Ethan Allen Reports Fiscal Year 2020 and Fourth Quarter Results
Ethan Allen Interiors, Inc. (“Ethan Allen” or the “Company”) provided several updates on its business and reported financial results for its fiscal year and fourth quarter ended June 30, 2020.
The Company’s fourth quarter of fiscal 2020 saw unprecedented disruption around the world as a result of the rapid spread of COVID-19.
Farooq Kathwari, Ethan Allen’s Chairman, President and CEO commented, “We are very gratified with the work and focus of our teams during this unprecedented crisis due to COVID-19. The foremost focus has been operating safely for our associates and clients. We have had to make many hard decisions including the furlough of approximately 70% of our global workforce. Fortunately, we have been able to bring many associates back with 56% of them having already returned to work.”
Mr. Kathwari continued, “Our action plan and the key steps taken helped us end with a strong cash position, which included generating $14 million in cash from operating activities over the last three months. For precautionary purposes, we drew $100 million from our credit facility in March 2020 and by June 30, 2020 had repaid $50 million, maintaining total cash of $72.3 million at June 30, 2020.”
“We are pleased with our written orders during the period considering almost all our design centers closed in mid-March and remained closed for the majority of the fourth quarter. Our advantage of combining the skilled personal service of our interior design associates with technology resulted in total wholesale orders, as a percentage of the previous year orders, as follows: April 35%, May 70% and June 117%. For the full quarter ending June 30, 2020, wholesale orders were 70% of the prior year. We are pleased that in July we continued with strong orders, reaching 103% of the strong prior year July. This was accomplished despite resurging challenges of COVID-19 in many parts of the country. As we move forward, we will continue to focus on our advantages, including a strong retail network, our vertical structure whereby 75% of products are made in our North American workshops and increasing the use of technology in all aspects of our enterprise, while also maintaining our focus on strong governance and social responsibility,” Mr. Kathwari further stated.
“We are also very pleased that our Board of Directors reinstated the regular quarterly cash dividend and declared a regular quarterly cash dividend of $0.21 per share, which will be payable to shareholders of record as of Thursday, October 8, 2020, and paid on Thursday, October 22, 2020. We are cautiously optimistic to grow our sales and profits,” Mr. Kathwari concluded.
The Company previously announced its COVID-19 action plan on April 1, 2020, which included, among other things, the temporary closure of design centers and manufacturing facilities, the furlough of 70% of its global workforce, the decision by the Company’s CEO to temporarily forego his salary through June 30, 2020, a temporary reduction in salaries of up to 40% for all senior management and up to 20% for other salaried employees through June 30, 2020, a temporary reduction of 50% in the cash compensation of the Company’s directors through June 30, 2020, the elimination of all non-essential operating expenses, a delay of capital expenditures and the temporary suspension of the regular quarterly dividend and share repurchase program.
The Company gradually began reopening its design centers beginning in May and as of June 30, 2020, has reopened all of its Company-operated retail design centers, including 14% open by appointment only. The Company resumed production in its North American manufacturing plants during the second half of the quarter, some in a limited capacity, and expects to work through existing order backlog and ramp up to full production by the end of August. The Company’s distribution centers are fully open and making home deliveries. The Company restored the temporary salary reductions on June 30, 2020 as planned and has reinstated the regular quarterly dividend.
Fiscal 2020 Fourth Quarter Highlights*
– Consolidated net sales of $91.6 million compared with $183.9 million.
– Consolidated gross margin of 52.3% compared with 54.8%. Adjusted gross margin of 53.3% compared with 55.9%.
– Diluted earnings (loss) per share (“EPS”) of ($0.48). Adjusted EPS of ($0.15) compared with $0.46.
– Cash on hand of $72.3 million as of June 30, 2020 and long-term debt of $50.0 million.
– Cash provided by operating activities up 28.1% to $14.0 million.
– Repaid $50.0 million of the Company’s outstanding debt from available cash on hand.
– The Company’s Board of Directors reinstated the regular quarter cash dividend on August 4, 2020 and declared a regular quarterly cash dividend of $0.21 per share, payable in October 2020.
Full Fiscal Year 2020 Highlights*
– Consolidated net sales of $589.8 million compared with $746.7 million.
– Consolidated gross margin of 54.8% compared with 54.8%. Adjusted gross margin of 55.7% compared with 55.1%.
– Diluted EPS of $0.34. Adjusted EPS of $0.52 compared with $1.56.
– Generated $52.7 million of cash from operating activities compared with $55.2 million last year.
– Paid cash dividends of $21.5 million.
– Share repurchases of $24.3 million, representing 5.8% of outstanding shares. During the third quarter, the Company’s Board of Directors increased the share repurchase authorization to three million shares.
* See reconciliation of U.S. GAAP to adjusted key financial measures in the back of this press release. Comparisons are to the fourth quarter and full fiscal 2019 year.
Fiscal 2020 Fourth Quarter Financial Results
Net sales were $91.6 million, a decrease of 50.2% or $92.4 million compared to the same prior year period. Net sales were negatively impacted as a result of disruptions from the COVID-19 pandemic, which included the closing of the Company’s design centers and manufacturing plants for most of the first two months of the fiscal fourth quarter as well as lower order backlog entering the quarter.
Gross profit was $47.9 million compared with $100.8 million in the prior year period due to lower sales volumes in both the wholesale and retail segments combined with a change in product mix, partially offset by an improved retail gross margin. Retail sales, as a percentage of total consolidated sales, were 77.2% in the current year fourth quarter, down from 80.0% a year ago, which negatively impacted consolidated gross profit. Consolidated adjusted gross margin for the quarter decreased to 53.3%, down from 55.9% in the prior year, due to the wholesale adjusted gross margin decreasing 260 basis points combined with product mix partially offset by the retail gross margin expanding 60 basis points from improved retail price optimization.
Operating expenses decreased 42.8% to $60.3 million compared with the prior year period primarily due to lower retail selling costs, reduced advertising and lower general and administrative costs. Retail selling expenses were down due to warehouse and delivery expenses decreasing from a 51.9% reduction in retail net sales and a decrease in designer selling expenses. General and administrative expenses decreased primarily due to lower wholesale compensation, freight and plant operating costs coupled with lower administrative, occupancy and regional management charges within the retail segment. Included in fiscal 2020 operating expenses were $7.2 million in restructuring and impairment charges compared to $18.4 million in the year ago fourth quarter.
Operating loss was $12.4 million compared with an operating loss of $4.6 million a year ago. Adjusted operating loss was $5.0 million or -5.4% of net sales compared with operating income of $15.9 million or 8.6% of net sales for the same prior year period. The decrease was driven by the 50.2% decline in consolidated net sales, a decrease in product mix and lower gross margins from manufacturing plant shutdowns during the current quarter. These decreases were partially offset by improved expense management, with operating expenses decreasing 42.8% year over year as a result of the Company’s COVID-19 action plan implemented at the beginning of the quarter.
Income tax benefit on the operating loss was $1.1 million in the current year fourth quarter compared with an income tax benefit of $1.5 million a year ago. The effective rate was 8.5% in the current year fourth quarter compared with 31.0% last year. The Company recorded a valuation allowance during the fourth quarter of fiscal 2020 in the amount of $2.5 million on the deferred tax assets related to state NOL carryforwards.
Diluted EPS was ($0.48) compared with ($0.12) in the prior year comparable period. Adjusted diluted EPS was ($0.15) compared with $0.46 in the prior year. This decrease was primarily from net sales being negatively impacted as a result of the COVID-19 pandemic partially offset by expense management.
Net sales decreased 52.0% to $51.6 million primarily due to a 52.5% decrease in sales to the Company’s North American retail network and a 41.7% decrease in international sales. Wholesale net sales were significantly impacted in the quarter due to COVID-19 disruptions, including its contract sales, which decreased 11.5%. Prior to March 2020, wholesale net sales were improving sequentially each month as customer demand increased. COVID-19 ongoing concerns made it difficult to quickly return to desired staffing levels, particularly in the manufacturing plants, which kept production and net shipments below last year’s rate, resulting in higher ending backlog at the end of the quarter.
Wholesale orders booked, which represents orders booked through all of the Company’s channels, were down 30% compared with the same quarter last year. The closing of the Company’s retail design centers and manufacturing operations for the majority of the first two months of the fourth quarter negatively impacted orders. While wholesale orders decreased 30% from a year ago, the Company realized sequential improvement in orders each month during the quarter, with June orders increasing by 17% year over year.
Operating income was $1.5 million compared with $6.3 million in the prior year period, primarily due to the 52.0% decrease in wholesale net sales partially offset by general and administrative expense reductions of 51.2% from plant closings and actions taken to control and minimize expenditures in the quarter.
Net sales from Company-operated design centers decreased by $76.4 million, or 51.9%, to $70.7 million. There was a 52.0% decrease in net sales in the United States, while net sales from Canadian design centers decreased 51.2%. These decreases were primarily due to the temporary closing of the Company’s North American design centers during the first two months of the fourth quarter due to COVID-19, lower starting backlog at the beginning of the quarter and a decrease in written orders. Retail backlogs grew significantly during the quarter and the Company is focused on its short-term ability to return its wholesale production and shipping to the levels that are necessary to properly service its customers. There were 144 Company-operated design centers at the end of the fourth quarter of fiscal 2020, consistent with a year ago, as the Company continues to relocate and open new locations while closing older locations.
Operating loss was $14.1 million compared with an operating loss of $10.6 million for the prior year period. Adjusted operating loss was $6.5 million compared with operating income of $1.6 million a year ago. Adjusted operating margin decreased to -9.2% from 1.1% due to the $76.4 million reduction in net sales partially offset by a 60 basis point improvement in gross margin and a 39.9% decrease in operating expenses from lower selling, administrative, occupancy and regional management costs. Retail restructuring and impairment charges in the current year fourth quarter were $7.2 million compared to $12.1 million a year ago.
Fiscal Year 2020 Financial Results
Net sales were $589.8 million, a decrease of 21.0% compared with the same prior year period. Net sales decreased by 23.5% within the wholesale segment and by 21.5% in the retail segment. International sales decreased $17.0 million primarily related to lower sales to China and in Canada. Consolidated net sales were 21.0% lower in the current year due to the introduction of the membership model, the disruptions in the market caused by the COVID-19 pandemic and softer order trends from consumers. Partially offsetting these declines was growth in contract sales, which grew 31.6%. The year over year increase in contract sales was attributable to continued growth in sales from the GSA contract.
Gross profit decreased 21.1% to $323.1 million compared with the prior year period due to sales declines within both the wholesale and retail segments. Retail sales, as a percentage of total consolidated sales, were 78.5% in the current year and 79.0% in the prior year. Wholesale gross profit was negatively impacted by lower sales volumes combined with a reduction in gross margin due to plant shutdowns from COVID-19. Retail gross profit was lower due to a 21.5% reduction in net shipments partially offset by a higher gross margin. Fiscal 2020 adjusted gross margin was 55.7% compared with 55.1% a year ago. This increase was primarily due to improved retail price optimization and increased wholesale contract business. Restructuring charges negatively impacted the fiscal 2020 consolidated gross margin by 90 basis points compared with 30 basis points a year ago.
Operating expenses decreased to $308.5 million compared with $375.5 million in the prior year period. The 17.9% decrease was due to lower selling costs, a reduction in general and administrative expenses and a gain of $11.5 million from the sale of the Passaic property during fiscal 2020. Excluding restructuring and impairment charges from both periods, operating expenses were down 12.6%. Retail selling expenses were lower due to reduced volume of shipments, less designer selling expenses and lower compensation due to headcount reductions. Wholesale selling costs were down due to a reduction in advertising spend and lower compensation costs. General and administrative expenses decreased due to lower compensation costs coupled with lower depreciation, occupancy costs and regional management charges.
Operating income totaled $14.6 million compared with $33.9 million for the prior year period. Adjusted operating income in fiscal 2020 was $17.1 million compared with $55.1 million last year. The decrease in adjusted operating income was driven by the $156.8 decline in consolidated net sales partially offset by a higher adjusted gross margin and a 12.6% decrease in adjusted operating expenses.
Income tax expense was $5.3 million for fiscal 2020 compared with $8.2 million a year ago. The fiscal 2020 effective rate increased to 37.3% compared with 24.1% in the prior year primarily due to a valuation allowance on deferred tax assets related to state NOL carryforwards.
Diluted EPS was $0.34 compared with $0.96 in the prior year period. Adjusted diluted EPS of $0.52 in the current year represents a decrease of 66.7% over the prior year.
Balance Sheet and Cash Flow
Total cash and cash equivalents was $72.3 million at June 30, 2020 compared with $20.8 million at June 30, 2019. Total cash increased during fiscal 2020 due to net borrowings on the Company’s revolving credit facility of $50.0 million, net cash provided by operating activities of $52.7 million and net proceeds from the sale of the Company’s Passaic property of $11.7 million, partially offset by $24.3 million in share repurchases, $21.5 million in dividend payments and $15.7 million of capital expenditures. Cash provided by operating activities was positively impacted by the deferral and abatement of $2.7 million in retail design center rent during the fourth quarter of fiscal 2020.
Inventories of $126.1 million decreased $36.3 million compared with $162.4 million at June 30, 2019. Wholesale finished goods levels decreased $21.0 million primarily from the concerted effort to reduce and maintain lower inventory levels and the non-cash write-down and disposal of certain slow moving and discontinued inventory items. Retail inventory levels decreased $7.1 million as the Company further improved its efforts to minimize inventory carrying costs combined with the sale of additional floor items during the just completed fourth quarter.
Debt outstanding was $50.0 million at June 30, 2020 as the Company drew down $100.0 million on its existing credit facility during March 2020 and subsequently repaid $50.0 million in June using available cash on hand. The outstanding debt at June 30, 2020 bears a weighted average interest rate 1.7% and the principal balance is payable on the maturity date of December 21, 2023.
Capital expenditures were $15.7 million, an increase of $6.6 million compared with $9.1 million spent a year ago. In fiscal 2020, approximately 53% of the Company’s total capital expenditures related to opening new and relocating design centers in desirable locations, updating existing design center presentations and floor plans and opening new home delivery service centers. The remaining 47% was capital expenditures incurred in connection with the previously announced optimization project as well as investments in additional technology to improve existing workflows.
Cash dividends paid during fiscal 2020 totaled $21.5 million, a decrease of $25.5 million over a year ago due to the special dividend of $26.7 million paid in January 2019. The Company had suspended its regular quarterly cash dividend as of April 28, 2020, due to the COVID-19 impact. However, on August 4, 2020, the Company’s Board of Directors reinstated the regular quarterly cash dividend.
Retail Segment Restructuring and Impairment Charges
During the fourth quarter of fiscal 2020 the Company recorded $7.2 million of restructuring and impairment charges within the retail segment. Approximately $4.8 million was a non-cash impairment charge for long-lived assets held at a number of retail design centers. The remaining $2.4 million represented remaining contractual obligations under leased space that was exited during the fiscal 2020 fourth quarter.
On August 4, 2020, the Company announced that its Board of Directors had declared a regular quarterly cash dividend of $0.21 per share, which will be payable to shareholders of record as of October 8, 2020 and will be paid on October 22, 2020. The Company’s Board of Directors met with management to review the effects of the COVID-19 pandemic on the business and determined that it was appropriate to return capital to shareholders in the form of a quarterly cash dividend equal to the pre-COVID-19 level of $0.21 per share. The Company will continue to monitor the pace of business as it relates to future dividends.
The Company adopted Accounting Standards Update 2016-02, Leases (Topic 842), as of July 1, 2019 using the modified retrospective method and have not restated comparative periods. Upon adoption, the Company recognized operating lease assets of $129.7 million and operating lease liabilities of $149.7 million on its consolidated balance sheet. In addition, $20.0 million of deferred rent and various lease incentives, which were reflected as other long-term liabilities as of June 30, 2019, were reclassified as a component of the right-of-use assets upon adoption. The Company also recognized a cumulative adjustment as of July 1, 2019, which decreased opening retained earnings by $1.6 million due to the impairment of certain right-of-use assets. The adoption of the new standard did not have a material impact on the consolidated statements of operations or cash flows during fiscal 2020.
For the full fourth quarter & fiscal year 2020 results, click here.
About Ethan Allen
Ethan Allen Interiors Inc. (NYSE: ETH) is a leading interior design company and manufacturer and retailer of quality home furnishings. The Company offers complimentary interior design service to its clients and sells a full range of furniture products and decorative accessories through ethanallen.com and a network of approximately 300 design centers in the United States and abroad. Ethan Allen owns and operates nine manufacturing facilities including six manufacturing plants in the United States, two manufacturing plants in Mexico and one manufacturing plant in Honduras. Approximately 75% of its products are made in its North American plants. For more information on Ethan Allen’s products and services, visit www.ethanallen.com.
Matt McNulty – Vice President Finance – email@example.com
Source: Ethan Allen Interiors, Inc.