Ethan Allen Interiors Q2 Earnings Call Highlights

Core Insights - Ethan Allen's fiscal Q2 results were significantly affected by a government shutdown, which led to reduced consumer confidence and lower retail orders, particularly in the contract segment [4][6][16] - Despite the decline in demand, the company reported an improvement in gross margin to 60.9%, up 60 basis points year-over-year, driven by a higher average ticket price and reduced headcount [5][7] - The company ended the quarter with a strong liquidity position, holding $179.3 million in cash and investments with no debt, and continued to return capital to shareholders through dividends [5][12] Order Activity - Retail written orders declined by 17.9% and wholesaler orders decreased by 19.3% compared to the previous year, with both metrics showing a sequential decline throughout the quarter [1][6] - The decline in orders was attributed to macroeconomic challenges and an 11% drop in design center traffic [1][4] Financial Performance - Consolidated net sales for the quarter were reported at $149.9 million, influenced by a higher starting retail backlog and fewer returns, although offset by lower demand and fewer contract sales [2] - Adjusted operating income was $13.5 million, resulting in an adjusted operating margin of 9%, compared to 5.4% in the pre-pandemic fiscal 2019 second quarter [8][10] Margin and Cost Management - The company faced pressures on operating margins due to fixed-cost deleveraging and increased promotional activities, but these were partially mitigated by expense controls, including headcount reductions [9][10] - The total number of associates decreased by 5.1% year-over-year, ending the quarter with 3,149 employees [9] Tariffs and Pricing Strategy - Recent Section 232 tariffs imposed a 25% tariff on fully manufactured upholstered wood products, with additional tariffs affecting non-U.S. manufactured goods [13][14] - To address tariff impacts, the company is implementing a three-part strategy, including vendor cost sharing, sourcing diversification, and selective retail price increases averaging about 5% on certain SKUs [18] Future Outlook - Management expressed optimism about maintaining margins and improving sales as government operations resume and consumer traffic increases [10][16] - The company operates 172 design centers in North America, with approximately 75% of its furniture produced domestically, emphasizing a vertically integrated model supported by technology [17][19]