Ethan Allen Interiors Inc. Q1 FY2026 earnings call

Management Statement and Operational Highlights: - The company's unique vertically integrated enterprise, along with focus on talent, service, marketing, technology, and social responsibility, has positioned it well. - Retail written orders grew despite macroeconomic challenges. - There was an increase in national marketing spend, with a significant portion allocated to paid search and paid social campaigns. - Technology is being utilized across manufacturing, retail, marketing, and logistics, acting as a game-changer. - Approximately 75% of design centers were relocated over 20 years, reducing the design center footprint by 25%, and stronger interior design talent has led to more business per retail associate. - The company has invested in manufacturing with new technology and opened new retail design centers in Colorado Springs, Greater Toronto, and Greater Houston. - It focuses on socially responsible operations and environmentally responsible practices.

Segment Performance: Consolidated net sales amounted to $147 million. Retail written orders grew by 5.2% due to factors such as improved order conversion, increased promotional activities, brand strength, client loyalty, new product introductions, and marketing efforts. Wholesale orders decreased by 7.1% during the quarter as the segment was affected by lower contract business, including reductions in government spending. The consolidated gross margin was 61.4%, driven by a change in sales mix, lower raw material input costs, selective price increases, lower headcount, and a higher average retail ticket price, although this was partially offset by increased promotional activities, elevated designer floor sales, and higher inbound freight including incremental tariffs. The adjusted operating margin was 7.2%. Adjusted diluted EPS was $0.43. The company ended the quarter with $193.7 million in cash and no debt, and generated $16.8 million in operating cash flow during the quarter.

Guidance: Management remains focused on strategic initiatives amidst ongoing economic uncertainty. The company is cautiously optimistic, confident in the strength of its business model including North American manufacturing and vertical integration, and intends to continue navigating the current environment while focusing on controllable elements like talent, service, marketing, technology, and social responsibility.

Risks: - Macroeconomic challenges like lower traffic and reduced unit volumes impacting sales. - Tariffs affecting non-furniture products and potentially margins. - Delays in U.S. government sales due to government shutdowns. - Potential operational inefficiencies if not managed properly.

Q: 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.

A: Yes, 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 the 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 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 of the economy and what is taking place. But the people who came in were interested, qualified. They worked with our designers, thereby helping us increase our business.

Q: Yes, that's great. Maybe just a 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 2026, if you want to comment on that?

A: Yes. 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 do give special savings every quarter, and we have maintained that. And we felt we do also provide financing, but also at the levels that we have been doing in the past, small changes, but not much. So we have maintained our -- 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.

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

A: Yes, that's an important issue. And 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 product or 75% to 80% of our furniture in North America. In Vermont, North Carolina, then we have in Central Mexico and in Honduras. Now there has -- first, there was no -- 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 2 weeks. It's 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 our North American presence. Our other products, which is our non-furniture products, a lot of that does come from overseas, and that has been impacted by tariffs. Now we have taken and again, that changes. So one has to be careful that you don't act too fast. But we have made some changes. We have taken some price increases anywhere from depending on the country, the region, anywhere between 5% to 10%. Some of our partners overseas have worked with us to manage the costs. So overall, I think that we have been much less impacted by margins -- by this question of tariffs, but most of it has been on our non-furniture product. We do have one major plant that we have in Southeast Asia, which has been impacted. But again, we have to watch that every month, the tariffs change. So overall, I think we're managing it well because of our strong presence in North America and our own manufacturing.

Q: I had a couple of questions. I wanted to start with the retail segment. It's been two quarters where the written demand has been positive, but sales for this quarter for that segment were still down 3%. So at what point will we see that demand translate into growth for that segment?

A: Well, if you take a look at our retail, we had -- on the -- interestingly our delivered retail was about 3.3% or 3.2% lower than last year. We were able to maintain our relative cost structure. I think that at this stage, our objective is to work towards -- and we are seeing that, that there are challenges that objective is to come close to what we did last year. That's what our objective is. We'll see what happens in November and December. October is just ending. But people, as I said, have been challenged. Our traffic has been down considerably, fortunately, because of the fact of qualified people coming in and especially our talented interior designers. If we didn't have that, the chances are we would be severely impacted with lower sales. So I think that at this stage, Cristina, our objective is to still watch but to come close to what we did last year.

Q: Got it. And then on the contract side, can you talk more about what's happening with the state department? It seems like this was a pretty challenging quarter for that particular contract. So do you think it can normalize here in the near term over the next quarter or 2? Or should we expect this lower trend to be a new steady state?

A: Well, it's a good question. It depends upon the opening of the government, where what we have seen is this and what we hear is that we would get orders if the government was open because the government is not open, new orders are not coming in. So it all depends upon where -- what happens with the government. And it also had to some extent, impact on our sales, not completely, we were able to ship some products but it's mostly on the new orders coming in. The government is closed. So we hope that the government opens up and what we hear is that there is some higher pending orders that they will forward to us when they open. And if that happens, again, let's assume that it happens in the next -- in this quarter, then the impact of that would be towards middle or end of the following quarter because we got to make that product.

Q: And then my last question was on the increased marketing spend year-over-year. Can you share where the spending is going? Is it reaching more customers? Is it a different type of, I guess, advertising that you're doing compared to last year? And where are you seeing the benefit of that advertisement and traffic or conversion? Or where do you think you're seeing the return?

A: Yes, it's a good question. And where we did was where we increased is on at a national level, we increased it in additional direct mail and paid search and paid social campaigns. We didn't have much in paid search and paid social campaigns in the past. So we accelerated. That's where most of the increase at the national level took place, close to 50% increase. Now we don't see the benefit of it right away. I would say that we should see some benefit as we go forward in this current quarter and as we move forward because this is a longer-term investment, but we believe it made sense. It also made sense that we had also this past quarter an additional direct mail that we didn't have in the previous year. So going forward, we'll continue with our direct mail as we have in the past. But to answer your question, most of the money, the new money, new advertising was on paid search and paid social campaigns.