Ethan Allen Interiors Inc (ETD) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Ethen Allen First Quarter 2008 Earnings Release Call.

At this time all participants are on a listen only mode. Later we will conduct a Question and Answer portion and instructions will follow at that time. If any one should need assistance during the conference please press star then zero on your touch tone telephone.

I would now like to introduce your host for today's conference, Mr. Farooq Kathwari. Sir, you may begin.

I'm pleased to have with us 110 of our retail professionals, joining us in this conference all here in Danbury, Connecticut. This group includes 30 members of our retail management team and 80 new interior design professionals who have joined Ethen Allen and are now going through a week long training program.

Jeff Hoyt will provide more detailed financial information in a moment but, first let me give a few highlights.

We are pleased that despite the challenging external environment, our sales increased 2.4% and earnings per share increased 7.5% to $0.57 from $0.53. Our and earnings per share increased primarily due to an increase in sales and improved gross margin, cost containment initiative and, the continued use of available cash to repurchase our shares and, to a lesser degree and increase in other income of $750,000 from sale of Clothes facilities.

We added 17 new Design Centers for the Regional division. Contributing to an increase in our operating expenses of about $9.0 million, offsetting this was a decline of about $1.5 million in our Wholesale operating expenses.

We maintained a strong financial position. Our inventories were lower than June 30, 2007 and about the same as September 30, 2006 despite adding 17 Design Centers for the Retail division

We generated $45.1 million in operating cash. Invested $12.5 million in capital expenditures, utilized $38.3 million to acquire 1.1 million shares and paid $6.2 million in dividends.

Our Retail division written sales increased during the quarter.The largest increase was in the month of August, partially due to the price increase for upholstery put into effect at the end of August.

Our Retail division written sales increased by 9.8% and comparable design center sales also increased 0.3% in this difficult period.

At this point Jeff will provide the quarter's financial highlights and I will follow with a brief business overview before we open the lines for questions.

Good morning.

Please note that in the earnings release issued earlier today and in the course of our prepared remarks, references made to certain non-GAAP information which excludes the effects of certain restructuring impairment charge included in the quarter ended September 30, 2006. The reconciliations of this Non-GAAP information to the most directly comparable GAAP measures are available in our web site.

For the quarter sales totaled $248.27 million representing a 2.4% increase from the prior year comparable quarter. Wholesale sales increase 0.4% to $156.3 million and sales for the Company's Retail division increased 10.1% to $182.8 million, while comparable retail sales 0.2%.Retail written sales increased 9.8% and comparable written sales increase 0.3%.

The consolidated gross margin for the quarter was 53.7% as compared to 52% in the prior year period. The gross margin expansion reflects a higher proportion of retail sales to total sales during the period and, efficiencies within our product sourcing operations most of which was brought about by the return of our case good plants to a 40 hour work week for the entire quarter; improved pricing on selected raw materials, including foam and reduced overhead associated with previously closed plants.

For the quarter, the consolidated operating margin was 11.2% and the Wholesale and Retail operating margins amounted to 7.1% and 0.5%, respectively.

On a consolidated basis, operating profitability has been reasonably well sustained despite cost incurred in the Retail division in connection with the addition of 17 net new Design Centers within the LTM and on-going efforts to ensure that all Design Centers are staffed with knowledgeable and professional design consultants.

Offsetting these costs were the gross margin gains mentioned earlier and the continued focus on operating costs [containment] within the Wholesale division, most of which occurred within our Distribution operations.

Interest and other income increased $0.7 million from the prior year period due primarily to gains totaling $0.8 million and associated with the sales of certain real estate assets during the quarter including two previously closed plan locations.

Other factors which positively impacted the results for the period include a slightly lower effective tax rate and effects of share repurchases and retirement occurring during the LTM, which served to reduce the weighted average share count by 6.6% or 2.2 million shares.

EPS for the quarter amounted to $0.57 on net income of $17.5 million. This compares to EPS of $0.26 and net income of $8.5 million in the prior year comparable period, which included a pre-tax restructuring impairment charge of $3.9 million. Excluding that charge the EPS and net income in the prior year quarter amounted to $0.53 and $17.2 million, respectively.

With regard to the balance sheet financial position remains strong as of the end of the period.

Despite the softer environment within the home furnishing retail and the continued growth of our retail division; which was stated previously at 17 locations during the LTM, we have effectively controlled inventories. Since June inventories have decreased 0.3%, and on a year-over-year basis have increased a mere 0,7%.

We continue to believe that our vertically integrated operation structure and continued inventory management efforts are proving to be successful while at the same time allowing us to maintain good service position.

One other item to note within the balance sheet, other long term liabilities increased $9.1 million as a result of our adoption during the quarter of our interpretation of FASB 48, a new tax accounting standard which requires that a portion of the Company's unrecognized tax benefit be classified as non-current liabilities as opposed to within the accrued expenses and other liabilities line item where such amounts were previously reported.

For the quarter we generated operating cash of $41.5 million utilizing $38.3 million to repurchase 1.1 million shares of our common stock in the open market.

Also during the quarter, we utilized $12.5 million on capital expenditures, more than 80% of which was related to the Design Center developments and/or renovation and, $6.2 million to pay cash dividends.

EBITDA totaled $35.1 million or 14.1% of sales as compared to $33.9 million or 14%, respectively in the prior year quarter, excluding the aforementioned restructuring charge

Given the challenging environment, we are pleased with the results and that this point, I will turn things over back to Farooq so he can provide an for an update on our strategic initiatives.

Thank you, Jeff.

I'm pleased to provide you a brief overview of our marketing and operational initiatives.

We have made major progress in transitioning Ethan Allen from a furniture manufacturer and retailer to an organization focused on providing solutions and service and in becoming an interior design company. The main initiatives (inaudible) are branding our product classifications into seven lifestyles and we're in the process of implementing the program in the retail network. Strengthening the professionalism of our associates.

During the last two and half years, we have put in place 300 project managers in our retail division and we have recruited 1,500 interior design professionals. Our independent retail network has also been enrolled in this process and we estimate they have put into place about 200 project managers. We have invested to train, on a monthly basis many of our associates.

We have continued to introduced stylish products that represent good quality and value. We conducted a retail conference two weeks back, during which we added many important product programs. We have made major editions to our current programs, to our leather upholstery and have also added many lifestyle presentations, especial especially in the Villa and lifestyle categories.

As you know, we are hosting an investor conference here in Danbury, on October 29 and we will have an opportunity to review many of our initiatives.

We maintained a strong marketing campaign. We have continued to invest in national television, direct mail and other mediums. Starting in October, that is this month, we further enhanced our national advertising program, our advertising expenditures increased about 10% this quarter, compared to last year's same quarter. We expect to maintain the increase for the balance of the year.

As we move forward, our objective remains focused on providing great style, quality, value and solution. In short, we refer to this as the SQVS initiative.

As we stated in our press release, we're gratified with our results. We're also aware of the difficult economic environment that still exists. As such, it's too early for us to give any information about the December quarter. We remain cautiously optimistic with regard to our ability to do relatively well as we move forward.

At this stage, we are ready for any questions or comments with the conference call ending at around 11:45 AM. Operator, could we please let them know how to get on-line.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Laura Champine of Morgan Keegan & Company.

Good morning, Farooq.

Good morning.

Could you comment on how sales progressed. I remember it early in September you mentioned that sales were tracking up year-over-year on a comparable basis and the end of the quarter flat. Should I read that into that, that sales decelerated in December?

As I said that -- we our sales increased during the quarter. Our largest increase was in August because of the fact that also, it coincided with the end of our -- coincided with the increase in prices in our upholstery program and also, we had a special financing program which also ended toward the end of August, early September.

Yes, we did have more business in August than September and I think what we did was we pulled some business into August from September.

Okay. So on a year-over-year basis, it would have been down in September but it's not clear that that because of the macroenvironment. Is that the right way to read that?

Yes. I think -- that is right.

Thank you.

[ Operator Instructions ] Our next question comes from Jeff Kline of Opus Trading.

Yes, thank you. Two questions what, percentage of sales are derived from overseas? I know you're involved in Asia and Mideast. I want to know how you take advantage of the low dollar on that?

You're referring to our sales from here or purchases overseas?

Sales.

Our sales we don't give the numbers but they have increased almost by 50% because of our business in China and we have 22 design centers operating in China right now, the 23rd is actually opening up in a few weeks.

What percentage of your revenues, the last quarter have been attributed to overseas sales?

It is less than 5%.

How much of the EPS are attributed to your recent buyback? In other words, you're reducing new shares outstanding and I want to know how that effects the earnings per share.

Yes. ---The the various elements which we discussed. Our gross margin contributed approximately $0.14 to our EPS increase. Our increase in operating expenses decreased our earnings per share by $0.14 cents and our shares repurchased contributed about $0.4 to the increase in EPS.

Thank you.

Our next question comes from Budd Bugatch of Raymond James & Associates.

Morning, Farooq.

Morning.

Morning, Peg. Just the -- gross margin is where I would like just kind of see if we can get some additional granularity. The 170 basis point improvement year-over-year. Jeff, you indicated that was due to a mix of retail and also efficiencies. Is there any way to quantify that differential, give us how much came from the manufacturing efficiencies or how much came from the mix of retail and maybe what the retail differential was year-over-year?

Jeff, we will be prepared to say if we take the wholesale and retail, probably close to half and half.

And yes -- the mix, Budd, was 73% retail total and the current quarter versus 68% in the prior year. So I would say at least a half of that comes from the shift.

And was the retail gross margin year-over-year about the same? Was there any major change in that from any promotional issues or discounts or markdowns?

Modest improvement.

Modest year-over-year?

Yes.

Okay, and you look at the inventories, that is remarkable that you have been able to -- essentially, keep inventories flat year-over-year with 17 additional design centers. Can we get an idea what the retail versus wholesale inventories look like?

-- Jeff is getting the information. Obviously our Retail inventory did go up and our Wholesale down and, part of that, Budd, was due to the fact of the two plants closing. By the end of the year, we were able to get out the inventories, work-in-process and, all of that. So that and the decline in our Wholesale and the retail increased ---

(inaudible)

You didn't need to buffer that anymore, Farooq, to keep service levels up?

Yes. We've actually done that. If you look at our -- increase from -- September-to-September is the question. It doesn't have it here -- but I would say that our September-to-September Retail did went up and Wholesale went down and it's likely, Budd, we will have some increases.

Especially we're making a very major initiative in changing and expanding our upholster programs. We have just introduced a major upholstery fabric program that started a month or two back, and in under four or five months would result in 60% change in our fabric programs. Reflecting the introduction of the lifestyles we reflect, giving an opportunity for us to an opportunity for us to expand our projections and that will give us some increase in inventories. But our objective still remains to be very cautious of the fact that we need to control our inventories and I believe you're not going to see, I believe another major increase.

Thanks and my last area of questioning has to do with the store composition. You now have 51% of the stores are company-owned, and we had, I think, from the June quarter to the September quarter it looks like, three independents were gone and the company's owned stores were flat. What is the outlook there? In my market here, we're going to have a couple of storms convert to a different format. What is going on inside the store base, Farooq, that you can feel comfortable discussing and disclosing?

This last past quarter we didn't acquire any stores. This quarter we did acquired two stores -- on top of the December quarter we acquired two stores.

We have had a number -- just a few locations including the one in your area, Budd, that decided to convert to a different brand because of the fact that they didn't feel compatible with our philosophy of converting our business to an interior design company and we believe that people have a right to make the decisions.

At this stage -- I think that we have a very, very stable network; however, our network as well as other networks have been impacted by this weak economy. Things are tough out there and if you are an independent retailer, it doesn't matter what brand. Ethan Allen, we're pretty strong. The fact remains if you're in an area of the country where things are bad, they're impacted. The reason why our Retail division has done relatively well is because we're spread out nationally. If you're in one region and that is negatively impacted, we would have a tough time.

So, ours independent, other independent retailers don't have that luxury. If they're in that market and that market is doing bad, well they get impacted. However, I think they we had a retail independent network meeting a couple of weeks back and, obviously going through a tougher time but we have a stable network now, Budd.

Okay, thanks, Farooq.

Our next question comes from John Baugh from Stifel Nicolaus.

Hi, good morning, John.

Good morning, thank you. Could you comment on how you're going -- doing in China with MarCor. Is that going in line with your expectations? And then I would like more color on the marketing spend, In particular, Are you doing anything different with the internet, your website?

Thank you.

John, am, of course, never satisfied and we should be doing much more. I have business in China, I believe, increased within 40% or 50%., 22 design centers. Obviously, as total dollars, it's not very, very large amount, because of the fact in China that we'rre getting started. MarCor is -- They're doing a good job. They projecting the Ethan Allen Design Center right next to their MarCor store. We're just in the process of launching, actually ourselves a national television, not -- a national advertising campaign and in the -- shelter magazine that is going to launch in a month or so. So , we're going to support them with a national shelter campaign of advertising in China starting in next

And then, again on the marketing spend here?

I'm sorry, say that again?

I had asked about your marketing spend. You said,it's up 10%.

Yes.

I am curious where that is going and if you're doing anything different on the website?

No, most of the market, 10% has gone into national and television and we have just started using a national television and primetime starting in October. Other website, as we've discussed in the past is under construction. The great website is going to be introduced early next year and I think -- we have, we believe, will have a tremendous impact in getting business and leads into our design center.

Are you going to sell on the internet?

We will, yes We are going to -- what we're going to do is we're going to -- I'm telling you some competitive things, John. (inaudible) folks are doing it and some of our competitors have already heard me.

So with that in mind, what we are going to do is, we're going to use our website to allow consumers to shop, to get information and, when they shop and buy, we're going to pass all the leads to our consultants in our design centers. Because we will consider them as leads. Even if they buy they are going to become a client of our design consultants. Our objective is to partner the website with our professionals.

And have you worked out that already in terms of the split, if you will, with the independence?

Yes, we have. We have discussed in great detail over the years and everybody believes that using technology and good personal service, we have for our 3,000 design consultants is a great advantage we have and we are going to use that. And our independent network also, almost 100% agrees with that.

Great, thank you very much.

[ Operator Instructions ] Our next question comes from Todd Schwartzman of Sidoti & Co.

Good morning, Todd.

Hi, Farooq, good morning. You referenced a 60% change in the fabric program. Is that a 60% turnover in the number of different fabrics or is that upholstered product SKUs over all or something else?

Todd, it's a 60% change in the fabrics, not in the SKUs of the upholstery items, even though we have made improvements over there, some changes but it's the fabric items. Not the SUKs in the upholstery program.

Does that change? Incorporate all price points for the most part?

What we have done, it does and, what we have done Todd, is when we introduced last year the seven lifestyles. We branded the lifestyles and then we gave ourselves objectives of taking the lifestyles and making many, many projections and it was to make 10 projections for each. As we did that we realized that we had the opportunity of creating more diversity in our fabric programs and while the number of our fabric is not going to change much but the diversity of the fabrics will change.

And there are factors in the last few months, the number of fabric mills ran out of business. That also created a problem. As you know, it created a big problem in the industry. We had to cope with the fact that a number of mills are going out of business, which impacted out fabrics. On top of it, at the same time we were completely remerchandising our fabric program, which we've done and on a planned basis every week or every other week, we're getting new fabrics into the hands of our design consultants.

Okay, and getting back to the media for a minute, are you boosting your radio exposure?

No, we are not. Our focus is on television and direct mail.

Okay. Finally, you have made a number of managerial changes in the corporate level in the past few months or so. Any -- you want to take an opportunity if there is an update to give as far as possible succession planning that maybe going?

We are very, very pleased that we have been able to promote two very talented individuals to the position of Executive Vice President . Nora Murphy heading our Style and Corey Whitely heading our Operations. We also promoted Linda Stout , the Vice President of our Advertising, Regional division, not Advertising. She's sitting right there. She was a bit little surprised. [ Laughter ] Now, Jeff Hoyt is next to me. As you know, he's going to bigger pastures and he has done a very, very good job. I commend him and he's also taken the responsibility of helping get his replacement here and we made great progress in

What about the next Chairman and CEO for when that day comes down the road?

Then, I will talk to you when that day comes.

Okay, thanks.

Thanks, Todd.

Our next question comes from Danilo Santiago of Fastwood Capital.

Hi, good morning.

Yeah, good morning. Could you tell me more about how you are being able to sustain margins on your wholesale which implies a lot of savings or price increase in manufacturing or wholesale?

There are a lot, a number of factors leading to that. The first, is the fact that we increased our sales. Our sales did not go down. The sales increased and we're able to maintain our Wholesale sales. We had the opportunity of absorbing our overhead, which we did.

Second is, we had benefited -- to a great degree by having our vertically integrated system simplified. Our every day best price enabled us to develop a business model that provides great service, credibility and also manage inventories and also manages markdowns. Somebody, I think -- the earlier question was that related to your question is -- How do we maintain our margins, especially these difficult times and promotions are going left and right? Through our system of every day best prices, we are better able to better forecast our inventories, better manage our inventories, work-in-process inventories and as well as finished and Retail inventories. And the result is that we have less to sell off that is discontinued, we have less to sell off excess inventories and we are able to maintain our margins.

And you saying your inventory plan, you plan ahead for the slowdown, maybe better than the competitors? They having a bad margins on manufacturing on the wholesale.

We -- if I understand you correctly, -- our margins also benefited from the fact that in this quarter, especially, we were very, very pleased that our case good plant, our wood plant are now operating at 40 hours and they were not operating at 40 hours for nine months, prior to that.

Okay, thank you.

Okay.

[ Operator Instructions ] Our next question is a follow-up from Budd Bugatch at Raymond James & Associates.

Yeah, Jeff, you may have mentioned this and I think I probably missed it because you went over it quickly. If you would do it again.

In the interest and other income, it looks like -- for modeling purposes, there has to be other stuff other than interest income in there. Can you characterize what that is and what it looks like to to continue?

As Jeff mentioned, we had about $800,000 increase in the other income this quarter versus prior year and practically, all of it was due to sale of real estate. We sold plants and we sold also retail store that we had closed gained from those. But, and as we go forward, that their is going to be --- We're fortunate that most of the plants we closed we sold them.

Not much more assets held for sale, Farooq? Or is there?

We have two plants left and one store. We're fortunate in the way we're able to manage in terms of closing as much as we have done and then selling them and as we go forward, it's also possible we may -- when we move some of our retail design centers. We have been able to, interestingly, make some gains in the sale of the retail stores that we moved and we owned and as you go forward, there will be some, but not many left.

Anything near-term?

When that happens, Budd, we'll let you know.

Okay, thank you.

Okay.

[ Operator Instructions ] Our next question comes from Barry Vogel from Barry Vogel & Associates.

Good morning, Ladies and gentlemen.

Good morning.

Farooq, you have been talking over the last years about locations that you believe need to be improved upon and the numbers a few years ago were fairly large. Can you give us an idea of where you think you are in terms of store locations that you would like to improve by changing the location?

This had been an ongoing process, Barry as you mentioned. Since we've been public, we have relocated 60% of the total network. 180 of 300 design centers have been relocated the last 15 years; however, the ones we relocated in the last 10, some of them had to be relocated again.

We have on board approximately 20 to 25 that we're working on, including one right in your backyard in Manhattan. We're going to be -- we're right now under construction of relocating two design centers, one on the West side and one on the East side to one right next to Bloomingdales on 60th, on Third Avenue and 60th Street. We should opening in the spring of next year.

We have approximately 10 or 12 others under construction that will open up this fiscal year and this process will continue. I would say that in the major relocations, in the next few years, we have done 50 to go so that we position them in the right places, so that we are able to get the right traffic, do more business. It is good for us. It's good our design consultants because if they do well, they make good money, which I want them to do so that -- these new design centers give creative opportunity.

I have a question for Jeff. Jeff, you have an estimate of capital expenditure and depreciation and amortization this year?

just The depreciation number for the quarter was south of $6.0 million and for the year, we're forecasting somewhere between $23.0 and $24.0 million.

And Cap Ex?

Cap Ex will be slightly lower than what we did last year. I would say, in the range of between $55.0 to $70.0 million.

Thank you very much, you're doing a great job.

Thanks very much, Barry.

Our next question comes from Eric Gross from George Weiss Associates.

It's actually Charlie Weissman, can you hear me?

Yes Charlie. How are you?

Good.

Go ahead.

I just noticed the customer deposits are up sequentially between fourth quarter and first quarter. I know last year they were down sequentially, is there anything? How should we read into that? Is that indicative of positive comps or what should we read into that?

That means we got more retail business know where during the period. The backlogs are higher. It does not necessarily mean comps. It means total retail sales, as we said were up 10%. And if if our Retail business is up, our deposits also increase.

Okay. I guess retail sales were up in the first quarter last year as well and deposits down sequentially but --

I think the reason -- we have to be very careful on this comps. The fact is -- Most of the design centers that we relocate, we don't put them into our comp numbers. We consider them as almost new. But the fact really is, these are existing stores. And -- we follow accounting rules but, they really, are not technically new stores. They're relocations and that is why you have to look at the total number. Our comp numbers are somewhat a little, I would say, deceiving in the sense that they may -- give you lower comps than you might have because of the nature of our new stores that -- especially the stores we're relocating, I mean.

Okay, thank you.

Our next question comes from John Baugh of Stifel Nicolaus.

Just a couple of quick follow ups and numbers, what was the diluted share count at the end of the quarter?

All right, Jeff is going to give you that, John.

Okay, and also while he's looking for that, any help with the tax rate going forward?

About the same John.

As the recently reported quarter? Okay.

[ Operator Instructions ] We'll pause one moment to see if there are any further questions.

The answer on the diluted is -- just south of $30.0 million as of the end of the quarter.

John is off but I am sure he heard it. All right, operator, there is no more questions?

No, sir, I'm not showing anymore questions at this time.

All right, well, thank you and good to have you on. We're happy, pleased to have the opportunity of continuing to do reasonably well under very, very tough conditions. We have a great talent here and I know that they are going to continue to do well. If you have anymore questions, let Peg Lupton know.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.