The second quarter of fiscal 2022 delivered a mixed bag for home furnishings stalwart Ethan Allen. The company reported a 2.4 percent drop in consolidated net sales but a 15.5 percent increase in net income for the quarter, which ended on Dec. 31, 2022.
Consolidated net sales came in at $203.2 million, down from $208.1 million during the same quarter in 2021. However, that number marked a 3 percent increase over the same period in pre-pandemic 2019.
“Our consolidated net sales of $203.2 million were helped by strong backlog pricing actions taking and the positive effects of product mix, partially offset by lower unit volumes,” said Matt McNulty, chief financial officer, Ethan Allen. “The prior year second quarter was one of the largest historical second quarters for net sales, which led to a difficult comparison.”
Ethan Allen ended the quarter with a wholesale backlog of $78.5 million, down 36 percent from 2021, and the home furnishings company was able to reduce the number of weeks of backlog, bringing it to a more current status. That said, the retailer’s backlog level remains 57 percent higher than pre-pandemic levels.
Wholesale written orders dropped 20.2 percent from 2021 and 18.6 percent from the second quarter of fiscal 2019. Retail orders were down 16.3 percent from the year before, but only dropped by 1.5 percent.
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“We had expected this percentage of retail sales to consolidated sales to moderate towards normalized levels and this began to take shape in Q2,” McNulty said. “Retail sales were 84.5 percent of consolidated sales, down from 86.3 percent last year, as we delivered out more of our wholesale order backlog.”
Ethan Allen’s consolidated gross margin grew 220 basis points to 61 percent, which McNulty attributed to product pricing, product mix, disciplined promotional activity and lower inbound freight costs.
The company’s adjusted operating margin increased to 18.1 percent from 15.7 percent in 2021, due to “wholesale gross margin improvement and maintaining a disciplined approach to cost savings and expense control, partially offset by lower net sales and high retail delivery costs,” according to McNulty.
Ethan Allen’s SG&A expenses decreased from 43.1 percent of net sales in 2021 to 42.9 percent in fiscal 2022. Adjusted diluted earnings per share was up 15.8 percent to $1.10 due to improved gross margins and a reduced expense base.
Looking at liquidity and capital, as of Dec. 31, the company had cash and investments of $140.4 million with no outstanding debt. Ethan Allen also generated $2.5 million in cash from operating activities during the quarter, bringing its total up to $40.9 million during the first half of 2023, an increase from $22.7 million in the prior year period, due to higher net income and an improvement in working capital.
Capital expenditures were $5.3 million for the quarter and included investments in various areas within manufacturing, technology and retail.
CEO’s take: Ethan Allen CEO Farooq Kathwari was pleased with the results, and said that the company would resume significant product introductions over the coming six months after scaling back intros over the past three years.
Kathwari also pointed to the company’s supply chain as a source of strength for future growth.
“Our supply side is stronger,” he said. “About 75 percent of our products are made in our North American workshops and about 75 percent made custom on receipt of orders. Our production capacity in North America has been increased with two very important factors: first, addition of qualified workforce and continued investments in technology. We are in a good position to service our clients.”
Kathwari also pointed to streamlining efforts in production that have paid off.
“We used to have 30 manufacturing plants,” he said. “Now we have Vermont, North Carolina, Mexico and Honduras, and that is producing twice as much the 30 did in North America. Similarly our logistics—we used to have 10 major national distribution centers, now we have two. So we have done a lot of work in terms of becoming more efficient.”