Ethan Allen Interiors Inc (ETD) 2003 Q1 法說會逐字稿

I'd like to welcome your conference call with Mr. Kathwari with Ethan Allen. Mr. Kathwari, we'll transfer the call over to you, Sir. Thank you for using Sprint Conferencing.

Thank you and Good Morning. I am Farooq Kathwari Chairman & CEO of Ethan Allen. I am joined by Edward Teplitz, our Vice President & Chief Financial Officer. Today we are reporting the results for the 3 months ended September 30, 2002.

We are pleased with the first quarter results, particularly given the continued uncertainty in both the economy and consumer confidence. Now let me give you the key financial highlights for the first quarter.

Diluted earnings per share were 52 cents. An increase in10 cents or 34 percent over the prior year quarter. Net income for the quarter was $20.1 million, an increase of $3.4 million from $16.7 million reported in the prior year. Net Sales increased 4.7 percent to $216.5 million from $206.7 million in the prior year's first quarter. Wholesale sales increased

Despite a difficult economic environment and delays in receiving off shore sources products due to hire than anticipated sales volume and shut downs experienced byte west coast ports, west coast test ports. We improved both our margins and our earnings. Our good results reflect our continued focus to be the best that we can be in providing excellence in service and value to the consumer and the benefits of quality standards implemented by the company to prove. Manufacturing efficiencies during the quarter in an effort to share the benefits of those initiatives without consumers, we announced that we will reduce prices up to 20 percent on selected collections including British classics, country French, more sense [ph] and Horizons and all of that. Country crossings and furthering an effort to continue to position Ethan Allen as not only a known brand, but a preferred brand for consumers, we introduced at our recent international retail convention two important new product lines for 2003--Tuscany and EA kids. We also improved our financial condition.

Wholesale sales increased 1.9 percent $257.8 million as compared to $154.9 million in the prior year quarter. Retail sales increased 21.9 percent to $120.5 million versus $98.8 million last year. Comparable store sales decreased 3.6 percent to the prior year quarter.

Total net orders booked for the current quarter increased 9.9 percent from the prior year quarter. At the wholesale level, net orders booked were up 3.6 percent while at the retail division written sales were up 32.7 percent. Retail division comparable stores written sales increased 4.8 percent over the prior year quarter.

Greater efficiencies in manufacturing have resulted in an increase of gross margin to 49.3 percent from 45.5 percent in the prior year quarter. Cost reductions have enabled the company to improve its operating margin. Our consolidated operating margin was 14.7 percent in the current quarter versus 12.8 percent in the prior year quarter. The wholesale operating margin increased to 18.3 percent versus 15 percent in the prior year quarter and the retail operating margin was 2.5 percent versus 3 percent last year. Delays in receiving offshore products due to higher than anticipated sales volume and shut downs experienced by West Coast boats-- had some impact to our quarterly results.

Regarding the balance sheet, cash and short-term investments decreased $10.4 million in the quarter. Inventories increased $3.8 million despite adding $10 million of inventory due to newly acquired stores in the retail division. Accounts receivable decreased $3.9 million. We remain in a strong inventory position with over 90 percent of our case good items available for shipment within four weeks.

We generated operating cash flow of $41 million compared to $30.5 million in the prior year quarter. We utilized $19.3 million for capital expenditures and the acquisition of new stores and $22.4 million to repurchase 721,300 shares of our common stock in the open market at an average price of $31.

Now I'd like to provide an update on our current business strategies. First we continue to expand our consumer reach with innovative and stylish products that offer good value.

Recently at our international retail convention we introduced three new product offerings. Tuscany, EA Kids and Leather Expressions-- most of which will be available to consumers in the spring of 2003. These products are mostly produced offshore enabling us to continue to balance a mix of offshore products to our domestic products. Our Townhouse Collection, which was introduced in June of 2002 as our first main product offering manufactured offshore continues to exceed our expectations. We fully expect all of these programs to continue to be well received by consumers.

As in the past our consumer finance programs are expected to make an important contribution to our business in fiscal 2003. Our programs, the simple finance plan and the revolving credit plan continue to be an example of another way in which Ethan Allen makes home decorating simple and easy.

Our simple finance plan has a portfolio of $173 million with open of about $600 million to buy. Our revolving credit has a portfolio of $119 million with open to buy of about a billion dollars. Both of these programs on a non-recourse basis to the company.

Next we continue to expand and strengthen our store network in the US and abroad. During the quarter we purchased seven stores from our joint venture in Canada and six from an independent retailer in the greater Chicago area. Our stores continue to be positioned in the right markets with a strong image and we believe will continue to realize more from within. At the end of the quarter our retail network consists of 313 stores, 116 of which were company owned. During the core quarter we consolidated three small stores in Glacamas,Oregon, [inaudible] and in Omaha, Nebraska. The second of our stores in the UK with our joint venture partner, [EMIndustries] is planned to open this month. In China we're still on track to open three stores--the furniture—somewhat delayed because of construction issues there.

For the remainder of the fiscal year we expect to open eight to 10 stores consisting of 50 percent relocations and 50 percent new stores.

Our on-going advertising efforts-- we continue to position Ethan Allen on decorating. All facets including direct mail, print and television emphasize the message that Ethan Allen makes decorating fun and easy through about 3000 design consultants that we have in the stores.

As a result of efficient size experienced in our US manufacturing our continue focus on quality and emphasis on doing it right the first time, we were able to announce earlier this month that we will be pass along to the consumer price reductions up to 20 percent on selected collections including British Classics, Country French, Horizons and County Crossings. These price reductions are not to have an effect on operations as the products affected represent only approximately 50 million of the companies total net wholesale sales. However, these selected products that have been reduced will enable us to reach more of the younger and newer consumers which we anticipate bringing to our stores with the edition of the new Ethan Allen kids program.

Finally as you are aware by now, we will behold the annual conference at our conference on November 12th. We can provide more details if you need them. I'm pleased that our focus on improving the operations from within the last few years is enabling us to perform well and positions us for growth as the economy improves. As you know, we have expanded our products to be stylish and more affordable. 50 percent of our stores have been relocated. We believe we have developed a strong retail network both independence and company operated and today with 3000 design consultants providing service, we are in a good position to help make decorating fun and easy. And now at this stage I would like to open for questions and comments. Kim?

)) Operator: We would like to begin the question and answer series by any one that has a question press star followed by one on your touch token phone. This will place you in queue until your name is announced. Bud, you have the floor.

Good morning. First of all, I wanted to complement you on putting both the comparable store sales and the release. Thank you very much. They were delivered and the written business if you would. Can you tell me, your increase in number of stores seems significant. Can you talk a little bit about what you've done in that and what may be going forward? Your increase in the store count, the company owned stores?

Yes. Well, Bud, we have made a lot a lot of progress making a strong retail network management structure ate than Allen. With that, it gave us an opportunity to include in our retail division those stores and those areas where we have found a tremendous amount of opportunity. Chicago is one of the largest markets in the country and the retail stores we took over did approximately$25 million in retail sales while the opportunity we have is substantially more than doubling that business. So it was -- it made sense for us to take those stores and similarly in Canada, we have stores in great locations, the right kind of occupy sir cost and it made since for us to work it out so that we would be able tube directly involved in management of those stores. I think those are very, very important areas which is what we've added to our retail division at this time..

Going forward we don't see too many more major additions to our retail division because the last year we have been very, very busy..

I see. Your expense to sales ratio, looks like it has gone up, you know, fairly dramatically in that. Do you see any leverage coming on that basis going forward?.

Well, that is of course a direct result of the retail division and otherwise our sales expenses for the company actually at the wholesale level and the corporate level are down. Now, as we go and get these stores, which we have taken over and we have been investing money in terms of putting the right service centers, adding more people, putting in the technology, even fixing up the stores and, in fact, adding more design consultants, so that has added to our sales cost. However, I think we're going to start getting leverage as soon as the stores start performing better and, plus, as the economy also improves..

And can you quantify any of the -- of that difference or is it just in that difference of 50 basis points in margin?.

Well, I'll tell you as you know our division is operating anywhere between two-and-a-half 3 percent7 percent in operating margins so we have that big leverage over there. And, you know, that incremental deliveries of products has a main impact the last quarter. We were impacted by this townhouse collection because that did very, very well. We had allot of emphasis off of it in the summer and then we sold more and it had impacted the wholesale and also the retail because the retail doesn't get it. It impacts their retail deliveries. And there is allot of emphasis on that. And as we go forward, of course, we balance between what we have imports and dough me speak products..

Two last questions. One, can you identify it all the impact of the dock strike in terms of the dock slow down and strike, how much merchandise you didn't get that might have been delivered in the quarter and what it looks like in this quarter, therefore, and I'll go with that one..

Bud, as you know, we are still 85 plus percent of our case goods are still manufactured in our plants so even with that, we saw an impact because this imported products was given allot of prominence and did very well. I would say in the last quarter we had a lot of products sold and not delivered at least 2 cents impacted on our earnings in the quarter. For this quarter coming forward, as you know, in our press release I sort of said that our -- our numbers are achievable what we were given previously but they will depend upon our ability to get all this product that is sold and is in the ships and in the ports on the West Coast. In the next couple of weeks we we'll see how much we can get out. If you don't deliver it this quarter, we'll deliver it next quarter.

Lastly the one thing on the operating margin on. Retail. What do you think it can Max out. I think you told me a couple of years 7 percent was the maximum operating margin you can get out of retail. Is that still an adequate goal?

Bud, I've never used the word maximum because there's no caps in my dictionary. But certainly 7 percent we have -- we have in some quarters achieved 7 percent so, you know, that is very much within the range that we can operate with. The first quarter that is this -- in the summer is generally low because of the fact our factories are -- take vacation times and especially the upholstery plants so that has an impact both in the wholesale shipments and the retail shipments because if they don't get it, you know, they can't deliver it. The good news is our net orders booked at the wholesale level and at the retail level have increased. Despite, you know, somewhat of a tough economy so I'm very pleased we have done it and we have done it by maintaining our gross margins both on retail and on sale.

Congratulations.

Susan Laurie, you have the floor.

Hi, a few questions for Margaret. We heard that you're thinking of introducing a new store layout but that its cost is relatively expensive. Can expand on that for us?

We had a retail convention of all our retail letters and ERS in connect where we talked about reinventing many elements of our business. In the last 10 years we have now changed our 300 or so stores to reflect the new design. So this time we're ready for taking our store design exteriors that I'm -- I think that is what you're talking about to the next level. This is going to be somewhat more expensive. However, the impact of that we believe is also going to be very, very good. We would obviously do these basically for our new stores and perhaps a few selected existing stores. We believe that it will continue to project Ethan Allen as a stylish brand and many stores that are now starting to look alike.

So you haven't actually started it yet?

We are going to do it in three or four of the new stores that are under construction right now.

Okay. And are those -- can you say where those stores are?

Stores are -- there is one in long island, there is one in Atlanta, one on the West Coast and one in Massachusetts.

Okay. And on your balance sheet you break out customer deposits for us. Can you just give us a little color on what exactly comprises that?

The customer deposits represent at our retail division deposits that when a customer comes into our store he has 30 percent or so deposit for all -- for products that they have ordered and that is a deposits that we have received from customers. As you can see it has become an important number we separated it from -- from our other liabilities.

Okay. And can you just explain why you weren't able to provide more specific guidance for us for the second quarter?

As I said to Bud, the reason being this, we are watching very carefully the impact of this slow down of this West Coast docks strike. There are literally hundreds of ships that are weight on waiting on the West Coast. We have products on the ships and products on the docks. We have to see how much of that has cleared all sold product. That could have a difference of maybe four, 5 cents if that doesn't come in if it does come in we would be able to achieve the numbers we had given previously. That is why we thought it would be better to wait a few weeks to see how much of that product is -- produced this quarter.

Do you source anything from Asia or is it all from China..

We -- China is part of Asia so we sold from Southeast Asia, Philippines, China and a few other countries.

So some of it does come from Indonesia.

Thank you Dennis McGill you have the floor.

Good morning, gentlemen.

Good morning.

I was hoping you would explain the difference between written store business being up yet same store I'm thinking of same store terms here. Same store sales being down this quarter.

Again, this is all -- allot of it is due to the fact of not having our stores receiving the products that they had sold. And as I said, imports did create that issue for us.

Okay. Were you guys repurchasing any more shares so far this quarter given your stock dropped below 30again?

You're talking about the second quarter?

Yes.

No, not yet.

Dennis McGill Not yet, okay. And lastly, you had mentioned previously that you expect imports to be 15 percent of sales by the end of the year. Are you still on target for that?

Yes, we are.

Okay. Very good. Thank you.

Thank you, Pam Singleton, you have the floor.

Good morning, Farooq. Just to get a little more color on the difference between the operating margin this year retail and a year ago, can you talk a little bit about the stores that you've just purchased and whether they would be below the company average and whether that is where you would see improvement coming over the next several quarters or are they on a par?.

I think they are on par. I mean, certainly until terms of the operating margins, the Chicago stores are on par. The Canadian stores are not on par. Where the opportunity is in the Chicago stores is to realize more volume and in the case of Canadian stores is to get the operating margins to improve.

Can you give us an idea what the operating volume is in the Canadian stores and what you think the potential for those might be?

I believe I said it last time about 18 to $20 million Canadian. I think it -- it ranges anywhere in that range in the US would be a little bit lower. I would say that opportunities we have is to do at least between30 and $40 million of Canadian -- in Canadian dollars in those stores because the stores, we took seven stores and they are for the most part in great locations, good stores. They just need some real building which we are doing right now, Pam

And the store you purchased in Atlanta with the new format, is that included in the store count or is that to come?

No, that is to some.

Okay, great. So you -- you would be -- would you beep expensing costs already in the retail division or do you not begin that until the store opposite? In other words, you've got carrying costs for that store..

We are expensing it right now but not in the retail division. We're expensing it at the corporate division, Pam, and as soon as we turn that store over to the retail division which is in the next four, five months and the reason we were weight is that we have been spending allot of time thinking about the store design. We have not finalized it, launched it with our retail network a few months back. When you come to our investor conference we'll show you the design that is well received. We waited in Atlanta so that that design would be completed. That is where that design is going to go in the Atlanta store. It's right now in the process, just about starting construction.

Just one more question. I know you don't like to break it down individually, but with wholesale shipments up 1.9 percent, can we assume that accessories and upholstery did a little bit better in the average incase not as good because of the availability of townhouse product?

Yes, Pam, that is a right assumption.

Thank you very much.

Thank you, John Fox, you have the floor.

Yeah, I've three questions. First, Farooq, could you repeat the margins for wholesale and retail? I missed that.

All right. Let meeting my -- these numbers back. We have at wholesale is 18.3 percent operating margin.

Okay, thank you.

Retail is 2.5 percent..

Okay. And I'm curious with the Chicago and the Canadian stores, what it that you can do differently when they're company owned to in vees the volumes as much as you are saying you can do. What do you guys do differently?.

We have -- depends again each store has a -- has different needs but in case of Canada, we needed to put in new store manufactures, which we did. We needed to remerchandise the stores which we are in the process of doing. In the case of Chicago, the stores are a little bit tired looking. They need to be redone in the process of doing. We're in the process of doing much stronger add advertising than we had done before. Chicago is a great market. Advertising is going to improve our stores, we're going to become remerchandised and we are -- and fresher and we are also started hiring more design consultants, which we need in Chicago and in Canada..

OK. That's quite a bit. Do you have KAFEX by itself without the store acquisition?.

Yes, it is 9.5 million.

OK, thank you.

Thank you, John Bowman you have the floor.

Thank you. Terrific margin performance. I want -- a couple of questions. One, if I were a consumer walking in to a store today, what would I be quoted on a delivery on Townhouse?

We are quoting approximately 12 to 14 weeks right now.

Okay. And that takes into account the dock strike you think?

That takes into account the slow down because what has happened is, John, as you know, the problem is not only the dock strike. Problem is all the ships coming to the us. Southeast Asia doesn't have a lot of ships. They need the ships back. It is a backlog of products being dropped in China and the Philippines right now because they don't have the vessels and the containers to ship the product. So I think all of that has to clear up.

Sure. Which you require a 30 percent deposit with that extended lead time?

Yes, we do.

OK. At what products, you've got Tuscany and leather expressions coming on. What do you see next spring as those items come on?

Well, on the planned basis obviously, John, we don't have -- in our system something has to get out before something new comes in. And on a planned basis we will have products taken out. I'm not in a position to announce it because we've got to do it in a very planned manner..

OK. The price reduction you just announced, I recognize that Southerners are a little slow. I went to a store in rich Monday and they were not aware of any details yet. When does that take affect across the system and, secondly, is it 20 percent on50 million? Is it averaged out to 5 percent or10 percent? Can you give some flavor there?

Yes, John. It's actually affected the price changes are affective now but they are going to start becoming affective from the start of a sale which is going to start this Friday. That is when we have our next interiors magazine, direct mail that will be mailed out. That direct mail will reflect these new prices because we already planned it about two months back. The impact of -- and the reason of course of folks in Richmond have been busy. We just ended Columbus Day. It's going to have most probably on an average between 11 or12 percent is going to be the average change at retail.

Great. And the leather expressions, is that going tube 100 percent imported product?

Yes, uh-huh.

Okay. Thank you very much.

All right, John.

Thank you Richard Diamond, you have the floor.

Yes, depending on who you speak to, there seems to be some question whether there is pent up demand for furniture from strong housing sales. Some are claiming the pent up demand is not there because of consumers trading down in price to better quality imported furniture. Is it possible to quantify, you know, the actual dollar amount of the demand in what is out there and would you address both the upper end and middle point and any other general insights you have on the subject?.

No -- you know, there has been discussion going on, Richard, about, you know, the mid price doing better and the top -- the high end not doing that well. Without people defining what that high end is, is it a $5000 bed that you talk of high end or is it, you know1200-dollar bed. So there is allot of issues people have to think through when given these kind of ter-- what is doing well and what is not doing well. I believe we have done well and I'm very, very surprised. I've gone through in the last two years, I've gone through a few recessions. How well we've held up this time I think to me has been remarkable. Allot of it is due to the fact that we are much stronger and I think secondly the consumer is also interested in continuing to buy as long as we help them. That is also we have the credibility of giving them good quality and good value and style which is what we're doing. Despite all of this, you know, gloom news that is out there, people are coming to our stores. Our business has been up the last year approximately, almost this whole year. I believe that there is allot of pent demand because in these tough conditions people are coming and buying. I believe there is a confident level and all these new homes that have been built, I don't think many of them have been furnished. So it is a great opportunity and that is why it is also important for us to reduce our prices on products that we believe are going to be used by folks who buy new homes. That is another strategy. As far as the number of that, Richard, I don't know the number and I don't know if anybody else knows it.

Thank you very much.

All right.

Thank you, Keith Hughes, you have the floor.

Yes, Scott Phillips stepping in for Keith Hughes. I want to ask you about new offers coming out on Tuscany and EA kids, where do they land in a price line perspective?

The legacy is -- the Tuscany is about townhouse or a little higher and the EA kids of course is at, you know, very, very attractive prices, great values.

Right. And are those goods mostly sourced?

Yes. Most of them are sourced accept as you know we have a total program. It's just not case goods, we have a all upholstery, leather pieces we talked about are all made in our own plants in the US similarly for the products that are for the kids is not only case goods but a total program of accessories and soft goods and upholstery and that is a mixture of sourced as well as made in our plants.

Do you think moving this forward to create a trend for future as far as the price point and the approach to sourcing of those goods in is that a focus.

The focus has been to expand our reach at both ends of the market. Products like townhouse and now Tuscany reaches the middle and upper price points as we define them..

Right.

And kids reaches the product lines at the more affordable price points and to complement the kids, we also have product lines that we already make and most of it made right in our plants in the US.

Right, right.

Product line, that was the one we reduced the most. The reason we reduced it the most it is a great design for younger people; secondly, wheat outsourced it to a manufacturer two years back. Two years back we didn't have enough production and now we have taken it down into our own plants. Our plants can make it at much lower cost than outsourced. That product line is going to be very, very good for newer customers, younger customers because the design is great and the values are going to be very, very good. So we want to start building client relationships, not just kids but with their parents and then of course Tuscany and townhouse reaches in our range.

I understand. Thank you.

David Richey, you have the floor.

Good morning.

Hi, good morning.

I've a couple of questions on Townhouse. Now do you have more experience, how is the production going over in China? Is it as efficient as you would like, the right quality, the right timing, et cetera?

Well, Dave, you know, I was -- I took a little bit of time in making a decision to develop products over there because I wanted to make sure that those folks were ready because at better quality product, it needs more time for -- in terms of learning. So the people that we have licenses with are probably the best manufacturers in China for this kind of quality. They're doing a pretty good job. They have been somewhat surprised as we have been at the very good response we have had with the consumer. And but they are meeting. Here that quality is great and their delivery is a little slower due tote fact the demand is greater but they're catching up. They have got -- they will have the ability in the next few months to catch up not only on townhouse but Tuscany and other product lines. We have quality and we're confident. We have not to overdo it. We have to absorb this. One little shut down, we're not that big and imports, it also impacted us. So we have to really balance between what we are doing here and what we are doing over seas.

Right. Have you found that that customer has pretty much been willing to wait? Are you spilling any revenues because people don't want to wait?.

Not yet. I think right now people are willing to wait as long as we explain to them. I hope when people get upset when you keep changing it two or three times. As long as you tell them upfront and the problem has been that it has been hard to enter space how this dock situation, lockout situation is going to work out. So we have been able to conservative giving information to the consumers and is that better. As long as you tell them upfront, they are willing to wait..

Right. Seems like your business has been on the order side quite solid throughout this entire past six months. Sounds like it is helped by townhouse. A lot of other expression ear retailers saw their business fall off in July with the stock market, never really recovered. If you were trying to, you know, look past townhouse, did you see similar patterns in your business or are they different?

Our business to a great degree is benefited by relationships we have with the can you remember. 3000 design -- that we have remained a relationship with the consumer. The consumer is willing to spend money as long as you help them. Now, would our business have been as strong as we have seen them if we didn't have townhouse? Changes are probably no. I think townhouse really helped us improve our business not only for the imported product but for our domestic product, too.

Last thing is, you've been emphasizing this year in your marketing advertising the advantage of your design consultants. Any way of measuring the impact of that advertising and what the consumer response is? Just looking at the numbers obviously the sales are down so it's tough to look at it that way.

No the sales are up.

Right, they are up. But specifically in terms of a designer, anecdotal feedback?

We wouldn't be doing as well if the fact was people were not coming in and utilizing these services. It is just a sort. But anti- dolghts information we total information has been good.

Thank you very much.

Larry [Perkowski], you have the floor.

Congratulations on a solid quarter. Could you talk a little bit on the average prips trends in case trends on case goods over all?

Our townhouse products have been introduced is in the middle to upper price points so we did not introduce a product line from overseas which is going to take our average price down. It did not. So we have maintained that and in terms of getting information, Larry, what I'll tell you because I don't have it in front of me. I'm actually in New York. It happened today on television. They give on CNBC and CNN and all that. the average information as we have given in the past of the average -- average price of what we are selling in case goods. I don't have the information but I believe it has a more or less stayed the same as we did previously.

Thank you. Congratulations again.

Once again if you have a question you may ask it by pressing star followed by one on your touch token phone. This will place you in queue.

No more questions. Please try to come to our investor conference in Danbury and the conference again is on November 12th. And we look forward to seeing you there. Meanwhile, any questions, please let us know. Thank you very much.

End--- 0