Earnings Call: Q4 2020

Aug 4, 2020

Hello, and welcome to the Ethan Allen's fiscal 2020 4th Quarter Analyst Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Matt McNulty, Vice President of Finance. Please go ahead, sir. Thank you, Kevin. Good afternoon, and welcome to Ethan Allen's conference call for our fiscal 4th quarter ended June 30, 2020. This conference call is being recorded and webcast live on ethanallen.com, where you will find a copy of our press release, which 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 to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward looking matters discussed during this call. Joining me on the call today is our Chairman and CEO, Faruq Kauwari and our Chief Financial Officer, Corey Whiteley. I am pleased to now turn the call over to Farooq Kauwari. Got it. Thank you, Matt, and thank you all for participating in our fourth quarter fiscal year ending June 30, 2020 call. As we all know, the last few months have been very challenging. The COVID 19 according to a recent economic study has wiped out last 5 years of economic growth. We are pleased and gratified that we have been able to generate business despite major closure of our retail network for most part of fourth quarter. We have been able to maintain business due to a number of factors, including a strong talent in our vertically integrated structure, the trust in our brand, great quality, value and service, combining personal service of our interior designers and combined with technology. Adding technology for client interaction was a major focus in the last few years maintaining strong marketing initiatives during the quarter. And 5th, emphasizing safety and social responsibility. Due to many initiatives, we were able to generate a positive 14,000,000 cash during the first quarter. Credit for precautionary purposes. We are especially pleased that our written orders for the 3 months ending June was strong when for most of the time period, most of our design centers were closed. Our wholesale orders as compared to previous year were for April 35, May 70% June 117% and July 103%. These numbers also reflect doubling of sales online during the We are pleased today the board reinstated the quarterly dividend of $0.21 per share. And after Cory provides a financial overview, I'd be happy to give more details, some more information, and that be able to open for any comments and questions. So Corey? Thank you, Farooq. The COVID-nineteen crisis challenged our operations during the fourth quarter. As Farooq mentioned, our teams did well and persevering through these challenges. Our primary focus was operating in a safe manner for our and our clients. As our design centers began to reopen, we implemented the CDC guidelines for operating businesses safely. We established logistics for the supply of hand sanitizer and related dispensers, disinfectant cleaning supplies, masks, and nitrile gloves, and we increased the cleaning frequency of our design centers and other facilities. For the safety of our associates and our design centers, we require all associates and clients to wear masks. So far, we have been fortunate with very few cases of COVID 19 throughout our enterprise. As we previously announced on March 19th, we temporarily closed all our the operated design centers in the U. S. And Canada due to COVID-nineteen and the various governmental stay at home orders. Each of our North American manufacturing operations were also impacted with governmental orders requiring temporary shutdowns for various periods during April, May June. Our logistics operations, while continuing to operate throughout the quarter, were operating in a limited fashion especially with restrictions on our in home white glove deliveries. As a result, our consolidated net sales for the quarter of a 91 point $6,000,000 were about half of the prior year net sales of $183,900,000 for the quarter. Wholesale segment net sales were $51,600,000 compared with $107,500,000 in the prior year quarter, primarily due to lower sales to our North American retail network and shutdowns at manufacturing related to the COVID 19 crisis. Retail segment net sales were $70,700,000 compared with $147,200,000 in the prior period. There were 144 company operated North American Design Centers in both the current and prior year periods. COVID-nineteen related manufacturing shutdowns and logistics disruption negatively impacted the net sales as and the consolidated adjusted gross margin, which decreased to 53.3%. For the full fiscal year, gross margin on an adjusted basis of 55.7% compared to 55.1% in the prior year. As we announced on April 1, we took many steps under our co 19 action plan, including the furlough of approximately 70% of our global workforce. The decision by our CEO to for go his salary through June 30, 2020, and the salary reduction of up to 40% for all senior management and up to 20% for other salaried employees through June 30th. Our Board of Directors reduced their cash compensation by 50% through June 30th. We eliminated all our nonessential operating expenses. We negotiated with our landlords to receive rent deferrals or abatements for our lease design centers. We delayed non essential capital expenditures and took other steps to reduce for the fourth quarter, which included $5,300,000 of advertising costs, decreased 38.2 percent from the prior year to 53,700,000 We incurred some incremental costs associated with the additional supplies and cleaning regimes based on the CDC safe business protocols. These costs, which were less than $1,000,000, are reflected within our 4th quarter SG and A expenses. Impacted primarily by lower net sales and a decline in wholesale gross margin, the adjusted operating loss for the 4th quarter was $5,000,000. For the income for the quarter totaled 7.5 quarter, of which $4,700,000 were non cash charges. Adjusted EPS for the quarter was a loss of $0.15 compared with adjusted last year. A key element of our COVID 19 action plan was to reduce expenses and conserve cash. We were pleased to have generated cash from operating activities of $14,000,000 during the quarter and $15,000,000 of $53,000,000 for the full fiscal year. For precautionary purposes, we do $100,000,000 from our credit facility in March. And by June 30, we repaid $50,000,000 while still ending the quarter with total cash of $72,300,000. We carefully managed our inventories and ended the fiscal 2020 year with $126,100,000 of inventory compared with $162,400,000 a year ago. We believe the fundamentals of the company remain strong with orders improving sequentially each month and it is our business has started to rebound, we are pleased to have called back 56% of our furloughed workers as of June 30th. With that, I will turn the call back over to Farooq. While many external challenges, we are pleased with the results of the call. And now, again, many unknowns, we still believe that we are positioned well to grow. The main areas of focus, I stated some of them earlier. 1 is maintaining a strong talent in our vertically integrated structure. Our teams really have done a great job in the quarter and the amount of changes we had to make and the way they did it while still maintaining business, in fact, increasing business in June July from the previous year. Today, combining technology with personal service will help us increased productivity as we saw in the fourth quarter. Now ability to service our clients is critical. With 75% of our products made in our North American workshops, we have the ability to service our clients well and increase efficiency. In our manufacturing and logistics. Now like others, we have take we have to get back into manufacturing. We had to make sure that we are also able to get some supplies of raw materials on a timely basis. But our production is increasing and with increased backlogs, we have an opportunity in the next few months to service this backlog. Now initiatives initiatives to strengthen expand our design center network is is extremely important. Currently, we have 200 design centers in North America than over 100 Internationally. We are also planning to launch a CAM paying to attract retail entrepreneurs to join our network in many markets that we are not currently present. Our government and contract business remains promising and we look forward to continued growth. Enhancing our marketing and product development program is critical. Our focus remains on 3 important attitudes in our product programs that we define as classics with a modern perspective, country coastal and modern. Our recent introduction of custom bedroom made in our North American facilities and this month introducing a program called the Farmhouse in spite colleagues is extremely well received by clients. We have maintained strong marketing various mediums, including national and regional television, direct mail, digital mediums, and grassroots at the retail level. Finally, focus always remains on managing our business with safety and social responsibility. And that is a focus all across our enterprise. Thank you. Our first question today is coming from Bobby Griffin from Raymond James. Hello. I hope you're staying safe. Thank you for taking my questions. The first thing I want to ask about, Luke, is the cost base. A lot of cuts during the quarter to conserve cash. As you've seen demand return here in June July, what's coming back in terms of cost? Is it all coming back or is there some that are going to be kind of permanent cost reductions? It's a good question, Bobby, because Chrysler does create an opportunity to rethink our enterprise, we think, how we can operate and we have been able to operate in during the last like the 3 months of this last quarter, with approximately at the retail level, with approximately, you know, and less people while doing more business. Now this is some of it perhaps with some pent up demand but I think most of it is due to the fact that we brought in the best of our best people. And the clients that came in were motivated. They were interested in buying. So the best of our design center interacted with them some in person in person as well as online. So I think going forward in the retail network, we believe that we can do substantially same business or much more business with a approximately 30% less associates. Now in manufacturing, we have brought back most of the people because of the fact there's much more focus on products made in North America, which is good news. So our operations in North America, in Mexico, Honduras, Vermont, is almost close to what we had previously. In other areas, I think, again, we are learning how technology is going to help us. I think we're going to operate with approximately 20% to 30% less associates and be able to do more business. Okay. That's very helpful. And I guess secondly for me, I know this time of the year is usually an important time of the year for the State Department contract as the fiscal year for the government. Can you maybe talk about what you're seeing from from that side of the business as, as things have returned a little bit more towards normal? Yes. It's, you said August September is out very 2 2 important months and the the the government fiscal year end September 30th. So we expect strong business, the next 2 months. And that's what has been indicated, and we believe that will take place. Okay. Thanks. I appreciate you answering my questions. Best of luck in the next quarter. Thank you. Our next question today is coming from Brad Thomas from KeyBanc Capital Markets. Good afternoon, Farooq. Good afternoon, Brian. Thanks for taking my question. How are you doing? We're all well. And good. And I hope you are too, Brad. Yes. Very well. Thank you. My first question is going to be around recent trends in the press release talks about wholesale orders versus prior year. And indicated that the deal was up in the July's had run up year over year. I was hoping you could talk a little bit about the retail side of things and what you've been seeing in recent months on the retail side? Brad, you know, the retail represents very, very vast majority. In fact, almost the significant majority of our business. So these numbers that you see, are a direct result of what is happening at retail. Gotcha. So directionally, Farooq, would it fair to say that the retail numbers have sort of tracked that pattern? That you outlined in the press release about the trend? Yes. Of course, not 100%, but pretty close because retail business is is the most is most is not his own, at this stage, between close to what Matt and Corey directly goes to the 85 percent, 90 percent of our total business? Yes. So directionally, there are almost step and step Yes. Okay, great. And as you've reopened the business, could you talk about, where the backlog is today with the timing is to fulfill orders and any nuances that we should keep in mind as we think about modeling sales in this current quarter as the demand starts to come back here? Well, Brad, we've already done this surprising have too many include some of us, the amount of business we were able to generate in in this last quarter, even in July. And last July was a strong July that our teams did exceedingly well to do more business this July than last July. Now having said this, as I also said, part of it perhaps is pent up demand. Part of it is due to the fact that we also gave pretty good decent savings for our clients, I would say that we are, I would, I would say, as I'm using the terminology, we are cautious optimistic that we'll continue to maintain this. Now having said this, we also have to keep in mind all the external factors that especially COVID. The last, even though our business held up in many of the states where the COVID has gone up like, say, Florida and Texas and, and, Jorgen, and in Carolinas, we have to just be cautious about that other those are external factors, but we were able to do well despite all of that especially in some of you, even in New England, Manhattan has still been slow. And I think that we're just about getting it started. But other than that, we have had some challenges in Seattle where people have been very careful. But the rest of the country in many, many parts of the country, I think we have been very fortunate that our designers and have done well. Our clients have trusted us. They've let them come into their homes also to do households. But now going to your other question, we do have a backlog we are now in the process of increasing our capacities. Some of that is impacted with some raw material challenges and issues, which is out of our control. But overall, I think we'll be able to meet this spend in a business that we have received this quarter and some in the following quarter. That's very helpful. I can squeeze one last one in clearly the backdrop from COVID has, accelerated market share on the UC side of the business of the world. Could you talk a little bit about, what opportunities you're seeing to enhance in our DTC presence, financials website. And then you may make clear investments in that, in the months or quarters ahead here? Brad, I was not completely able to understand maybe Cory, if you heard it really because Brad, you know, where I am in New Rochelle, we had a big huge storm. Our internet is out. Alexis was out. And a big hoot under the air or tree fell right in front, unfortunately, on the other side of our house. So I'm a little bit impacted by that call happened this afternoon. But Corey, if you heard that question, could you please respond? Yes. I think Brad, you did break up a little bit, but I think you were really kind of questioning just online presence and, how we're going to focus and continue to grow that more so, even than what it has been. As Rook mentioned, you know, we more than doubled the business online and we, you know, even in July, it was over 100% of what it was the prior year. So we are seeing a strong growth there, but at the same time, just doing even more in driving business into our design centers. In the right when the crisis started, and we had to, you know, shut down many of our design centers due to these government patients. We added and make an appointment feature to our website. It's on the homepage, it's on every designer's portfolio page on our Find a Store page. And the find the make of the appointment really took off exponentially throughout the quarter. People could do two things that make a virtual appointment with one of our design consultants, or it can make a private and store appointment with one of our design consultants in those areas where we could do that safely. And that, really, was a great feature. People really like it, and, we're continuing to see a great use of that the tool even today, where people do have the ability to go out and shop much more freely. And then, of course, the live chat is also a a great generator of sales. And then, of course, as we've said before, is, you know, when they work with a designer on live chat, then the designer usually works those sales through their local center and processes it through the design center's point of sale system and they don't really reflect as web sales. So the web plate does very well at driving business presenting the brand. And yes, we did more than double the sales online and we'll continue to see that grow because there is a great opportunity for that as we go forward, but it does need to connect the personal service of our designers with the customers. Yes. Brad, I'll also mention that, unfortunately, in the last few years, we focused a lot in adding technology. To the personal service of our interior designers and help them train, get knowledgeable about it. And it's amazing how much a business they've been able to do by utilizing technology and doing working offline, not in the design centers, in completing projects. And I think that has really been very beneficial as we move forward is going to, again, answering Bobby's question, it also brings about efficiencies because we have helped, we have to do, become more efficient. We've also added a lot of technology in our manufacturing, and that has also helped us as we move forward in making our our products not only better, but also doing it more efficiently. Very helpful. Thank you so much, Farooq. Thank you, Corey. And sorry if that's me with the bad connection. I can hear you both. Thanks again. Thank you. Our next question today is coming from Christina Fernandez from Telsey Advisory Group. Your line is now live. I wanted to follow-up on Brad's question about the backlog. Can you help us understand how much of the May June orders were already delivered in the quarter? Just want to get better sense of how that's going to flow through and what is the time delay to date between when the time and order is placed versus when it's delivered to the customer? And how has that changed, compared to, like, prior to when COVID hit let's say, early this year? Yeah. You know, I would I would what I would mention is this that we've got 2 elements to it. The retail backlog has increased by about over 30% in this last quarter, which has been good, but we need to now make this product And that, while the retail has increased, 30%, I think that you'll also take a look at it that our our, our total, I'm sorry, our wholesale backlog increased by 37%. Over 30%. Very important. And that is something that we're going to be delivering in the next, this quarter and some in the following quarter. And can you talk about the time to delivery, like how long it's taking the deliveries to be made from when the customer places an order? Oh, yeah. Well, this is varies because of the fact that, we have, for instance, it's custom products, like, for instance, all our upholstery today is, we always been custom. It is, now taking anywhere from, I would say, close to 8 to 10 weeks. We have a quick ship, Alan, quick, ship part of the poultry, which is now coming out a little bit earlier, we used to deliver it within 30 days. Now it's about 45 days. As far as our wood products are concerned, many the ones that are in stock, they are being delivered, obviously, right away, the ones that are being made custom in our good manufacturing is approximately taking also about 6 to 8 weeks. Okay. That's helpful. And then any color you can share about traffic and ticket trends in any shift or changes you're seeing the types of products customers are buying over the last couple of months that you've seen demand pick up? Yes. I would say that, our traffic is most likely approx, I'm talking to the whole Nationally is down about 30% while our business is higher than last year. It's much more qualified traffic. That is very good. That's very important. I think that qualified traffic is critical. And people who are coming in are more knowledgeable, more motivated, they've done their work. And, what I'm sorry, your next question was? Oh, the products, any change in the mix of what consumers? Yeah. You know, it's interesting that, obviously, a lot of companies are selling a lot of mattresses. We are doing some, but we are not in a major mattress business, although we are increasing there. What we are seeing is that people are living today. They want, especially from us, for products that is great design, classic, but livable. So our country design, our coastal design, are doing well, but so is our, what we call, the classics, because our classics has also been modified to be more livable. So I think that's what our whole product line is. In addition to that, as you know, we introduced Lucy, which are the more of a part of our modern perspective. We have 3 attitudes: country and, coastal and turn is modern. The modern, Lucy has done extremely well too. So Now, there has also been a demand on our mattresses have doubled, but although still a smaller portion of our business is going to increase our home office. We have not been extremely strong in that. We are developing more products, but that also being strong overall. That's helpful. And one last question on the amount for employees you brought back to 56%. It seems a little bit lower relative to all the stores being open and manufacturing being back up. Is that a function of operating the stores with less employees? As you said, you can operate them with 30% less associates? Or are you having some trouble bringing some of those employees back? Well, there are some people that have decided stay home, but no, the majority of the people want to come back. We have not had any major issues. It is just a question of our retail teams are making the determination of of, how many people they should be, because what's happening is this because the more qualified people are doing more business. And we're going to watch very carefully how many people we bring in. We have also modified our hours. I've given a fair amount of leeway to some degree off to our retail leaders around the country to determine whether they're going to be open on Sundays, whether they should be open on Mondays, what are should they be working on? How much of their time should be spending on appointment and that's what they're doing. They're working less hours, spending time with appointments, and that and it's working very well. We're working very carefully in, as we go forward, we'll make adjustments. But the model is that, which is what I really wanted all the time. We call them design centers. With professionals. Today, they are much more really a design center than ever been, and our designers are working with clients They're working with online. They're working in this in their homes. They come. They make appointments. So we are going to less people continue to do a lot more business. And that, that will be our new model. Thank you, Christine. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments to prove. Alright. Well, thank you very much and thank you for all being on the call. These are challenging times, but we are pleased with the results that we have had, what our people have done been really somewhat amazing. We'll continue to we have reduced, we have good positive cash. We won't be able to watch very carefully, our inventories will reduce substantially. We are going to make sure that we focus on marketing because we did. We maintained a strong marketing presence of about 5% of sale during this period. And this last quarter. And we're going to and our plans are to continue to be aggressive in marketing. So again, thanks very much. Any further questions, please contact, I mean, you can talk to Matt or Corey. Thanks very much. You. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. 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