Greetings, and welcome to the Ethan Allen Fiscal 2021 Second Quarter Analyst Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow this formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to our host Matt McNulty, Vice President of Finance. Thank you. You may begin..

Thank you, Diego. Good afternoon and welcome to Ethan Allen's conference call for our fiscal second quarter ended December 31, 2020.

This conference call is being recorded and webcast live on ethanallen.com, where you'll 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 today on the call is our Chairman and CEO, Farooq Kathwari; and our Chief Financial Officer, Corey Whitely. I'm pleased to now turn the call over to Farooq Kathwari..

Thank you Matt and thank you all for participating in our quarterly call. As we all know, the last 12 months have been traumatic, challenging, and also rewarding in many important changes to strengthen our enterprise and also achieving strong results. This has been an amazing journey.

Nine months back, I had to furlough about 4,000 associates, closed all our manufacturing and most of retail, our stock price like most enterprises bottomed to close about $8. As you know, the good news is written sales have continued to grow quarter ending December 31, 2020 [ph] increased 45% from previous year quarter.

Our adjusted earnings per share of $0.69 increased 155.6%. Our backlog for retail division increased 146%, and after Corey provides a brief overview, I will review our initiatives.

Corey?.

Thank you Farooq. During the second quarter of fiscal 2021, our teams remained focused on serving our clients and keeping our workplaces safe. Our retail segment written orders continued to accelerate, achieving 44.9% growth compared to the prior year. Our e-commerce orders reflected 194% growth for the quarter.

We are pleased that our January retail written orders are continuing the upward trend. Consolidated net sales for the quarter were $178.8 million, a 2.4% increase to the prior year quarter.

Wholesale net sales increased 10.5% as production levels throughout our manufacturing steadily improved, and our peak production weeks during the quarter matched the pre-COVID-19 production levels. Wholesale segment written orders increased 28.1%. Excluding GSA and other government orders, wholesale segment orders grew 39.7%.

We continue to see COVID-19 pandemic-related disruptions that are delaying issuance of new GSA and other government orders. Our retail net sales increased 4.1% for the quarter. At the end of the quarter, both retail and wholesale had high order backlogs that we expect to get caught up over the March and June quarters.

Our adjusted gross margin increased 80 basis points to 56.9%. The increase in consolidated gross margin was due to higher productivity in our manufacturing and a change in the sales mix. Retail sales as a percentage of total consolidated sales were 81% compared with 79.7% a year ago, which positively impacted consolidated gross margin.

Adjusted operating margin, which excludes the impact of pretax charges from restructuring initiatives after the impairments and other corporate actions increased to 13.1% compared with 5.4% a year ago, primarily due to a 3.9% increase in gross profit and an 11.4% reduction in adjusted operating expenses.

Adjusted operating expenses for the quarter were lower due to reductions in selling expenses, including advertising costs and reduced compensation expense as we are operating more efficiently with 19% less headcount than in the prior year period. Our GAAP EPS was $0.67 compared to $0.27 in the prior year quarter.

Our adjusted diluted EPS increased 155.6% to $0.69 compared to $0.27 in the prior year second quarter. As of December 31, our balance sheet remained strong with cash on hand of $80 million, inventory of $126.7 million, and no outstanding borrowings.

During our fiscal first half, we generated 65.9 million of cash from operating activities, a 181.8% increase from the prior year period. We paid regular dividends of $5.3 million during the quarter.

In November, the regular dividend was increased by 19%, and we just paid $6.3 million in regular dividends on January 21 reflecting the increased $0.25 per share dividend. With that, I will turn the call back over to Farooq..

All right. Thank you Corey. I am also pleased to provide a brief overview of our initiatives, which as we have discussed previously focuses on five important areas. The first is talent. Talent development is key and a continuing process.

Crisis does create an opportunity to review talent, and I'm pleased we have greatly strengthened our leadership in our retail network, in our merchandising, in our marketing, manufacturing, finance, technology, and other areas of our vertically integrated enterprise. The second area is marketing.

We continue to refine and invest in various mediums, most importantly in the digital mediums. Digital mediums have enabled us to increase our reach to more potential clients while reducing our marketing costs. The third area is service.

We continue to make progress despite many challenges due to COVID-19, the transportation issues in getting products from East Asia, shortage of raw material.

However, our advantage of making about 75% of our products in our North American workshops is an advantage; and as reported, we expect to catch up in the next few months, and we are also investing in our North American manufacturing.

Our logistics network of delivering products in white glove service across North America is a strong advantage, and we continue to refine. The fourth area is technology. Combining technology with personal service of about 1,000 talented in-house professional interior designers has been a key to increasing written business at retail.

We also -- as Corey said, we also have had major increase on our e-commerce. We are investing in technology in various areas, including retail network, manufacturing, and operations.

And the fifth area is social responsibility, we’ve always been in forefront in this area not because of external pressures, but because it's the right thing to do for the welfare of our associates and our clients. Now as we indicated in the press release, we see that our January written orders continue the upward trend.

Also, the government orders that were postponed have started to come in in January, and with this brief overview I'm pleased to open up for any questions and comments..

Thank you. At this time we will be conducting a question and answer session. [Operator Instructions] Our first question comes from Brad Thomas with KeyBanc Capital Markets. Please state your question..

Hello Brad..

Hi good afternoon Farooq, good afternoon Corey and Matt. Thanks for taking my question. Farooq, I was hoping to ask about this important topic of converting these orders into revenues, particularly because the order trends that you've been seeing are just so extraordinary. I mean this is best that I can recall in over a decade of covering the company.

I know that this is an unusual world that we are in. There are logistical challenges. It sounds like you'll be able to make some progress here in your fiscal third quarter, but could you talk a little bit about what a reasonable revenue growth rate might be given the strong backlog that you have to work through. Thank you..

Yes, Brad it’s a very important issue. It's been a challenge. I would say that overall I don't have to mention all the issues of every -- I am sure you have all heard about the issues of transportation, of raw materials, and all of that. Our advantage is the fact that 75% is made in our North American workshops, and we have increased our capacities.

We have worked very hard to get some raw materials which have created issues like for instance like we don't make the fabrics. We make 100% of our upholstered products, which is the largest category in our business in our own workshops. So it's improving.

I would say that we would see increases in this coming quarter and maybe more might flow into the fourth quarter, but we'll see how it goes Brad..

Okay. Is there any sort of way you could help frame up what’s a reasonable revenue range or reasonable revenue growth rate might be for this March quarter, because in a normalized year if your supply chain, your factories were 100%, one would think that we would be seeing double-digit revenue growth this quarter.

Can you help give us any perspective on what reasonable growth might be for this quarter?.

No Brad, I mean obviously we have 146% increase in our backlog in our retail division. We have a measure in the wholesale. I would say that I'm just thinking loud right now because again there’s so many factors beyond our control. I would say that we should increase our delivered sales that we are talking about this quarter.

I would say that at least anywhere between 10% - 15% - 20% in that range is what I would like us to increase our delivered sales..

That's very helpful Farooq. And lastly for me I was curious if you could just give us some sense of how you're managing some of the inflation that we are starting to see bubble up. Obviously, some of the raw material prices are increasing, transportation costs, etc.

How do you feel like Ethan Allen’s position to deal with some of those in the quarters ahead here?.

Yes. They are increasing, and in fact I am sure that you are also aware of the fact that obviously our exposure to external sourcing is less than 25%, but even there we see a major increase in transportation costs, especially I think the short-term thing that everybody is being asked to pay somewhat of a premium to even book a container.

If our business were all import related, it would be a big-big issue. I would say that we have fortunately, most of our lumber. We do it, we have our own sawmill. We go to the forest. We are okay over there. Where we do see some, we do see increases is really more on the 25% of the imported products and of course the fabrics.

So, I would say that -- Brad that there is an increase in what we are considering is in the next few months a small price increase at retail..

Very helpful. Thank you so much Farooq..

All right Brad. Thanks. .

Our next question comes from Joe Feldman with Telsey Advisory Group Advisory Group. Please go ahead with your question..

Hello Joe..

Hi, how are you guys? So, I wanted to ask with the January backlog up so much, did stimulus help that at all or is it just the demand is so strong? What's driving that? Was it the marketing that helped or are you seeing new customers come in? What do you think that’s behind it all?.

Joe, we have got a great company. We have got great products. We have got great people. That's the number one. But also I would say that the result is, certainly the result is people have been interested in home.

There is a lot of interest in home and then people are looking at our brands where we have quality, we can deliver the product, and it also goes back to that Brad had asked we have also given more discounts or savings than we normally would do, and there is a reason for it.

Even though our margins have held up, our sales have increased, we have given savings up to 25%, and the reason is that we wanted to, and I wanted to make sure that all the new people that are interested in home come to us and become our clients and that's also taking place.

So, I would say the benefit of our client base plus increasing clients through of course, our marketing, through our name, and also this savings has all helped us increase the business..

Got it and then there was another topic I wanted to ask you about was on the promotional side, I mean have you had to, have you scaled back the promotions this period just given the demand is so high, and how do you envision the environment in the coming six months to round out the fiscal year?.

Joe take a look at this. When you take a look at what we have done, we have given more discounts. We have had somewhat less production. We have been faced with all issues but our margins at wholesale increased and our margins at retail increased with all of this.

So, a lot of reasons behind it, but efficiency in terms of operating our business at our manufacturing level, at the retail level has given us at this stage greater margins with all the challenges I have talked about without increase in sales. Now, I am talking about gross margins.

Our operating margins have also increased with a lot of reasons and, of course, as Corey just mentioned we have reduced our expenses. We have even reduced our marketing expenses from spending close to 5% to spending less than 3%, not because it has been less, it's less effective.

But today digital marketing and all the tools that we are using is giving, helping us to reach more people and less costly. .

Understood. If I can just sneak one more in. I guess if I were to walk in today and buy a new sofa what are you telling people these days? Is it 8 week, 12 week I assume, 14 weeks.

Like what's the time frame you are giving them these days?.

The good news is it's being reduced and approximately 8-9 weeks is the time we are giving. .

Okay..

Keep in mind it's all custom. And we also have an element which we call quick ship which is still made custom but there we are now shipping in less than 6 weeks..

That's great. thank you. Good luck for this quarter..

All right. .

Thank you. There are no further questions at this time. I will turn it back to management for closing remarks. Thank you. .

Well thank you very much and I know of course we have given a lot of information out and I understand the reason we don't have questions is because we have given a lot of information and of course the results are good. The objective really is to continue to operate the business. As I said earlier, the first important thing is do it safely.

The welfare for people is tremendously important at all levels and we are very-very pleased that our people have really done an amazing job in terms of managing this health crisis. So we are going to continue to be very proactive.

We have a major-major focus in increasing our offerings to reach a consumer base that we believe is very much relevant to us. We are going to increase our technology. We are going to increase our manufacturing for instance we are doubling our production in some of our wood products in North America.

We had already in the last few years invested greatly to double our capacities in terms of capacities of our facility in our upholstery manufacturing and so we are ready to grow the business and we are ready to service.

So again thanks to everybody for being part of Ethan Allen and to all of our stockholders and also to all our associates for listening. Thank you very much..

This concludes this conference. You may disconnect your lines at this time. Thank you for your participation..