Ethan Allen Interiors Inc (ETD) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ethan Allen quarterly and fiscal year conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and you may press the one key to ask the question at that time. If anyone should require assistance during the conference, please press star and then zero on your touch-tone telephone. I would now like to introduce your host for today's conference, Farooq Kathwari.

Yes. Good morning. This is -- I'm Farooq Kathwari, Chairman and CEO of Ethan Allen. I'm joined today by Jeff Hoyt, our Vice President of Finance. Today we are reporting results for the 3 and 12 months ended June 30, 2004. Because of the extent of the non-GAAP pro forma financial information resulting from the Company's April 2004 and March 2003 restructuring and impairment charges, I do not plan to repeat all of the information contained in this morning's earnings release.

Instead, I plan to use this time to provide an overview of our financial results and discuss developments affecting our business. We have, in connection with the issuance of our quarterly earnings, release, prepared a reconciliation of all non-GAAP financial information to the most directly comparable GAP financial measure. Our earnings release and this supplemental schedule should provide you all of the necessary information that you need to complete your financial models. The press release and related GAAP reconciliation are available on our website.

Overall, we are pleased with the company's results for the year, despite the continued uncertain economic environment. For fiscal year ended June 30, 2004, we achieved record annual sales of 955.1 million, representing an increase of 5.3% over the prior year. Wholesale sales increased 1.9% and retail delivered sales increased 9.5%, and comparable store sales increased 4.6%. For the three months ended June 30, 2004, our fifth consecutive quarter of improved sales performance, sales increased 4.3% over the prior year quarter.

Wholesale sales increased 0.8%, retail delivered sales increased 7.6%, and comparable store sales increased 6.1%. Our written sales increased for the year by 4.4% from the prior year. Wholesale orders increased 3.2%, while written sales increased 7.7%, and comparable store written sales increased 2.6%.

The written business for the fourth quarter was impacted by store business conditions and timing of product introductions, and the leveling of orders due to full implementation of the everyday pricing program. Written business was lower by 7.6%, as compared to the prior year quarter.

Wholesale orders were lower by 10.2% while retail written sales decreased by 0.9%, and comparable store written sales decreased 2.6%. The decline of 2.6% in comparable store activity provides a better indication of normalized written business during the quarter. Gross margin for the quarter was 47.5%, compared to 48.6% in the prior-year quarter.

For the full year, gross margin was 48.3%, compared to 49.5% a year ago. Excluding the effects of restructuring and refinancing charges, operating margins remained strong at 14.2% for the quarter compared to 13.8% in the prior year, and was 14.7% on full-year basis for both fiscal 2004 and fiscal 2003.

Our wholesale operating margin also remained strong. Prior to restructuring and impairment charges, the margin was 17.1% for the quarter and 17.9% for the year, compared to 18.4% and 18.5%, respectively, in the prior year. The retail operating margin for the quarter and the year, was 1.9% and 2.3%, compared to 0.9% and 2.8%, respectively, in the previous year.

Regarding our balance sheet, cash decreased 149.5 million during the quarter primarily as a result of a one-time cash dividend of $3 per share utilizing 111.4 million, and repurchase of approximately 960,000 shares for 37.3 million. During this fiscal year, we have so far, that is the fiscal 2005, repurchased 312,000 shares for 10.9 million.

Our remaining authorization is currently at 1.5 million shares. Inventory levels remained essentially unchanged during the quarter and were lower by 11.3 million year-over-year. Our capital expenditures for the year amounted to 23 million. For the fiscal year, we generated operating cash flow of 125.5 million compared to 100.1 million in the prior year.

Fiscal year 2004 was challenging as well as very productive. During the year, we undertook many initiatives with objective of improving the competitive advantages of Ethan Allen. As I have said in the past, it is very important to undertake major projects in a slower economy. Following are some of the main initiatives. The first is repositioning of our product programs to reach a larger consumer base.

During the year, we continued the development and marketing of major product programs such as Tuscany, New Country, Newport, and the development of Casual Contemporary program, which we plan to introduce in September of this year at our convention. By spring of next year, we will have changed about 70% of our product programs in the last three years, strengthening both the formal and the casual programs with stylish, quality products at good value.

Second, balancing the sourcing of products and strengthening of our domestic manufacturing. During the year, we took steps to consolidate two additional manufacturing plants. During the last two years, we have consolidated a total of five plants. The result is that we have concentrating our U.S. manufacturing in our best plants and as we move forward, we anticipate better utilization.

During the fiscal year we absorbed over $15 million in negative variances due to plant closings and downtime, which negatively impacted our gross and operating margins. At this stage, our plants are being better utilized and we expect this reduction in excess capacity to have positive impact on our margins.

During the year, we continued to develop an effective outsourcing program; at year-end, outsourced products represent about 30% of our sales. In anticipation of potential duties on bedroom furniture from China, we had developed alternative sources for this product and we do not expect any material impact on margins of service.

Third, developing a strong retail network. We ended the year with a stronger retail network, both independent and company-owned. About 60% of our wholesale business comes from our independent retailer network, and these retailers remain financially strong. We continue to make major improvement within the company-operated Retail Division in our management, stores, logistics, and information systems. We expect continued improvement both in sales and profitability from the company Retail Division.

The fourth, repositioning of the store network. During the year we continued to reposition and strengthen the Ethan Allen retail network. We ended the year with 311 stores; 127 of them operated by the company. During the year, we opened 11 new stores, 5 of which were relocations and closed 4 stores.

During the fourth quarter, we opened 3 new stores, 2 being relocations and closed 2 stores. During fiscal 2005, we plan to open about 14 new stores, 9 of which are relocations. We continue to make progress in opening new stores at the right locations, mostly larger in size and conveying our current image.

Fifth is strengthening our marketing programs. Finally, among our marketing programs, we introduced during the year one of our most important solutions: that is of offering all of our products at everyday best prices. The response of our design consultants and consumers has been very positive. As we move forward, this initiative will help us become more productive in forecasting, servicing, and most importantly, in the productivity of our 3,000 design consultants.

I would like to advise you that our annual investor conference is scheduled right after our fall retail convention on September 21st, in our headquarters in Danbury, Connecticut. During this conference, you will be able to review our new products and business plans in greater detail.

We are gratified that we are repositioned and reinvented Ethan Allen so that we are able to be ready for the next phase of economic growth and interest in home decorating. We have positioned Ethan Allen to be a provider of solutions and service to the consumer. At this point, I will open the call for questions and comments.

[Operator instructions.] Our first question comes from Margaret Whelan from UBS. Your question, please.

Good morning, Farooq.

Good morning, Margaret.

Nice quarter. A couple of questions. The first one is, will you talk a little bit about the delay in the roll-out of your new product lines and the reason for that, and what we should be expecting when that product comes out?

Our initial objective was to produce some of our -- this casual, contemporary products to our retail networks in June and then deliver the products sometimes toward the end of the year or early next year. But as we got closer to June, we realized that we did not need two conferences to introduce products because as long as we were going to deliver the products in end of the year and early next year, it made sense to only have one convention. And that's what we did.

Because what we'll do is we'll still introduce the products, we'll still deliver it fairly close to what our original objective was, but rather than spending all kinds of time and effort and money on two conference we're going to only have one.

Okay.

Our casual contemporary products are going to be very -- a fairly major introduction for us, because the last three years we have spent time in reinventing our formal side of our business. And now we are in the process of developing products for the casual side because we have a tremendous opportunity in that area. And starting early next year to the middle of next year, we'll be marketing it to the consumer.

Okay. And the -- the casual contemporary, is the price point about the same as your average or is it slightly lower?

It would be on -- overall, it will be slightly lower, but not much.

Okay. And then we're hearing just a lot of scuttle butt out of China about delays because of the power shortages and the tariff. I know you've a vendor relationship with Alexander and their tariff was highly unexpected. Are you seeing any disconnect there?

Not -- not much different than what we have had in the past. We -- in fact, actually at this stage, our service position is the best we have had. We've had more delays going back six months or eight months back because of the fact, you know, we introduced a lot of products, and we give a fair amount of business.

Um-hum.

But therefore, they are catching on. Other than the normal issues from time to time, we don't see any major issues.

Okay. Good. That's good. And then just finally, you know there's some more retail bankruptcies going on this year. Are you seeing an opportunity to buy up any new stores?

Margaret, we have, of course, looked at this -- you know, the current issues of [Runas]. Their stores are just too big for us. And there are one or two or three locations that we are looking at which are somewhat more of the size that we want, and many of them are also in locations where we have already stores.

Okay. So just putting in a traditional [inaudible] or maybe one of your new kids stores or something wouldn't make sense?

No. Because of the size of-- I mean I'm talking of [Runas] stores are fairly large and most of them are already in markets where we have stores.

Okay.

We are looking very, very aggressively to have stores, but I want to have them in the exactly, absolutely the right locations.

Okay. Thank you very much.

Our next question comes from Budd Bugatch from Raymond James. Your question, please?

Good morning, Farooq. Yeah, just a couple of areas. Talk a little bit about what your dealers are seeing out there currently and what your expectations are, qualitatively and quantitatively, if you like, for the next 6 to 12 months in the environment, and what you see as the most important factors driving demand right now.

Budd, as I think -- as a number of other people have reported, there was a fairly good business confidence among consumers, we saw in the first quarter. Then by somehow in May, maybe because of all of the external factors, people were somewhat cautious. What we are seeing is right now towards the last couple of weeks or so in July, that we see that people are coming back into our stores. So we're seeing somewhat more of a positive attitude.

Having said this, we are somewhat being cautious because of the fact that so many external factors are there which does concern consumers almost from month to month. But, overall, we are -- our independent dealers, in fact, our own retail network -- is positive, and I used the word "cautiously optimistic," and we feel that is the best way to describe the perspective of all our retail networks.

As you look down around the future, too, for the next year and two years of the 300 plus stores, how many do you think need to be relocated or expanded over the next several years? How many of your own and how many of your dealer stores would you be --

We have targeted, Budd, about 50 stores.

Fifty?

Five-zero.

Over what period of time and how many of them would be --

You know it's as I said, in this next fiscal year, at least nine of them are going to be done in this next fiscal year. And we will do them as rapidly as we can. I wish that I could do them in one year's time, all of them, but to get the right location, to build the store, as you know, most of these stores we buy a piece of land, we put up a store, and we want them to be in the right location and it's sort of a more laborious process for us.

So we are going to do it as rapidly as we can. We have strengthened our real estate department, both from a legal perspective as well as people. And I think that as opportunities come by we are positioned to get more stores in.

Nine of your own, or is that nine of -- combination of the company-owned and the owner stores?

It's a combination. I would say that most probably -- I don't have the numbers -- but I would say 60% will be company and 40% will be our independents.

All right. Okay. Thank you very much.

Our next question comes from Ivy Zelman from Credit Suisse First Boston. Your question, please?

Good morning, Farooq. If you could elaborate on the gross margin decline. It sounded like with the cost running through with closing facilities, obviously, that impacted margins, and probably some of that behind you now. Also, whether the gross margin negative year-over-year comparison has to do with the everyday best pricing, and if that, in fact, is impacting.

You're doing a nice job offsetting it with lower SG&A, but if you could give us some guidance going forward on what we should expect grows margins to do with the costs hopefully being alleviated on the closures.

You know, our gross margin for the 12 months ended this year were 48.3% versus 49.5%, so we're about 1.2% off in our gross margins during the two fiscal years. And that's also approximate impact for the quarter, it was 1.1% difference. I think, substantially, all of that is due to the manufacturing issues relating to shutdowns, consolidations, and this year we are going to have some residue of these consolidations that were taking place in this first [inaudible]. So after that, I believe that we have the opportunity of going back gross margins that we had in the fiscal year '03, Ivy.

Great. And Farooq, with respect to your outsourcing, the balancing that you've been trying to accomplish, sounds like, obviously, you'll continue to do that going forward in terms of your initiatives. What do you think the '05 fiscal year would likely result in future closures or the 30% of sales should be where you wind up at the fiscal end -- the end of fiscal '05?

Ivy, at this stage we have six very good plants; three in the Southeast, three in the Northeast. In fact, there are five plants, one of them being a wood processing plant. These are now the most efficient plants we have, and we have the opportunity of having these plants run at a much better level of productivity, assuming that the business holds up. And we have today, I believe, that in the next fiscal year -- I don't think that at this stage we have any -- we are considering any issues of further consolidations. We're always open to looking at things, but today, I think we're well-set in our manufacturing and our objective is, as we go forward and business conditions improve, to keep them really busy.

But that's the only we we can be competitive in the United States. Today we have that kind of manufacturing base, both in upholstery and case goods. And I think as we go a year from now, I would think that at this stage -- and again, it's too early to make that kind of a judgment -- but I would think that for the fiscal year, our ratio of 70/30would more or less remain at that level, Ivy.

Terrific. And lastly, Farooq, with respect to the everyday best pricing. Realizing that, if anything, over the last few months with the industry struggling, we've seen an increase in promotional activity and discounting. It seems as if not only are you, again, the most innovative, but it may -- it's somewhat surprising that, I guess, the consumer wouldn't be more inclined to go with the discounting. Can you talk about our your designers have reacted to this and how the reception's been by the consumer with a little more detail?

Everyday pricing solution is one of the most important initiatives we have taken and it's also one of the more, you might say, scary initiatives, because the whole world only has -- believes on sales. So we had to do a lot of internal marketing to make this happen. And what we have found is that our design consultants have embraced it, which is the most important thing we did.

Our retailers also embraced it, but, you know, those -- some retailers in our system who have not completely positioned their stores as a source of solutions with a great team of design consultants, they are the ones who are more nervous. But you know for them, there is no option. They've got to embrace it because it is the only we we can differentiate ourselves and sell to the consumer. Just think of it that our design consultants were spending a tremendous amount of time working with the consumer around the sales -- the beginning of the sale, the end of the sale -- and they were not really giving the consumer what was the best for the consumer.

Now, if we were in the business of selling a commodity where people would come in and say, all we want to buy is that sofa, a chair or a table or whatever, and the price was the most important issue, then the consumer makes the decision. But when our 3,000 design consultants work with consumers, we said we are going to give them the whole menu at the best possible price, and they understand it.

It's like go being to a restaurant and saying that only 30% of the great menu is on sale, the rest you've got to wait. And, you know, when we used that analogy with our people, they understood it. But it's going to take time.

How much of your product right now is using everyday best pricing?

A hundred percent.

A hundred percent? Okay. Great. Thank you very much.

Again, if you have a question, please press the 1 key on your touch-tone telephone telephone. The next question comes from Joel Havard from BBNT Capital Markets. Your question, please?

Thank you. Morning.

Morning, Joe.

Farooq, the transition to an EDLP structure confuses me in the sense that I was always under the impression that the sales promotions tended to emphasize certain products during the sales promotions, and that that was how you were able to drive efficiencies at the factory. If lower pricing smooths production over the course of the year, does that -- how does that translate into better planning and scheduling at the factory level or is it an inventory, a buffer stock?

All right. Joel, you know, first of all, thank you for giving this EDLP. At first I was figuring out what you were saying. But it's good, we're going to use it. EDPL. Now, to make this happen, Joel, we had to spend a fair amount -- this has taken us years to do this.

Um-hum.

Previously, about 14, 15 years back, we decided to go from, you know, 30, 40% suggested sale prices to 10% or 12% sale prices. So we had really already narrowed down the difference between the regular and the sales price.

Um-hum.

The second thing that we did, which was the most important one, is the fact that our whole product program has now been changed to reflect a lifestyle projection rather than a manufacturer's selling of product line. Let me explain that.

You know, we were a manufacturer, we still are, but our thinking was, even 15 years back, a manufacturer we said we're going to develop lines. We developed a wood line, would be cherry, maple, pine and everything else, and each one was sku's were 150 to 300 items.

Um-hum.

That is not the case today. Today, our whole product line is more mixable, it's integrated, like, for instance, this Tuscany bedroom and the Townhouse bedroom, which, you know, has gotten this higher duty.

Um-hum.

The total of the two is eleven items. Eleven items is all, and they did a great amount of business. So in other words, our British Classics, our New Country, to make this happen we have spend the last few years transforming our product lines from a manufacturer case goods program to a lifestyle program where products are intermixable with very few items doing the work.

Now that is very, very important, because when we had 300 different items, then from a manufacturing point of view, we had to do what we did before that only focused on 30% of those. Today, we can focus on 100% and have it in stock, and that is what is enabling us today to better service it, have all of it in stock, and be efficient in our manufacturing.

Okay. So that's the key -- you're building to a -- you're still building to a forecast; that forecast is translating into an inventory position that allows you to still maintain the quick serve?

Exactly. And look at this, we are 92% -- we deliver within four weeks of our case goods and our inventories are lower.

Hmm. Well, I guess I'm looking in terms of towards --

You know, what we did yesterday was yesterday. It worked fine. But not for today and tomorrow, Joel.

Okay. All right. I think I understand, and I'm sure I'll pester you about this a lot over the next year or so as the transition continues.

It's all right. You can pester me because this is a very important one. I'm not an easy decision to make, and I, myself, am holding a lot of hands right now to go through this very important initiative in our own system.

Sure. Finally, Farooq, do you all have a handle on what ending square footage for the whole system was at year end?

Not really. I mean, you know it -- it doesn't -- I can have that -- I can get some information on those, but, you know, really I don't look --

I know it's not a focus, but just to kind of help us put a yardstick to the year.

No, if you had to do this, I would say, approximately, we have 4.5 million square feet of retail space.

Okay. All right. Thanks. Good luck, guys.

Alright.

Our next question comes from Laura Champine from Morgan Keegan. Your question, please.

Good morning.

Good morning, Laura.

I know that you grew revenues 5.3% last year, but what was your unit growth?

Well, if you are -- if the question goes back to the fact of its impact on our, you might say average price, our unit growth was approximately similar, and in fact, our average price for the whole fiscal year was about 2% lower than the previous year. So what we've done is we've been able to maintain our price points -- and that was the question that was asked earlier, too, and I know this question has been asked of us in the previous conference calls -- and that's why I have some work done on this.

Okay. So to hit the 8% top-line growth that you think you might be able to do this year, will you need just similar unit growth or will you need greater unit growth?

I think, overall, this year also -- if last year we achieved this growth with a 2% decline in our average price, I would say most probably -- I'm just right now just making a judgment -- I would say 1, 1.5% further decline in the average price would be, then, the factor that we will add to the number that you are talking about.

Okay. So to -- so roughly 10% unit growth would get you to the 8% top-line growth for next year?

About 8.5%. I would say about 1.5% or so next year.

Okay. For -- in the -- I know you said 14 new stores, including nine relocations. Are there any store closures or is that five net-new stores for next year?

Don't have any store closings in mind right now, but it's possible there might be one, two, or three, you know. As year comes by we look at stores, but it's possible that we might have two or three stores that will close.

Okay. Thank you.

Again, ladies and gentlemen, if you have a question, please press the 1 key on your touch-tone telephone telephone. Mr. Kathwari, I'm showing no further questions at this time.

All right. That's great. I can go back to work. And I'm looking forward to seeing you at our investor conference on September 21st. And any questions, please give a call to Peg Lupton. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect.