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Ethan Allen Interiors (ETD)

Participants
Corey Whitely EVP and CFO
Farooq Kathwari Chairman and CEO
Budd Bugatch Raymond James
Jeremy Hamblin Dougherty & Company
Cristina Fernández Telsey Advisory Group
Call transcript
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Operator

Good afternoon, and welcome to the Ethan Allen Fiscal 2019 First Quarter Analyst Conference Call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be provided at that time. [Operator Instructions] It is now my pleasure to introduce your host, Corey Whitely, Executive Vice President of Administration and Chief Financial. Thank you, you may begin.

Corey Whitely

James. you, Thank welcome first and Allen's call conference Good ended to September our quarter XX, for afternoon Ethan XXXX. which find This conference ethanallen.com, press reconciliations also on on information release referred call. webcast and details, to release of our in non-GAAP call is where being you recorded contains including supporting and the live this will

CEO, refer could company statements matters After the then I questions. updates increases, to call. will details sales those differ to risks subject brief increasing on X.X% As fiscal our quarter a Farooq lines are compared to for filings the fourth period. the comments some reminder, SEC obligation Kathwari, $XXX.X any this consecutive risks. provide XXXX business results uncertainties million our today first initiatives. net update cause We'll that a that our consolidated materially. the of forward-looking actual financial will on year ongoing open revise growth prior during up or had our Please assumes to for telephone include sales forward-looking and review to provide We results, of the our and and Chairman with quarter discussed complete no The our

orders retail helped our improved shipments network retail and during X.X% and sales. increase contract Our increase and efficiencies drive to in increased manufacturing including in strong the reflected The X.X% the wholesale GSA strong shipments sales quarter. wholesale business, increase

Our wholesale normalized levels. backlogs current set are and we've

mix sales a sales the the gross increased mix the primarily higher our prior consolidated programs reflecting raw retail compared margin material was as XX.X% in consolidated XX.X% for upholstery XX%, of to in Our cost and year. percent quarter the of

international to we minimize workshops, fairly make our current international the America closely assess trade North in impact Because on of we impact watching situation the are our are well-positioned believe XX% currently to what disputes. We sell gross margins. the we dispute from trade potential the we

Our $XX.X costs X%. was million, expenses the our increased our were we expand by The increase to during to continue variable operating sales, related which increase and programs. an driven XX.X% expense as quarter first quarter increased of primarily marketing advertising

$X.X of X.X%, an For the net increase of of the $X.XX, margin with prior adjusted EPS operating XX.X% was income million, over quarter, EPS.

Turning securities the paid no cash We $X.X $XX.X we balance our debt activities quarter sheet, and the of to our during dividends, facility. We million. we generated of from $XX.X had credit quarter. cash outstanding million and ended million with operating the of under

and rate the as effective a the was of XX.X% quarter Tax Our tax result of Cut Jobs Act.

effective year We With to Farooq. expect in be the turn XX.X%. that, fiscal rate will to range the our call I for of XX.X% over XXXX would

Farooq Kathwari

you, Thank Corey.

technology, XXX on in our this design interior we range of centers XXX X,XXX offers are and positioned designers combined point design interior of believe to capitalize in overseas a full designers North fast-changing of technology. providing Service we the ourselves product selling to this to continue and release, and our share. commodity As our are is in will opportunity strong impacting our opinion, manufacturing, our of differentiate as and service we centers, differentiation. services, XXX critical crucial. lose our brick interior personal dedicated In well retail, mentioned focus design in market press With retail world point network mortar differentiation. and with a American another

areas. continue focus five on We to important

talent. of First, development the is

includes advertising offerings both Second program relevant and mediums. that sound and that digital the marketing encompasses traditional is comprehensive

fifth and focus quality of products the in and the Third, inventories investing all is margins. investment in provide sourcing social manufacturing retail. areas, to highest Fourth, well-managed and responsibility. critical strong logistics in technology and on manufacturing, And is including

years. XX% refreshed in are the as have products our We growth three of positioned for last been well

now, from products where our we artisan-inspired inspired our than headquarters, a in Convention by weeks our newest Danbury will XXX to our our The we team received. and casual including Two review Annual at mentioned. to quarter, at celebrate spring members modern This living our accomplishments I introduce were are products more introduced will launch also plan marketing associates' and XXXX. consumer programs, the with products products new new just well

expand various We spend our by continue to quarter, mediums. Corey marketing our first In our increased said as advertising in we XX.X%.

importantly is to to programs digital our and continue our strong mediums centers. to Our drive to traffic design objective

We continue invest in our to infrastructure.

retail New years. our to network of XX In America, North California. continue in grow our and As with and under design in centers are noted about Colorado; with stronger design we locations America Bangkok, North XXX Denver, XXX transitioning stores Iowa; centers Taiwan, focused to consists relocated past York; internationally. earlier, remain XX% Currently, of and the in openings Internationally, recent we Albany, new Coralville, Mirage, construction in China. on Rancho

under Cambodia Our is construction. location in

negatively believe the we received gross competitor, in Chapter low a which by were state contracts, we While the impacted and to due the XX. bulk margins department sales bidding amount was of

North our American manufacturing produce Our about of offerings. XX% facilities furniture

manufacturing During square Mexico doubled technology. have to the upholstery two feet, investing years, increasing XXX,XXX last in our about our we force and

at invest technology Honduras America and our delivery invest one in-home cost to in We U.S. to in continue clients. manufacturing in our network, and also logistics we delivering premier in to plants, continue and our products North

philosophy and of our law, with the the social people, land. the respecting we continue respecting respecting our strong Finally, responsibility focus on

As now as excellent and supported great call relevant I provider and for products, interior comments mentioned, quality, service, to open am questions. with a I desirable well-positioned we the and value. pleased are design of

Corey Whitely

call. And James, we can and the go ahead open

Farooq Kathwari

there? right. All are James, you

Operator

Bugatch Instructions] James. Budd and Our from ladies you, Thank gentlemen Raymond with first [Operator question comes Apologies.

is open. line Your now

Budd Bugatch

Hello.

Farooq Kathwari

got name. fix We your is to Budd. Name

Budd Bugatch

syllable to on an the we work that, Farooq, have Well, will in think today. I extra name we have

So that good. was all

Farooq Kathwari

All right, Budd.

Budd Bugatch

little rates. a us to Talk bit order about

rates because better that give the may the began products. developed than the down were retail situation. the bit down You fact in have quarter little the talked of as feel how think because ended of of in introduction about I us you Canada orders of were Can over you because release that lifestyle overall the of rates you a well

Farooq Kathwari

orders talking our order about Yes. mentioned we -- division. in We did that retail are our

Budd Bugatch

Yes.

Farooq Kathwari

there what and increased increase them are by that is we about -- all Right, see X.X%. they we

As I centers orders, Canadian XX%, decreased again were written July, X.X% down and August orders but design our by increased increased X.X%. X.X%, said, the about in the September by

Budd Bugatch

continuing And now, are is can momentum and so far in we subsided? the has October you it -- or

Farooq Kathwari

XX% Well, of the last to know, as we is month XX% of the almost you our XX% business. about get where -- week

programs So what but very October, happens we there. strong but will confident, determine very seven overall are out days People have in got programs. very, strong six, next five, the we

Budd Bugatch

you have Okay. $X.X advertising is average XX.X%, increased million, wrong by I if the -- do we that you have that say number or beginning… a you And is number am it about

Farooq Kathwari

right, it also And that's Budd upfront. I as just -- come exactly $X.X No, advertising; just, I'll question mention am sure million. this on will

we lot spent move we we the year about we expand money of third of last forward, was million, $X.X X.X% our and but spend in -- As advertising the which quarter. in a quarter, second then fourth

in across, impact know that. campaign. have million, spent didn't million, it quarter $XX.X you we It bringing very was an in but national fourth a much it as the all our did quarter television know and As $XX.X message and get of spent we in strong on as sales. third know we We

money, $XX.X the this news going spend money, is but quarter, spend not in money. fourth are to but the will the strong we will million will spend third we be we good less year, still strong, So and we

Budd Bugatch

in GSA are or wholesale the Okay. amount the GSA revenues And that of can you orders quantify for us segment?

Farooq Kathwari

competitor was as I Corey, lowering the but said, is low have Budd, I what impacted Corey prices. at because bidding we impact such, public such know mean, information, Government this It the an benefited. on orders lowering the can you give? been had and also margins, the sales negatively

Corey Whitely

does because out Yes, Budd, the [indiscernible] we million fluctuate, out know quarter, $X in every about don't but in give had sales won't it you quarter. we it or

Farooq Kathwari

of are the Budd? last quarter, you You about or talking year, this are talking

Budd Bugatch

quarter talking off the -- now I is auctioned not? to equipment I week, -- and was understand that what right, trying about gone, true about last or that the is was current for talking is competitor am it

Farooq Kathwari

you sold know, things, do name, they most Well, not, whether it, or sold they I they sold it they sell or not their not. likely contract know, off even was if this can off other

as this contract, that to forward, more the a well. news, think that's we I move are So chances we years four have have that so we of good doing -- opportunity an

make of that the we products money, though the were internationally, very homes and like they and able were diplomatic people we and provide in One the because what the reasons positive fact Allen was it, impact our Ethan a aggressively but we on happy money, programs. that we make do, products to bid had even that wanted didn't did we we all did much very

looks I very So it think Budd. positive,

Budd Bugatch

release China, because you some gave could be the international revenues, that's bulk international some the cautionary about over of your flavor us must you where I of in located, stores it are give happening what's there? language that Also take

Farooq Kathwari

Well, factors. there of are number

products. formal were you Because more, years of Two XX% it's of somewhat positive as are in in very markets stores in changed and in programs, about projecting Allen flagship Ethan they in the newer product most we've interested very China, might, strongly, traditional. mentioned our repositioning is our are offerings they the know, you of their line. the reflecting their very, fact First they I are back, interesting, what and them process

Now say, our with towards product they more, new interested but more attitude. in the might are which lines somewhat much modern more classic you are a

aggressively whole issue Having the they on very cautious and So they've this, eager centers. design going been of also reposition this are tariffs. to said

has So that issue. been an

our from fact of our impacted. we America the be because North perspective, most they in less Although will make of products

overall, is think, I So positive.

orders. they and But keep we're chances right in some up I cautious, were China, all in good Southeast going it, held Asia. they business the on to impact countries are be building Budd, our some very and see other Some in as

Budd Bugatch

getting Okay. on good quarter. comment you very for the is Well, much and last thank much, very for in release, Corey queue the out that luck with the appreciate my

Farooq Kathwari

much, Yes, thanks very Budd.

Operator

you. Thank

Capital. question Brad Our next from comes with Thomas KeyBanc

Your line is open. now

Farooq Kathwari

Brad. hello, Yes,

Unidentified Analyst

Corey. hoping Andrew in and afternoon, would business you We recent the cadence you months? comment more feel the how is business actually the quarter in were This on Good Hi. on Brad. of a for about bit Farooq little and the

Farooq Kathwari

we increased had -- in X.X%, July decrease earlier, as Well, progressively and a of months I X.X%. increased August that our starting in X.X%, business mentioned September increased in was the

last advertising -- So the for the bit month it's and see of now, little programs. A a in we August went the started the did our We'll early as it latter how spent was see seeing of September, course, as advertising lot strong of we into we ends. growth and the with quarter, results. And half quarter.

and We have of continuing this strong programs, we're forward, positive at stage, trends. looking our

Unidentified Analyst

know we the know in you a us, in Great. regarding little the your remind loss any on could operating touched And mind then prior sharing consumer the with you that of region? Do health We bit questions. you just this comments stores China.

Farooq Kathwari

China, In cautious. question. other and good competition consumer overall, as areas for a And hand, increasing that we becoming furnishings It's other on the is also considerably. the read, home the is Chinese

and caution, it I would there competitiveness, in of So do. the as is of did as not have they terms while question they what to previous competitive say more competition, what year. still is a more some But pricing is overall, major it growth, much their there's

Unidentified Analyst

Farooq. Thanks, Okay.

Farooq Kathwari

very much. thanks right, All

Operator

you. Thank

Our next Hamblin Jeremy with Dougherty. question comes from

open. now line is Your

Farooq Kathwari

Hello, Jeremy.

Jeremy Hamblin

business to the here, basis, can Hi, relates of back to a come commentary but good quantify the taking the impact kind from evening. about also Want to wholesale struggling consolidated specific just business? of the Thanks was on contract. the point to to Corey, you then both what the basis government going competitor margin as the it questions. out quarter, for

Farooq Kathwari

tough a but we Corey, we that's what information give I specifics; can. question, Jeremy, he can can mean But, give?

Corey Whitely

from degree. we have really of going the the XX. did basis gross -- by the was know I points so the impact line wholesale margins XX points to consolidated would our out an Chapter the that lines close But to with lower the the on deal gross out on you the business, break wholesale XX Yes, margin basis margin. or the product probably margin on say -- XX impact it don't around

Jeremy Hamblin

had because Okay. margins X% that you that segment. I were overall points wholesale XX growth down basis despite in ask the fact

companies I circumstance. some an say was would provide So most unusual probably there if color would

Corey Whitely

the wholesale the It Jeremy. an increases the was as on that, raw state as cost pricing competitive that had margin was low on That well to impact due bidding material also on line, department…

Farooq Kathwari

XX% say, department due because the state costs. of in I would impact, to Jeremy, XX% increases

Jeremy Hamblin

on Okay. December that we've And cost, How in terms seeing costs think quarter? of on looks in or that was here Whether two. should impact, next like in It seen point change in about on the we -- trend that some month the you're my follow-up. last

Farooq Kathwari

higher at gross in this; has That it impact of But think the October price margins. to impact -- has discounts sell taking in -- price clearance all been the on also because also of we've few we side. fact to still last changed changes material increasing few had also overall in the with our of our And that And have our we've the we took years that increases impact especially I relating continue will also because to Jeremy, this also also Well, we were somewhat that an place the offerings, retail. I year. we increase And next product, in XX% last the our from on major floors. product raw upholstery say more the to continue the would product offerings. an must provide years

factors are So where that expecting. we is think the something all would approximately that are what those I margin combined, gross now we

Jeremy Hamblin

other of just level and next about quarters? the maybe of In the December like words, kind that's thinking the what the XX% for quarter you're in you QX, couple saw,

Farooq Kathwari

it's but up, could to stage good would say I go possible a potentially it, this be using that At Yes. use it -- Jeremy. would good

Jeremy Hamblin

that flipside, spend said you on would -- in catch Okay. I absolute the noted this your And dollar an did down think that basis on on you basis, what cost quarter, was correctly? be the December then that marketing I

Farooq Kathwari

and just quarter, -- Yes, Jeremy. last December. the you're the to in close million, of December in spent what I quarter, the talking year referring was December the year third $X.X we we sales, the last spent. X.X% not we pretty quarter fourth No, to

Jeremy Hamblin

I see.

certainly if SG&A costs. to pull can overall then They're kind from we have over overall a your maybe high 'XX. of at plan you but seen sales look somewhat from a lever get couple or pretty point to come jump But comprehensive Have significant fiscal have margins the SG&A if they down that up seen last costs down you Okay, I years, have a fiscal just 'XX. are in were from your high in you slightly you down mean developed I identified your any last this where of is another -- level year?

Farooq Kathwari

year, opportunity, strong quarter go margins fourth the where our is have in while a last marketing margins still also gross program; Also, we and third our maintaining the we would an down. did in Jeremy, advertising -- impact expenses the also.

want And our We cycle. then objective. a it also to increase increased business, to our our service our that's production increase it's will business. capacities. we able we if We But not vicious and are

from No, interested are it a amount and selling then and in having and model. overseas our lot We not of inventories. a of product not buying that's tremendous increasing inventory

Our model conservative on is to be inventories. extremely

of in of as increase SG&A, but Mexico costs some our I and on our cost -- did and So North we production. Honduras, some in Carolina. our position, investing also did take a mentioned, also in Vermont capacities That increasing and

to forward move is with we more. have opportunity we that what leverage the As we have

operating We have a leverage. very strong

is You go operating focus Because that's can where wholesale level, strong vertical network upon why our fast a the XX% can sales, depending us. integration, incremental from a know, for you volume more see leverage that strong through XX% to We retail of goes and from, output that. our at very is and our That's our is. our wholesale. relatively with

we're as our marketing. we mentioned this in I SG&A think very Where I controlling have was well. the opportunity

Jeremy Hamblin

luck. for Thanks my taking good Okay. Great. questions,

Farooq Kathwari

right, All Jeremy.

Operator

ahead. Fernández question Please you. Advisory Cristina comes Telsey go the with line final Group. And from Thank our of

Farooq Kathwari

Hello, Cristina.

Cristina Fernández

previous good questions on a ones follow-up hi, have of that some the asked. couple of I been had afternoon. Yes,

government million, lower can of see those how on that impact quarter? were already that much delivered December or lot a quarter margin, orders So, the in were first we $X here the upcoming in this still that of

Farooq Kathwari

received backlog, we was for which Well, -- just with year, so? had have also that fiscal also referring is was what mention fiscal Corey would or he to the $XX had this also $X addition million that received to quarter, this will we basically -- million the because year, last in

Corey Whitely

Yes, was million… $XX our backlog about

Farooq Kathwari

had $XX be will those year in million that the quarter. at year low this in fiscal previous the we received in first and margins delivered second

have do impact see bidding margins do wholesale will we we we the won. happens, have starts close that until some $XX new lower So but million at as the what which we to at

Cristina Fernández

That you still read that have it? to Is to the right way deliver?

Farooq Kathwari

to have we what that's right, that's Yes, yes. deliver,

Cristina Fernández

back you also and onetime like the I Are product efficiencies, that already talked costs. and lot year at then the or want to you the you you. rate? this from Okay. And -- manufacturing profitable manufacture seemed the production from what can you run first last as of place hurricanes go at headwinds quarter look are had and where you first point onetime about Thank a at be

Farooq Kathwari

profitable. good We've much. our always what The well-positioned, control. at we're It's Well, under yes, news about high been as are to. good how operating have we but used not just are a as margins, is, been question operating backlogs we fairly

Our manufacturing is not service more only even production. but service to can geared

we're the and did third sales we're the we of to of had the lot of So do a quarter. second having in last year even it, fact year because to into This quarter, that, because that's backlogs produce much last disruptions opportunity a State -- new products is in had Department high being our we lots good really why we more position. position better and flowing focus time -- a it made create ability get at for the have year in this that's and the of we

Cristina Fernández

performance metro Are stores? ramp-up has stores stores you've been high the about us Chicago, some of to in and talk locations, on those with you opened like [indiscernible] you can the the happy question traffic those? what markets your last of my And new

Farooq Kathwari

of Well, we opened happy that still tough of in Chicago, ways high. Downtown the we're we less. the are to we been our both high We go -- some all markets, be happier what as plan rents to opened lose because these because terms losing objective where gearing Manhattan, in Buckhead that's but is are Chicago. The has in up, opened costs not so is. have somewhat area so expensive we the very money, And it Downtown they Downtown would are very, in less

Cristina Fernández

next this with luck good and you, Thank quarter. Okay.

Farooq Kathwari

All right, Cristina, thanks.

Operator

do actually line. we And you. Jeremy Thank a Hamblin's from have follow-up

Your open. back line is

Farooq Kathwari

All right. Jeremy.

Jeremy Hamblin

one you give to as Thanks here. me wanted online of see, more your in total were what percent I quarter? can for sales a taking the

Farooq Kathwari

Corey?

Jeremy Hamblin

Roughly.

Farooq Kathwari

It's X%. less really under than because That's really relatively although, come still our our and increased, want has folks into It's small. with than less Jeremy, focus, opportunity, X%, is X%, to what we do centers it's the our design but biggest it designers. interact really,

Jeremy Hamblin

Right.

attention lose you mortar. is model total. competitors, key, most terms that as the opening rate at do wanted excess well not that? much your this you sense that with of price connecting double-digits Ethan my for or I mortar is penetration service to caught is of higher higher Even are you significantly a in competitors comments about a agree to expect brick frankly brand share point, get of which a of what service and are what to the but at think -- with and Allen rate sales percent not seeing You penetration or are that in competitors that your similar and why your just the points brick on think continue -- to in continuing online and I do your

Farooq Kathwari

is of basically of that's one. is most of you good do business. items, all lot accessories some A a that business smaller -- that's and Jeremy, on competitors number mentioned, number So have why That's these they a factors, first question. their

great returns. is is people our helps get not also service, to meet that design Return our only controlled less The our a bring service; -- provide have second us focus That's them furniture. factor into -- centers not have to it designers. is only on less big we where we

they lot are they non-furniture and those number don't be of may non-furniture I the two of do. large a products, think promote you as I which of referring So also they -- that lot to, it some have they but that fairly We is furniture, factors. sell. know promote competitors a

Jeremy Hamblin

if potentially that got of consideration a little promotions kind lot to years that on but sales couple a products, of of that back in here you consideration aggressive success a leverage Is jump allowed to to on over get of aspect would significant nice aggressive couple of in. Is more had new ago know, of then on think also that your leverage where more you next your financial a a run pretty I kick had something that you the little you you a your that when really more -- you last a be aggressive operating that saw quarters maybe get mentioned, business? and

Farooq Kathwari

the we to we got how But increasing critical that it's see leverage it. sales, take Well, opportunity of accomplish have we major. is we because the

so is increase to And whole sales. focus our

them our major I as said, We Now, clients. advantage. ones be to is having advantage designers want with interior competitive working with X,XXX the a

-- about Awards. are design We is year, in operating to because I focus a XXX recognizing are impact positioned the our uniquely Yes, would weeks. different our as like because a almost business that It's Academy have of them here that We best model, we sales, our on one of do two increase having, margins. it's networks. has interior every our say major we

Jeremy Hamblin

Okay. thank for taking Great. you Well, question. extra the

Farooq Kathwari

Jeremy. No, thanks much, very

Operator

so Thank show I'd further no like closing to the in queue you. for questions I back call turn remarks.

Farooq Kathwari

plus profits. increase able give any our to locations, free be vertical and much and strength that to us as and mentioned sales in remarks you others bring opening an our release here very comments to press internationally, call. with design I designers the very as much great and opportunity more thank in company in in see fact to positioning, I my Well, this questions feel integration of X,XXX utilize our traffic further interior said also and more and using XXX Thanks my XXX please in a then

Operator

participation does may Ladies you. conference. you for and you Have a conclude wonderful that your gentlemen, much disconnect. Thank very day. all today's Thank

Farooq Kathwari

Bye. very much, right. care. All Thanks take