Earnings Call: Q3 2020

May 11, 2020

Ladies and gentlemen, today's conference is scheduled to begin momentarily. Again, ladies and gentlemen, today's call is being scheduled to begin momentarily. Good afternoon and welcome to the Ethan Allen's Fiscal 2020 Third Quarter Analyst Conference Call. It is now my pleasure to introduce your host, Kari Watley, Executive Vice President, Administration And Chief Financial Officer. Thank you. You may begin. Thank you, Lee. Good afternoon and welcome to Ethan Allen's conference call for our third quarter ended March 31, 2020. This conference call is being recorded and webcast live on Ethanolen.com, where you will also find a copy of our press release which contains supporting details, including reconciliations of non GAAP information referred to in the release and on this call. As a reminder, all 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 matters discussed during this call. To Amy on the call is our Chairman and CEO, Farooq Cafore and Matt McNulty, our Vice President, Finance. After Farooq provides his opening remarks, I will follow with some details on the financial results. Frooq will then provide some closing comments before opening up the As we mentioned in our press release, our 3rd quarter results were negatively impacted as a result of lower order backlog entering the quarter from our transition to the membership model combined with the disruptions due to COVID-nineteen. In the March quarter, we saw strong growth for the 1st 2 months of our fiscal third quarter, until the significant disruption in March due to COVID 19. We are pleased With almost all our design centers closed, we were able to generate about 35% of written orders in April compared to April 2019. Our unique vertically integrated structure where we produced about 75% of our products in North American Manufacturing enabled us to maintain our sourcing. In addition, all our logistics, our delivering products to our clients has continued to operate. We are also pleased, as of today, over 60% of our about 190 design centers in North America are opened are about to open. We're also pleased that during the quarter, we have maintained strong liquidity while also purchasing 3.8 percent of our outstanding shares for $14,000,000 and paying $5,500,000 of our quarterly regular dividend. After Kori provides a brief overview of our financial results for the quarter, I will discuss in greater detail our initiatives as we move forward. Thank you, Farooq. During the third quarter of fiscal 2020, our consolidated net sales were $149,800,000 compared with 100 and $77,800,000 the prior year quarter. Net sales were negatively impacted as a result of lower order backlogs going into the quarter transition to the Ethanolin member program, along with the emerging impact of the COVID-nineteen health crisis that rapidly intensified during latter half of the quarter. Wholesale segment net sales were $93,100,000 compared with $108,400,000 the prior year quarter. There were 180 North American Design Centers this year compared to 184 in the prior year period, as we continue opening new design centers while closing older locations. We saw continued growth in our contract sales, primarily with the GSA contract However, the growth rate slowed this quarter as the COVID 19 health crisis began delaying some GSA orders and shipments. Our total wholesale orders decreased 21.9% in the 3rd quarter compared with the same quarter last fiscal year. Orders from our North American retail network declined 32% while wholesale orders from China declined 25 point percent, mainly due to local quarantines in place for most of the fiscal third quarter. The closing of our retail design centers manufacturing operations during March negatively impacted our results as evidenced by a 37.3% decrease in March wholesale orders compared to a year ago. Retail segment net sales were $115,700,000 compared with $138,900,000 in the prior year quarter. Our retail segment orders grew during the 1st 2 months of the quarter. In fact, our February retail orders increased by 13.6% a very strong President's Day period. Business conditions then began to deteriorate as concerns over COVID-nineteen increased leading up to the March 11th now by the World Health Organization of the COVID-nineteen being declared a pandemic and the subsequent closures of our design centers. By March 19th, all our design centers were closed, along with most of our North American manufacturing. Despite the disruptions and resulting lower net sales, our consolidated adjusted gross margin for the quarter of 56% remained strong. Adjusted operating expenses for the quarter decreased by 4.4 percent to $83,600,000, which included $8,300,000 of advertising costs impacted primarily by the lower $8,000,000 and represented restructuring and asset impairment charges during the quarter. Compared to $0.31 in the prior year. In the fiscal third quarter, the decrease in wholesale net sales along with the decline in our stock price and the significant adverse changes in the business climate from the COVID-nineteen health crisis, that is to determine that impairment triggering event occurred. This required an interim quantitative impairment assessment of goodwill and intangible assets. While our preliminary results released on April 22 included the effect of an impairment to our performed, the fair value of our wholesale reporting unit exceeded its related carrying value by approximately 25%. Thus no impairment of goodwill as of March 31. We also performed the interim trade name impairment test and concluded that its fair value substantially exceeded the carrying value as of March 31. So there was no impairment of the trade name either. Turning to the balance sheet, we ended the quarter in a strengthened position inventory of $138,800,000 compared to 164 point $6,000,000 in the prior year. Cash increased to $116,900,000 with $100,000,000 in borrowings on our credit facility. As Ruth mentioned, we returned value to shareholders during the quarter by paying regular quarterly cash dividends $1,000,000 and repurchased 3.8 percent of the company's outstanding shares. As part of the company's COVID 19 action plan, the company has rarely suspended the regular quarterly cash dividend and share repurchase program. As we announced on April 1, we are taking many steps under our COVID-nineteen action plan to ensure liquidity, including the furlough of approximately 70% of our global workforce. The decision by Fruh Kattuari to forgo his salary through June 30, 2020, and the salary reduction of up to 40% for all senior and up to 20% for other salaries employees through June 30th. Our Board of Directors reduced their cash compensation by 50% through June 30th. Delineation of all non essential operating expenses, negotiating with our landlords to receive temporary rent deferrals or abatements for our lease design centers, delaying non essential capital expenditures and taking other steps to reduce disbursements. We are fortunate to own cash on hand through a detailed cash burn analysis and believe the fundamentals of the company remain strong. Of March 31, 2020, we had total cash on hand of $117,000,000 and remaining borrowing availability of $24,000,000 under our credit facility. In addition, there are no debt maturities until December 21, 2023. Based on our current cash burn analysis, we believe our liquidity will sufficient to fund our operations for at least the next 12 Thank you, Corey. As I mentioned in April 2020, we were able generate 35 percent of written orders compared to April 2019 with practically all our design centers closed. This was due to our interior design associates working remotely utilizing technology we deployed over the past few years, including the Ethan Allen in home augmented reality, 3droom planner tool, live chat on Ethanolen.com and communications tool, including Skype and FaceTime. As we move forward, we have a strong combination of personal service of our interior designers and technology. We have started to open design centers. And as of now, as I mentioned, about 60% of our 190 design centers in North America are open or about to open. We continue to bring back furloughed associates back. Our vertically integrated structure is an advantage including making about 75% of our products in our North American Manufacturing. Most of our North American Manufacturing is now operating and we continue to bring back our associates. Our National And Regional Logistics are also fully operational. We are also pleased that our licensees in China has opened up most of their 100 locations, and we continue to do business with the U. S. Government. In April and May, we have maintained strong marketing initiatives including distributing about 2,500,000 copies of our spring magazine. The magazine projects fashion, service, accessibility and strong offer of savings of up to 25% free premium home delivery, 48 month interest free offer and very importantly, complimentary design service. Our objective is to continue our strong advertising to bring clients to our design centers and let them know of our strengths at a time when many retailers are in trouble creating consumer With this brief overview we would like to open for any questions or comments. Your first question is from javel from Stifel. Your line is now open. Yes, hi there. I don't know what that was, but, good afternoon, Farooq, Cory. I was curious, first of all, could you perhaps tell us where, your lease negotiations are going and what you think ultimately may happen there? And then secondly, I'm curious, when did you open the first, I don't know, handful or tranche of stores. And is there any sense, is there enough time there to get a sense of how that ramping versus full closure? We are talking about, our discussions on our current lease stores. Yes. The lease of payments on the 65% yeah, lease doors. Right. Yes, we are having just good discussions with the various landlords. And I like in more most other businesses, there is some abatements taking place, some reductions taking place, And I think we're making good progress. It's important. But as also, as Corey mentioned, the good thing is that we own most of our properties. That was not the case, as you know, I've always said, it's good to own these properties because the next recession is going to make a difference. And fortunately, we are in a better position. And then, stores, Did you open when did you open your first, I don't know, 10, 15, 20 stores? And is there any color on the ramp, since you did that? Well, you know, you're talking about when we have not opened too many stores in the last couple of years, very, very few actually. If you take a look at it about a year and a half back, we opened downtown Chicago I'm talking you're talking of new stores. No, our focus is on that. No, no, I'm sorry. I was talking to close, but stores, all the stores you had to close. Oh, one to 3. Yes. No, no, no, but we closed most of them, towards the end of March early April. We reopened them probably most of them have reopened in the last 2 weeks and some may have opened even the couple before that and some of the states that had more relaxed rules in place. Yes, I'm sorry. I was wondering what No, no, I understand that, yes, we closed almost all of them by the first, by towards in March, almost all of them were closed. And now we are starting to open them up. In fact, even today, Since every day we are hearing of states, which are allowing stores to open up as long as they're done safely and distance is maintained. And what we have done also is, we have spent a great deal of time in making sure that we put the right kind of safety procedures on. And in fact, we have also been able to obtain and they're just being received a fair amount of masks and gloves. From our partner in China, they were able to range it for us so that we are able to distribute it in our manufacturing and our retail. So as I said about as of now, 60% but just in the last 1 hour of Wisconsin, for instance, decided that, we could open up the design centers. Now what we are doing is this, we're not we are bringing people in selectively. We are, as Corey said, 70% of our folks were furloughed in our retail and in manufacturing. The good news is we're starting to bring them back. And, but in a basis that, because this is going to ramp up, it's not going to do going fast. We are also opening them up in most of the stores are now being opened up Monday to Saturday. Our Tuesday to Saturday so that we don't we are not open 7 days in most of the locations. And my last question is, you mentioned Corey that you have enough cash to run for 12 months. Any parameters around the scenarios you ran, that make you comfortable? I mean, is there a percentage of sales decline, for example, worst case that you could share that you still have the cash to operate for 12 months. Yes, John, we use very conservative numbers. And we've actually ran you a few different scenarios and went very, very low based upon the kind of a worst case scenario based upon the immediate drop off in business that we saw after March 19th when we closed all our locations. So it was in a very slow ramp up to business going forward. So it was very conservative are, we felt very comfortable that that would be a worst case scenario. And of course, our outside auditors we're also comfortable with it as well. So we feel comfortable making that statement, concerning our liquidity. You said, I'd like to also add a couple of is one of the one of our business because it's mostly custom. As of March 31, we had $86,000,000 of order backlog So it's $86,000,000 of backlog on which we did have about 55% deposits by our customers also helped us maintain cash flow during this period, in April. Also, when we take a look at, our business in April, 35 percent of our orders by a retail division were written, without any of the stores, almost any of the stores open. So it was these are very positive factors. And Farooq, I'm sorry, I did that on April where you wrote 35% of last year's business. Was there did you get better towards the end of the month adjusting to the virtual world and working online with the stores closed it. Was there any improvement in that downtrend through the month? It did improve to us. And look at because of the fact our e commerce, for instance, increased by 2 15%. But the reason that we don't do give a lot or put a lot of emphasis on that is all the business of this 35% was done through technology. At the end of the day, these were our folks who were meeting our designers, So yes, there was increase as people become more became more comfortable, but not like the normal towards end of the month, we used to get big, huge businesses, not that, but it was somewhat better as the month progressed. Okay. Thanks for that call. Good luck. Your next question comes from Bradley Thomas from KeyBanc Capital Markets. Your line is now open. Hey, Brad. How are you? Hey, good afternoon, Faruk and Kari. This is Andrew on for Brad. Yes, Andrew. Hi, Andrew. I wanted to ask, given this changing environment we're in, as your strategy behind the membership, model changed at all. And we were wondering if you could give us a sense for how you're thinking about non membership model promotions during this time as well. Well, it's a very important question. This crisis what's coming along. Of course, when we saw it happening in China, we saw it happening it overseas. So we decided that, that we would for the time being hold up the membership program. And in March, we took it out so that people would be able to purchase our products without being a member and they would be able to get premium free delivery. So at this stage with the way the conditions are, we really are giving everybody the benefit of a member. Understood. And then it's also good to hear that the contract sales continues to grow throughout the quarter. But going forward, how do you expect the pandemic and the changing environment to potentially impact your contract business? Well, our garment contract business at this stage is holding up. I think that there is always, you know, every, every, every, all of the world people have somewhat slowed down, but they're not slowed down in terms of their needs. People are placing orders a little slowly, but what we hear is that they will continue to do that And, and generally speaking, this last, this quarter and the next quarter are generally very strong for the government business. Got you. And then I guess the last question from me, I wanted to ask given the changing consumer environment, have you noticed any changes in average selling price lately? And if so, how do you expect this to impact margins? Well, as you know, even this quarter, our group improved our gross margins considering the fact that our volumes were low. And, even if you look at our operating margins held up pretty good, it was because of the retail not being able to deliver that had most of the major impact. So I think that, we have continuously made improvements in our operations. It was actually all we've continuously made sure that we operate more efficiently. We didn't have to wait for this crisis to consolidate some of our manufacturing, we've already done it. So we're operating very efficiently, and I would think that we were able to maintain our gross margins despite very tough conditions. So we have an opportunity of improving our operating margins as we move forward. Your next question is from Christina Fernandez from Telsey Advisory Group. Your line is now open. Hello, Christina. Hi, good evening and hope you're all well. I wanted to ask about the expense reductions that you're making, is there any way you can size for us in aggregate with all the efforts, including the furloughs and how much should we expect overall expenses to go down in the 2nd quarter maybe on either expenses or cash, so we have a sense of where business could be from a profit standpoint? Yes, it's a good question. I think that will let us study because it's changing every day. We've already now opened up close to 60% of our store. We brought a lot of people in. Certainly, our expenses are going to be in Global. There's no question about it. And how much lower I think that might be better for us to discuss it at the end of this quarter because overall, we're going to all operate more efficiently. We are learning how to do business with Zoom and Skype and all of that. Our traveling is going to be much less our focus on making sure that our operating expenses across the board are not going to be reduced only now, but as we go forward So I think, Christina, it would be better for us to give that kind of right at the end of this quarter. It would be a better time. Okay, understood. And in that light, I wanted to get your thoughts, obviously, a lot of change in the 3 and perhaps some more permanent changes to how consumers shop more digitally. I guess, how are you thinking about the Furniture And Home Furnishing business, how that can evolve over the next 1 to 2 years and perhaps how the way you conduct your business will evolve? As a result of this pandemic? Well, I think that there's no question that there will be a great over and I'm talking for us and most probably our industry too, but certainly for us, which is a combination of personal service and technology. When I mentioned that we did 35 percent business of our written business in April under very tough conditions, all of it was done. Almost all of it was done with our designers working with consumers or with with mostly remote. In some cases, in some states, they were able to go by appointment, meet, So I believe the combination of personal service and technology is going to be very, very important. I think those businesses that basically sell a product as a commodity. Like, for instance, we are seeing that in apparel. We are seeing that in other toys. If they can buy it online, they don't need much personal service, the chances are they're not going to go to stores. So you got to have stores got to be able to create the opportunity for people to buy offline, but with personal service. And I think that is important for products like ours, services like ours, because we're not selling items or toys. So I think that's where the difference is going to be for Stena. Okay. And last one, any trends you're seeing differently by region across the U. S? For example, urban versus more suburban? And then the type of items consumers are buying, Well, obviously, when you look at urban areas like for instance, New York, obviously, it's almost shut down. I'm talking Manhattan. Suburbs are a little bit better. And I think that, certainly, there has been some somewhat of a increase in home office because people are using their homes, and we have been also advertising it too. But overall, really, people are paying more attention to their homes. If you take a look at our advertising, we've gone to an advertising that we had done many, many years back. We said home is a haven. Our whole advertising is on that concept. Home is a haven. People are spending more time. They're learning how to operate So, it has to be functional utilitarian and people have got to be able to to be able to combine a great design, but also function. And that's what we see. Thank you and best of luck this quarter. Your next question is from Bobby Griffin from Raymond James. Good afternoon. How are you? Thanks for thanks for your time for taking the questions. I jumped on the call late. I was having some problems getting in, so I apologize if this was already addressed. But the first question I wanted to ask is maybe about the health of the independent network, the non company owned stores. Well, I give you this. Good news is they are in very good shape. For a number of reasons, the average association of our independent family is about 40 years. 2nd generation, 3rd generation. And over the years, the ones who retired, we took over those So the ones we have are fairly, fairly strong. I had an opportunity of talking to them every week because they want to know how things are. So they are they maintaining the business so far. We have not heard of anybody going out of business, which is a great news. Okay. And then, how have they adopted to the membership model? What's the feedback you're getting from them on the membership model? Yes. I had a question that was asked. Basically, we decided, I saw in February that things were going to get bad because we saw what's happening in Now what's happening to other countries? So we, in March, even before, a lot of this emergency was taking place, we said we are going to give the opportunity to every to become a member. So every customer is getting the benefits of the membership without having to pay $100 fee. And we believe from the time being, and that's what we're going to do. And now is that just temporary? I did hear your answer to Brian's question. Is that temporary or we'll see at this stage, we'll continue. It's a great opportunity, great benefit because what it means really to a great degree is giving an opportunity of delivering their products free to their homes, which we used to do, which we have done from time to time. We'll continue. We'll see how the where this crisis leads to. But for the time being, we'll give everybody an honorary membership, and that's what we are doing. Okay. And then I guess lastly for me, I saw in the release the commentary about the China orders wholesale orders during the quarter, but how have those trended in April early May? Are you seeing a recovery in your China wholesale order business? Yes, they have gone down quite a bit, not only because of this crisis, but because of all the other issues that were faced in China. The good news is they just starting in the last month, which was a good surprise to us. They decided to use our utilize, our television commercial, which really focuses on at Ethan Allen, we make the American home. And with all the conflicts and problems facing and we hear about with China, they decided to use that commercial. And based on that, they're doing some decent business So we're starting to get back orders after few months of really business being down. Okay. That was it for my questions. I appreciate the time and best of luck here in this tough environment. Got it, Bobby. Thanks very much. And there are no further questions at this time. Presenters, you may continue. Well, thank you very much. If there are any questions, comments, please feel free to contact Matt McNulty is here too. Corey or even myself, if you want to, but, both Matt and Corey are available if any questions are coming. So thank you very much for participating. Thank you very much. You're most welcome. Thank you everyone for participating. This concludes today's conference call. You may now disconnect.