Ethan Allen Interiors Inc.

Good afternoon and welcome to the Ethan Allen Fiscal 2024 fourth quarter analyst conference call. If you require operator assistance, please press star zero. Please note this conference is being recorded. It is now my pleasure to introduce your host, Mack McNulty, Senior Vice President, Chief Financial Officer and Treasurer. Thank you, you may begin.

Thank you, operator. Good afternoon and thank you for joining us today to discuss Ethan Allen's Fiscal 2024 fourth quarter and full year results. With me today is Bharut Kathwari, our Chairman, President and CEO. Mr. Kathwari will open and close our prepared remarks while I'll speak to our financial performance midway through. After our prepared remarks, we will then open the call for your questions. Before we begin, I'd like to remind the audience that this call is being recorded and webcast live under the news and events tab on the investor relations page of our website. A replay of today's call will also be made available on our investor relations website. There you will find a copy of our press release, which contains reconciliations of non-GAAP financial measures referred to on this call and in the press release. We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business. Our comments today may include overlooking statements that are subject to risk and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our annual report on form 10-K. Please refer to our SEC filing for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. With that, I'm pleased to now turn the call over to Mr. Kathwari.

Well, thank you, Matt. And thanks for participating in our fourth quarter and fiscal year, June 30, 2024 meeting. As stated in our press release, we are pleased to report strong performance in this post-pandemic period. Despite lower demand and reduction in high backlogs, we did well. We had strong gross margins of 60.9%, and despite lower sales, had an adjusted operating margin of 13.1%. We continued to generate strong cash and ended with cash an equivalent of 195.8 million, up from 172.7 million last year. Our inventory have been reduced by .5% since June 30, 2019, and the headcount also reduced by 28% June 2019. Now, we know this after multiple years of high demand during the pandemic period, consumer is much more focused on quality, value, and service. And provides an opportunity for enterprises like us that have relevant products, strong talent, providing service, and also to have good, healthy cash positions. After Matt provides an overview of our financial results, I will review our initiatives going forward. Matt.

Thank you, Mr. Kathwari. Our financial results for the full year and fourth quarter ended June 30, 2024, were highlighted by double digit operating margins, disciplined expense management, strong operating cash flow, and a robust balance sheet. As we operate in a post pandemic period, defined by challenges within the home furnishings industry, our operations produce positive financial results, which I will now discuss. Our fiscal 2024 consolidated net sales totaled 646.2 million, which included fourth quarter sales of 168.6 million, our highest level of quarterly delivered sales during the fiscal year. The reduction in net sales when compared to the prior year are reflective of lower delivered unit volumes, lower backlog, and a strong prior year comparable. Overall demand patterns began to show signs of improvement during the just completed fourth quarter. Retail segment orders for the quarter were down 1.3%, while wholesale written orders increased 0.4%, as our wholesale segment benefited from improving orders within our contract business. We ended the fiscal year with wholesale backlog of 53.5 million, nearing historical norms and pre pandemic levels. We improved customer lead times and reduced the number of weeks of backlog. For the fiscal 2024 year, our consolidated gross margin was 60.8%, a 10 basis point improvement over last year. In the just completed fourth quarter, consolidated gross margin was also 60.8%, our 13th consecutive quarter, that gross margin has exceeded 58%. When compared to last year, our quarterly consolidated gross margin was impacted by fewer delivered sales and higher in-bounce rate, partially offset by change in sales mix, lower raw material input costs, reduced headcount and a disciplined promotional level. For the 2024 fiscal year, our adjusted operating margin was 12.1%, down from .9% last year. Improved fourth quarter adjusted operating margin of .1% reflects lower headcounts and strong expense management. Our SG&A expenses decreased .9% and equaled .7% of net sales, up from .1% last year, due to lower sales volume relative to fixed costs. Compared to our pre pandemic 2019 fourth quarter, our adjusted operating margin improved 450 basis points, due to our focus on streamlining our vertically integrated enterprise. On a full year basis adjusted EPS was $2.49. For the quarter, our adjusted EPS was $0.70. Our effective tax rate was .3% for the full year and .1% for the quarter, which varies from the 21% statutory rate, primarily due to state taxes. Now turning to our liquidity. We ended our fiscal year with a robust balance sheet, including cash and investments of 195.8 million and no outstanding debt. We generated 26.2 million of cash from operating activities during the just completed quarter, bringing our full year amount up to 80.2 million. We also reduced our inventory levels by 7.2 million. Capital expenditures were 9.6 million for the full fiscal year, including 2.1 million during the fourth quarter, as we continue to invest capital in manufacturing, retail, technology and infrastructure. We also continued our practice of returning capital shareholders in the form of cash dividends. This past April, our board increased the regular quarterly cash dividends by .3% to 39 cents per share, which was subsequently paid in May and brought our total fiscal 2024 dividends paid to 50.3 million. Also, as just announced in our earnings release, our board declared a special cash dividend of 40 cents per share, in addition to our regular quarterly cash dividends, both of which will be paid in August. This recent action marks the fourth consecutive year we have paid a special cash dividend. In summary, our vertically integrated business delivered positive fiscal 2024 operating results during a period marked by industry-wide soft demand and challenging headwinds. We achieved these results and generated strong cash flows while protecting our margin gains through disciplined investments and solid execution. We are building a fundamentally stronger company, protecting our profitability and enhancing our operational efficiency. As we move into fiscal 2025, we will continue to carefully manage our expense structure while investing in growth initiatives that we believe will further our business. We remain cautiously optimistic as our balance sheet has us well positioned. With that, I will now turn the call back over to Mr. Kefwari.

All right, thank you, Matt. Matt provided a good overview of our financial results for the fiscal fourth quarter and year ended June 30, 2024. I will now briefly discuss our strategic priorities as follows. First is talent. Continued development of strong talent is critical to our vertically integrated structure. We are pleased with strong leadership talent in all areas of our enterprise, which includes manufacturing, retail, logistics, marketing, merchandising, technology and finance. In marketing, we continue to provide innovative marketing both in content as well as the mediums we utilize. While overall marketing expenditure is equal to .8% of sales, much lower than the 4% of sales we had five years back. The ability to utilize technology in marketing is a game changer. For example, we now reach over 9 million households every two weeks with our 36 page digital magazine. We also continue to quarterly mail our printed magazines. And this past quarter also mailed our 2024 style book. The interaction on social media by our interior designers is extremely important. Utilizing technology at all levels is key to our vertical integration, which involves manufacturing, producing efficiently about 75% of our products in our North American facilities. Also many years back, we operated over 30 manufacturing towns in the United States and today the number is 10 in North America. Now, technology has helped us retain strong talent in all areas of our business, and especially in manufacturing where we have reduced head count by 28% since 2019. Our national and retail logistics is very important for our vertically integrated company. We are unique as we deliver our products, what we call a white glove service to our clients in North America at one delivered price. Many years back, we operated 10 national distribution centers for our North American retail and now one major facility with a smaller backup provides this service. Our retail logistics has also been greatly made smaller, more efficient. Today we have 22 service centers that deliver great service to our clients throughout North America. Now combining technology with talented associates has been critical, resulting in very professional service in all areas of our business. It has also resulted in lower head count. For example, 10 years back, we had a total head count of 5,000 associates and now it is 3,400. A reduction of 32%. Now providing superior service is key to our vertical integration. We are an interior design-based network and last year we further enhanced by a number of initiatives, including the launch of what we call the interior design destination concept. This initiative provides great projection to our enterprise. We use the size of our interior designers and helps provide superior service by interior designers. Having consistent offerings shown in our design centers has helped productivity and service at all levels, from retail to manufacturing to logistics. Now since our start over 92 years back, we continue to have a very high level of service and continue to be a socially responsible enterprise. That is in all areas of our enterprise, whether it is from manufacturing to logistics to retail and other areas as well. Now finally, we are very pleased that we were recently named again as America's premier retailer by a study conducted by Newsweek. And with that, good news, I'd like to open it up for any questions or comments.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Taylor Zick with KeyBank Capital Markets. Please proceed with your question.

Hi there, how are you? I'm

doing well, how are you, Frug?

Thanks very much.

I just wanted to start and ask about the cadence of written orders during the quarter. You obviously saw some pretty strong sequential improvement in three queues and four queues. Could you talk a little bit more about what led to that improvement? And then maybe if you have any comments on how July is trending so far?

All right, well, you're talking about fourth quarter. Now fourth quarter, we had, I think, somewhat consistent business throughout the quarter. And obviously, somewhat stronger towards the end. And I think it also, it's reflected to a great degree our, the work of our interior designers. They make tremendous amount of contacts. And then the social media is tremendously important. So I would say that Matt is correct with our business was somewhat consistent throughout the quarter.

Yes, that is correct. It was fairly consistent with the, a little bit of a heighten around the Memorial Day week that in May there was a little bit of elevated written.

Gotcha. And then maybe just one on the cost side as well. Frug, in that you've done a great job kind of controlling the costs, and structurally reducing the overhead of the past three years. But I'm curious what kind of leverage you have left if the demand does stay any more challenged. Obviously, you've seen an improvement, but what else can you do on the cost side to kind of maintain some of these margins?

Well, this is this question about Austin. We mentioned that it is something that you've got to get into the system with everybody's mind. So it starts with that mindset. And then technology has played an important role in all areas of our business. As we mentioned, today we have about, our headcount is at .5% versus 4% four or five years back. Tremendous reduction in headcount, but more qualified people. So initiatives of this technology, but technology is only good if you've got good people. So we have used technology in our retail network, but less people as I mentioned. We have technology in our manufacturing, in our logistics. So technology has been tremendously important, which has also resulted in less

people.

Our headcount is lower as I mentioned. So I would say the first half of the attitude, then it starts with the fact that people have to, you've got to have stronger people, and you've got to have technology.

Understood. And if I could squeeze one last in, and I think I'll head back towards the written orders. Is there anything else you can share on the improvement in written orders? So have you seen the refocus on the home continue in the most recent fourth quarter? Has traffic increased? Any thoughts on conversion or financing, and anything like that to kind of help us handicap this pretty good improvement?

Yes, I think that when you take a look at our written orders, we discuss it. Our written orders, interestingly, when you take a look at it, do we share the written orders? Yes, we do. Okay, they were down. Yeah, the percentage. They were down at 1.3%. That is really incredible that with all the challenges being faced by the country and problems. So we held up our retail business, and I think as we go forward, it looks like we're going to be holding it up to the previous year, even though there are a lot of challenges. Again, challenges relating to economic challenges, political challenges. But I believe that we have that opportunity.

Great, thank you.

Thanks very much.

Thank you. Our next question comes from the line of Christina Fernandez with Telsey Advisory Group. Please proceed with your question.

Hello Christina, how are you?

Good, how are you Farouk? Hi Matt. Yeah, I wanted to follow up on Kayla's question about demand. I guess if you take a step back and think about the industry and particularly furniture demand, I mean, do you think overall it's getting better? Like we've reached a point where demand has bottom or do you see it as more specific to Ethan Allen and some of the, I don't know if it's like, as you said, product or marketing or your designers that allow you to do a lot better than some other players the past couple of months?

Well, it's also a factor that, I mean, there are a lot of many great companies in our industry and I think we'll and most likely we'll do well. Our focus has been whereby we have focused on one brand, one program, one level of quality and the close of 70% made in our own workshops right here in North America. All of those things have been a factor in terms of for our profitability. We have, it's amazing, we have less head count than we have had last year or even certainly from four years back. So I think this question of combining great talent in, when we look at, for instance, let us say North America. North America is where we manufacture the product. We deliver our product at one cost nationally. The other area that has been very important and critical has been our interior design network. That interior design network is very stable, it's less because of the fact of, you know, over a period of time we have less people but very qualified people, talented people. So that, those elements of that is vertical integration from making manufacturing, delivering our product. Think of this, when I did this 20 years back, people thought I was crazy that we will deliver our product at the same price in New York and in San Francisco, Miami and Texas, it can't be done. Well, it can be done but you have a vertical integration to make it happen. I think all of those factors are important. I think that our interior designer network is less but very talented and qualified. Combining interior designers with technology is, as I said earlier, the game changer. So those things differentiate us. We have one level of quality, weak producer programs of products and consumers suffer, they're much more careful who they buy from. In the last two, three years back, that was not the case. So all I would say those companies that have some of the ingredients I'm talking about most likely will do well.

Thanks. And my second question, I wanted to see if you could expand on your strategic plan for fiscal year 25, particularly as it relates to your showroom, do you plan to expand the number of showrooms and also in marketing, should we think about sort of like 3% of sales being a good guidepost for the upcoming fiscal year?

In terms of our retail design centers, it has remained pretty consistent. We have today, we have 142 design centers that we operate and we own. Pre-COVID we're 144. So we have overall, when you take a look at it, we have design centers, we have about 40 that are operated by our, 30 that are operated by our independent retailers with an average association of 40 years with us, families. So I think that we are very careful and where are we going to bring in? So this last year I think we only brought in two or three new design centers. I think going forward, it would be most likely three to five but not a large number. Our focus is to make sure we improve what we have. But also in this last year, as you know, we reduced the size of our design centers. We reduced some of our design centers were 20,000 square feet and above. I said, no, the max size is 12,500 and we had the newer ones we're getting is anywhere from six to eight or 9,000 square feet. So I think that our focus really is having, and then the other thing we did was we re, you might say, we call them the interior design concept. We redesigned all our design centers with one great look. 10 years, five years back, people in New Jersey thought they were very different than in Long Island. Forget California or Florida. All our design centers today, especially the company operated one, have one image. Now, other thing that we are doing is now, we have been developing a lot of, also new product. Again, we have to be cautious that we only bring in product because we don't sell it to anybody else. It's all through our own network, but we have been adding new products and as we have the ability to make the product, it is coming into our design centers and by next April, around that time, we would have another major introduction of new products which we are developing right now.

And last question, can you talk about the State Department contract, I guess how did that progress this quarter? Are you seeing any more demand? Do you expect it to be a little bit of a pause here with potentially a change in administration?

Yeah, that's a good question. But with this conflict in the Middle East, it did have an impact where the State Department focus was on a lot of other factors, security. What we have seen in the last two or three months, they're starting to focus back on the home. So we're starting to get good orders now. So it looks like that we will have a good business with the State Department this fiscal year.

Thank you and good luck.

Aris Prasena, thanks very much.

Thank you. Our next question comes from the line of Bud Bugat with Water Tower Research. Please proceed with your question.

Hello, Bud, how are you?

I'm well, Luke, how are you? Thank you for taking my question.

Well, look at it, I've been only doing, hey, Bud, I've been only doing it for 30 years, 35 years now, your questions.

A longer time than that, yes, that's correct.

Let's talk a little bit about the dichotomy of sales between wholesale and retail. The retail sales still down about 20%. How do they parse out between domestic and international?

Matt is here, but I would say that international was much more impacted during this COVID period the last year. Then good news is they're starting to get back. In fact, many of our international design centers have also been repositioned with this interior design concept and they're having ribbon cuttings all over in many parts of the world. But I think that our written business was down, well, if you take a look at it, it's last quarter was down only .3% in the retail division while our international most likely were down close to 30, what is it in here, I'm looking at it, 30%, right? So international is coming back. It was impacted in this COVID period. A great degree, all kinds of issues. But the good news is they're coming back, Bud.

Yeah, and Bud, just to add, this is Matt here. You are right that wholesale sales are down 20% while retail is down 7%. A lot of the drive for that or the difference is on our contract business and international business. As Mr. Kefwari alluded to, our fiscal second and third quarters, the State Department was slow with conflict in the Middle East and other factors that delayed the purchases. So the subsequent delivered of those orders didn't happen as fast as the fourth quarter for us. So that definitely was a lot weaker than the retail division sales side of things. Now we're seeing some improvement in there as we talked about on the State Department business. So we should see those two numbers or metrics, retail sales and wholesale sales more aligned.

But having said all of that really, this wholesale orders are down 9% considering all those problems that we are talking about. So it's not too bad, but I think they'll come back.

Well, I'm concerned about the wholesale as it impacts the partner stores. And you're right, I mean, the international side of it was I think weak over the first couple of orders of the year and most of that's Asia. Is that the weakness we're seeing in the international?

Yeah, that's

right, yeah. Okay, and you gave us the wholesale backlog I think of 53 and a half million. Did I miss you're giving us the retail backlog at the quarter end?

We do not publicly disclose the retail backlog, but typically it's a little under two times the customer deposits on our balance sheet.

I think that's what you told me last quarter as well. I was giving you the opportunity to see if you wanted to make a change to this.

I'm glad he is giving you more information than to give to anybody else with anything. Go ahead, Bob.

I'm not so sure I do agree with that Farouk. I agree with that you are an incredible businessman and you run the business with a great deal of discipline, but the amount of information, that's a topic of another conversation. $34 million or so I think of investments. You included that in the cash and investments side of the business. Can you talk a little bit about what that investment is or what those investments are?

You're talking about the US Treasuries? Yeah, you know all of our, but we have close to $200 million in cash, frankly any extra cash we put in US Treasuries.

Okay, well good luck on the upcoming year and good luck to society on the upcoming year as well.

All right, well always good to hear from you,

bye. Thank you. There are no further questions at this time. I'd like to turn the floor back over to Mr. Swarthi for closing comments.

All right, well thanks very much. Well, good to have you all on this call. We've gone through a lot of challenges, but I've always felt that challenges create opportunities. We are positioned well. We have a strong product programs and in the next year we're going to now introduce more new products because we held that back. We have regional network is strengthened. We have repositioned all our design centers. We have a strong manufacturing base both in North America and then as I said earlier, technology has played a tremendously important role combining great talent with technology is what it's all about. And I think as we move forward, continuing with this, these initiatives of strong product programs, strong talent, providing great service and then finally be a socially responsible company. We have been recognized by many organizations and I'm happy that as I said, in the news week for the second time named as America's number one retailer. Thank you very much and any questions please let us know.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.