Ethan Allen Interiors achieves solid first quarter results with 5.2% sales growth and robust cash flow amid economic challenges and strategic investments

Good afternoon and welcome to the Ethan Allen Fiscal 2026 First Quarter Analyst Conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press Star zero on your telephone keypad. Please note 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, Operator. Good afternoon and thank you for joining us today to discuss Ethan Allen Interiors' fiscal 2026 first quarter results. With me today is Farooq Khafari, 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 then open the call up for your questions. Before I begin, I'd like to remind the audience that this call is being webcast live under the News and Events tab within our investor relations website. A replay and transcript of today's call will also be made available on our investor relations website. There you'll find a copy of today's press release which contains reconciliations of non GAAP financial measures referred to on this call and in the press release. Our comments today may include forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our most recent quarterly report on Form 10Q. 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. We are pleased to have you all on this call. Considering the many challenges, we are very pleased that our unique vertically integrated enterprise and our focus and investments over the years are providing strong results. Our interior design focus, investments in technology and many years of developing a strong retail network. Our North American manufacturing and logistics have positioned us well. Our written sales in the first quarter increased by 5.2% despite the question of tariffs. We continued our history of returning capital to shareholders by paying 16.4 million in cash dividends and ended the quarter with 1 93.7 million in cash and no debt. Our US government sales were impacted by delays in advance of the government shutdown. I will discuss a lot of this in more detail after Matt provides a brief financial overview of the quarter and we will also discuss our initiatives to continue to strengthen our enterprise and provide an Opportunity to grow our sales, earnings and cash. Matt.

Thank you, Mr. Kathwari.. Our financial performance in the just completed first quarter was highlighted by retail written order growth, strong gross margin, positive operating cash flow and a robust balance sheet. Despite macroeconomic challenges, our operations produced positive financial results which I will now discuss. Our consolidated net sales were $147 million as higher average ticket prices and designer floor sample sales were offset by lower delivered unit volumes, reduced traffic and fewer contract sales. Retail written orders grew for the second consecutive quarter as demand patterns continued to improve. Retail written order growth of 5.2% was driven by improved order conversion, increased promotional activities, the strength of our brand, the loyalty of our clients, new product introductions and additional marketing efforts. Wholesale orders decreased by 7.1% during the quarter as the segment was impacted by lower contract business, including reductions in government spending. We ended the quarter with wholesale backlog with 53.5 million. A lower volume of contract orders combined with improved customer lead times helped reduce our backlog from a year ago. However, in the last three months, our wholesale backlog rose by 4.7 million due to the timing of incoming contract orders. Strong consolidated gross margin of 61.4% was driven by a change in sales mix, lower raw material input costs, selective price increases, lower headcount and a higher average retail ticket price, partially offset by increased promotional activities, elevated designer floor sales and higher inbound freight, including incremental tariffs. Our adjusted operating margin was 7.2%. For historical context, our pre pandemic fiscal 2020 first quarter operating margin was 20 basis points lower. Our current year operating margin was impacted by fixed cost deleveraging from lower delivered sales combined with increased promotional activity, additional marketing, higher occupancy costs from new design centers and sales of floor inventory to make room for new products, partially offset by a disciplined approach to controlling operating expenses, including reduced headcount. Our headcount totaled 3,189 at quarter end, a decrease of 4.7% from a year ago as we continue to identify operational efficiencies and streamline workflows. Adjusted diluted EPS was 43 cents. Our effective tax rate was 25.4%, which varies from the 21% federal statutory rate, primarily due to state taxes. Now turning to liquidity, we ended the quarter with a robust balance sheet including total cash and investments of $193.7 million with no debt. We generated $16.8 million in operating cash flow during the quarter through lower inventory levels and higher customer deposits. Capital expenditures of $2.4 million were primarily for retail Design center build outs and investments in technology. We continued our practice of paying cash dividends. In July, our board declared a special cash dividend of $0.25 per share in addition to our regular quarterly cash dividend of $0.39 per share, both of which were paid in August. We have paid a special cash dividend in each of the past six fiscal years and a cash dividend every year since 1996. Also, as just announced in our earnings release, our board declared a regular quarterly cash dividend of $0.39 per share which will be paid in November. In summary, we are pleased to deliver positive first quarter results with a resilient client base, a debt free balance sheet and a vertically integrated business. We are navigating the current environment, focused on what we control, what we can control, which is talent, service, marketing, technology and social responsibility. Looking ahead, we remain focused on our strategic initiatives in the face of ongoing economic uncertainty. We are confident in the strength of our business model, including our North American manufacturing base and vertical integration which allows us to provide clients with custom furniture and complementary design services. With that, I will now turn the call back over to Mr. Kathwari..

Alright, Matt, thanks very much. Now, as we have mentioned, considering the many challenges, we are pleased with our results. Our recent sales increased by 5.2% despite lower traffic. This is due to number one, we have continued to position Ethan Allen as a desirable brand. Two, we had more qualified customers who visit our design centers. Less customers, but more qualified. We continue to focus on key areas of strengthening the following talent. We have strong dedicated team members in our vertically integrated structure in marketing. During the quarter, we increased our national marketing with many initiatives. Our marketing costs at the national level increased 44%, going from 2.4% of net sales last year to 3.4% in the current period. We believe that we should continue to see the benefit of this increase as we move forward in technology. Continued utilization of technology in our vertically integrated enterprise is a game changer. This time included technology in our manufacturing. This has included technology in our manufacturing, retail, marketing and logistics. Our focus continues reinvention has positively impacted many areas included interior design network. We have relocated about 75% of our design centers in the last 20 years while reducing the design center footprint that is the size of a design center by 25%. We have stronger interior design talent. We have 50% less designers today than 10 years back, but generating 75% more business per retail associates. Again, combining good talent, technology, products and all the other things we do has made it possible. We invested in our manufacturing, including new Technology. Opening new retail locations while closing other locations has been important. New design centers that were opened in Colorado Springs, Greater Toronto and Greater Houston. We have 173 retail design centers in North America including 143 company operated and 30 independently owned and operated. About 75% of our furniture is made in our North American manufacturing and almost all custom on receipt of custom orders. This is very different than what happened say 20 years back when about 80% of our case goods was made for stock. We deliver our products at one price to our clients in North America with our white glove delivery service. This is very, very important, not easy to do to deliver the product whether you are in Seattle or you are in Miami or New York at one delivered price to the customer with white glove service. It is unique but very important for us. We have consolidated our national distribution into one major distribution center while reducing the number of company operated retail centers location by 35% in the last 10 years. Keep in mind we have about 10 national distribution centers now. One major distribution center with two smaller locations is what makes it work. On social responsibility, our teams continue to focus operating a socially responsible enterprise and treating our associates and our clients with respect. In addition, we focus on operating in an environmentally responsible manner. We recently had our annual convention about two weeks back which was attended both physically and virtually by our entire enterprise. Under the theme of always moving forward, we reviewed our many initiatives including the launch of new products that will be presented to our clients in the spring of 2026. In our design centers, the new products have been important. We have launched new products in the last one year which of course resulted in our selling of floor samples. But we also have included new products which we introduced in January two weeks back and will be in our design centers by spring of next year. As I stated earlier, both the domestic and international economies are going through major changes. We remain focused on providing great service to our clients through our vertically integrated structure. We remain cautiously optimistic. At this time, we are open for any questions or comments.

We'll now be conducting a question and answer session. If you'd like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your lineup in the question queue. You may press Star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment please, while we poll for questions.

All right.

Our first question is from Taylor Zick with Keybanc Capital Markets.

Hey, good afternoon. I'm doing well. How are you, Farooq, first off, congrats on the strong comp here in this fiscal first quarter. I just wanted to ask more specifically about the cadence of retail written order trends during the quarter. Maybe what you saw during the Labor Day sales period and outside of that as well.

Yeah, that's a good question. Because the first quarter we were looking at all these, the challenges of government shutdowns and everything else. What we saw was much lower traffic, interestingly, but more qualified people and the ones who came in were buying. And what we saw was that mostly most of the quarter we maintained more or less similar increases. We did not see any major highs or lows during the quarter. What we saw was people coming in, working with our designers and buying. Now, you know, if the environment was different and we didn't have about a 30%, 30 plus percent lower traffic into our design centers because of the fact, you know, with the economy and what is taking place. But the people who came in were, were interested, qualified, they worked with our designers, thereby helping us increase our business.

Yeah, that's great. Maybe just to follow up here on promotional activity, obviously we've seen the industry become more promotional over the past few quarters. You noted it this quarter here for Ethan Allen. Can you talk a little bit more about what you're seeing and maybe what your expectations are for the balance of the year or you know, 2026, if you all want to comment on that?

Yeah, I mean, we are watching what is happening in the industry. We have more or less maintained our promotional activities across the board. We have not gone into any major promotions. We have, we have, we do give special savings every quarter and we have maintained that. And we felt we do also provide financing, but also at the level that we've been doing in the past, small changes, but not much. So we maintained our strategy. And that's because of that, you see, our margins have been maintained. If that was not the case, we would not have the gross margins that we have today.

And then I guess just one last question for me before I turn it over. Tariffs continue to impact industry pretty broadly. What are you seeing in terms of pricing across the industry? And then maybe if you've taken any pricing yourself.

Yeah, that's an important issue. Of course it's changing consistently. So we do not know where we're going to end. We do make about close to 80% of our products or 75% to 80% of our furniture in North America, in Vermont, North Carolina, then we have in central Mexico and in Honduras. Now first there was hardly any tariffs in Mexico. Then there were tariffs and now they are thinking of not having the level of tariffs that they had last two weeks, it is ever changing. So fortunately for us, while on the furniture side, we are less impacted by tariffs, we are able to manage it because of the fact of the.