Ethan Allen Interiors Inc (ETD) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ethan Allen earnings release conference call. Now I will introduce your host for today's conference, Mr. Corey Whitely, Executive Vice President, Administration and CFO. Please begin.

Thank you, Jonathan. Good afternoon and welcome to Ethan Allen's earnings conference call for our fourth-quarter and fiscal year ended June 30, 2016. This call is being recorded and 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.

As a reminder, our comments today will include forward-looking statements. These are subject to risks and uncertainties which could cause actual results to differ materially. Please refer to our SEC filings 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 some details on the financial results. Farooq will then provide further updates on our ongoing business initiatives before opening up the telephone lines for questions.

With that, here is Farooq Kathwari.

Thank you, Corey. We are pleased that we are reporting a strong fourth quarter and fiscal year ended June 30, 2016. For the fourth quarter, sales increased 6.3%; gross margin of 56.3%, 144 basis point increase; adjusted operating income of $25.2 million or 12.3% of sales compared with 10.3% in the previous year, an increase of 27%; adjusted EPS of $0.57, an increase of 32.6%.

For the 12 months, our sales increased 5.2% to [$794.2 million] with adjusted EPS increasing 36.2% to $1.92. We also maintain a strong balance sheet.

As we reported in the press release, our many initiatives in the last few years of repositioning our product offerings, strengthening our interior design network, creating desire and action through our various marketing initiatives, benefiting from our technology enhancements, and improvements to our manufacturing logistics and sourcing has resulted in our strong performance.

We remain cautiously optimistic due to the launch of many initiatives, including the launch of the Ethan Allen Disney Program in the latter parts of our second-quarter. I will discuss our initiatives in greater detail after Corey provides a more detailed financial information. Corey?

Thank you, Farooq. For the fourth quarter of fiscal 2016, we continued our growth with consolidated net sales of $205.7 million, a year-over-year 6.3% increase for the quarter. For the full fiscal year, net sales increased 5.2% to (technical difficulty) [$794.2 billion]. During the fourth quarter of fiscal 2016, consolidated operating adjusted operating margin increased to 12.3% from 10.3%, and adjusted net income increased to (technical difficulty) [$0.57] from $0.43 per diluted share.

We are pleased that many initiatives are making an impact and we continue to benefit from the operating leverage of our vertical integration.

During the fourth quarters of fiscal 2016 and 2015, net sales increased 7.6% in our Retail segment and 9.6% in our Wholesale segment. These increases reflect that our (technical difficulty) continue to generate more interest. The mix of retail segments increased net sales with (technical difficulty) helped drive the strong consolidated gross margin to [56.3%] (technical difficulty) prior year. During the quarter of fiscal 2016, retail segment also had improved gross margin due to product mix and less clearance sales.

Comparative written orders for the fourth quarter held even to the prior year quarter, which had (technical difficulty) [10.4%] (technical difficulty). This timing also affected our retail order backlog, which was (technical difficulty) [13.7%] (technical difficulty) 2016 than a year ago.

As we have mentioned, our faster delivery time, primarily a result of our stronger inventory position, (technical difficulty) manufacturing efficiencies and the custom quick ship program along with the timing of (technical difficulty).

International net sales (technical difficulty) were 8.4% for the fourth quarter of fiscal 2016 versus 10.1% for the comparable prior-year period, primarily due to a decrease of wholesale shipments to China. Adjusted operating expenses for the fourth quarter of fiscal 2016 increased $4.2 million versus the prior-year quarter, most of which was variable cost that increased due to increased sales.

Our adjusted operating income was $25.2 million, 12.3% of net sales for the fourth quarter, an increase of 27% from the $19.8 million in the prior-year fourth quarter. Our press release provides details of the non-GAAP adjustments.

Our effective income tax rate was 35.6% for fiscal 2016. That compared to 34.5% for fiscal 2015. We've benefited by the resolution of certain income tax matters and we'll continue to use 36.5% as our enterprise effective tax rate for fiscal 2017 planning purposes.

Moving to the balance sheet, we ended the year with a strengthened balance sheet, while also focusing on shareholder returns throughout the fiscal year. For the fiscal year, we reduced our debt by $34.4 million, which further reduced our interest expense.

We have maintained our borrowing capacity, and at June 30, 2016, we had %89.8 million of availability on our revolver. Our total cash and securities at June 30, 2016 totaled $60.5 million and debt totaled $41.8 million compared to $76.2 million at the prior year-end. We also had [$61 million] of customer deposits as compared to $68 million in the prior-year quarter.

For the fiscal year, we repurchased 700,000 shares during the second and third quarters this fiscal year, for $19.3 million, and we paid out [$16.6 million] in dividends, an increase of 24.7% from the prior-year period. Inventory of $162.3 million increased as planned by $10.4 million from the prior year-end, as we prepare for our upcoming new product launches and to support our new custom quick ship program. We expect our inventory to stay about the same as this level for fiscal 2017.

Capital expenditures, including acquisitions this year, totaled $23.1 million, a depreciation of $19.4 million. And we expect capital expenditures of $25 million with depreciation of $20 million for fiscal 2017.

So with that, I'll pass it back over to Farooq.

Thank you, Corey. We have continued to create a competitive advantage by focusing on implementing most effective initiatives of excellence in customer experience. These include strengthening our interior design network of about 1,500 interior designers and 300 design centers.

Our interior designers provide as little or as much service to our clients, and now we continue to empower our interior designers with technology to interact with their clients. We also continue to reposition and relocate our interior design centers.

During fiscal 2016, we opened design centers in Wichita, Kansas; Pittsburgh, Pennsylvania; Toledo, Ohio; Philadelphia, Pennsylvania; Hattert, Germany; seven in China, Dublin and an area in San Francisco; Columbia, Maryland; Cranston, Rhode Island; Rockland, Maryland; Hyannis, Massachusetts; and Savannah, Georgia.

Scheduled to open in fiscal 2017 is our flagship design center in Flatiron District of Lower Manhattan, opening next Friday. And also under construction are several design centers, including two in Germany and one in Taiwan.

We have been adding new product offerings on a planned basis. (technical difficulty) Capitol Hill, (technical difficulty) Georgetown; Noma, Arquette (technical difficulty) and Brooklyn product line is going to be introduced in August (technical difficulty). We also had a positive impact on the introduction of our quick ship (technical difficulty) programs and very importantly in August, we are introducing the Brooklyn offering.

In November, we plan to introduce a collection of about 500 products. This is (technical difficulty) furniture, lighting, accessories and the Ethan Allen Disney Magical Home Program. Another major competitive advantage in providing good customer experiences and strengthening our premier home delivery where we deliver at one national price our products to customers' home in white glove service.

Our marketing focuses on conveying in an effective manner (technical difficulty) (multiple speakers)

(multiple speakers) Okay, I'm back. Well, the question is, Jonathan, did we lose any part?

It's more like you just lost part of a word here and there.

Yes, I don't why because I've been speaking clearly, so -- loudly, so I do not know -- okay. And when we open for questions, I want to see if there is an issue. All right, so going back to what I was discussing -- I was talking about the -- about 70% of our furniture products are manufactured in our North American workshops. 80% of our furniture products are custom and delivered within four to six weeks, while 20% of our furniture products and over 60% of our non-furniture products are available for immediate delivery.

We continue to add technology to the craftspeople in our workshops. We are also pleased that environmental stewardship, sustainability, health, safety, and increasingly, social responsibility, are an important focus. And finally, combining technology and personal service is one of the major differentiators of great customer experience, and we are adding technology to create a dynamic omnichannel environment.

With that, I will prepare to open for any questions or comments.

(Operator Instructions) Budd Bugatch, Raymond James.

Good afternoon, Farooq and Corey. This is Bobby actually filling in for Budd. Congrats on another excellent operational quarter.

Yes, thanks, Bob.

A couple of questions for me. Farooq, can you just update us on the Phase IV new product offering progress? How much is that on the retail floors? How much is left to be implemented?

On the Phase IV is -- the last part of that is going to be introduced next week, which is the Brooklyn product line and that is already getting into our floors right now.

Okay. And then after the Brooklyn product line, Phase IV is then complete?

Yes, it is complete. And then after that, our next major program is the Ethan Allen Disney, which will get onto our floors in mid-November.

Okay. Perfect. Thank you. And then is there any update on the government contracts that we've talked about before in the past?

You know, they tell us every week, every day. So we're waiting.

Still waiting. All right. I appreciate it. And then lastly for me, can you or Corey maybe comment on what you expect for store activity this year, adding to the Company-owned design centers or independent, and kind of how you expect that to flow during the year?

Yes. Our focus continues to be on relocations. And, in fact, and as you noticed, there's major, major changes that you had referred to, and at the end of the day, the net gains was relatively small. But the qualitative change is a major one because we are moving them into the right places.

And also keep in mind all these changes -- all these design centers that we've moved, do create also disruption in terms of even an impact on earnings. We don't show these separately, but when we have to close a design center, move it, then it really has -- it does have an impact on our earnings, our profitability for that period of time.

But we have been doing it for some time and will continue to do it; that's why we do not separate it. So I would say that we would have approximately anywhere between five and 10 new design centers. And again, many of them will be relocations; some will be new.

Okay. Thank you. Best of luck moving forward. I appreciate you guys answering my questions.

Okay. Thank you.

John Baugh, Stifel.

Just so you know, the first part of the call was pretty broken up, so. So, a few things -- any way you could parse out what you thought orders might have done, written, [including] the timing of the price increase? And then could you tell us what you are going to do in August with pricing? Will it be similar to last year? How does it differ?

Yes. I think just keeping perspective -- Corey did mention it -- that in the last year in the fourth quarter, our orders were up -- on an account basis -- they were up about 10.4% this quarter, just because of the price increase a major factor.

But then in the first quarter of last year, our orders were down nine-point -- 8% -- I'm sorry, they were down

9.8%.

9.8%, yes. So you can see the difference in the timing. Our price increase is approximately similar to last year ranging anywhere from 3% to 4% at retail -- between 3% and 5% at retail, John.

Okay. Thank you. And I wonder if you could comment -- your incremental margin, if I did the math right, in the fourth quarter, was [above] 40%. If I did it for the entire fiscal year, it was closer to 20%. Of course, you had a sluggish kind of first half of revenues.

So I was wondering if you could comment about how you feel about incremental margins going into fiscal 2017? And give us some puts and takes on that.

John, you know with the increases that we are talking about that we have had, you've got to keep in mind we've got a pretty -- a major base to work from. So we already have increased our margins -- gross margins pretty strong when you look at our gross margin of operating at 56.3% as compared to 54.9%. These are very -- they're pretty high margins.

And secondly, if you took a look at our operating margins of 12.3% this quarter versus 10.3%, I mean, they are high. So it was hard to predict, but I think if they're able to maintain these high margins, it would be pretty good.

I'm not sure you answered the question, Farooq, but I'll try to put that into the calculator, as my dear friend Budd would say. If you -- I think you commented China has been slow two quarters in a row, if I'm not mistaken. And I think last quarter, you said it was just timing. Any thoughts there?

Yes, there are two elements to it. One is slowing our shipments and other is really they are slowing down there. I think we've had an impact in the last two quarters of they're having had inventories they are using, from what we hear, their business has sort of held up -- especially our business has held up at the retail side.

Our business has been somewhat down on our shipment side because, like everybody else, they are taking down inventories. Having said this, I think that they are -- they've started to -- starting to build the inventories back, because I think, like everybody else, they went a little bit too far. So I think that there's a difference between our shipments and the business in China. Certainly there has been pressure over there, but interestingly, their business at retail has held up.

Great. Thank you. And then my last one -- maybe you could comment on a little more granularity around -- what's the current promotion schedule look like for the September quarter? I think you've moved somewhat away from monthlies; what's the percent off? What are you running? And how does it maybe compare to what you did last year? Thank you.

John, at this stage it would be somewhat comparable to what we did last year and what we are doing -- what we have done this last quarter.

Great. Thank you. Good luck.

Thanks, John.

Jessica Mace, Nomura.

Good afternoon and congrats on a nice quarter.

Thanks.

My first question is, if you wouldn't mind repeating the backlog number; that was one I missed during the prepared remarks. And as a follow-up, I did hear you say that there were some dynamics that caused the volatility in the backlog figure, and wondering if there's any other place you would kind of point to, to help us look at kind of the trends of the business exiting the quarter?

Corey had given that information. Corey, go ahead.

Yes, the backlog was down 13.1% on June 30, 2016. So Jessica, my comment then was that really the backlog is a little bit not necessarily an indicator of future sales, because there's so many variables that go into it, such as the tightening of the price increase last year versus this year.

And then we are just more efficient in our shipping today with our custom quick ship, the level of our in-stock programs, and then our improved efficiencies and our manufacturing with our shortened lead-time. Today that's an advantage that we're leveraging, is the ability to deliver faster. And that's a good competitive advantage for us. So the backlogs will fluctuate as you've seen, so there is not a strong trending for those.

Understood. Thank you. And then I was wondering if you could comment on how some of the product introductions that are nearly 18 months -- almost two years old now -- how those are contributing to the topline strength that we've seen? And kind of what you expect as we go through Phase IV and some of those earlier periods are a little bit further away?

Yes, so Jessica, if you take a look at since about the last year is that when we started introducing the rounds for these five major offerings, it was about the summer of last year when we introduced what we call now Capitol Hill, that was Georgetown previously. The No Mile, which we called Euro last year -- we changed the name to Sonoma, which was introduced in the fall of last year. And then -- and actually really was mostly selling, starting to sell in the winter and spring of this year.

And then from June, we have been introducing these three new attitudes -- they are all contributing, but they now represent most of the space in our floors in our design centers. We've also continued to be -- this has -- in addition -- have you had good results, but consider the fact that we are also going through a disruption of selling products off -- clearing the floors.

We will still continue to some degree as you move forward. But these -- all the new products are making a difference. And they are actually contributing to the substantial increase in our sales.

Got it. And then just following on to your comments about clearing the -- in previous quarters, clearing the floor to make some room, is that the lower clearance activity in the retail margin this quarter -- was that up against somewhat of an easy compare? Or is there anything to infer about the overall promotional environment?

No. I mean, we have been -- relative to last year, it's about similar. And again, it will continue that for this year too, because again, it's still continuing to sell that clearance. And then with the Disney -- Ethan Allen Disney coming in this November, we've got to make some more room. So we will continue this fiscal year also.

Great. Thank you so much for taking the questions.

All right. Thank you.

Jeremy Hamblin, Dougherty & Company.

Congrats on a great quarter and really a terrific year, especially in a fairly tough environment. I wanted to just follow up on the question around clearance. Think about how we should be looking at near-term, given all the product turnover.

So, first half of fiscal 2017, what type of impact should we see on the clearance activity? Whether you're expecting it to be elevated through the first half of the year? Is that going to have a negative impact on your gross margins?

And your gross margins really have trended towards a higher level, and I know that's reflective somewhat of the sales gains. But in terms of how we should be thinking about gross margins moving forward, historically, you've talked about a kind of 55% level. And you've really kind of cleared through that now, closer to a 56% level. Can you just provide us with some color on that?

Jeremy, it will vary from quarter to quarter, but I think if you stop between last year, we had -- in the first quarter, we had 55%, now it's 56.3%. I think it's going to vary between the two in that range. So it's hard to -- at this stage, I think if we are maintaining between 55% and 56%, I think that will be a good margin.

I agree, but just in terms of thinking about the near-term where you might have a little more visibility given the product turnover and the new introductions coming in August, and then obviously you'll have to make a little more room I think in the back half of the year for the Disney product, should we be thinking that clearance activity would be higher in the first half of the year versus the second half?

Yes, I think that's a fair assumption, yes, that is because we will continue with still the products that we have been clearing -- with all of that has not cleared up. And secondly with the Ethan Allen Disney coming up, so I think there will be more in the first half, Jeremy, you're right.

Okay. Terrific. And then in regards to the Disney launch, I think it looks like the launch is planned for mid-second quarter, is how it's termed in here. So it looks like maybe a November launch. Is that a little later than you had been anticipating I thought from the day in February that we were looking for maybe a little bit earlier than that?

And then the second part of that question is just can you provide any more color in terms of impact that you think it will have? Is this something that's going to kind of replace the entire kind of children's selection that you currently have, which I know is fairly limited? Any sense of how much of your showroom floor space it will take up?

Yes. On the question of timing, yes, we were initially thinking of our objective was somewhere about October. And now we are thinking -- now we are planning for mid-November because the logistics of getting everything in is a major, major undertaking. And on top of it, which is a great thing to do, that every resource that we are using with Ethan Allen Disney has to go through a very extensive social responsibility testing by an independent people, which is great, because that's the good thing about it.

So we have gone -- I think 70 different reviews done in the last few months. So that's taking a little bit of time. And the next thing is -- the next reason is that Mickey Mouse's birthday is November 18, so we thought it's a good day to -- a good time to launch it with his birthday.

I like it. One last one quick for Corey -- advertising expense, Corey, was that up/down in Q4? And then how should we be thinking about that moving forward?

Yes, it was up in Q4.

Was it $1.1 million?

Right, $1.1 million. And certainly looking ahead, we have some aggressive plans.

Yes, I think the last first quarter last year we had somewhat lower expenses of advertising -- I'm looking at it here -- we had approximately only close to 4% -- slightly under 4% -- almost 3.5% of sales, so $6.6 million. This year we are going to increase it and it will be closer to [4.5%] to 5%.

4.5% to 5% in Q1?

4.5% might be more realistic, yes.

Great. Thanks for taking my questions, guys. Keep up the great work.

Thanks, Jeremy.

Cristina Fernandez, Telsey Advisory Group.

So just following up on the prior question, the 4.5% -- is that for the full year or just for the first quarter?

For the first quarter.

Okay. And then for the full year, should we be taking about a similar range?

Yes, I would say so. At this stage, this could change depending upon how we look -- how we see at this stage 4.5% is a good number.

And then I believe the marketing program with the real estate agent said -- you had commented at the Analyst Day earlier this year is just getting started. Could you talk about what progress you're making on that and when could we start seeing some benefit?

Yes, it's with the realty company, which has a fair amount of real estate brokers. It's just too early. It is getting good comments, but it just started just a few weeks back. And -- but I believe that it is a very -- I would say a program that brings in people and the realtors. So I would say that by next quarter, we will be able to give you a total better indication of how it really is doing.

Thank you. And last quarter you had commented that you were seeing traffic up I believe in the 5% to 10% range. Did those trends continue this last quarter? And if you look at your customer base, are you still seeing new customers coming to your store?

Given the factors I would say that -- I don't have the numbers of traffic in front of me, but if I have to just use my judgment based on what I see, I think the traffic was probably flat. So because traffic overall, as you know, in retail across the board has gone down -- not just us but I'm talking everybody else.

But what we do see is this: that people coming in are more qualified. Because in the past, people used to come in to do window-shopping in the design centers, our stores. Today they can do all of that on mobile or on the Web, and that's what they are doing.

So I think that we are getting more people getting onto a website -- there's no question about it. Mobile has gone up and what we are now doing is this -- more and more, we are empowering our interior designers to interact with their clients on -- with technology.

That's -- so combining technology and personal service is one of the very important parts of creating a great customer experience, and taking people who may just be perhaps only interested in window-shopping, but converting them into a client. That's where our focus is. And that -- we will see more of that.

And the last question -- since you commented on mobile, how are trends online in your eCommerce website? You've made a lot of improvement; are you seeing penetration rise in that channel?

It's increasing both in terms of sales -- they're up close to 40%/50% from a small base and we will continue to increase; it's just I'm glad to see it's [up about] 40%, 50%. And our traffic has increased and we will be even more aggressive. But not only selling products online but also having them interact with our interior designers.

Thank you. And good luck this quarter.

Yes. Thank you.

(Operator Instructions) Justin Bergner, Gabelli & Co.

Hi, Farooq. Hi, Corey. Most of my questions have been taken, but I will ask the following -- is there anything you can comment on in terms of initial success of the Georgetown product line that I guess was rolled out about a month ago?

You don't mean Georgetown -- are you talking about Santa Monica?

Santa Monica -- I'm sorry.

Yes, we just had Santa Monica, which is in July this month; and before that in June, we had Buckhead.

Oh, Buckhead -- that was what I was thinking of.

Buckhead is well-received. They've both being well-received. They're great style. They're relaxed, and this is what lots of folks are looking for. They're looking for stylish products which are great quality and then -- which is what we have. But also relaxed. And I think that lifestyle is important.

And the Company -- these product lines, of course they mix well with each other. So when we talk about Center Buckhead, that works well with also Santa Monica and it's been well-received, and Santa Monica has been well-received too. And it's interesting, depending on what part of the country, Santa Monica has a major coastal feeling, so it is doing well.

And obviously those folks who are interested in a coastal attitude, while Buckhead is somewhat more, you might say -- of course as the name implies, it is the South with color, with more soft touches. And -- but they mix -- they intermix and they work together well.

And Brooklyn is of course slightly different, which we are introducing next month. And I'm sure you're going to get our direct mail magazine -- beautifully done; you're going to like it. And it really represents Brooklyn, because I got my start in Brooklyn when I was going to NYU. So I was living in Brooklyn, but it was a different Brooklyn in those days, you know?

Okay. Thanks for that early sort of read. With respect to the wholesale margin, was -- I don't mean to sort of pick on it, but was there anything that limited leverage on the wholesale operating margin this quarter year-on-year?

No, that's a good question. There are two factors. One was the fact that while our overall margins are very, very good, our manufacturing, domestic manufacturing, especially good manufacturing case goods, had to contend with lots and lots of new products. So the learning curve of new products is always about a year or so; that had an impact.

And secondly, there was a little bit of a difference in terms of taking a higher -- from lower margin, it's wholesale, and we benefited the retail. So those are the two factors.

Okay. Thanks. And then finally, what were the proceeds from the sale of the store -- or the sale of the real estate?

Yes, that was -- the gain on the real estate was about $595,000.

And the total proceeds? As you know, we've been selling -- continuously selling these properties on a planned basis.

Yes, I don't recall what exactly the amount was on the net proceeds, Justin.

But you'll let him know, won't you?

I'll let you know.

Okay. Thanks so much.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

All right. Thanks very much. And if you have any further questions or comments, please let us know. Thanks very much.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.