Prior to the pandemic, the company was facing sales pressure from weakness in international markets, trade tensions with China, and a decrease in sales from a failed membership program. The COVID-19 pandemic compounded this negative impact, as most U.S. states required the company to close its stores and manufacturing facilities in mid-March through most of the fiscal fourth quarter.
DThis has been made possible by new technology that allows designers working remotely to provide personalized service to customers. Online sales in fiscal 1Q21 rose 112% from the prior year, and management now believes that it can achieve the same or higher sales levels with 20%-30% fewer sales associates. Looking ahead, we expect continued sales recovery, gross margin improvement from the company’s restructuring efforts, and lower expenses as ETH leverages its new designer technology. We also expect benefits from product lines that target a younger demographic, which are essential for growing the business.
The beta on ETH is 1.17.
The company reported 1Q net revenue of $151.1 million.
The lower revenue reflected lower orders in the prior quarter due to the temporary closure of design centers and manufacturing plants. However, management said that retail orders and production backlogs were up in the double digits in 1Q21. It also expects the company to be back to prepandemic levels by the end of the fiscal second quarter.
In October 2019, ETH announced a new $100 membership program giving participants savings of 20% on purchases, complimentary design service, free delivery, and special financing options. Management expected the new program to increase the gross margin by reducing ordering errors, production errors and cancellations that resulted when customers concentrated purchases at the end of the month to take advantage of promotions. However, customers were reluctant to join the program as membership was required to purchase products. Management estimated that 90% of lost retail revenue in fiscal 2Q20 (i.e., before the pandemic) resulted from this customer resistance. In February 2020, the membership program became optional and in March, the benefits of the program were temporarily extended to all nonmembers in response to COVID-19.
The company completed the consolidation of case goods manufacturing in 2Q20 and expects it to generate significant gross margin benefits. The consolidation moved all case goods manufacturing to Vermont, converted manufacturing space in North Carolina to a new distribution center, expanded the upholstering plant in North Carolina, and closed the company’s existing distribution center in New Jersey. In 1Q20, the company sold the former distribution center for $12.3 million, resulting in an $11.5 million pretax gain. The sale was excluded from adjusted results.
Management did not provide guidance, but is cautiously optimistic about the year-over-year increase in contract sales in October. It also expects 2Q21 sales to be in line with the prior year.
EARNINGS & GROWTH ANALYSIS
Ethan Allen reports revenue for two divisions: Retail (55% of 1Q21 net sales) and Wholesale (45%). First-quarter business trends for these segments are discussed below:
The company’s business segments reported lower sales in fiscal 1Q but higher operating margins as a result of restructuring efforts. In the Retail segment, sales declined 14% to $118 million due to COVID-related disruptions in manufacturing and store closings as well as clearance sales. Management reported that retail written orders and manufacturing backlogs increased 11% and 39%, respectively, from prior year.
Wholesale revenue fell 4% to $97 million, reflecting a disruption in sales in China and to U.S government during the pandemic. The division reported adjusted operating income of $13 million, up 27% from the prior quarter. The division operating margin improved 330 basis points to 13.5%.
Adjusted operating margin rose 110 basis points to 8.1%. Selling, general and administration costs declined 15% and were 49% of net sales.
However, it expects 2Q21 sales to be consistent with the prior year. We look for sales to return to prepandemic levels and for restructuring efforts to boost margins over time.
FINANCIAL STRENGTH & DIVIDEND
During the quarter, the company strengthened its balance sheet by paying down its remaining $50 million in outstanding debt.
Following a series of increases, the quarterly payout rose to $0.21 per share. After temporarily suspending the dividend in fiscal 3Q20 (during the initial phase of the pandemic), the company reinstated the dividend in August; the payment will be made in 2Q21. The company has not yet reinstated its share buyback program.
MANAGEMENT & RISKS
In the online space, Wayfair’s low-cost, delivery-to-doorstep model is a competitive headwind.
The company could be subject to some disruptions or political risk at its manufacturing facilities in Mexico and Honduras.
We note that Ethan Allen owns all of its wholesale and 35% of its retail properties.
FY20 sales were $589.8 million.
We will look to upgrade the stock on signs of continued earnings growth.