Ethan Allen Interiors (ETH)

1
Ethan Allen Interiors (ETH)
RECOMMENDATION HOLD
2
Investment Thesis

• Broad product range in casual and classical
  styles appeals to a larger customer base
• Vertical integration allows superior
  manufacturing and market efficiency
• Uniform pricing, national advertising, and
  exclusive distribution system uniquely positions
  ETH to sell its products online
• Strong balance sheet and free cash flow should
  allow for further growth through acquisitions,
  expansion, and share repurchases
• Customer service focus allows for higher margins
• Well-seasoned management with immense industry
  experience

3
Background

• Ethan Allen Inc. is a leading manufacturer and
  retailer of quality home furnishings in the
  following product categories

• The Company produces or assembles 80 of its
  products at its 21 manufacturing facilities and 3
  sawmills.

4
Background

• Store Network
• 305 Ethan Allen Stores
• 82 are owned by the Company
• 203 are independently owned
• Complete room Displays

• Style
• 2 categories
• Classic, which includes English 18th Century and
  19th century Neo-Classic styling)
• Casual (contemporary design elements)

5
Background

• Ethan Allen's policy is to sell its products at
  the same delivered cost to all dealers
  nationwide, regardless of their shipping point.
• The adoption of this policy has discouraged
  dealers from carrying significant inventory in
  their own warehouses. As a result, Ethan Allen
  obtains accurate information regarding sales to
  dealers to better plan production runs and manage
  inventory.
• Having one national landed cost has permitted
  Ethan Allen to provide one national suggested
  retail price which, in turn, helps facilitate a
  national advertising program. Ethan Allen
  television advertising is aired approximately 27
  weeks per year

6
Important Shareholders
7
Stage 2 (1999 and onward)

• Goal is to make the shopping experience of
  customers as enjoyable and effortless as possible
• - New contemporary store façade
• - Plan is to relocate or add 10 15 stores
  per year
• - Company owned stores represent 27 of
  total
• - New product line focuses on two
  different lifestyles, casual and classic
  (compared to four product categories in the past)
• - Simple finance plan
• - Regular sales events spread over the four
  quarters
• - Clicks and mortar

8
Economic Environment
Furniture industry has benefited from a strong
economy. -Rising Income Levels -Family net worth
has jumped 18 , or from 60,900 to 71,600 in
past five years -Consumer Confidence -Wealth
effect of booming equity market -49 of U.S.
families hold stock, up from 32 in 1990
9
Economic Environment

• Furniture industry has benefited from a strong
  economy
• -Favorable Demographics
• -Baby boomers are reaching their peak earning
  and furniture spending years
• -Record Home Sales
• -A record 66.8 of American households owned
  their homes at the end of 1999

10
Present Economy

• Housing Activity Slowing
• -Result of Feds tightening
• General Consensus
• ECONOMIC SLOWDOWN
• Hard Landing or Soft Landing?

11
Why Be Bullish on Furniture Ethan Allen

• Recent strength in housing should still sustain
  furniture demand
• -12 to 18 month lag between purchasing a house
  and furnishing the interior
• Expect furniture companies to continue to report
  strong results
• - Healthy home sales levels and high consumer
  confidence
• Furniture stocks undervalued by association with
  housing economy
• -Furniture P/Es are low, and near the low of
  historical ranges

12
(No Transcript)
13
5 Year Stock Price

14
Financials

• Moving on to Excel

15
Word on the Street

• First Union Securities has a buy rating on ETH
  with an estimated 2001 EPS of 2.40 and a 12 mo.
  price target of 30 (12.5x)
• Sun Trust Equitable Securities has a buy rating
  on ETH with an estimated 2001 EPS of 2.43
• UBS Warburg has a buy rating on ETH with an
  estimated 2001 EPS of 2.35 and a 12 mo. price
  target of 38 (16x)
• Robertson Stephens has a buy rating on ETH with
  an estimated EPS of 2.44

16
Summary

• Increase in EPS since 1991 (20 consecutive
  quarters with significant increase in sales and
  EPS)
• Overall performing better than industry and peers
  with higher profit margins
• Furniture demand is much less cyclical than new
  housing which is not currently being realized
• Current furniture P/Es are shrinking and are at
  the low end of their historical ranges

17
Summary (contd)

• Stock price has unfairly been beaten (P/E to EPS
  growth 1.0 broke through 100 and 200 moving
  day averages below P/E high of 27 with current
  P/E at 12)
• Trading at 75 P/E discount to SP 500 (20 year
  average is 15 discount)
• Future looks stable with growth potential and
  sustainability in the long term

RECOMMENDATION Hold shares