Ethan Allen Interiors: A Free Cash Flowing Small Cap Overlooked Due To Recession Fears
Ethan Allen Interiors Inc. (NYSE: ETD), a fully integrated furniture company which conducts business primarily in the United States, is a name that has seemingly become overlooked by investors given the recent focus on large and mega-cap names. Ethan Allen operates as an interior design company which manufactures its own furniture and sells its products in its own retail stores.
Ethan Allen’s business was boosted during the pandemic as customers ordered the company’s goods to enhance their stay-at-home lifestyles. Consequently, the company’s annual revenue reached US$845 million for the twelve months ended December 31, 2022, up from US$745 million in calendar 2021. Ethan Allen’s pre-pandemic revenue run rate was in the US$750 million range.
Ethan Allen’s business is quite profitable — its gross margin was 60% in calendar 2022 — and it has cut costs in its business. For example, its furniture segment revenue is up 7% since 2019, yet that division’s headcount is down 24%. In addition, Ethan Allen’s balance sheet is solid. The company had US$85 million of cash as December 31, 2022, and its debt, which totals US$118 million, consists almost entirely of operating lease liabilities.
ETHAN ALLEN INTERIORS INC. – Summary Financial Statistics
| (in thousands of U.S. dollars, except per share data) | 12 Months Ended Dec. 2022 | Dec. 2022 | Sep. 2022 | Jun. 2022 | Mar. 2022 |
| Net Sales | $845,033 | $203,161 | $214,530 | $229,683 | $197,659 |
| Year-Over-Year % Change | 13.3% | -2.4% | 17.7% | 28.8% | 11.7% |
| Gross Margin | 60.0% | 61.0% | 60.4% | 58.2% | 60.4% |
| Operating Income | $151,317 | $37,069 | $39,650 | $41,945 | $32,653 |
| Net Income | $114,279 | $28,166 | $29,880 | $31,519 | $24,714 |
| Diluted EPS | $4.47 | $1.10 | $1.17 | $1.23 | $0.97 |
| Year-Over-Year % Change | 41.0% | 4.8% | 48.1% | 73.2% | 56.5% |
| Operating Cash Flow | $87,594 | $2,517 | $38,422 | $29,355 | $17,300 |
| Capital Expenditures | ($18,130) | ($5,294) | ($3,179) | ($4,356) | ($5,301) |
| Free Cash Flow | $69,464 | ($2,777) | $35,243 | $24,999 | $11,999 |
| Cash – Period End | $85,392 | $85,392 | $92,878 | $109,919 | $95,045 |
| Debt – Period End (Operating Lease Liabilities) | $117,828 | $117,828 | $113,748 | $115,211 | $117,426 |
| Shares Outstanding (Millions) | 25.3 | 25.3 | 25.3 | 25.3 | 25.3 |
Despite the company’s solid fundamentals and balance sheet quality, investors are valuing Ethan Allen at a sharp discount to the average stock. Based on its earnings for the most recently reported twelve months (through December 2022) of US$4.47 per share, Ethan Allen trades at only a 5.9x P/E multiple.
Furthermore, Ethan Allen’s stock has a dividend yield of 4.85% based on its current regular dividend rate of US$0.32 per quarter, a rate that has been increased about 50% over the last four years. The current dividend rate seems well supported by the company’s free cash flow (defined as operating cash flow minus capital expenditures), which was nearly US$70 million, or around US$2.70 per share, in calendar 2022. Important to note: Ethan Allen’s stated dividend yield does not factor in any of the three special dividends aggregating US$2.00 per share paid out over the last two years.
ETHAN ALLEN DIVIDEND DETAILS
| Dividend | Amount |
| Special Per-Share Cash Dividends : | |
| Declared on 8-2-2022 | $0.50 |
| Declared on 8-3-2021 | $0.75 |
| Declared on 4-27-2021 | $0.75 |
| Declared on 11-14-2018 | $1.00 |
| Regular Per-Share Dividends: | |
| Quarterly Dividend Rate as of 4-26-2022 | $0.32 |
| Quarterly Dividend Rate as of 11-30-2021 | $0.29 |
| Quarterly Dividend Rate as of 11-12-2020 | $0.25 |
| Quarterly Dividend Rate as of 7-25-2019 | $0.21 |
Clearly, Ethan Allen investors are concerned about a potential economic slowdown or hard landing which many analysts and economists fear could occur in the second half of 2023 or 2024 and have marked the valuation of the stock down. However, given the degree of the P/E haircut applied to Ethan Allen’s shares as well as its high dividend yield, it certainly is possible the stock is more than discounting a fairly deep recession.
Investors should also factor into their risk-reward calculations the shareholder friendliness of the company’s management and Board, as evidenced by the frequency and magnitudes of recent special dividend declarations. Ethan Allen will report earnings for its March 2023 quarter on April 26.
Ethan Allen Interiors Inc. last traded at US$26.38 on the NYSE.
Information for this briefing was found via Edgar and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.