Earnings Call Transcript - ETD Q2 2025

Operator, Operator

Good afternoon. And welcome to the Ethan Allen Fiscal 2025 Second Quarter Analyst Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, 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.

Matt McNulty, CFO

Thank you, Operator. Good afternoon. And thank you for joining us today to discuss Ethan Allen’s fiscal 2025 second 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 for 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 of today’s call will also be made available on our Investor Relations website. There you will 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. We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business. 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 quarterly report on Form 10-Q. Please refer to our SEC filing 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 turn the call over to Mr. Kathwari.

Farooq Kathwari, CEO

Thank you, Matt. And thanks for participating in our second quarter results ended December 31, 2024. I would like to start with the devastating effects of wildfires in Southern California, which have resulted in loss of life and devastated many communities. Our team members and our clients have been impacted and we pray for their safety. Fortunately, our design center in Pasadena, close to the fires, escaped the fire and is back in operations, along with all of our six design centers and a major retail service center in the area. As we mentioned in our press release, despite a challenging political and economic environment, we had strong financial results in our second quarter, especially in our book orders. We reported consolidated net sales of $157.3 million, gross margin of 60.3%, operating income of $18.2 million, operating margin of 11.5%, and diluted EPS of $0.59. We had strong operating cash flow and ended with $184.2 million, an increase of $16.4 million from a year ago. We paid $10 million in cash dividends and are pleased that yesterday our Board approved a regular cash dividend of $0.39 per share payable on February 26, 2025. After Matt presents a more detailed financial information, I will review our ongoing initiatives to continue our progress. Matt?

Matt McNulty, CFO

Thank you, Mr. Kathwari. Our financial results in the just-completed second quarter were highlighted by strong demand, margin, and operating cash flow. Our consolidated net sales were $157.3 million, compared with $167.3 million a year ago, and the higher average retail ticket price and lower sales helped to offset lower backlogs, fewer contract sales, and a lower delivered unit volume. Demand levels improved sequentially throughout the quarter and concluded with a strong December, aided by our special promotion. Retail segment orders grew by 15.8%, while Wholesale segment orders were up 14.3%. Written order improvement was driven by increased promotional activity, strong financing programs, and elevated interest in the home post the U.S. elections held in early November. We ended the quarter with 172 Ethan Allen retail design centers in North America, including 141 company-operated and 31 independently owned and operated locations. Wholesale backlog at December 31st totaled $57.7 million, up 5% from a year ago. As expected, our Wholesale backlog declined in the past three months as our State Department delivered sales outpaced incoming orders. Our distribution center in North Carolina, which previously sustained flooding from Hurricane Helene in September, resumed operations, and we’re thankful to those who helped us recover. Strong consolidated gross margin of 60.3% was driven by a favorable change in the sales mix, lower headcount, selective price increases, lower raw material input costs, and a higher retail average ticket price. Our consolidated headcount totaled 3,318 associates at December 31, 2024, a decrease of 6.9% from a year ago, as we continue to identify operational efficiencies and leverage the use of technology to streamline workflows throughout our vertically integrated enterprise. Adjusted operating margin was 11.5%, compared with 12.8% a year ago. Our double-digit operating margin reflects our ability to tightly manage expenses. Compared to our pre-pandemic quarter ended December 31, 2019, our adjusted operating margin has improved 610 basis points due to streamlining our vertically integrated enterprise. Adjusted diluted EPS was $0.59, compared with $0.68 a year ago. For historical context, adjusted diluted EPS for the three months ended December 31, 2019, was $0.27. Our effective tax rate was 25.4% for the quarter, 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 cash and investments of $184.2 million and no outstanding debt. We generated $11.6 million of cash from operating activities and kept inventory levels consistent with a year ago. Capital expenditures were $3.8 million and included additional investments in technology, retail design center relocations and improvements, and remodeling costs associated with our hotel. New and relocated state-of-the-art design centers in Waukesha, New Jersey, and Peoria, Arizona were opened during fiscal 2025 that showcase our unique style while combining complementary interior design services with technology. We also continued our practice of returning capital to shareholders in the form of cash dividends and have a current yield of 5.5%. In October, our Board declared a regular quarterly cash dividend of $0.39 per share, which was paid on November 27th. 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 this February. In summary, we are pleased with our performance that saw incremental consumer interest return to the home. Disciplined investments and solid execution throughout our vertically integrated business produced strong written demand, positive operating cash flow, and a double-digit operating margin. Our robust balance sheet has us well-positioned as we continue to move through the calendar year. With that, I will now turn the call back over to Mr. Kathwari.

Farooq Kathwari, CEO

Well, thank you, Matt. We are positioned well as a vertically integrated enterprise, which includes a very strong and dedicated team, the ability to provide interior design services with state-of-the-art technology, offering relevant high-quality products that offer both a modern design with a classic perspective and a classic design with a modern perspective, and this is very important, these two attitudes. Seventy-five percent of our furniture is made in our North American facilities. Our national and retail logistics is unique and a great competitive advantage, enabling us to deliver our products with what we call white-glove delivery at one cost in North America to our clients. Our retail network of 172 design centers in North America and additional design centers internationally are well-positioned. During the last two years, we have continued to strengthen our network with new and relocated design centers, especially by freshening the interiors with our products and attitudes. We continue to relocate to stronger locations and add new design centers. After the pause due to COVID, we have been introducing new products to strengthen our offerings. Our marketing initiatives continue to get our message across. This includes direct mail magazines, digital magazines, our website, and local and regional advertising. During the last few years, while strengthening our offerings, retail network, manufacturing, logistics, marketing, and technologies, we have been able to also reduce our headcount. Technology has played a very important role in that. At December 31, 2024, our headcount was 3,318, down 7% from a year ago and 27% less than December 2019. During this period, we also repositioned our manufacturing, national logistics, and retail network. In summary, we continue to strengthen the various areas of our vertically integrated enterprise and are well-positioned to meet the opportunities and challenges ahead. With this, I would like to open it up for any questions or comments.

Operator, Operator

Great. Thank you so much. First question is from Brad Thomas from KeyBanc Capital Markets. Please go ahead.

Farooq Kathwari, CEO

Yeah. Hello, Brad.

Brad Thomas, Analyst

Hi. Good afternoon, Farooq. Good afternoon, Matt. And first and foremost, congratulations on the very strong end of the quarter, I should say, the end of the calendar year on the order front.

Farooq Kathwari, CEO

Yes. Thank you. It is very encouraging to see that.

Brad Thomas, Analyst

It really is. We’ve all been waiting for a turn in the industry, and I think we’re hopeful that that is what’s coming to fruition here. I guess that was going to be my first question: what’s the degree of confidence that you have, Farooq, that this is the turning point here for the company and for the industry?

Farooq Kathwari, CEO

Well, I should also mention that there are factors that led to this as well. Certainly, it reflected our enterprise, our strong product programs, our network, but it also reflected the fact that we did give a special savings during this quarter which helped. So it would not have happened without all of the other factors. I think that all of those factors helped make this quarter, especially on the written business, very, very strong. Now, your next question about as we move forward, we are positioned very, very well. January did start mostly because of the weather. We had very tough weather in many parts of the country for the first three weeks, but as the weather improved in the last week or so, we can see more robust activity. We feel good about it, to answer your question. We have strong programs. Our retail network has been repositioned, and we have strong manufacturing, logistics. As I said, we have been able to do all of this while making it extremely efficient. I think the opportunity of having strong product programs, of the efficiency that we have brought in, and really a strong designer network combined with technology—this major decrease in our headcount is mostly due to the fact that we are combining good talent with technology. I think as we do that, we feel confident that we will continue with the progress.

Brad Thomas, Analyst

That’s great. And clearly, the incremental promotions seem to be a positive for you here. Do you intend on keeping up these incremental promotions, or will you be more normalized going forward?

Farooq Kathwari, CEO

We’ll use both. It depends on the opportunities that arise, as there are certain timing opportunities for holidays and events that give us an opportunity to do that. So we’ll combine both as we go forward.

Brad Thomas, Analyst

Great. And maybe just one more last one for me here, Farooq. It was such an again impressive acceleration from your September quarter to your December quarter in terms of orders. Any other nuances that you might highlight? Is this all new customers or incremental customers coming in? Is anything different happening in terms of the average ticket or the types of customers or the types of products? Just any other detail would be really interesting.

Farooq Kathwari, CEO

I would say that in the last year or so, we have also been introducing new products. We will continue to do that because, prior to that, we were cautious due to very high backlogs, and we didn’t want to introduce new products because of service. Our service position is very good right now, so we are being more aggressive introducing new products. The other aspect is that we are also increasing our marketing. In fact, in this last quarter, we increased our marketing spend, and we will continue to do so. We increased our marketing by $0.5 million.

Matt McNulty, CFO

Correct.

Farooq Kathwari, CEO

In the last quarter, by $0.5 million, which represents 15% higher from 2% to 2.5%. So we will continue to do that, but we should focus on utilizing more innovative ways of marketing than the old traditional ways we used to do.

Brad Thomas, Analyst

That’s great. We’ve certainly heard some good data points out of the industry, but this really exceeded anything that we’ve heard out of anybody else lately. Congratulations, and I’ll turn it over to others.

Farooq Kathwari, CEO

Yeah. Thanks very much.

Operator, Operator

Next question is from Cristina Fernandez from Telsey Advisory Group. Please go ahead.

Farooq Kathwari, CEO

Hello, Cristina.