Adjusting Ethan Allen Estimates for Q1 2010 Loss

Tonight, Ethan Allen (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

Comments

[LCM:]

Isn't it amazing that every quarter the CEO, Kathwari has to adjust his numbers to the downside. As someone who worked for EA, I can tell you, this is a terribly managed retailer that is stuck in their own thinking...and devoid of reality. They have way too many "design centers" across the country located within areas where the demographics do not support the pricepoint of EA products. The vast majority of locations have never made a profit within the last 6 years. Yes, that includes the "good times" before the recession. A large portion of their "sales" are actually the corporation selling product for floor display..This product isn't truly being sold to a customer, but the company itself. I predict many more store closing across the country. As for increasing hiring, I'm sure it's out of necessity due to the fact that the stores are running on a truly skeleton staff, no doubt eroding any customer service.

Oct 29 11:36 AM