Ethan Allen Interiors (ETH)

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Ethan Allen Interiors (ETH)
RECOMMENDATION BUY
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Background

• Ethan Allen Inc. is a leading manufacturer and
  retailer of quality home furnishings, offering a
  full range of furniture products and
  accessories. Ethan Allen manufactures and
  distributes three principal product lines
• case goods (wood furnishings), consisting
  primarily of bedroom and dining room furniture,
  wall units and tables
• upholstered products, consisting primarily of
  sofas, loveseats, chairs, and recliners
• home accessories, and other, including
  carpeting and area rugs, lighting products,
  clocks, wall decor, bedding ensembles,
  draperies, decorative accessories and
  indoor\outdoor furnishings.
• The Company's operations are classified into
  two main businesses wholesale and retail home
  furnishings. The wholesale home furnishings
  business is principally involved in the
  manufacture, sale and distribution of home
  furnishing products to a network of
  independently-owned and Ethan Allen-owned
  stores. The retail business exclusively sells
  Ethan Allen's products though a network of 309
  retail stores (73 owned and operated by ETH, 215
  independent retailers, 21 stores abroad). Ethan
  Allen is one of the ten largest manufacturers
  of household furniture in the United States.
  Ethan Allen manufactures and/or assembles
  approximately 90 of its products at 21
  manufacturing facilities which includes 3 saw
  mills, thereby maintaining control over cost,
  quality and service to its consumers. Ethan Allen
  distributes its products primarily through
  eight regional distribution centers and terminals
  strategically located throughout the United
  States.

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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.
• Ethan Allen's product strategy has been to
  expand its home furnishings collections to
  appeal to a broader consumer base while
  providing good quality and value. Management
  believes that the two most important style
  categories in home furnishings today are Classic
  (style which includes English 18th Century and
  19th Century Neo-Classic styling) and Casual
  (style is based on classic contemporary design
  elements). Each collection includes case goods,
  upholstered products and accessories, each
  styled with distinct design characteristics.
  Ethan Allen's store concept allows for the
  display of these categories in complete room
  settings which utilize the related collections
  to project the category lifestyle.

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Background
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Honors / Management

• Furniture Today (a leading industry publication)
  published a survey of America's Top 100 Furniture
  Retailers for 1999. Ethan Allen was ranked No. 2
  in terms of furniture, beddings and
  accessary sales for dealer-owned and
  company-owned stores and was ranked No. 1 as the
  largest single-source store network for home
  furnishings in the country.
• Worth Magazine named ETH CEO Farooq Kathwari in
  the top 50 for successfully reinventing the Ethan
  Allen Brand. In the past 7 years, he has
  introduced furninture with a more casual, classic
  style, cut prices, designed new customer friendly
  stores and launched a 67.5M national advertising
  campaign in 1998

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Whats up ? (Firm)

• First quarter sales and EPS increased 14.1 and
  18.4 respectively. EPS(Q) at 0.45 was a 4.65
  surprise. This is the 17th consecutive quarter
  ETH has been able to report significant growth in
  sales and earnings.
• Approximately 90 of the Company's products have
  been redesigned over the last six years. This
  allows the Company to maintain focused lines
  within each style category which enhances
  efficiencies. In 1992, Ethan Allen
  instituted a new image and logo program.
  Additionally, Ethan Allen undertook a program
  to renovate the exterior of its stores. As of
  June 30, 1999, this renovation program has
  been substantially completed with 297 or 96
  of all stores (including dealer-owned and
  Ethan Allen-owned stores) having either
  implemented new exteriors or are currently under
  renovation. The store is divided into
  three-stores-in-one and positions Ethan Allen as
  specialists in casual styles, classic designs
  and decorative accessory retailing. It features
  two fully designed show homes to inspire
  consumers and show them how product could look
  in their homes. In addition, it presents
  products in focused vignettes that are easy and
  relatively inexpensive to update each season. In
  the last six years 130 new stores were opened,
  many of them relocations. Sales to independent
  dealer-owned stores accounted for
  approximately 60 of total net sales of the
  Company in fiscal 1999. In fiscal year 1999,
  the Company's focus was on introducing the
  Avenue and Ethan Allen Kids lines of home
  furnishings. These products have recently been
  introduced at the retail level and revenues to
  date have not been significant. Also, in fiscal
  year 1999, the Company initiated its Internet
  distribution strategy, which is expected to be
  launched in the second quarter of fiscal year
  2000.
• Were expanding our reach, our
  relationshipTheres no reason not to help
  decorate the clients childrens room and
  garden. (CEO)

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Whats up ? (Industry 1/2)

• BAC (10/04) Home furnishings is 125 billion
  industry (accounting for 2.2 of total annual
  consumer spending). Consumers spend an average
  of 1,215 per household per year on home
  furnishings of which 46 of that figure on
  furniture. According to BAC the industry is not
  as volatile as investors think with only three
  years of declining growth since 1970. Three
  areas besides furniture are housewares,
  accessories and textiles that are growing at a
  faster rate. Sector has been holding share
  better than most other product sectors. Growth
  for home furnishings segment has a rate of 8
  since 1970
• BAC enumerated four growth drivers'' for the
  home furnishings industry
• Favorable Demographics -- 35-54-year-olds
  represent 52 of home furnishings purchases and
  this age group is estimated to increase 33 to 46
  million people by 2010.
• Home Ownership - home ownership is at record
  levels in the U.S., up 67 since 1970. And, homes
  are larger these days, requires more furnishing.
• Influence of Media - a dramatic increase in home
  magazine readership (up 13 since 1995)
  illustrates a growing consumer interest. Home
  furnishings television programming has also
  gained enthusiasts.
• Renovations are at an all-time high, having
  totaled 164 billion in 1998. In the last seven
  years, home renovation spending has increased
  74. Increase in renovation has come about
  particularly as more Americans begin to work from
  home offices. Last year, 3.6 million Americans
  were paid to work at home - 89 more than in
  1991.

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Whats up ? (Industry 2/2)

• Finally, Hale (BAC) outlined some of the trends
  that will continue to characterize the home
  furnishings industry, including the polarization
  of spending a focus on value at the low-end
  increased dominance of brands at the high-end
  new retail concepts from national players and
  do-it-for-me'' one-stop redecorating resources
  offered by companies like The Home Depot and
  Sears.
• AG Edwards (10/04) believes that the broad
  economic environment has been quite conductive to
  solid growth and profitability in the home
  furnishings arenawe expect those trends to
  continueat a somewhat slower more sustainable
  pace over the next year or two. Virtually all of
  the economic variables necessary to drive growth
  in this segment are positive house activity,
  interest rates, consumer confidence, employment
  levels and demographic trends such as the middle
  aging of the baby boomers
• Brand names (including Ethan Allen as one of five
  mentioned) are key to expansion in the retail
  industry.

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Balance Sheet

• BV per sh
• 1999 8.58
• 1998 7.28
• 1997 6.05
• 1996 5.15
• 1995 4.49

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Cash Flow Statement
Capital expenditures have increased due to new
store openings and expanding manufacturing
capacity. Financing flows include buying back of
stock (due to stock options given to management)
so that earnings are not diluted.
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Income Statement

• Fantastic Margins !!!!
• Margins that are greater than any competitors
  and the industrys

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Growth/Assumptions for model
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Proforma Income Statement

• Estimates
• First Call 00 2.17 01 2.47
• Schwab 00 2.17 01 2.47
• Value Line 00 2.20 04 2.80
• Zacks 00 mean 2.18 01 mean 2.47

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Stock Price Estimate
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DuPont Analysis

• Profit Margin increasing
• More sales generated from assets
• Less leverage

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Firm Ratios and Comparisons
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Firm Ratios and Comparisons
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Firm Ratios and Comparisons
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Why ETH? (as opposed to FBN)

• Significantly better margins
• Vertically integrated company taking advantage of
  cost savings and advantageous margins. Also
  lower risk.
• Initiation of Internet presence
• Proven management

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Determining the Value of ETH based on Free Cash
Flow

• FCF NIDepreciation-Capital Exp-WCCF
• TV FCF3 (1g) / (WACC - g)
• Value PVFCF (FCF/1WACC) PV TV
• Share Price Value / 42M

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Summary

• Increase in EPS since 1991 (17 consecutive
  quarters with significant increase in sales and
  eps)
• Overall performing better than industry and peers
  with higher profit margins
• Proven management that has revived the firm
• Firm is adaptive to current market trends and
  takes advantage of them
• Attractive stock price (P/E to EPS growth 1.2,
  broke through 50,100,150 moving day average,
  below P/E high of 27 with current P/E at 17)
• Future looks stable with growth potential and
  sustainability in the long term

RECOMMENDATION BUY