Adjusting Ethan Allen Estimates for Q1 2010 Loss

Oct.28.09 | About: Ethan Allen (ETH)

Tonight, Ethan Allen (NYSE:ETH) reported Q1 10 results that missed Wall Street estimates by a wide margin. ETH reported Q1 10 revenue of $136.2 million, missing top-line estimates by 10%. In addition, ETH reported a loss per share of $0.20 (excluding one-time charges), which was well below the consensus estimate of ($0.08). Given the Street was expecting FY 10 revenue and EPS of $602 million and $0.21, respectively, we believe estimates will coming down significantly in the coming days.

Based upon continued sequential deterioration in Q1 revenue, we are now projecting FY 10 revenue of $573 (versus $600 million previously). Gross margin has shown slight sequential improvement, so our new estimate assumes margin increases from 49.1% in Q1 to a full year margin of 51.0% (as cost savings kick in). On the operating expense line, we are assuming SG&A bottomed at $73.6 million per quarter. Annualizing this rate gives us operating expenses of $294.4 million. Leaving our net interest and tax estimates alone, we estimate the Company will report a loss of $6.2 million in FY 09 (translating to an EPS of negative $0.21).

Factoring in 10% revenue growth in FY 11, and assuming that 60% of cost savings from restructuring activities are permanent (per management's guidance), we estimate FY 11 revenue and earnings of $630.8 million and $0.10, respectively.

Based upon these estimates, ETH is trading at roughly 130 times FY 11 earnings. While the market is clearly valuing the Company on a normalized earnings powers, we are concerned estimates may not be considering the shift of its business model to more of a custom model. In our view, the operating leverage inherent in its old model may be a thing of the past. Thus, we believe ETH should be valued based upon a blend of its near-term trough earnings estimates and an estimate of normalized earnings power.

Our price target of $10.50 is based upon assigning a 15x multiple to the average of our FY 11 earnings estimate and our normalized earnings estimate of $1.31.

Disclosure: The author is short ETH