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Report
Ethan Allen Interiors
(ETH)
RECOMMENDATION:
HOLD
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
Background
Ethan Allen Inc. is a leading manufacturer and retailer of
quality home furnishings in the following product
categories:
1.)
2.)
3.)
4.)
Product
Description
Case Goods
Upholstered Products
Home Accessories
Indoor/Outdoor
Wood Furnishings
Sofas, recliners, etc.
Clocks, area rugs, etc.
Patio furniture, deck chairs
% of Sales
•The Company produces or assembles 80% of its products at
its 21 manufacturing facilities and 3 sawmills.
57%
28%
14%
1%
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 NeoClassic styling)
Casual
(contemporary
design elements)
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
Important Shareholders
All Directors except CEO
Farooq Kathwari (CEO)
1.2%
11.5%
Number of Institutions
363
Percent of total
74%
Institutional Holdings
% SHO
% Chg
Bamco Inc.
11.7%
2.6%
American Express Financial
5.7%
2.5%
Thomson Horstmann
3.9%
-1.0%
Lazard Freres & Co.
3.1%
5.3%
Citigroup
2.5%
-9.4%
Mellon Bank
2.4%
4.1%
Purchases
Sales
Net
3,486,174
6,069,217
(2,583,043)
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
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
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
Present Economy
Housing Activity Slowing
-Result of Fed’s tightening
General Consensus:
ECONOMIC SLOWDOWN
Hard Landing or Soft Landing?
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/E’s are low, and near the low of historical ranges
Firm Ratios and Comparisons
(10/5/00)
P/E
P/E Low(last 5 years
P/E High(last 5 years)
1 yr. Rev GR.
5 yr. Rev Gr.
1 yr. EPS Gr.
5 yr. EPS Gr.
Gross Margin(5 yr ave)
Op. Margin(5 yr ave)
Net Margin(5 yr ave)
Current Ratio
Debt/Equity
ROA
ROE
Revenue
Net Income
2000 EPS
ETH
FBN
LZB
12.86
7.22
9.40
10.82
6.66
8.82
28.76 27.92 20.56
12.32
12.45
14.45
33.52
44.69
15.61
9.18
2.18
0.05
17.45
24.34
$856,171
$90,570
$
2.20
4.53
14.25
11.15
31.58
28.06
8.54
4.09
4.49
0.94
8.95
24.14
41.30
15.10
13.40
18.94
25.74
7.63
4.68
3.26
0.38
9.59
16.52
STLY
8.94
7.09
18.42
BSET Industry S&P500
9.57
13.60
34.17
NA
11.07
16.86
NA
33.41
48.95
10.16 (3.55)
7.51 (5.03)
31.96 (1.46)
35.62 (3.85)
23.99 16.81
9.95 (0.34)
5.03
2.58
2.20
3.28
0.49
0.20
12.14
5.10
26.41
6.89
16.85
12.58
1.79
24.29
34.23
11.98
7.17
1.85
0.69
8.68
20.61
22.77
21.08
25.64
21.84
48.39
16.84
10.21
1.76
0.87
10.05
22.45
5 Year Stock Price
Financials
Moving on to Excel
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
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
Summary (cont’d)
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 S&P 500 (20 year average is
15% discount)
Future looks stable with growth potential and sustainability in
the long term
RECOMMENDATION:
Hold shares

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