Ethan Allen Interiors Inc (ETD) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Ethan Allen Q4 earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a Q&A session and instructions will follow at that time. (Operator Instructions)

I would now like to introduce your host for this conference call Mr. David Callen. You may begin, sir.

Thank you, Kevin. Good morning. I'm David Callen, Ethan Allen's, Vice President of Finance and Treasurer. Welcome to Ethan Allen's earnings conference call for our fourth fiscal quarter ended June 30, 2013. This call is being webcast live on EthanAllen.com, where you will also find our press release which contains supporting details including reconciliations of non-GAAP information referred to in the release and on this call.

Our comments today will include forward-looking statements that are subject to risks which may cause the actual results to be materially different than expected when making those statements. Please refer to our filings with the SEC for a complete review of those risks. The Company assumes no obligation to update or revise any forward-looking matters discussed during this call.

After our Chairman and CEO, Farooq Kathwari, provides his opening remarks, I will follow with details on the financial results. Farooq will then provide more details about our ongoing business initiatives before opening up the telephone lines for questions. With that, here is Farooq Kathwari.

Thank you, Dave. Thank you for participating in our conference call to discuss our fourth quarter and fiscal year ended June 30, 2013. We had excellent earnings results for the fourth quarter and the fiscal year ended June 30th. We could have done even better on increase of our top line. That is our next opportunity.

As I indicated in our press release, that both of our written and delivered sales were somewhat impacted by several factors, including significant reduction of clearance from prior periods, lower international shipments to our international licensee, and importantly, (inaudible) written in the fourth quarter by timing of a price increase. Fiscal 2012 we had a price increase, effective July 2013, resulting in larger written in June 2012.

This year our price increase ranging from 2% to 7% will be effective August 2nd, thereby taking written business to July instead of June. We're already seeing the positive impact in July. While Dave will give more details, the impact of this in the fourth quarter, the written, was that instead a decline of 1.9% we estimate a positive increase of 2.1%.

On the delivered side, eliminating the impact of clearance and lower international sales would have resulted in about a 3% increase in delivered for the fourth quarter. However, as I said, our main focus is to increase the top line, which I will spend time discussing after Dave gives a brief overview of our financial results. Dave?

Thank you, Farooq. Consolidated net sales during our fourth quarter were $182.3 million, 1.7% lower than the prior-year quarter. As expected and as discussed during our third-quarter call, our net sales were impacted by lower shipments to an international retailer as they reduced their inventory and by 30% lower clearance sales through our retail division.

You will recall that clearance sales impact both our delivered net sales and our written orders.

Our retail segment net sales for the quarter were $145.3 million, up 1.1%, including comparable design center net sales growth of 2.5% and the 30% decline in clearance sales noted earlier. Our retail division's written orders book during the quarter were 1.9% below the prior year and included comps to our orders that were 0.9% below the prior year. Again, the written order growth was negatively affected by the 30% decline in clearance sales compared to the prior year fourth quarter.

The 147 design centers operated by the Company's retail division at the end of the quarter were equal to the count at the end of the prior year. Our wholesale segment net sales of $106.7 million were down 5.4% from our prior year. This includes the impact of the lower shipments to our international retailer.

Our global retail network included 295 design centers at June 30, 2013, compared with 298 locations at the end of last year. Independent retailers operated 148 of these, including 68 in China. This compares with 151 independently operated design centers last year. Our consolidated gross margin for the quarter improved slightly to 54% from 53.9% in the fourth quarter last year.

Our retail division made up 79.7% of our consolidated net sales for the quarter compared with 77.6% of the prior year which helps the consolidated gross margin. This was partially offset by a $0.04 million lower year-over-year benefit in consolidation from the sell-through of retail inventory.

We continue to see operational improvements in our wholesale business including leverage of our operations in Mexico and Honduras. Our adjusted operating expenses for the quarter were $80.9 million. This year-over-year reduction of $4.8 million, or 5.6%, demonstrated again our focus on disciplined business initiatives.

The current year excludes $1 million, or $0.02 per diluted share, incurred primarily for our international expansion. Please refer to our press release reconciliation tables showing the adjustments made to our results for all periods.

Our adjusted operating income for the quarter was $17.5 million, or 9.6% of net sales, compared to $14.2 million, or 7.7% of net sales the prior year, an increase of 22.7%. This includes an improvement of $5.2 million in the adjusted operating profit of our retail division on their 1.1% increase in net sales.

During the fourth quarter, we bought $24 million of our bonds which mature October of 2015. Costs related to that transaction total $1.9 million and are included in our other income line. We have treated these one-off costs as a special item adjusted from our results.

Our normalized income tax rate for both the current year and prior year was approximately 36.5%. Adjusted earnings per diluted share for the quarter increased 26% to $0.34 per diluted share from $0.27 the prior year.

Consolidated net sales for the full fiscal year were $729.1 million, essentially even with the prior year. The retail division's full-year net sales grew 3.4% to $578.3 million. Our wholesale segment full-year net sales were $434.4 million, down 4.9% from the prior year, which had grown 8% in part from higher-than-normal shipments of prototype products during our significant product overhaul last year.

Consolidated gross margin for the fiscal year improved 110 basis points to 54.6% from 53.5% the prior year. Adjusted operating income was $68.8 million, or 9.4% of consolidated net sales, up 32.9% versus the $51.8 million, or 7.1% of net sales, during fiscal 2012. This includes an improvement of $24.1 million in the adjusted operating profit of our retail division on their 3.4% increase in net sales.

Our adjusted net income in fiscal 2013 increased 39.6% to $38.4 million, or $1.31 per diluted share, from the $27.5 million, or $0.94 per diluted share, earned the prior year.

Now a few comments on our balance sheet and liquidity. As I mentioned earlier, we bought $24 million of our bonds during the fourth quarter, bringing our outstanding balance down to $129.4 million.

Even with this transaction and having paid $22 million in dividends and $19 million for capital assets during the year, our cash and securities at June 30, 2013, totaled $103.6 million. We reduced our inventories $18.5 million, or 11.9%, this year ending with a balance of $137.3 million.

Our balance sheet is healthy and we are well positioned to aggressively pursue our business initiative. Here is Farooq to discuss those initiatives further.

Yes. Thank you, Dave. I wanted to give a very, very brief overview of financials before when I spoke earlier. But let me again reiterate, even though Dave has given all of the financial information, just the highlights.

For the fourth quarter, keep in mind our adjusted net income increased by 26%, our operating income by 23%, our gross margin remains strong at 54%, and, importantly, the Company retail division adjusted operating profit increased $4.2 million from a loss of $1 million. And, as Dave said, we are pleased that we purchased $24 million of the bonds and also then ended up at June 30 with $104 million of cash.

Now for the fiscal year, also, we made lots of progress. From a financial perspective, our adjusted net income grew 39%, our operating profits by 33%, our gross margin increased 110 basis points to 54.6%.

Now the retail division; adjusted operating profit increased to $14.5 million, a positive change of $24.1 million from the previous year. And as Dave also mentioned, we increased the cash dividends to stockholders by 176% to $22 million and also we have managed our inventories quite well.

Now during fiscal 2013, we had many initiatives to position us for growth, including strengthening the Company retail division. During the year, we further strengthened management, closed two design centers that were trading dollars, relocated several to new locations and we are starting to see positive results and we expect them to continue.

Technology has been an important focus during the year. This included migrating our website to a cloud environment, enhancing our retail and manufacturing systems and a stronger focus on use of digital mediums for our marketing. Recently we have also enhanced the express program with strong digital marketing. In our manufacturing and logistics, during the year we made continued progress in improving the efficiency of our North American manufacturing and logistics.

We are continuing to invest in our newest facility in Honduras. During the year, we invested in our international expansion. We expect during fiscal 2014 to substantially reduce the cost of the international expansion. During fiscal 2013, the Company opened new design centers in Brussels, Antwerp and Montreal.

At this time, we have a number of new design centers under construction by our licensees, including in Amman, Jordan, in Korea, there's a third one there, a third in Philippines, a new one in Bucharest, Romania, and recently a new design center that in June was opened in Jeddah, Saudi Arabia. Finally, during fiscal 2013 we concentrated on developing programs to help us reposition our brand to reach a larger consumer base, both Baby Boomers and Gen Xers.

Many of you saw the projection of our Danbury design center in June at our investor conference. As you saw, the Danbury design center projects the new eclectic attitude in design, products and signage. We have migrated our focus from a furniture store to a stylish home design center reaching a large consumer base.

Our objective now is to complete the transformation by the end of September of about 200 design centers in North America and many locations in other countries for this projection. We plan to start a major marketing campaign in the fall to launch the program. As I had indicated, we expect to spend about a little over 5% on advertising efforts on an annual basis on the average of about 4% to 4.2% we have been spending so far.

With that, I'm happy to open it up for any questions or comments.

(Operator Instructions) Our first question comes from Brad Thomas with KeyBanc Capital Markets.

Thanks. Good morning, Farooq, and good morning, David.

Good morning, Brad.

First, I want to just talk a little bit about the current pace of business. You called out the timing of the price increase as one item that should have helped the July sales in this fiscal first quarter. First, I just wanted to ask have you moved to where the written orders are now positive.

Yes, they're very strong is this July so far, Brad. As I'd indicated, we took the June business to July and so far they're trending very, very positive, and we expected that to take place.

Great. Then with respect to the shipments to China, do you feel like those partners are at the right inventory levels now and have you started to resume growth in shipments to China?

Yes. What we expect is that -- keep in mind that, as I said the last time and also now, they have continued to grow in sales. So they're getting out of this excess inventory and they are substantially out. They are now starting to place new orders.

In this first quarter we expect still about a 20% lower shipments than we did in the previous year, not 70% or 80% that we had in the last two quarters.

Okay, great. Then maybe just lastly as a big picture item, when we look back at your fiscal 2013 as a whole sales were about flat for the year, but to your point, Farooq, the company had big growth in EBITDA and earnings.

As we look forward here to this coming year, what's the right contribution margin or flow-through margin to think of? Are there still opportunities to improve profitability even if the sales don't pick up or do we really need to see sales to get an increase in profit?

As you can see, we made a great progress in our retail division. I actually spent a lot of time in that. We got a strong, strong management. We made many, many improvements and saw a $24 million positive contribution in the year. And that is really still, we have a lot of opportunity there.

Now I'm talking about even with relatively small increase in sales, but, Brad, we need to increase sales. And that's where our focus is. We have got very, very strong marketing initiatives in place starting, actually, in September when we launch these new initiatives.

So, to answer your question, I think we're going to get even very -- relatively small sales. Our retail division has the opportunity to continue to improve. But, really, at this stage, we need to grow the top line, even if it's in the mid single digits. That data, I think, will make also a significant impact both at the wholesale level and the retail level.

Great. I'll turn it over to others. But, thanks, so much.

Thank you, Brad.

Our next question from Matt Fassler with Goldman Sachs.

Hello, Matt, good morning.

Hi. Good morning. This is actually [Hallie Goodman] on behalf of Matt Fassler.

Yes, Hallie, good morning.

Good morning. So our first question relates to the delta between written same-store sales last quarter and delivered same-store sales this quarter. And we were wondering what drove the better trend in delivered sales this quarter?

You're talking on the fourth quarter or the first quarter of this year?

The written same-store sales trends in 3Q compared to the delivered trends in 4Q.

I see. Go ahead, Dave. I'm taking a look at it, too.

Well, it has to do partly, Hallie, because of the numerical value. You're looking at percentages. The comp store decline in the third quarter was 2.4% and you're comparing that to the growth rate in comp store of 2.5% positive in the fourth quarter, correct?

Correct.

Okay. So part of that is the numerical value, the total dollars of sales. The written orders in dollar terms is greater in the third quarter than the shipment dollars in the fourth quarter and that does play -- so the percentages look a little funny when you make that comparison. But it's difficult to make that kind of correlation that you're trying to pose.

Great, thank you. And our next question relates to inventory. What was the main driver of the large year-over-year decline in inventory and what are your plans for inventory for the next year?

That's a good question. Our inventories declined substantially and it declined, actually, in all areas, both from our raw materials to work in process and also some finished products. I believe that as we move into this new year they're going to somewhat increase, that's our expectation, from $135 million, maybe $4 million or $5 million is what we're thinking of now, especially with the launch of these excellent accessories programs that we're going to launch this fall.

And will that additional inventory mainly come from those accents and accessories versus furniture?

I would say that 70% or so would be in the accessories and the rest would be furniture.

Thank you very much.

Thanks very much.

Our next question comes from Todd Schwartzman with Sidoti & Company.

Yes. Hi, Todd, good morning.

Hi, Farooq. Hi, David. A couple of things. When do the international costs start to moderate a bit? And maybe if you could quantify on a full fiscal year basis what you're expecting as far as a change in the international-related spending?

Yes. I think that at this stage our best projection is that we spent about $1 million dollars this last quarter. I think that, most probably, it will be reduced by at least between 15% or so in our first quarter and then will be reduced by -- then will go down -- then be about 20%, 25% in the second quarter. And in the first six months our objective would be they should out of our system.

Okay. I heard what you said about the marketing, advertising costs as a percentage of sales going to 5% from roughly 4% to 4.2% in recent times. How much of that is not new eclecticism related? Is that really the biggest piece or are there a lot of other parts there to speak of?

A lot of it is going to be our expansion in reaching more consumers and the direct mail is a very important part of that. We have a very, very strong program of direct mail starting in September and October and November and also we're look at December.

So direct mail is going to be the main part and, of course, the new eclecticism really represents all our programs. So this increase basically means that we're reaching a larger consumer base, both Baby Boomers and Gen Xers, especially in our direct mail.

Got it. And in the fourth quarter, what did you see by product category in the way of written and delivered business?

Well, interestingly, as you all know, case goods has been a challenge. We, of course, started a few years back as being a very strong case goods company. That still has shown declines even though the decline has moderated. Our upholstery was somewhat -- didn't grow but didn't go down.

And our accents, to some degree, went down, too. And I think that that is where the opportunity is, where all these new products that we have introduced is going to help us bring that business up. I would say case goods and then accents and upholstery were stable or slightly up.

It's a little surprising to hear that accents were down. You've made it, I think -- not that it wasn't a focus previously, but I think in recent months you've seemingly made it a little bit more of a focus. Can you speak to traffic trends or anything else that you think might be playing into that?

Yes. The traffic was somewhat down for us. That's why we have looked at our advertising from base zero. We're looking at the mediums we are using and we're already starting to see positive trends in July. Of course, it also reflects a change in our prices. But I think our advertising mediums and the message is also being changed to get more traffic into our design centers. Our traffic was not what we wanted it to be.

Do you guys have any numbers internally regarding attachment rates of accents versus an accent bought stand alone without the associated furniture purchase?

Good question. We do have it, but I don't have it handy. At this stage I'm just giving you my sense of what we do. I would say at this stage about 85% of our business in accents is done when we do our furniture and 15% is stand alone.

And is that something that you're looking to potentially change for competitive reasons?

Absolutely. I think that when you came to Danbury you saw the focus of creating shops, create layering of our products, bringing in a lot of accents, even price points we've changed. So there will be a lot of focus and then we also have a very strong focus of delivering it pretty fast.

So our logistics is also gearing up so that we will be able to ship it, next-day shipments of all the accents that we purchase. So we have a very major focus this fall. It's all about getting in the business and, in fact, as I said, this fall we want to really want to be an important factor in this whole issue of accents, which, in the past, really -- the November to December period for us has been something we're almost out of the market. Not this year.

Okay. And what are you seeing as far as commodity costs currently?

Well, so far it has been stable. So far. But there are some concerns on the plywood costs. Hardwood, plywood that we use in our frames and our upholstery is having a lot of challenges there. We are looking at that very carefully. We're looking at a lot of different resources.

Even though, for the year, our fuel costs are somewhat stable but recently we have started seeing major increases in fuel costs. And, as you know, we deliver our products at one cost nationally so we bear that cost, not the retailer. And approximately 25% to 30% of our fuel costs is represented by surcharges. So fuel is something and the cost of delivery is an important factor that we're watching very carefully and that's a concern.

Okay. And, finally, CapEx for the year for 2014?

Our objective at this stage, really, is to keep it close to our D&A, $19 million both.

Great. Thank you very much.

Thanks, Todd.

Our next question comes from Jeremy Hamblin with Dougherty.

Yes. Hi, good morning.

Hi, guys, good morning.

Good morning.

I wanted to see just see if I could clarify something on the China impact. I think you had indicated that you expected in this quarter the impact to be about $6 million or so in revenues.

Yes. Dave, that's right?

Yes. That's what we had indicated in the third quarter was the impact and expected something similar in the fourth quarter.

And so then can we infer, from what you said, that in the September quarter it's going to be between $1 million and $2 million?

Yes, closer to $2 million. Yes, you've got your numbers right.

Okay.

Yes.

Then I wanted to just ask you about the Fresh Colors line and see if you guys are getting -- what kind of response you're getting from that line of products and whether or not you're getting the marketing support you need in it. Is there anything you can share on that front?

As you know, the Fresh Colors objective, really, was to reach a younger consumer base, Gen Xers, through their children. So the Fresh Colors is basically a kid's program. We have given it a lot of emphasis. It has increased. But I think, as you know, it was really towards the end of the fiscal year we introduced it.

You're going to see a lot more impact of that as we go forward and because of the fact that it's very much tied to reaching the Gen Xers which is our objective. Right now, our business is about 75%, 80% is Baby Boomers and 20%, 25% is Gen Xers. Our objective in this next year is to take it to 60%/40%.

Okay. And then in terms of the pricing, it sounds like 2% to 7% impact on pricing this year and that has the ability to move around the cadence of your delivered sales. Can we assume then that sales, delivered sales, were better in the first half of the Q4 of the June quarter based on what you said about June?

I'm sorry, say that again?

I'm just saying in the fourth quarter can we assume, based on what you said about June results being impacted from last year's price increases that were in July -- so, presumably, June was the weakest month of the quarter for delivered sales?

Well, I was really talking about written sales. The written sales were the ones that were impacted. Of course, we don't deliver that right away.

Right.

Whatever we write in June were going to be delivered anyway in this first quarter of fiscal 2014. So our written sales were lower. Our delivered sales reflected our business in the previous periods.

Okay. Any color you can share then on the cadence of the quarter?

You're talking of the quarter ended?

Correct.

I think that -- I'm just trying to now -- Dave, take a look at it to see the impact. Obviously, our June quarter was impacted because of the fact of this price increase. Last year, June became -- the month of June, as well as the June quarter, was very positively impacted because of the anticipation of a price increase.

But this year we didn't have that so because of that June was lower. But, I think, from a retail perspective, I think it was somewhat flat.

Okay. And then last question. Just in terms of how we can think about company-owned and independently-owned units for fiscal 2014, any color you can share there?

At this stage I think it's more or less going to be stable. We are looking at -- our biggest focus, really, is improving what we have. Similarly with our independents, they're doing the same thing, too -- realize more.

As we have indicated even in these various models we give, I very strongly believe that we have the opportunity of at least going to a $1 billion or doubling our business without adding a lot of new locations. Although we will do that. So I would expect approximately 200 or so design centers in North America. Internationally, we will add some more.

But the 200 are continuously being re-examined, relocated. We have a number of them going on right now that we will relocate to better trading areas as we move forward.

Thank you.

Thanks very much.

Our next question comes from Budd Bugatch with Raymond James.

Hi, Budd, good morning.

Good morning, Farooq and David. It's actually TJ filling in for Budd. Thanks for taking the question. Most of mine have been answered, but, Farooq, I was interested in your commentary about targeting the Gen X versus Baby Boom and the incremental ad spend.

So talk to us a little bit about the spending patterns of those two buckets, maybe what you think the impact of that transition does to your average ticket. And then if you're going to spend about a percent more of sales on advertising, is the incremental going to go to new zip codes or how much of that are you willing to test the markets in areas maybe where you haven't been before?

Yes. I think you have a good question about the impacts on the average ticket. I think our average ticket is going to go down because of the fact our focus is on selling accents, and especially in this fall period, which is good, which means we are going to bring in more traffic.

We would expect this fall for them to buy a lot of our accents and not necessarily buy them in conjunction with buying furniture. So we'll see, but I would expect it to come down and in a positive way.

As far as advertising is concerned, our focus really is, as many people in our industry are doing, to target our advertising, especially through a number of mediums. Certainly digital is important, but direct mail is very important where we can really target based on age, based on income, based on demographics. And that's what we intend to do and substantially increase our reach in direct mail starting in September.

Okay, that's very helpful. Lastly for me. The $24 million debt pay-down during the quarter, any expectations for future pay-downs or anything we should be looking for this year? I know you feel comfortable with the capital structure but any color you can add there would be helpful.

Yes. As you know, according to the terms of these bonds, we cannot solicit. When somebody comes to us and offers us some reasonable terms then we think of buying them. And that's what happened. And if others come in, we'll be happy to consider buying our bonds because, on a plan basis, I don't want to have any debt for the time being.

That's a very nice goal to have. Thank you for the color and best of luck on fiscal 2014.

All right. Thanks.

Our next question comes from Cristina Fernandez with Telsey Advisory.

Yes. Hello, Cristina.

Hi. Good morning. I wanted to ask on the gross margin. It was up a little bit this quarter but less though than it's been. You've had very strong gross margin gains since 2010. Are we getting to a point now where gross margin expansion is just harder to achieve?

I guess I wanted to get your sense of gross margin going forward. And then also will the home accents roll out here in the next two quarters have a negative impact on the gross margin as we clear inventory to make room for that new merchandise?

I think it's very important issues. At this stage I would think that we -- for the time being -- you know I never accept anything the way it is, but I think it is harder now to increase our gross margin from the 54% or so that we have.

Now on the -- we are going to have -- again, we are starting, actually, next month in August with clearance events to clear for all the new products that are going to come in, because in our system I don't want products coming in unless something goes out. So we are having a fairly significant marketing effort in the month of August and partly in September to sell off our products.

Because as you know and saw in the Danbury design center, we changed the projection even of the current products that we have in color, in feel, in texture, whether it is upholstery or case goods, even though they're not new products. But for the design centers they're new. So on a wholesale side our plants are going to be very, very busy.

But it does have and it is going to have an impact on inventory and margins. So I would say that it's possible that our margins may be somewhat impacted, not much, as we go into this August, September period. But on the other hand, we expect to sell a lot of these products.

Okay. No, that's really helpful. And then just lastly on the competitive environment. Are you seeing any significant changes? It seems to me that this last quarter was more promotional, not just for you but for the industry. Would you agree with that assessment?

Absolutely. And, in fact, even though we have taken a price increase, we have also slightly, as you must have noticed, increased some of our promotional activity. So that also has an impact on this gross margin you talked about.

While we're taking a price increase, yet on the other hand we have to give a greater savings to consumers, which we are doing. And what we have seen, of course, in the industry is a major one. There's, [oddly] some of people in the competition are give away 30% to 50% to 70% every day.

Well, thank you and good luck in this next quarter.

Thank you.

Our next question comes from Todd Schwartzman with Sidoti & Company.

Yes. Hello, Todd.

Hi. I just have one more thing. What would EPS for this past quarter have been if international operations were excluded?

EPS -- we already said $1.

Yes. No, we just talked about the net sales impact of the lower shipments, but we don't really quantify, Todd, the EPS impact of what it would have been if they had been flat.

Okay.

I'm sorry, are you saying is the $0.02 the impact of the international -- are you talking of sales or are you talking about P&L?

Yes, P&L. If you just remove the operations, just looking at the core North American or, even better, US business what was the bottom line?

$0.02 difference.

Okay. Thanks.

Yes.

(Operator Instructions)

All right, it looks like no more questions. Thanks very much. Any questions, comments, please let us know. And thanks very much.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.