Ethan Allen Interiors Inc (ETD) 2007 Q3 法說會逐字稿

Good day, Ladies and Gentlemen. Welcome to the Ethan Allen Interiors Inc. quarterly earnings release conference. ( OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to your host today, Mr. Farooq Kathwari, Chairman and CEO. Please begin, sir.

Yeah, thank you and good morning. I am Farooq Kathwari, Chairman and CEO of Ethan Allen Interiors Inc., I'm joined by Jeff Hoyt, our Vice President of Finance,and Peg Lupton, our Vice President of Investor Relations. We are today giving you an overview of the three months and nine months ending March 31, 2007.

During the quarter, we achieved the following objectives: Despite a challenging home furnishings retail environment, a very tough comparisons to our last-year third quarter results, a decline of 7.7% in sales, we improved in the gross margins and also maintained an operating earnings of 11.4%.

We have continued to strengthen Ethan Allen's competitive position as a provider of solutions and service. At this stage, while still early, and again having tough comparisons with the last quarter of fourth year where our total written was up 14.5% in the retail division, where our comp written was up 6%, where the retail division delivered 21.8% and comp delivered was 12.8% and total sales were up 12.3%. We do believe that our -- that we have the opportunity to generate earnings per share for the fourth quarter ending June 30, 2007 in line with current range of analyst estimates.

I will be providing you with greater details about our business and also my comments relating to trends and at this stage, I would like to ask Jeff Hoyt to provide a brief overview of the financial performance for the period. Jeff.

Good morning. Please note in the earnings release issued earlier today and in the course of our prepared remarks, reference is made to certain non-GAAP information which, excludes the effects of restructuring charges recorded during the current and prior nine-month period. A reconciliation of this non-GAAP information to the most directly comparable GAAP measure is available on our website.

For the quarter, sales totaled 246.5 million, representing a 7.7% decline from the prior-year comparable quarter. As mentioned last quarter, and in this mornings earnings release, sales in the current quarter were up against very challenging comps in the prior year periods.

As Farooq mentioned, sales increased 16% last year quarter, with double-digit increases experienced within wholesale sales, retail sales and comparable retail sales. In the current quarter, wholesale sales decreased 10.6% to 171.9 million, while sales for the company's retail division decreased 0.3% to 167.7 million and comparable retail sales decreased 8.6%. For the period, retail written sales increased 2.1% and comparable written sales decreased 7.1%. The consolidated gross margin for the quarter was 52.1% as compared to 50.5 in the prior-year period.

The increase in gross margin reflects a higher proportion of share of retail sales to total sales during the period and efficiencies within all facets of our product sourcing operations, most of which was brought about by improved pricing on selected raw materials, namely foam and reduced overhead associated with previously-closed plants.

Partially offsetting these gross margin gains were the additional costs associated with the closing of our Spruce Pine facility, including the reallocation of related production and the operation of our Case Good plants at 32 hours for much of the quarter, in an attempt to balance inventories. These items negatively effected the consolidated gross margin by approximately 1%. For the quarter, the consolidated operating margin was 11.4%. And the wholesale and retail operating margins amounted to 18.5% and negative 0.1% respectively.

Operating profitability has been reasonably well-sustained despite the decrease in volume, due in large part to the increasing gross margin mentioned earlier and a continued focus on cost containment, particularly within our distribution operations. For the nine months ended March '07, sales amounted to 746.8 million, representing a decrease of 6%. The wholesale sales decreased 11.6% to 493.2 million, while sales for the company's retail division increased 0.9% to 511.1 million and comparable retail sales decreased 6.4%. On a year-to-date basis, retail written sales increased 1.8% and comparable written sales decreased 6.1%.

Our financial position remains strong as of the end of the period, Despite the continued growth of our retail division and an overall softer environment for home furnishings, we have effectively controlled inventories, keeping levels essentially flat with those reported at December '06 and down 5% from June '06 while at the same time, maintaining good service position.

Elsewhere within the balance sheet, the increase within prepaid expenses and other current assets is a result, primarily, of income tax receivables brought about by the magnitude and timing of our quarterly estimated tax payments. Throughout the period, we continue to employ available cash in a manner consistent with our past practice of re-investing in the business and increasing shareholder value. We generated operating cash of 69.9 million for the nine months ended March '07, utilizing 58.8 million to fund the capital expenditures and acquisitions, 40.2 million to repurchase shares of the company's stock and 18 1/2 million to pay quarterly cash dividends..

During the quarter alone, we repurchased 581.200 shares of our stock for 20.4 million, representing an average price of $35 per share. As of April 23, '07, we have remaining authorization to repurchase an additional 1.9 million shares. Overall, we're pleased with our operating results and financial standing in the challenging environment and at this point, I'll turn things back over to Farooq to provide an update on our strategic initiatives.

Yeah, thanks, Jeff. And, I am pleased to provide a brief overview of our initiatives during the quarter focussed on positioning Ethan Allen as a leading provider of interior design solutions.

We continued our focus on strengthening our associates at the retail division and our licensees. We're attracting many independent interior design professionals to give up their businesses and join our team. Our structure of a credible and desirable brand, everyday best price, a vertically- integrated structure gives these independent designers an opportunity to practice with profession-- their profession with professionalism and makes the process simpler for them and the clients.

We have also strengthened our comprehensive training programs, including the intensive boot camp training for new associates held in our headquarters in Danbury, Connecticut. We continue to add stylish, better quality and good-value products. During the quarter, we launched the modern glamour program with a coordinated advertising utilizing national television, direct mail and other mediums. The reaction to this program has been positive, both by our own associates and the consumer.

Towards the end of the quarter, our design centers got ready to receive the horizon's studio program which will be marketed this fourth quarter starting in May, again with a coordinated advertising and a marketing program. During the quarter, we opened nine design centers, which included four in China. In North America, we opened design centers in Fresno, California, by an independent Ethan Allen retailer; Winston-Salem; Florence, Kentucky, a suburb of Cincinnati; and Dallas, Texas. Four design centers were closed all with relatively low volumes. During the quarter, we acquired two design centers in Florida and at the end of the quarter, we had a total of 310 design centers of which 156 are independent operated.

As you know, most Ethan Allen stores were open in the late 1960s and 1970s-- and early 1970s. Since our IPO in 1993, of the 268 design centers in the United States, 59% are new. Our independent retailers have also participated in the opening of new and relocated design centers. Ninety-nine out of the 149 company-operated design centers are new and 53 out of the 123 design centers operated are new-- let me repeat that, and 53 out of the 123 operated by our independent retailers are new. Of the 38 international locations 82% are new since 1993.

Our objective continues to add 15 new design centers each year of which about 80% are expected to be relocations of existing design centers. During the next six months, we expect to open eight to ten design centers in important markets such as Los Angeles, Denver, St. Louis, Minneapolis, Dallas, Philadelphia, San Antonio, Cincinnati and most importantly, a major design center in Manhattan on Third Avenue and 60th Street adjacent to Bloomingdale's. We continue our strong focus on internal and external marketing. We have increased our national television presence every other week for the year. In January, we introduced our 350-page style book which is available on a complementary basis to consumers when they visit our design centers. In addition, we continue a very strong program of direct mail, mailing out approximately five to six major mailings during the year.

We're also expanding our reach via bimonthly e-mail, and as I mentioned previously, we expect to roll out our new website by the end of this year, which will enable consumers to also order online. We have been able to control our costs and reduce costs in-- in many areas, such as -- especially our distribution division, which during the last 12 months has been undergoing a major transformation with consolidations of two major distribution centers to our now distribution centers in Dublin, Virginia, and Tulsa, Oklahoma. During the last one year, we have spent an excess of $3 million in additional expenses for this transformation. We continue to fine-tune our vertically-integrated structure which evolves from the concept of an idea to its design, manufacturing, retail, service and delivery. And finally, let me expand on our statement of positive trends.

We're greatly impacted by consumer confidence, we see positive trends due to many factors, including improved stock market, stabilization of housing and lower unemployment. During the last few weeks, we see our clients getting more positive and willing to make commitments. We are progressively seeing, in March, better results than we have had in the previous two months in terms of written sales. We also see the excess inventory issue, that of our competitors have, seem to be stabilizing and while the factors outside our control are improving, most of our profits will come, as it has in the past, through our own initiatives and positioning Ethan Allen as a provider of solutions and service. With this, I would like to open for any questions or comments.

Thank you. ( Operator Instructions ) Our first question comes from Budd Bugatch.

Good morning, Bud.

Good morning, Farooq. Congratulations on your operating earnings performance. It's really very, very heartening. A couple of questions. One, was interested in your March comments, obviously, I think that takes precedent over anything else. There any way to quantify it? Maybe characterize it against last March, give us some additional color on what you're seeing year-over-year or quarter-- month over February and January--. and April so far.

First of all, I am -- we still,l as I mentioned earlier, our comparisons for the third quarter weren't extremely high, 15% increase in sales. That's we were comparing against. So, our sales were down but, as you rightly said, to maintain an 11.4% operating earnings with decline of 7.7% and all the other factors, I think that reflects the fact that we have been able to really control our costs and fortunately, we didn't have inventory issues.

Because we have been very, very careful in managing our inventories and we have always also felt it was important for us to take down time, and it's tough to take down time, and we didn't have to. We could have maintained our inventories but, we at the wholesale level, reduced our inventories., because, I know excess inventories means possibly lower future earnings. So, we have done that and we have taken that-- those issues. We're comparing again tough numbers. But to give you a perspective, that for instance, we were almost flat in our comp sales, just about, I think, down a percent or so in March as compared to larger declines and over the quarter, we declined 7% but March was 1%.

Okay, and any comments so far on April?

It's a little bit early. We continue to see guardedly, but positive, trends from our retail.

Okay, I am, though, I am-- marvel at your inventory composition, particularly with more company-owned stores and can you give us any color on how that inventory and particularly on the finished goods which would be both for your wholesale support and for the -- for your retail stores. What does that composition look like now and how does that compare year-over-year, quarter-over-quarter?

Okay, let me just give you from our fiscal June '06 to March '07. Our wholesale and (inaudible) inventory is down approximately 14%, which includes a decline both in factory level and finished goods and our inventory, the retail increased 5% reflecting about 20 new stores.

That is very, very -- that's impressive. Okay. And, the last question I have, is just a detail question. I think you have 272 stores, if I did the math right, in the states, how about North America or Canada, what is the level?

It's 268 in the United States.

272.

Peggy said 272 in-- in Canada, you mean.

Yeah.

I understand. 268 in the United States and four in Canada, 272 in North America.

Okay, so the 38 international are the ones that are offshore.

They're all offshore.

I got you. Thank you very much.

Our next question comes from Ivy Zelman.

Good morning, Farooq, good morning, everyone. Congratulations, like Bud, it's very impressive and you obviously continue to show the differentiated model that you have. I am curious though, Farooq, with respect to your comps in March, I would imagine that some of that is related to easier comparisons throughout the quarter compared to the strength you had a year ago in January and February which may have caused some of that weakness. Is that somewhat the case here, that March was an easier comp than January-February?

Jeff (inaudible) -- get that information for me. Let us see what happened in last year. Ivy's question is our comps. What was -- Jeff, what is it? What is last March?

Last March our comp was 53 million.

In terms of down. They were down 1% this last year. Yeah. This is -- I'm talking about -- she's talking about '06 compared to '05. You don't have it here.

No.

I think, Ivy, I'll take a look at it to see-- you're talking about '06 to '05.

Yeah, I was just wondering if the benefits of the improvement might have just in the comp with a little bit easier.

No, it's not easier.

It was not easier?

Our comps, as I said, overall were up 12% for -- and I think we had it more across the quarter. But, Peg will let you know.

Okay, thank you. I guess the view that you mentioned that your feeling better and your customers are feeling better, stock market improvement, housing is not stabilizing based on my due diligence. In fact, it's accelerating in its weakness over the last three to six weeks and, obviously, that may not show up in terms of the impact on you, but what would happen in your expectations, Farooq, your fiscal year ends in a quarter, but, when you look out the next 12 to six months, let's assume that my due diligence is correct, and the housing market continues to worsen, or get more difficult, and people are continuing to have financial issues related to the tightening and credit, what, does that do to your thoughts on the business, realizing that right now you made the comment you're feeling better, obviously would change your view somewhat?

Well, obviously it depends on the extent of it, Ivy, and also as we have held relatively well and the reason being this, that most of the housing boom that took place which I have used to say so many times, used to be at more or less at the beginning price points. It did affect all housing, but certainly the majority was there. m And, they are the people who have been greatly impacted negatively by this housing slump.

Our customer-- the demographics of the customer, although impacted, is impacted less and impacted more by the impact on their confidence level of what is taking place. They're not necessarily impacted directly financially but it's a confidence level. And the confidence level depends upon the extent of what is going to take place. It appears to us that, yes, we have had a major issue, we still have issues on housing, but I would think at the level of the demographics we're taking, which is middle to upper level, we think that our demographics will be less impacted than the general public in the United States; however, it depends on the extent.

Okay, thank you.

Ivy, I just got that information.

Sure.

Last -- we were about 7% comp last March to '05.

Great, all right, thanks, Farooq.

Okay.

Our next question comes from Matthew -- ( inaudible)

Hi, good morning.

Matthew, please go ahead with your question. Pick up your handset and press the mute button.

Okay, why don't we continue on until Matthew gets on.

Our next question comes from Laura Champine.

Yeah, good morning.

Good morning.

We heard that there might be an initiative to purchase back a larger slug of franchise stores. Is there anything to that, Farooq, are you looking at buying back more than Wednesdays, Tuesdays that you have in recent quarters?

No, I have not heard that rumor and obviously it's a rumor which I have not heard. At this stage, it looks like it will continue the way we have done it in the past.

Okay, thank you.

Our next question comes John Baugh.

Good morning, John.

Good morning, congratulations. Curious, I think you mentioned the two stores you acquired were in Florida and we know that state is in particular state of distress. Was that a-- somewhat of a distressed sale and the broader question, are you seeing any of your licensed dealers struggling and, you know, obviously you're in a position to, quote, bail them out and take them over. Just -- just curious to that outlook.

We don't bail anybody out. We're not the federal government there, John. We basically work with folks that make good sense (inaudible), that's how we do it.

Overall, interestingly, Florida business is down but not to the extent of what we are hearing, again in the general markets, and I think that relates to what ivy was asking me about the impact on our business relative to a major impact of housing in Florida, certainly. In fact, our-- our business in Florida and the company retail division in the east coast has more or less held up the last eight or nine months. These we purchased was from a retailer who was not doing well, but mostly because they were not following up on the strategic initiatives they needed to and that was the reason we decided this was in Fort Myers and Naples, and it's a very, very important market. And, we felt we needed to do that so we are going -- we're in the process of building a great new design center in Fort Meyers and for the next year or so, we'll operate the one that we have there.

Okay -- .

So, again, the broader question, the difficulty we're seeing at retail hasn't caused a number of your licensed dealers to call you and say this is a good time for us to move out, are you interested?

No more than the usual, although this has been a tough period for the last year or so, has impacted everybody, it has impacted a cash flow. It has impacted small competition and also made everybody realize that on this today your positioned well and you're the best location of a design center. You have great people to work there and you really embrace the Ethan Allen program, you're going to get into trouble. And, those folks who are embracing our program are doing better.

Great. And then, I wanted to go back to the wholesale operating margin. You mentioned some positive factors and then some negative factors. I'm just-- I am trying to make sense of a pretty sharp decline in volume and (inaudible) and EBIT, year-over-year. With their-- Number one, there was something in the year-ago period that dragged, I don't recall and number two, just a little more color on-- was there a mixed shift to the positive or is this all cost reductions and distribution, or just more color on how you're able to achieve that margin.

Well, first of all, as can you see, our wholesale business was down. Now, more and more our wholesale business and information we're giving you, while important, is not as important as it used to be. Because, a great amount of our wholesale shipments go to our company retail division and at the end of the quarter, depending upon how much or what the wholesaler ship them and is shipped out, has an impact on what the wholesaler reports.

For the wholesaler at the end of the day, we have to eliminate that unless shipped to the consumers. So, that's why the wholesale in the past, when we shipped it and we were predominantly selling to our dependents, wholesale was our main business in terms of reporting information.. Today, when we ship about 50 to 60% of the wholesale to our retail division, and that retail division inventories at the end of the quarter, has an impact on the eliminations and thereby, the reporting, of our wholesale shipments, yet the wholesale profitability reflects without those eliminations. John, are you with me?

Yeah.

Now, that is the reason our wholesale can show a very high profitability. Yet when you consolidate it, the overall gets lower, because of the fact that all of that may not have been shipped by our retail division. So while you look at our wholesale image, it's relevant but it's not as relevant as it used to be. That's number one.

Number two is that while we still,l as Jeff mentioned, are running operating expenses off the closed plants, like Spruce Pine and to some lesser degree, Toka, we have now gone through the cycle of the costs associated, for instance, the Dublin closing and other closings. They're out of us, or most of us are out of our system. We (inaudible) drag. While we still have a drag until most probably around the year or so when most of the operating expenses of Spruce Pine, for instance, that flows through our income statement will be out. The third thing, is we don't have distribution. Distribution was-- was an expensive proposition of consolidating our major distributions in Vermont and North Carolina is where we used to ship our products from. We took all the product into Dublin, Toka, (inaudible). and Encino and left one more in Northern California and cost us, as I said, approximately $3 million of expenses in addition to the cost of improvements.

We are now seeing in this quarter a lot of those costs are no longer--were in the third quarter and, of course, as you go forward, those costs are not going to be there. And then finally, we have also been able to, as we continue to do, we look at our structure. Our every day best pricing has continued to make tremendous improvements overall in cost reduction, because of the facts of having six sales and preparing for those sales in terms of costs associated just managing it at all levels and they're fairly expensive. All of those are benefiting us today.

Right, thank you for that color.

Okay.

( Operator Instructions ) Our next question comes from Todd Schwartzman.

Hi, Todd, good morning.

Hi, good morning, Farooq. Did you return to the regular 40-hour schedule on your Case plan as you indicated you would hope to last quarter's call?

No, Todd, I had hoped to. Our objective now is to start from May.

In May?

In May, yeah. Okay, and -- We have been operating at 32 hours and that has been a drag. We can understand it, but we felt it was extremely important not to have inventories which we did not feel were the right inventory levels to have.

So, you got to the gross margin for the quarter, 52 without the benefit of any additional -- any length in shift?

That's right.

Okay. And in terms of Cap Ex, that 80 is looking ambitious now, for the whole year.. What's your forecast for Q4?

Approximately, -- I would say approximately $20 million or so in that range.

Great, that's all I have got. Thanks. Thanks, Todd.

Our next question comes from Budd Bugatch.

Yeah, Bud.

Goes to the capital question that Todd was just asking. That's a lot of capital. Last year, much of the capital was spent on the retail division and I would imagine that is where it's going this quarter. Can you give us some color on some of those capital projects and maybe comment on how much real estate now--how many of the stores the company-owned stores you do own now, the real estate?

Yes. In the capital expenditures approximately, in the third quarter, 85%--, 85 and 90% is on retail and is on for now retail locations. Not for maintenance but for new, and for us that's an important factor because this is not a capital expenditure in the sense of maintaining what we are doing, this is in lieu of. occupancy cost. And, occupancy cost, if you want to leave, as you know, that it would be almost twice the rent and we're also ensuring future cash flow for this company by what we have done and putting the amounts of money we have put into real estate for our retail-- for our retail division. What was your next question?

How many of the stores now, how many of the company-owned 154 stores, do you own real estate in?

Approximately 60.

Okay, thanks, Farooq.

Okay, Bud.

I'm not showing any further questions at this time, sir.

All right, thank you very much and good to talk to you. Anymore questions, please let us know.

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