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Ethan Allen's Q2 Worth A Second Look

Posted: Jan 25, 2008 08:31 AM by Glenn Curtis

Tickers in this Article: FBN, LZB, JCP, SHLD, RSTO, HD, LOW, ETH

Given the sluggish real estate market and the growing unwillingness of people to part with their hard-earned cash it should be a given that a manufacturer and retailer of furniture would be suffering right now. However, such an assumption is wrong - at least when it comes to Ethan Allen (NYSE:ETH).

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Overshadowed by the Dow
Given the commotion surrounding the roughly 600-point swing we had in the Dow on Wednesday the January 23, odds are you didn't get a chance to see Ethan Allen's second-quarter earnings results. It's a shame that Ethan Allen's numbers were pushed off the stage because they were exceptional.

In the period ended December 31, the furniture company earned $20.6 million or 70 cents a share. That's down slightly from the $22.8 million, or 70 cents a share it earned in the comparable period last year (note: there were about three million fewer shares in the most recent quarter, thanks to ongoing share repurchases). So far, the numbers don't sound great; however, I would argue that it was actually a noteworthy performance for a few reasons.

First, its earnings came in about 2 cents north of expectations. That's obviously pretty good news. But even more intriguing in my mind is the fact that this marks the second quarter in a row where the company beat expectations. In the September quarter the company beat estimates by a penny. (For the basics, check out Everything You Need To Know About Earnings.)

In short, I think that it's these types of upside surprises that are likely to draw institutional interest to the stock. It could also give the sell side some confidence to raise their full-year fiscal 2009 estimates going forward. To be clear, this is speculation. I haven't seen any sell side research disseminated since the earnings release; however, speaking as a former sell side analyst, a trend of positive earnings surprises - even if it's only two quarters - is certainly something analysts like to see. (To learn more, see Can Earnings Guidance Accurately Predict The Future?)

Comparison Shopping
When I look at companies like Home Depot (NYSE:HD), Lowe's (NYSE:LOW), as well as other home improvement retailers such as Restoration Hardware (Nasdaq:RSTO), I see companies that are seriously struggling. The same thing is true when I look at some of the major department stores such as Sears (Nasdaq:SHLD), and JC Penney (NYSE:JCP), which also sell furniture and home related goods.

Ethan Allen seems unfazed by the recent turmoil. Its improved gross margin of 53.7% (up from 52% from the same quarter last year) suggests that it's doing a really good job sourcing materials and that it has a solid merchandise mix. For comparison purposes, in their most recent 10-Qs, Home Depot and Lowe's saw their gross margins both decrease 20 basis points to 33.4% and 34.27% respectively. Meanwhile Restoration Hardware saw its gross margin drop roughly 80 basis points to 33.4%, Sears saw its gross margin drop 90 basis points to 27.4% and JC Penney saw its gross margin drop 180 basis points to 39.7%. In short, it's evident that it pays to manufacture, distribute and retail your own goods something which, with the exception of Restoration Hardware, none of the other above-mentioned retailers do.

Furniture Brands (NYSE:FBN) which does make and sell its own furniture saw its gross margin decline 40 basis points in the latest quarter to 21.1%. To its credit, La-Z-Boy (NYSE:LZB), which also makes furniture, did stand out - its gross margins actually increased 70 basis points to 26.9%. However, given that Ethan Allen's overall gross margin is so much higher than La-Z-Boys, I find Ethan Allen much more attractive.

The Bottom Line
On the surface Ethan Allen's Q2 results appeared lackluster. However, the bottom line numbers came in ahead of Wall Street expectations, and "between the lines" the company seems to be doing pretty well, and this intrigues me. In the world of furniture, Ethan Allen is probably the place to be right now.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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