Yesterday, I had the pleasure of attending the Ethan Allen Interiors Inc. (ETH) analyst/investor conference held at its new design center in NYC. The sprawling space, tucked nicely behind Bloomingdales, was a sign of what's to come for the repositioned Ethan Allen. Over the past twelve-months the company has been hard at work relocating its store (we hasten to utter the word "store" as the CEO is poignant in noting they are "design centers") base to higher traffic generating locations while at the same time implementing a design solutions business model.
We have long been impressed with the ahead of the curve nature of the company, spearheaded by longtime CEO Farooq Kathwari. Manufacturing plants have been aggressively rationalized during his tenure and greater focus continues to be placed on driving efficiencies throughout the organization. The company is now all but complete with its implementation of its design center model, where associates actively provide customers with comprehensive fashion solutions for their home furnishing layouts. Moreover, the company has also entirely refreshed its product line, grouping items in collections that should lead to more robust levels of sales growth once the furniture industry turns around.
We will have much more to say regarding the conference and our thoughts on Ethan Allen shortly. For perspective, we have maintained an underweight recommendation on the stock in recent months, owing to inflationary pressures on the input side and waning demand trends in most markets. Although there are many challenges facing the company, and industry, for the remainder of 2008 and into 2009, we are inclined to believe that Ethan Allen is poised to gain meaningful market share once the down cycle concludes.
At this time, we are still recommending investors to stay clear of the stock pending better visibility into when demand could resurface to a modest degree. But, long-term investors may want to give Ethan Allen a glance as the company sports the following positive business model attributes:
- Competitive advantage of offering consumers not only high value-added products but also exceptional customer service. New design center managers help customers plan the entire layout of their homes, and will even make trips to the home for free.
- Manufacturing footprint is quite lean. The total number of facilities has been reduced from 21 years ago to 9 at the present time.
- New marketing campaign, and those to follow in the future, are very well integrated with the company's repositioned brand message. This should garner strong customer interest in the new Ethan Allen, and help to spark traffic and conversion growth.
- The company has concluded its store relocation initiatives, meaning cash flow trends should strengthen in upcoming years.
- Everyday best pricing model has helped to preserve gross margins during the industry down cycle. As the industry returns to health, and it will, profitability should be that much better leveraged.
Click here for a copy of our latest comprehensive report on Ethan Allen.
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.