1/23/2008

Ethan Allen Holds It Own
By Brian Sozzi

Today, Ethan Allen Interiors Inc. (ticker symbol: ETH) announced its 2Q`08 financial results.  The company recorded net sales of $259.5 million (consensus $258.8 million) and diluted earnings per share of $0.70 (consensus $0.68).  We forecasted net sales of $268.0 million and diluted earnings per share of $0.74.  Key elements that went against our modeling inputs included a strong advance in general and administrative expenses and a negative comparable store sale (or comps, which are sales from stores open in excess of a year) results at retail locations.

All things considered, Ethan Allen had a reasonable quarter of execution.  Macroeconomic conditions throughout the company’s reporting period were extremely challenging, leading to elevated competition among home furnishings retailers.  Ethan Allen’s comps at retail only fell 0.6% (+0.2% 1Q`08), significantly better than readings from its peer base.  Additionally, the gross margin rate expanded a healthy 178 basis points as management continued to focus on executing upon its everyday low pricing product strategy.  Operating cash flow was positive at $6.0 million, and the operating margin rate at the retail business advanced noticeably on a sequential basis.

Having reviewed the quarter on a preliminary basis, we are inclined to reiterate our overweight recommendation on Ethan Allen shares.  Critical factors to our thinking include 1) Competitive advantages brought about by a unique business model, 2) Attractive valuation from absolute and relative perspectives, 3) Historical out performance of the stock during Federal Reserve interest rate easing cycles and 4) Strong executive leadership.

Written by Brian Sozzi, a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the apparel/hardline goods sectors of the retail industry.