Good afternoon, welcome to the Ethan Allen Fiscal 2023 Second Quarter Analyst Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. It is now my pleasure to introduce your host, Matt McNulty, Senior Vice President, Chief Financial Officer, and Treasurer. Thank you. You may begin.
Thank you, Camilla. Good afternoon, thank you for joining us today to discuss Ethan Allen's fiscal 2023 second quarter results. With me today is Farooq Kathwari, our Chairman, President, and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will open the call for your questions. Before we begin, I'd like to remind the audience that this call is being recorded and webcast live under the News & Events tab on the Investor Relations page of our ethanallen.com website. There, you will also find a copy of our press release, which contains reconciliations of non-GAAP financial measures 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.
Our comments today may 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. With that, I am pleased to now turn the call over to Mr. Kathwari.
Thank you, Matt, and welcome to our second quarter fiscal 2023 earnings call. We are pleased with our results. Our sales of $203.2 million were the result of many factors, including strong offerings and Interior Design Destination, 75% products made in our North American workshops, a unique logistics network where we provide personal in-home delivery at one delivered price to our clients in North America. Combining the personal service of our interior designers with technology has been a game changer. We were also helped by a stronger backlog of orders. Our gross margin increased to 61%, and operating income margin increased to 18.2%. Our adjusted earnings per share of $1.10 grew by 15.8%. We ended with strong cash of $140.4 million and no debt.
Our unique vertically integrated structure continues to be strengthened. After Matt provides a brief overview of the financials, I will review our focus and opportunity going forward. Matt?
Thank you, Mr. Kathwari. As a reminder, we present our financial results on both a GAAP and non-GAAP basis. Non-GAAP results include restructuring initiatives, impairments, and other corporate actions and are further detailed in our press release. We believe that these non-GAAP presentations better reflect underlying operating trends and performance of the business. Our consolidated net sales of $203.2 million were helped by strong backlogs, pricing actions taking, and the positive effects of product mix, partially offset by lower unit volume. The prior year's second quarter was one of the largest historical second quarters for net sales, which led to a difficult comparison. Compared to the second quarter of fiscal 2019, which is pre-pandemic and more reflective of historical norms, our consolidated net sales were up 3%.
We ended the quarter with wholesale backlog of $78.5 million, down 36% from a year ago, as we were able to reduce the number of weeks of backlog, bringing it more current. We remain 57% higher than pre-pandemic wholesale backlog levels. Wholesale segment written orders were down 20.2% to last year and down 18.6% to the pre-pandemic second quarter of fiscal 2019, primarily due to lower international orders and the timing of incoming GSA orders. Our retail orders were down 16.3% due to a strong prior year comparable, w hen compared to Q2 of 2019, retail orders were only down 1.5%.
Consolidated gross margin grew 220 basis points to 61% in the quarter from product pricing actions, a favorable product mix, disciplined promotional activity, and lower inbound freight costs, partially offset by a change in our retail wholesale sales mix and a decrease in unit volume. We had expected this percentage of retail sales to consolidated sales to moderate towards normalized levels. This began to take shape in Q2. Retail sales were 84.5% of consolidated sales, down from 86.3% last year as we delivered out more of our wholesale order backlog.
Adjusted operating margin increased from 15.7% last year to 18.1% in the current year's second quarter 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. Our SG&A expenses decreased from 43.1% of net sales last year to 42.9% this year, reflecting our ongoing operating leverage despite a declining net sales environment. Adjusted diluted earnings per share was up 15.8% to $1.10 due to improved gross margins and a reduced expense base. Our effective tax rate for the quarter was 25.7%, the same as last year. Turning to our liquidity and capital resources.
As of December 31, 2022, we had cash and investments of $140.4 million with no outstanding debt. Our sources of liquidity include cash and cash equivalents, short-term investments, and amounts available under our credit facility. We generated $2.5 million in cash from operating activities during the quarter, bringing our 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. In November, our board declared a regular quarterly dividend of $0.32 per share, which was paid on January 4.
Yesterday, as announced, we declared another regular quarterly dividend of $0.32 per share, payable on February 21st. In summary, we increased gross margin, operating margin, operating income, net income, and diluted EPS during our just completed second quarter despite operating in the current environment. With that, I will turn the call back over to Mr. Kathwari.
All right, Matt, thanks. We have substantially strengthened our offerings and new products will be introduced in the following 6 months. During the last 3 years, while we introduced only limited new products, the good news is we were busy developing strong new products. We have also greatly enhanced our marketing, combining the traditional mediums increasingly with digital mediums. Our supply side is stronger. About 75% of our products are made in our North American workshops, and about 75% made custom on receipt of orders. Our production capacity in North America has been increased with 2 very important factors. First, addition of qualified workforce and continued investments in technology. We are in a good position to service our clients. Our design centers are being refreshed and reintroduced as an Interior Design Destination with very talented interior designers.
We are reinventing the projection of our design centers with more fashionable and relevant projection. Our plan is to convert most of the 173 design centers in North America in the next 12 months to this very exciting projection. We also plan to review the projection with our international partners. Combining technology with personal service of our craftspersons in our manufacturing and interior designers in our retail network has been a game changer. We are in a good position to continue our progress and maintain strong financial results, w ith this, pleased to open for questions and comments.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 1 moment, please, while we pull for questions. Our first question will come from Bradley Thomas with KeyBanc Capital Markets. Please proceed with your question.
Yeah. Hello, Brad.
Hi. Good afternoon, Farooq. Good afternoon, Matt. How are you doing?
Good to hear your voice, Brad.
Likewise. Good to hear your voice, Farooq.
All right.
Congratulations on the strong earnings here for this quarter. I thought the gross margins were particularly impressive. I was hoping you could talk a little bit more about how you're thinking about, you know, gross margins going forward, and if you feel like the industry is getting more competitive, and if that's a risk for you?
Yes, Brad. We have had, as you said, very strong gross margins, which is of course, a combination of higher volume, and also reflects the improvements that we have made through technology in terms of, for instance, in our manufacturing. Just to give you a perspective, just from 2019 to now, we have increased our sales of actually over 7%, while our headcount overall has gone down by about 24%. Very important, which is a result of having better quality people and technology at our manufacturing, at our retail. Those are the factors that have helped us become more productive. Of course, also, higher volumes do benefit gross margins, especially from the manufacturing side. I think going forward, I think where we are in gross margins, our objective is to continue with that.
That's great. Farooq with, you know, the orders starting to slow a bit, you know, of course, the whole industry benefit, you know, from volume during the pandemic, and the orders have slowed a bit. How do you think about the cost structure of the business and, you know, the levers that you might pull if we see sales, you know, declining going forward here?
Yes. Our backlogs were of course very, very high. Good news is that while we have been able to increase our production, deliver the products, reduce our backlogs, our backlogs are still decent. That's to start with. However, yes, we are, we're watching very carefully the business, the watching very carefully the environment and we always have operated, as you know, you might say lean. We'll continue to do that. At this stage, with our structure in place, both in terms of a much fine-tuned manufacturing, fine-tuned retail network, our logistics. You know, just keep in mind, it was not that many years back, we used to have 30 manufacturing plants. Now we have Vermont, North Carolina, Mexico and Honduras. 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. We have done a lot of work in terms of becoming more efficient, which is going to help us, Brad, as we go forward. However, we are watching very carefully the markets, the sales, the consumer attitudes, we will have to, you know, make some adjustments if sales don't hold up.
That's great. Thanks so much, Farooq.
All right, Brad. Thanks.
As a reminder, it is star one to ask a question. Our next question will come from Cristina Fernandez with Telsey Advisory Group. Please proceed with your question.
Yeah. Hello, Cristina.
Hi. Good afternoon, Farooq and Matt. I had a couple of questions. Can you provide more color on what you saw around demand, the order intake for the quarter? How did it progress? Were there any categories or product lines that were more affected than others or any regions? Any call outs would be helpful.
Yes, of course. W hen we compare this last in terms of the written business compared to previous year, the business of course was down from very, very high levels we had in the previous year. Overall, we have had a very strong business in our upholstery business. Our upholstery has held up quite well, but also, we saw an increase in our accent programs to support the work that our interior designers are doing. Where of course, the major factor has been the interior designer's ability to utilize technology to help. That has really been a very important factor. When they do that, they then are able to provide a much, you might say, a more total solution rather than selling items and products.
Because of that, we have seen we have maintained a good business in our various categories from our, you might say, our living room to dining room, bedroom and accents. We, I think we're gonna continue to see that because our business has more and more gone towards interior design. That's why, Cristina, I said, and in fact, I'm sure you've seen in all our marketing and communication, our message is, we are an Interior Design Destination. We have today about when we look at our designers, we have about 30% less designers than we had 4 or 5 years back, but more qualified, more talented.
In the last 2-3 years, we have invested a great deal, and we're gonna continue to invest a great deal in providing technology to them as we have been doing in our manufacturing. That's what we see, Cristina, going forward.
That's helpful. I had a second question, which is a follow-up on Brad's question about the cost structure. If orders were to remain at this level and sales eventually go back to the pre-pandemic level, that was around $750 million annually, what level of operating margin do you think you can achieve in this scenario with the changes you've made to the cost structure?
Well, you know, that's a good question. I think that, when you take a look at our gross margins, for instance, even when you go back to the pre-pandemic levels, you know, they were at about 55%-56%. When you look at our operating margins, our operating margins were also at, you know, at that time, 11%-12%. We are now, of course, comparing 11%-12% to 18%. I think we have an opportunity. Those were really on the lower side, which of course, when you look at the industry, even at 11% is a pretty high margin. W e have an opportunity of maintaining higher margins. Whether we can maintain it at 18% or so will depend upon our, you know, sales and how much we are able to deliver.
We have a good opportunity of maintaining stronger margins because of the fact of strengthening our retail network, strengthening our operations, our manufacturing. We spent a lot of time on our logistics. Our costs are structured today as lower with higher volume than it was four or five years back. Of course, it will also depend upon sales going forward.
Okay, that's helpful. Then the last one was on the refreshes for the interior design centers that you talked about. Can you provide more specifics exactly what will be new or refresh at the, you know, in the stores?
Yes, I think that's a very important development. In fact, in March, we are going to have our Danbury Design Center and also one in Manhattan, which would be a new one that will open up, will really project what we are talking about the next Ethan Allen projection of design centers. We've been working on it. That projection is going to be stylish, is going to be more designer-oriented, and that will then, as we do it during January, we are also right now planning that in the next 1 year, almost all our 174 design centers in the country. That's our plan to renovate them to the new projection. The projection is higher end, the projection is style, color. I'm sure that we are already doing a lot of it.
If you take a look at our advertising, I don't know if you are getting our printed magazine. Today, I didn't talk much of marketing, we are sending out 9 million digital magazines every 2 weeks. It was impossible to think 5 years back. It used to take us 2 months to make up a 32-page magazine. Today, with digital advertising, we have very strong photo studio here, we also fortunately were able to use one in Ukraine, which does an amazing job in terms of providing us with digital photography. Digital is tremendously important. Our designers today are able to work with clients, whether they're in their homes, whether they're in the design center. Combining personal service and technology is tremendously important. That's what we see, Cristina, in the next year or so.
That is our design centers are going to be more a design center rather than a furniture store.
Okay. Sorry, one last one. Is there a CapEx increase or like, how much is the investment you need to make to refresh, all the design centers?
It is not gonna be major because most of the work. I mean, our design center is in good position. Most of it, the refreshing is going to be paint, color and new products.
Okay, helpful. Thank you so much and best of luck this quarter.
All right. Thank you very much.
As a reminder, it is star one if you would like to ask a question. There are no further questions at this time. I would like to turn the floor back over to Mr. Kathwari for closing comments.
All right. Well, thank you very much. Look forward to continuing our journey. You know, I was just mentioning to Matt that, and Matt was mentioning to me that this is our and mine, 108th consecutive quarterly meeting. It's great to see you all, to talk to you. I always say we're just getting started. Thanks very much and look forward to talking to you soon. Camilla, thanks.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.