Earnings Call: Q1 2021

Oct 29, 2020

Greetings, and welcome to the Ethan Allen fiscal 2021 First Quarter Analyst Conference Call. At this As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt McNulty, VP of Finance. You, Mr. McNulty. You may begin. Thank you, Victor. Good afternoon, and welcome to Ethan Allen's conference call for our fiscal first quarter ended September 30, 2020. This conference call is being recorded and webcast live on ethanallen.com, where you'll find a copy of our press release contains reconciliations of non GAAP financial information referred to in the release and on this call. A replay of today's call will also be made available via phone and on our website. After our prepared remarks, we will open the call to questions. As a reminder, our comments today will include forward looking statements that are subject risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for a complete review of those risks. Company assumes no obligation to update or revise any forward looking matters discussed during this call. Joining me today on the call is our Chairman and CEO, Fruv Kewari and our Chief Financial Officer, Corey Whiteley. I'm pleased to now turn the call over to Fruv Kewari. Yes, thank you, Matt, and thank you all for participating in our call. As we advise in our press release, we are making very good progress in growing our sales, profits and strengthening our balance sheet. A few important highlights. And I believe in this new world, we have to compare our results to last year and also the COVID September 30th, increased 65% from our delivered sales in the fourth quarter ended June 30, 2020. Sales were lower by 13.1% from September 30, 2019. Our written business at retail division increased 79% from fourth quarter into June 30, 2020, and also increased 10.8% from September 30, 2019. We are pleased that we are positioning well after major challenges faced due to COVID 19 in the quarters ended March 31, 2020 June 30, 2020. 20 increased 43% from June 30, 2020, and increased 39% from 930, 2019. We also improved our gross margins at September 30, gross margins of 56.8 percent increased from 56 point 3 percent from September 30, 2019 53.3 percent from June 30, 2020. The gross margin of 56.8 percent was achieved despite our manufacturing operating at below Optimum levels during the quarter. Our adjusted operating income margin of 8 to 1 percent at 9 30, 2020 compares to a negative gross margin 5.4% at June 30, 2020, and 7% in previous year quarter ended 9 30, 2019, and also impacted by the lower production in our manufacturing. On strengthening our balance sheet with paying down $50,000,000 of debt and at 9 30, 2020 ended with cash of $62,000,000 and debt free. Now, after Cory provides a brief overview of our financials, I will provide some information on our initiatives to grow our sales and profits. Corey? Thank you, Farooq. During the first quarter of fiscal 2021, our teams remain focused on serving our clients and keeping our workplaces safe. Our fundamentals continue to be strong with retail written orders and backlogs reporting double digit growth compared to offering increased steadily during delivery lead times in the near term. Consolidated net sales for the quarter were 151,100,000 compared with 173,900,000 in the prior year quarter. While net sales decreased, written orders accelerated during the quarter. Retail segment written orders were up 10.8% over the prior year, including 26.5% growth in August, 11.8% growth in September. Our e commerce orders reflected 112% growth for the quarter compared to the prior year quarter As Ruth mentioned, we continue to see very strong retail written order trends for October with month to date orders up over 50% to prior year. Wholesale segment orders while benefiting from the strong retail growth were negatively impacted for the quarter by the timing of GSA and other government orders due to COVID 19 pandemic related disruptions that are delaying issuance of new orders. The delayed orders are expected to be issued in the coming months. Excluding GSA and other government orders, wholesale segment orders increased 9.2% for the quarter. Our adjusted gross margin increased 50 basis points to 56.8 percent, primarily due to expansion within the wholesale gross margin partially offset by a decrease in the sales mix and lower manufacturing production Adjusted operating margin, which excludes the impact of pretax charges from restructuring initiatives, asset impairments and other corporate actions, increased to 8.1% compared to 7% a year ago, primarily due to strong gross margins, and cost containment, resulting in a 14.3% reduction in adjusted operating expenses. Adjusted operating expenses for the quarter were lower due to reductions in selling expenses and reduced compensation expense as we are operating more efficiently 23% less headcount as compared to prior year first quarter. Our GAAP EPS was $0.37 compared to $0.53 in the prior year quarter. As you may recall, last year our GAAP EPS results for Q1 included a one time net pre tax gain $4,900,000 or $0.18 per share from the sale of our Safe New Jersey property net of restructuring activities. As of September 30, 2020, our balance sheet remains strong with cash and cash equivalents of 62,000,000 dollars. During the 1st 3 months of fiscal 2021, we generated $42,200,000 of cash from operating activities as Ruth mentioned, we paid the remaining $50,000,000 in outstanding debt using available cash on hand. With that, I'll turn the call back over to Farooq. Yes. Thank you, Corey. Our focus remains on the following important initiative to grow our sales Number 1 is to continue to focus on strengthening our talent. We have a strong team managing our vertically integrated enterprise During the last year, we have strengthened our retail, marketing and product development teams. 2nd is focus on service. It's critical. Our advantage of making about 75 percent of our furniture in our North American facilities provides a competitive advantage especially during these challenging times. We are adding to plant capacity and investing in technology. As we indicated, we expect to catch up on most of our backlog by end of this quarter and some early, early next quarter. We have maintained strong marketing initiatives, including television, direct mail, digital and print, We have also introduced digital magazines in categories such as mattresses, outdoor lighting and rugs, and have seen an increase in business in these We plan to continue our strong marketing in the next three quarters of this fiscal year. 4th is combining personal service with technology is a strong competitive advantage. Our investments are providing tools such as augmented reality, 3d4 floor planner, web AR is making it possible to have our interior designers interact with clients Number 5, operating our business with high standards of safety protocols, following CDC guidelines for safe store, manufacturing, and logistics operations for our customers and our staff is important and a white and an important focus. And finally, as advised in our press release, we are very pleased to have continued written orders compared to October 2019. This is a result of strong product programs personal services and technology. Also, to some degree, was helped that last year, written was impacted by the introduction of the member program. We look forward to continue our progress and remain cautiously optimistic with this and now happy to open for any comments. Arthur? Ladies and gentlemen, we will now have A confirmation Our first question comes from Brad Thomas with KeyBanc Capital Markets. Hello, Brad. Hi. Hi, Farooq. Good afternoon. Thanks for taking my question. I wanted to talk a little bit more about, working through the strong backlog and strong written orders that you've generated. Could you help us think about your ability to convert these orders into GAAP reported revenues in this upcoming quarter and, and, how we should try to triangulate the strong written trends to revenues going forward here? Yes, Brad. Of course, that is of critically importance. Our manufacturing is almost close to operating at the pre COVID levels. Now having said this, we still have issues relating to some raw materials from fabrics. But we are catching up. And I believe that, as I said, if I today just had to give an estimate, I would say the backlog, perhaps, 60, 70% of that we would be able to produce or even more of that in this quarter. And some of it in the next quarter. Now, there are other issues that we have is that, we also have to the customer's ability to take products. We have products are we are getting them into our service centers all across the country And now we are working to see that the customers take them in because, as you know, there are issues on that side too. But I would say this, that most of it by December and some by January February. That's helpful, Farooq. And could you talk a little bit about the competitive and promotional landscape? I think broadly what we're seeing out of the industry is is because of the strong demand and because of some inventory in availability that, many of the many of the industry many of your competitors are dialing back on the promotion. Can you talk about your ability to get stronger margins in this quarter ahead of us here? Yes. So Brad, you know, this is an important question. Now, our Almost, I would say close to 80% of what we sell is custom. That's a big difference. So we don't, we don't have a lot of excess inventory. Now in this period, people have been hiring. They've been sitting in their homes. They want product and they want it tomorrow. Now we can do some of that, but we cannot compete with folks who've got lots of inventories on hand and they sell it right from the warehouses. So that has been an impact. And we've seen many, many people who are more of a commodity business or people who have an ability to have had inventories they have sold. But now what I hear is that they're also running out of it and now they're waiting for containers coming from overseas. In our case, we have the ability, as I said, 70% plus is made in our own workshops we have had to get it back up because as a COVID in the March quarter, we had to close all our plans. We were asked to close all our plants. And unlike a typical retailer, they don't have the overhead of plants. We have a positive because when it's all operating, we get the benefit of margins, we get the benefit of service. But on the other hand, when there are times where we are not able to produce at a level of that will maintain the right kind of margins, it has an impact on our margin. And that you can see it right now. Then our margins, when our plants are operating at full capacity, our retail is operating at higher volumes under just exits operating, we have a great opportunity as we have done in the past years of operating at margins. So our focus right now, good news is that we are, our manufacturing is operating. We do have the opportunity of fulfilling this backlog. So that will have an that has a good opportunity of continuing to increase our cash and margins. Very helpful Farooq. Thank you so much and good luck here. Thank you. Our next question comes from Bobby Griffin with Raymond James. Hello, Bob. Good afternoon. So I guess the first thing, first question I want to ask was maybe on October trends, understanding that the prior year comparisons a little, little different with the membership model, but can you just talk about October in reference to maybe September, which would help us think about the strength of the business? Did you see the business in orders get stronger in September, I mean, in October versus September sequentially? That way it takes the weird comparison out of the equation? Yes, you know, Bobby, I mean, I actually had this included this October only. Yes, today talking to Corey. And when I said, we gotta let people know that this question is going to come up. How are we doing in October? And initially, we were going to say we are doing well, but that's not enough. This 50% increase is a big increase. And it is a reflective of 2 factors, which is the impact of, the COVID impact I'm not a COVID under the membership impact last year and the increased business this year. I mean, if I had to say, and again, this is just distributable, I would say, most likely, 30% of the sew. And these are my estimates, not Corey's and Matt's, I would say that about 30% of this 50% is due to the current and 20% or so due to the fact that last year we were impacted by membership. Okay. That's very helpful. I appreciate it. Did you did you change the marketing message at all or any anything in seen in October versus September, August, or is just the customer coming back with more strain? We didn't know, actually a number of factors, which is that's right from June onwards. Keep in mind that in March quarter, up to June, we were we had closed almost all our design centers. So it was actually in September. And even in October, we're bringing people back in. We still haven't brought in all the people that we need to bring in. So it is a factor of not only marketing. Yes, we maintain strong marketing. We have maintained very strong direct mail We have maintained digital advertising. From time to time, we do television. But what also is a factor is that we have now bringing more people in operating in our design centers. Keep in mind, for instance, our we have a different business model than typical retail where people come in and see and buy it. Our designers operated from homes. In fact, in many design centers, still in many cities, like for instance, Seattle and Chicago and bigger cities where the COVID situation was greater, we were not operating 7 days a week. But now starting in October. And then, and finally, in November, I think almost all our design centers will be operating 7 days a week, which they have not been. So in October, we increased more people. We can maintain our marketing, we added more days of sales. All of those things Okay. And then Farooq, I mean, I understand it's still early kind of this buildup in recovery, but clearly you guys are operating the business with less headcount and less SG and A dollars, pretty big delta versus last year. I mean, how much of that do you think you're going to be able to maintain going forward? Do you still have to bring some more SG and A cost back on? How do we think about that for 2000 next year, next fiscal year? We are going to Our manufacturing, most of the folks are back in our manufacturing. It is really in the retail. At this stage, we are still operating with less people. And I would I would say that as we move forward that, if you take a look at, for instance, as of now, our total headcount is down approximately, if you take a look at prior year, I'm talking about at the end of September compared to last year, we're down 23%. In total headcount. And a lot of it is still at retail. Our manufacturing is more or less caught up back to where we were. And in fact, we're going to increase it because with all this new business coming in, we are looking to see how we can we are adding more people in Vermont. And you know what? There's a little bit of a shortage of people there. We are adding more people in North Carolina. We are adding more people in Mexico and Honduras. So at this stage, it's 23% if I were to say that at the end of the day, it also depends on business. If the business continues to increase, we will operate with what we had last year, but we'll have more business. But right now, it's 23%. And I would say that by the end of this quarter, most likely, it might be down 15 percent or so, I mean, between 10% 15% based on business by the end of this quarter compared to the previous year. Okay. It's very helpful. I appreciate the details. Best of luck in the quarter. Next question comes from Christina Fernandez with Telsey. Please proceed with your question. Hi. Good afternoon. Hi, Ruth and Corey. I wanted to follow-up on Brad's question about converting the backlog to sales. So if you can convert 60% to 70% of the backlog sales, does that imply that you can that sales can be up in the December quarter, year over year, or should we still think about, being limited by capacity and still having a year over year decline? Yes, I think that, as I mentioned, the factors are, the question about consumers also taking in the products because our product is somewhat different than all the other products that they are buying and going into a large furniture store that they are they taking it and they buy it? In our case, they've ordered it. It's all custom. And it's interesting that Again, it's across the board. There are people who want it from yesterday. There are folks who want to wait, but I would say this that, perhaps Corey, you may also chime in in here. My perspective is this that for the next for this quarter coming up, the chances are we'll be should be pretty close to what we did last year, but it will be somewhat of a struggle to make sure that all this product is delivered. But that is our objective. Corey, what do you say? Yes. No, I agree, Fruk. And looking at it, obviously, there's some unknowns out there, but our manufacturing getting back ramped up. And with where we were last year for this quarter, we do, likely we'll meet or just somewhat exceed that a little bit. Okay. That's really helpful. And then going back to the October trend, which was very strong, can you remind us what the October order number was last year. I don't think I have that. And then the trends you're seeing in October, are you seeing better traffic to the design centers, or is it still conversion or e commerce? How are you, I guess, what is different? Or how are you getting to that accelerated number? Like what business trends are you seeing there different? Christian, I don't know. I don't think we give any monthly order numbers. So let's hold that off for a minute, Matt, and Corey, if you look at that. But as far as Fence, it's an interesting that people that are coming in, there's less traffic. Our traffic is lower than last year. For us, but it's more qualified. And when they come in, they are, they've already done their homework. Which is very good. Our designers are very productive working with them. And as I mentioned also, with all the technology tools that we have, designers are making appointments. They are able to virtually show them all their designs and plans. And it's an amazing how much of work they're doing today by combining personal service and technology. So, yes, our traffic is still lower, but more qualified. Has it picked up from, like, August September or is it trend that year over year is still pretty similar decline? You're compared to last year? Well, just just over the past couple of months. No, no, it is picking up every month. Compared to last year, it is lower. Got it. Okay. And then one last one question. Are you over the past couple of months, are you seeing any meaningful differences between performance by market, or, for example, between some of your suburban stores or design centers and in urban centers like we continue to hear, you know, New York's very weak other markets, you know, broadly speaking across retail. Any trends you can share there would be helpful. Yes, it's really it's an interesting thing because I mean, of course, I've watched it very, very carefully. Like for instance, it ended as sort of to some degree varied month to month, few months back or even after last month, we saw that that Florida was doing extremely well. There's a little bit of a challenge now. In Florida with, again, it also reflects the question of COVID, how far where it is and what stage it is that we have issues, for instance, when you go to, the West Coast, Seattle had been impacted more by this COVID. San Francisco and all that area have been affected by wildfires. So there's a lot of other factors other than the COVID. And I would say, like, this is our business in New Jersey is very good. Long Island is is very strong. And Connecticut is very strong. A lot of Manhattan is somewhat weaker from last year. I mean, still holding up, but is weaker. And of course, we know the factors. A lot of people are moving to suburbs. And so our business, Connecticut, our business in New Jersey, Long Island is very good. And that also reflects what's taking place because our business in Washington area is very good. So I would say that, We've done extremely well in Ohio, well in I would say that in North Carolina, in South Carolina, great results. And it also reflects, so I would say that that, I would not say that some areas are doing better than others. It's interesting in some areas, like you've got to be specific, like Manhattan is a tough situation. San Francisco has been more difficult. Seattle has been difficult, but other areas have been doing well. Okay. That's helpful. It seems pretty broad based. Those were all my questions. Thanks and good luck this quarter. There are no further questions at this time. I'd like to turn the floor back over to Mr. Kathwari for any closing remarks. Thank you for all of you participating and listening. And we are really gratified with the work that our associates have done on the very, very trying circumstances. It's great to see the increase in our business the increase and the focus of people in terms of strengthening our balance sheets, watching every expense and building all these backlogs. And as I said, we are a vertically integrated company. Good news is when everything is working, it helps every element of our business and we look forward to that. Thanks very much for participating in this This concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation, and have a great