Ethan Allen Interiors Inc (ETD) 2003 Q2 法說會逐字稿

May have your attention please? I'd like to thank you for holding and welcome to our conference call with Farooq Kathwari. At this time you'll be able to listen only.

Later on we'll open it up to a question and answer session. At that time, if you have a question will if you will press star one for a question.

Later on during the Q&A, I'll turn the conference over to Mr. Kathwari. Thank you for using Sprint Conferencing Services.

Thank you and good morning. I'm Farooq Kathwari, Chairman and CEO of Ethan Allen. I'm joined by Ed Teplitz, our Vice President and Chief Financial Officer and Jeff Hoyt, our Director of Financial Reporting. Today we are reporting the results for the three and six months ended December 31, 2002. We are pleased with the second quarter results, particularly given the soft economic climate and its continued impact on consumer confidence. Now let me give you the key financial highlights for the second quarter. Earnings per share were $.60 for the quarter, an increase of $.07 or 13.2% over the prior year quarter. Net income for the quarter increased by 9% to $23.1m. Sales increased 3.1% to $229.7m from $222.9m in the prior year year's second quarter. Wholesale sales remained virtually unchanged at $158.4m. Retails sales increased 19.1% to $139.3m. Comparable store delivered sales decreased 3.6% during the same period period. For the six-month period, earnings per share were $1.11, an increase of $.16 or 16.8% over the prior year six-month period. Net income increased by 14% to $43.2m. Sales during that same period increased 3.9% to $446.2m. Wholesale sales for the current six-month period increased 1% to $316.2m. Retail sales increased 20.4% to $259.8m. Comparable store delivered sales for the six-month period have decreased 3.5%.

During the current quarter, total net orders booked increased 6.7% from the prior year. At the wholesale level, net orders booked were up 3.4%. Meanwhile, at the retail level, written sales were up 19.1% while comparable store written were down 3.4%.

For the six-month period total net orders booked, increased 8.3% compare compared to the prior year. Wholesale net orders booked were up 3.5%. Retail division written sales increased 25.6%. While comparable stores -- that is written sales, were up 0.6%. Our ability to continue to sell our products at our suggested retail prices is one of the most important factors in our improved gross margins. In addition, greater efficiencies in manufacturing and continued growth in the retail division have resulted in an increase in gross margin in the current quarter to 50.4% from 46.4% in the prior year quarter. [inaudible] of further quality improvements and a strong focus on cost reduction have enabled the company tome prove its operate margin. Our consolidated operating margin was 16.2% in the current quarter versus 14.9% in the prior year quarter. The wholesale operating margin increased to 17.7% versus 15.5% in the prior year quarter and the retail operating margin was 5.8% as compared to 6.6% a year ago. For the six-month period, gross margin was 49.9% up from 45.9% a year ago. And operating margin increased to 15.5% from 13.9% over that same period. Wholesale operating margin improved to 18% from 15.2% during this period. While retail operating margin declined slightly to 4.3% from 5% a year ago. As you will recall, we experienced some delays during the first fiscal quarter in receiving some of the offshore products -- source products as a result of shutdowns experienced with the West Coast ports. During the second quarter with that work stoppage results we were able to service the orders.

Regarding our bs, cash in short-term investments increased $4.3 million during the quarter. Inventories increased $1.9m, half of that was due to the addition of two new store stores that we purchased. Our ar decreased $7.1m. With available cash, we further improved our financial condition. We remain in strong inventory position with over the 90% of our case good items available for shipment within four weeks. We also continue to generate strong cash flows. During the quarter, our EBITDA was $42.6m or 18.6% of net sales as compared to $39m and 17.5% respectively in the prior year. Depreciation and amortization expense for the quarter totaled $5.3m compared to 4 million last year. In addition, we utilized cash of $8.4m for capital expenditures and acquisition of new stores. There were no stock repurchases during the quarter.

Now I would like to provide you with some of the important elements that continue to differentiate Ethan Allen. First our focus to provide stylish, good quality and value products. Consumers continue to recognize and appreciate the style and value of a product offerings. The success of our Townhouse Collection which was introduced last summer has exceeded our expectations. Beginning in the spring of 2003, we will introduce in our retail network our latest product lines that is Tuscany, Ethan Allen Kids, and the Leather Expressions which we are also expecting should do well. As mentioned previously, most of these products are produced offshore and enable us to continue to balance a mix of out-sourced products to our domestic products. As a result, of the lifestyle orientation that these collections offer and a strong advertising campaign, we expect that these programs should be successful.

Second, providing unique consumer finance programs. Our consumer finance programs continue to make an important contribution to our continued business growth. Effective January 1, 2003, the simple finance plan and the revolving credit plan have been combined and allows consumers to choose from multiple finance options with the use of just one card. The new Ethan Allen plus -- the finance plus card will continue to help make our products affordable to many consumers, especially newer and younger consumers.

The third element is strengthening the retail network. We continue to expand and strengthen our retail network in the U.S. and abroad. During the quarter, we completed acquisition of two stores from an independent retiring retailer in the Houston area, opened one new store in the Atlanta market and closed one smaller store in West Virginia.

Internationally, the second of our stores in the UK with our joint venture partner MFI industry opened in a London suburb of Bromley in October. This 16,000 square foot store has a presentation and layout similar to our U.S. stores and also provides the design consulting services as we do in the U.S. In December, we opened a store in Tianjin, China with our licensee, Markoff(ph.) Furniture. We continue to expect that additional stores will be open in China during this calendar year.

Our focus as we go forward will be to aggressively position our stores in the right markets with the strong image. We believe this will enable us to realize more from within. As these stores will be in better locations and most of them larger in size enabling us to market our products to a larger consumer base. At the end of the quarter our retail store network consists of 314 stores, 118 of which are company owned.For the remainder of the fiscal Year, we expect to open anywhere from six to eight stores.

Next is our strong national advertise advertising program. Our ongoing advertising efforts continue to position Ethan Allen as an authority on home decorating by getting the message across that our 3,000 design consultants will help make the decorating process easier and even fun. All [inaudible]current advertising campaign, including direct mail, print and television, emphasize this message. Most notably, in December we introduced our first design book entitled "Ethan Allen Style." This over 200 page hard cover Publication, extremely well done, will be given to consumers when they come into our stores in order to help them in defining their style and illustrating how to get the look they want with our products and our services. And I would very strongly recommend if you would please visit our stores and get this book it will be given to you on a complimentary basis if you use my name and in fact even without my name.

Now during the quarter, we initiated a series of designer summits which were attended by over 1,000 Ethan Allen design consultants. The objective of these sessions was to educate our designers on certain key aspects of home design as well as current product offerings. We believe that these efforts will enable us to continue to provide this unique service to our customers in a consistent, effective and efficient manner.

As a result of these and other company wide initiatives, I believe we will continue to effectively differentiate Ethan Allen from the competition because today the retailing is very negatively impacted by the issue of sameness. At Ethan Allen we offer consumers unique products and services, backed with the professionalism of our people. That differentiation is a difference between meritocracy and excellence.

At this point I would like to open the line for question and comments.

Again, if you have a question at this time please press, star one. Star one if you do have a question.

Cathy, are there no questions? Hello?

We have a question, one moment.

Okay.

Raymond James, go ahead, please.

Raymond James Good morning, Farooq, congratulations on the quarter.

Thank you, Bud.

Raymond James A couple of questions, one, can you give us a feel for maybe what you think comps might run in the company owned stores for the balance of the year? I know we've had now about, well, I guess about six consecutive quarters, at least, of some negative comps coming against some easier comparisons.

Yes. Bud, we, of course, have had previously as you know in the company operated stores had comps of anywhere from 20% to 30%, very, very high comps in the previous years. Now, hard to tell, Bud, I mean we are looking at conditions as we go forward in the next six months, where it's very hard to make a determination of what's going to happen to the economy, to this war-like conditions and things of that nature. So I would think that obviously, we have the opportunity of now improving our comparable sales in the stores. So it all depends on what assumptions we make or what is going to happen in the next six months.

Let's assume we can't do anything about, you know, the geo-political risk if we do go to war. In the absence of a war or in the aftermath of one, it should -- seems to me we should be starting to see positive comps return either this quarter or next.

I think that this quarter we got to -- it would appear to me that the consumer is still very concerned. I think the economy is -- conditions are still very tough. And, January is almost over. And we still do not know -- uncertainty in the economies there. So let's talk about -- let's assume that this quarter we are going to remain in this uncertainty. And the next quarter, I would say that we should have at least 4%, 5% increase in comparable sales in our company stores.

So in the fourth quarter at least?

I think so, yeah.

Steady environment. And the other thing that strikes me is that the margins are just, you know, eye popping. From my standpoint, mine, it's a fabulous gross margin. Can we quantify in any respect, the source of that gross margin? I know we obviously have a mix of an increased retail presence with higher margins at the retail side and the import side, but you would also reduce prices at least partway through the quarter.

Yes, I mean as mentioned in my statement, I think one of the most important factors that differentiates Ethan Allen is that we have been able to maintain our margins at retail in a very tough economic environment. And because of that I also not emphasize tremendously on the issue of increasing the top line if it meant giving up margins. For us, it is not just a question of giving up margins, it is also a question of giving up credibility. So we have got a balance and that's why we are very, very careful in terms of when we do things like, for instance, on the across the board on a limited amount of items we reduced our prices. We just didn't do it as a special promotion, we did it because it made sense for us to reduce prices. Half of those items we reduced used to be previously out-sourced in the U.S. where you could make them in a better -- with a better margin and still maintain our margins. The impact of those, Bud, so far as not been that material. As we go forward, we will have, I think, a greater impact of some of those prices we reduced, especially when we introduce the kids programs, because you recall our objective was to reduce prices on those items which we feel younger families will benefit from when they come into our stores when they are bringing the kids, also.

Okay. And lastly from my perspective, you ended the quarter with 314 stores. I think you said you are going to open another four or six stores by the end of the year?

Yes.

Any plans for closure? What do you think you'll end the year at in terms of number of stores?

I would say that most probably there is a possibility of looking a couple of small stores, very small markets where we might close them and we'll open. So, it's possible we might close a couple of small stores and open up six or eight more stores.

So end the year at somewhere between 318 and 320 stores?

Yeah, that's expectation.

All right. Thanks Farooq.

Jason Putman, you now have the floor.

Hi, good morning, Farooq.

Good morning, Jason.

Just to follow-up on a couple of Bud's sale questions on comps. If you look at the total sales I think your previous guidance was for 8 to 10% growth. Obviously that doesn't seem like that's going to be achievable. Is there a new range you wanted to provide or just assume that's going to be lower than that range?

Yes, Jason, at this stage, from based on what we're looking at, I think it will be lower and it's hard for me to make a projection again . The next six months are so difficult to project. I think that I've said it is going to be lower, how much lower I really don't know.

Okay. Then starting on in January, have you seen any meaningful change in trends or has it been kind of a continuation of November and December?

I think that the trend has been as we saw in November, December, you know, people were concerned. There was a slower traffic, you know, we have done reasonably well even with that and we've seen that trend has continued because the consumer is still very cautious.

Okay.And then one thing that stood out to me, you know, looking over your results was the level of Inventories up 14% year over year, I realized with the increase in imports as well as you have taken on a lot more stores in the last year it should be up but is there anything else that's going on there? Or do you actually just want to maintain a little bit higher level going forward?

The retail stores are very, very important because we purchased the stores in Chicago, in the first quarter. And then, we purchased a couple of stores in Houston this quarter. So they were the predominant factor in increase in our Inventories, Jason.

Jason Putman But the 14% higher, should we expect this kind of inventory level, the 180 million to continually inch upward?

No, I would think -- it also depends on our ability to open up more stores and we are looking for very aggressively on real estate around the country to get the right kind of real estate that we need. But I would think that our finished goods inventory most probably slightly higher than I would like to see it only because we are balancing the needs of maintaining, manufacturing. We have taken some time time -- reduced some time in our manufacturing in the U.S. and since last quarter we'll do some more in this quarter and we're watching our Inventories very carefully. The good news is our inventory is generally in good condition. It is not an inventory that is going to get us into trouble.

As imports I guess as imports continue to increase as a percentage of your total sales, is that going to I guess -- it will increase your finished goods inventory so I guess I'm just wondering is that just a trend we should expect to continue or is it just, you know, a little bit higher than it should be right now?

I think that if our sales increase during this quarter our Inventories are going to come down. And we'll be able to operate more sales with the current level of Inventories.

Okay, then just a housekeeping question. In the Cap Ex number you gave how much of that number was the actual purchase of the stores?

About $800,000 was allocated to the acquisition of stores in the and the rest was capital expenditures, mostly in building new stores and also in our manufacturing and operations.

Okay. Great, thanks Farooq.

All right.

Margaret [inaudible], you now have the floor.

Thanks, good morning Farooq.

Good morning, Margaret. Will you talk to us a little bit about the imports, the number, the percent of your revenue is representing at the moment? What it will be over the next couple of years? The number of Asian manufacturers you are working with? And how you're going to prevent your product from showing up at Costco homes and these sort of stores?

Answering your last question first you really cannot prevent folks from buying products. They can do it now and they can even buy our similar kind of products domestically made.

We have maintained a competitive advantage of making products which are not only stylish but meet very specific and stuff -- specifications that we give.

And then in the end when we offer them to the consumers we offer them at good value and backed with a lot of service.

Now, as is happening -- I've seen in the last 30 years. A lot of folks have been selling some products only on price and, you know, so far, most of them have not done well because furniture is a tough product to service if you don't have reasonable margins.

I don't think anybody can really stop from Costco or others mentioned at buying products and selling it at lower price.

But I guess the question is what we've heard recently with some of your competitors they have actually been buying the exact product that those competitors are specking and bootlegging it straight into their stores? Can you just describe the relationship you have with your Asian suppliers and how you can prevent that from happening?

We have good relationships and they are not supposed to sell exactly what we -- what they make for us to others and we are not aware of that, that they are doing it.

Okay.

But if they did that, they would be -- it would be -- they would have to lose us as a partner.

However, as I said, this is something not tremendously unique. It's been happening in the United States for a long, long time with manufacturers in the U.S. doing it.

Yeah. And then how many Asian manufacturers are actually working with now?

Margaret, we are working with a number of people but I would say that four or five are the key large ones that are providing most of the product.

Okay. Just on the inventory questions, your Inventories are running up 1% sequentially and they are still running 20% of revenues. Is that what you're targeting or would we expect tote creep up another bit?

It will depend on the next six months how business conditions are. I think that the opportunity we have, forget about the current level of inventory, we have the opportunity of doing a lot more business.

Okay. So you'll build inventory in anticipation of that so we'd expect it to creep up?

No, no, I'm just saying our Inventories that we have today will enable us to do more business and not increase the level of Inventories.

Margaret Okay. Okay. Thank you very much.

Yep.

John Ball, you now have the floor.

Good morning John.

Good morning, nice quarter. Just a couple of quick things. I wanted to follow-up on the margin question Bud was asking and you did 17.7 in the wholesale in the quarter. If you assumed that you did the 230 to 240 million type volume quarter, where would you get guess that operating margin would go in the wholesale side of your business because reducing -- there does seem to be some cross current with the recent price reduction. You mentioned the kids at a lower price. I'm wondering if you're going to get some more efficiency out of your plant? Have you reduced cost? Where do you think that number goes, sideways, or up or down?

John you're not looking for us to increase our margins even more than we have done.

That's my question. It's awfully good. I guess the question is it sustainable at that level or should we expect it to come down a little bit?

It will, you know, again there's so many variable factors that I believe that if the economy and the consumer confidence is such that we are able to maintain the level of sales that we are doing today, the opportunity for us to maintaining this kind of an operating margin is there. If on the other hand business conditions are slower, then it will have an impact on margins even as you know we have been able to in the last two years maintain margins at about 15% operating margins at 15% levels which has been, you know, remarkable even for me that we've been able to do it. I think that I have always said we got to balance margins with fact that we need to be competitive. We need to make sure we offer good values and we don't -- we've got to be careful that Margaret availed us of this question -- if there is these mass merchants get in, what will happen? Well, we have an opportunity to continue to improve and we have opportunity to make sure that we offer better values to the consumers so, John, we'll watch watch it very carefully what makes good sense. We don't want to get high margins and loose the good value to the consumer.

So you have taken obviously a couple of competitive steps by lowering on the 50 million and the four or five collections earlier this year and then the kids so are there -- the question is, are there significant cost savings coming or should we expect the margin to maybe bleed a little bit but hopefully the volume to pick up?

Yeah, I don't think that we have any tremendous major, you know, cost reductions that will increase the margins because we already are operating a very, very high levels. It's really another opportunity for us to increase the top line.

Ok, super. The second question is just on Townhouse you mentioned this has gone so well. I know you don’t want to quantify the volume there, but could you tell us where you are in terms of delivery, what time of lead time you're quoting and also maybe a quick comment on whether the price reductions on those suits that you did earlier in October have had any impact yet?

Yes. On the issue of Townhouse and today we have been able to get the Townhouse about 90% of it is in stock now. So, you know, we've gone from just four months back into a situation where we suffered because we didn't get it. But now we have it in stock and we have a great opportunity to service the consumer. And the people that we are dealing with overseas are great partners for us and they have done a really, really good job because they know that it's a mutual relationship.

You know, they do well with us, we are going to do well with them. And I'm very, very clear on those points. As far as a price reductions is concerned it is having the impact. For instance, as you know, we reduce prices on some selective items. For instance, just to give you an example, in one of our British classic programs, we reduced the prices on chairs and what's happened is we are now selling whole dining rooms. We reduced the price on some very key beds and now we're selling all bedrooms and a lot it to newer and younger customers so, because of that, not only have we been able to get newer customers. We have been able to merchandise the margins, by selling products across the line, by reduction of a few key items as we did in number of our collections. Then as far as that Horizons, where we reduced across the board. There we had an opportunity of maintaining decent margins because we took to manufacture it ourselves rather than out-sourcing it domestically.

Ok, last question. Tuscany hits the floor when?

Tuscany is going to be in our stores by March of this year and the kids program is going to be in our stores by the middle to late May.

And, the Leather Expressions?

The Leather Expressions is getting into our stores right now.

Great. Thanks Farooq. Good luck.

Thanks, John.

Joel Harvard (ph.) you now have the floor.

Good morning, Joel.

Good morning, I'll add my congratulations to this. All the good questions have been asked so I'll keep it theoretical. When you go into a market like Houston or I think you mentioned Chicago earlier and make these accusations does Ethan as the master licensee typically want to control that whole footprint or do you have markets where it's kind of mixed between company and licensed dealers?

Both Chicago and Houston are mixed. We have a great retailer in Houston who operating four stores. And in Chicago, we also have retailers who are operating together with the company stores.

Joel Harvard Okay. So there's not a policy that dictates then you go one way or the other?

No, there is no policy.

Is there any conflict from a field management standpoint where you've got two -- [inaudible] in the Houston March market? I don't know.

There are six stores, four operated by our retailer and two by us.

Does your bs strength maybe offer you the opportunity to broker these stores for a while and then you would maybe flip them back out to a good healthy dealer? Or is that – opportunistic?

No, those options are always there but, we are most probably one of the very unique examples where we have been able to develop a system where we are able to operate stores operated by the company and by a licensees with the ability to project a similar vision to the consumer, credibility to the consumers, because our stores and our products share the same name, that’s Ethan Allen. That's all those stores have from a consumer's point of view they cannot differentiate. And while our retailers have the ability to charge whatever prices they want to, we have always believed that we should suggest a price that is credible so we don't raise a price so we can lower them and all that kind of stuff. Because of that, most of the time the consumer has the opportunity of getting credible prices from whether it be a retailer, an independent retailer or a company stores because we start with a suggested prices that is credible.

With those prices in print nationwide in the treasuries and I guess now a more condensed treasury/catalog, do you get much variance in dealer pricing from that suggested price?

Well, they have the opportunity of establishing whatever their price they would like to. But as I said, because of the fact they recognize and realize that if they were to deviate too much from it in the sense, for instance, let us say, they would deviate and lower the prices which they have -- you know, by law they can do that, but generally it will not make enough margin to service the consumer and make a profit. If on the other hand, they decide because of the fact that they have exclusivity with us they are going to charge higher prices then we require them to say that these are not Ethan Allen suggested prices they are their own.

Well that's all I had. Congratulations again on a solid quarter in a tough market.

Thanks, Joel.

Keith Hughs (ph.) you now have the floor.

My question has been answered thank you.

David Berman(ph.), you now have the floor.

Hi, this is actually Christina Henry with Berman Capital.Good morning.

Good morning.

I just have one question about inventory. Given your inventory was up 14%, I thought it was interesting that your payables were down significantly about 50%. I wouldn't have expected that relationship to be as such. Can you comment on the quality of the inventory or any other factors you think are relevant in explaining that relationship?

Yeah, it's a very simple relation relationship on do you remember our accounts payable are down because of the timing of income taxes. And Inventories we increase about 1.9 million this quarter from last -- from, you know, as of September September 30th. Our Inventories are in good shape. It's products that -- as I said, a lot of it is due to the fact we acquired a lot of new stores and so when you acquire a store, you also acquire inventory. And our finished good inventory is in pretty decent shape.

Okay. Thank you.

Thanks.

Nathan Weiss, you now have the floor.

Hello.

Good morning.

Could you go into a little more detail on the expense side of the statement. Particularly interested how your currency exposure may change going forward, as you purchase more goods from Asia, does that change? Are you purchasing those in dollars or are you subject to some new currency exposure and do you hedge that? And also what material prices are you exposed to? For example, I assume you're exposed to wood prices prices.

Right.

Some detail.

That's a good question. As far as purchases are concerned it's all done in U.S. dollars. And a lot it is now coming from let us say China and the Chinese currency is sort of very close to the U.S. dollar and so we don't have an exposure in the sense unless they increase their prices or due to the fact of whatever might happen in China. As far as the material is concerned, lumber is on one of our major commodities and with decline of manufacturing in the United States in wood products and slowdown in the economy, I think for the timing we sort of don't -- they are pretty stable right now. I think that if there were to change it would be due to pretty robust business and I think then it's okay. We'll be ale to handle it.

Okay. Very good. Thank you.

All right. Thanks.

Reed Anderson, you now have the floor.

Reed Anderson Good morning, Farooq.

Good morning.

Could you comment on the trend you're seeing in average size and how that's been impacting comps?

I'm sorry, average trends? in?

Average transaction size?

You're talking about --

Average purchase.

Purchase, yeah, right. Interestingly in the conference call somebody had asked a question that because of the fact we are importing products, because the fact we are reduced some prices, has the average selling price of a products come down? Interestingly it has slightly gone up. Because of the fact that the products, [inaudible] for instance, we are getting from offshore are not at a lower price points for us, they are in our middle to higher price points offering come consumers a great value. Because of that our average selling price has remained pretty constant and in fact, in the case as I said in the last few months, it has slightly gone up so we've been able to maintain our average ticket price because it's a tremendous amount of concern on the issue of deflation. That is as you know it's happened in many, many industries.

So that would make sense really the comp being down is really just a function of traffic and the number of people shopping basically.

That's right, yep.

One other thing too, could you just maybe comment, too, about the likelihood of more deal acquisitions in the second half of this year? I know you don't give specific numbers but just comment on what might be in the pipeline near term?

At this stage we don't have much in pipeline.

Great, thank you.

All right. Thank you.

Larry Pitkowski has the last question.

Hi, Farooq, how are you?

Good morning, how are you.

Larry Pitkowski Just two questions. You had made some mention of the booked order numbers and different pieces of the business and if you could review that and also just a little bit of color on the SG&A line on some of what is happening there.

All right. What we had said that for the written business, there's the booked orders. For the quarter, our book business increased by 6.7%. At wholesale it increased 3.4%, retail it increased 19%. Our comparable at the retail was down 3.4% and for the six months net orders booked increased 7.5%, wholesale was up 3.5%,retail was up 21.5% and the comparables were up .6%. As far as the SG&A, we have two Elements, we have the wholesale element and we have the retail element. The wholesale element are expenses, from year to year, are down. We have been able to reduce those expenses. Both selling and administrative on the the wholesale side. On the retail side they have grown because of the growth of the retail business. The increase of 21% in the six months in sales mostly due to the acquisition of new stores. Basically I would say that over 100% of our increase in SG&A is related to our retail because the wholesale side our expenses are reduced.

Larry Pitkowski Okay. Great, congratulations Farooq.

Thank you.

That was the last question, sir. I'll turn over the call back to you.

All right. Well, thank you very much. If you should have any more questions or comments please let us know.--- 0