar year 23, we were only down a very low single digit compared to this past
a year ago as much higher written. Certainly good to see, you know, the positive rent comps here in January. That's great. And Farouk, maybe for my second question, can you touch a bit on the contract side of the business? You have obviously cited the government shutdown as sort of a headwind here. But, you know, since the government has reopened, have you seen any improvement in the orders or does those you know remain relatively uh soft well during the last quarter you know
the order stopped that of course had a major impact on our results last quarter because of the fact that you know the government's being closed they were not sending any orders the good news is and they are coming in uh reasonably high but not as strong as you know we had last year because it is now taking the government, all the embassies, all over the world a little time to get back on. So, yes, we are seeing new orders. It's a little bit lower than last year, but every week it's growing.
Maybe one last question for me before I turn it over to others. You know, the company continues to put up, you know, very strong gross margins here despite, you know, the difficult environment and tariffs and all that. So how should we think about the sustainability of these margins as we, you know, look to 3Q and 4Q?
had? I think we have a good opportunity of maintaining them because of the fact that a lot of work has been done at all levels in terms of combining impacted our retail network, our manufacturing, our logistics. So I believe that opportunity of maintaining them.
Thank you. And our next question comes from the line of Christina Fernandez with Telsea
advisory group please receive your questions hi good afternoon hi Farouk hi Matt I appreciate all the color on the tariffs Matt that you gave I wanted to see if you could give more detail as far as I guess what the total impact is and you mentioned that you were mitigating some of it so I want to see if you can give some color on what the unmitigated amount is and how should we think about that impact as we move forward do you think with the price increase in some of the changes you've made you can mitigate the cost or we're going to see some impact flowing through the you know the
cost base sure yeah i'm happy to answer that one so there's a couple strategies we took it's really a three-pronged approach to trying to mitigate some of the tariff impact one is vendor cost sharing or partner cost sharing reaching out to partners to help negotiate and sharing some of the cost. That we did over the last several months and was very successful. Another strategy that we've employed is supplier sourcing diversification, trying to source from other countries, which we've done to some extent. And then the third prong is really the retail price increases, which I mentioned we pushed through about a blended average of 5% in October of this past quarter increase. Those did help mitigate some of the tariff impact. It did not do all of it. Now price increases were late in the beginning of October, but late from a delivered perspective. A lot of those orders did not get delivered out fully in the quarter. So, we'll see a little bit more of a benefit from price increases moving forward. With that said, there will still be some more headwinds. You mentioned the Section 232 tariffs that came into play mid-October. So, we hadn't really experienced a full quarter worth of those. That's probably the largest. That's about 40% of our overall tariff exposure is there. And then the IEPA tariffs, which are currently under review by the Supreme Court, it's about 40%, and the remainder is Section 301 tariffs. I would say all in, we're still seeing a headwind. We don't disclose the actual percentage of the headwind overall, but I think the steps we've taken will help mitigate a significant amount of that, plus our current structure of being 75% in North America does help mitigate it naturally that way.
Yes, and also, of course, we are not counting on it, but the U.S. Supreme Court has still not decided on the validity of the IEPA tariffs. And it's possible that it goes away, and that will impact 40% of our exposure if they take it down completely, with an annual savings of approximately $8 million. But again, as I said, we are hoping that happens, but our plans are to keep them on the side while making all changes so that we are able to maintain strong margins.
Thank you for that, caller. I had a question on the January trend relative to the second quarter. What would you attribute it? Do you think it's marketing? Promotions seem pretty similar to last year. what would you attribute the improved trend?
I think the most important one is that the consumers came back. I think in the last quarter, with all the uncertainty, government shutdowns, people were scared, people were not coming in. What we've seen in January, people are coming back. Now, the good news is because of our structure, because of our interior design network, and we have most likely the strongest interior design network, they have maintained good contacts with their clients. And what we've seen is that traffic has increased, people are coming back. Again, you know, there's still some concerns, but the concerns we had in the last quarter about all the uncertainty in the marketplace, we see in January, you know, the government shutdown was not there. somewhat of a better consumer attitude so people also the people our designers worked with clients and as in last quarter the ones who did not close they
are closing the business now and the last question I had was on on marketing the 25% increase I mean do you expect that level to continue must we move through the year? And where are you mostly seeing the benefit of this marketing? Is it better traffic? Is it new customer acquisition? How are you measuring the efficiency of that
marketing spend? Yeah, that's a very important issue. Now, if we knew that the government shut down and all of those were going to take place, we would not have increased our marketing by 25%. That's what we did. But the reason it is mostly on digital marketing. This is the digital marketing is where clients today, you know, it used to be that our designers time working with the clients physically. Today, consumers and our clients and our designers are able to work virtually will continue to do. But having said this, we are advertising expense in some other mediums. Look at 10 years back, we spent a lot of money on national advertising, zero. Then we, in the last year or so, we spent a fair amount of money on digital magazine. Where do we spend? Take it down to 9 or 10 million and still make an impact, and especially spending.
Thank you.
Thank you. And with that, there are no further questions at this time. I'd like to turn the floor back over to Farouk and Cathari for any closing remarks.
Thank you for joining. I would say that we are stronger today. We have spent a fair amount of time. First, we've got, as you know, every week I get about 40 reports. They don't all report to me, but they have to write on five things. First is talent. What have they done to improve talent? The good news is we've got strong talent. We have less people, but strong talent. Today is about 30% less than what was only five or six years back. now that is due to high talent and it's also due to technology so we're going to continue to have technology are tremendously important second third thing is marketing and marketing again is tremendously important but the means of marketing are constantly changing and this also reflected what we did last quarter in terms of spending more money on digital mediums will continue to be provided by interior designers services provided by our logistics to our products at one price for joining and with that ladies and gentlemen this does conclude today's
teleconference we thank you for your participation you may disconnect your lines at this time and have a wonderful day thank you