Retail
The global economy overall is mending from the 2008 crisis. Many key metrics over the past 5 years have improved materially relative to the crisis years. The S&P 500, for instance, after reaching its low in 2009 has recovered more than 150%. The financial markets are now more stable through the enactment of various legislation including Dodd-Frank and Basel III. Even unemployment has rebounded steadily as consumers are more confident of their future prospects. These trends bode very well for the furniture retailing industry which was devastated by the financial crisis. As such, I believe many companies within this sector are poised for a strong and sustained recovery. Of the many companies and competitors within the sector, Ethan Allen Interiors, Inc. is best positioned for sustainable long-term growth (Gray, 1977).
To begin, the company is fortunate enough to have a strong economic tailwind behind it. The housing sector, which is indirectly responsible for a majority of the company's revenue, was devastated in 2008. As such the company suffered dramatic loses in regards to many of the more common financial metrics. Below is a chart indicated revenue and earnings per share for the company over the past 10 years. Notice in both fiscal year 2009 and 2010 were met with negative operating margin and earnings per share. In short, the company lost money in both years due to macroeconomic conditions prevailing at the time. The business is heavily cyclical, and dependent on both consumer sentiments and disposable income to capture large profits (Robert, 1988).
Chart 1
2004-06
2005-06
2006-06
2007-06
2008-06
2009-06
2010-06
2011-06
2012-06
2013-06
Revenue USD Mil
1,066
1,005
Gross Margin %
48.3
48.6
50.7
52.4
53.7
51.5
47.5
51.5
53.5
54.6
Operating Income USD Mil
96
-73
-12
32
50
60
Operating Margin %
13.4
13.6
13.4
11.1
9.8
-10.8
-2
4.7
6.8
8.3
Net Income USD Mil
80
79
86
69
58
-53
-44
29
50
32
Earnings Per Share USD
2.1
2.19
2.51
2.15
1.97
-1.83
-1.53
1.01
1.71
1.11
As the recovery continues to take shape, I believe Ethan Allen can regain much of the momentum of the 2004- 2007 period. During this period, the company had strong earnings per share growth, coupled with strong returns on both assets and equity. In fact, prior to the crisis, the company was an industry leader in both categories. Chart 2 indicates the firms ROA, ROE and Return on invested capital during the past 10 years. In addition the chart displays critical information regarding margins and asset turnover, both of which are critical to proper functioning of the furniture industry. Notice once again, the substantial decline in the years of 2009 and 2010. The company now has rebounded very promisingly from those devastating years. I believe the company is poised for still further growth.
Chart 2
Profitability
2004-06
2005-06
2006-06
2007-06
2008-06
2009-06
2010-06
2011-06
2012-06
2013-06
Net Margin %
8.41
8.36
8.03
6.89
5.93
-7.81
-7.51
4.31
6.81
4.45
Asset Turnover (Average)
1.38
1.48
1.48
1.25
1.25
0.96
0.92
1.08
1.15
1.16
Return on Assets %
11.59
12.37
11.9
8.57
7.42
-7.48
-6.93
4.64
7.81
5.15
Financial Leverage (Average)
1.42
1.45
1.95
1.96
2.03
2.11
2.44
2.23
2
1.85
Return on Equity %
16.09
17.73
20.12
16.74
14.79
-15.46
-15.7
10.83
16.47
9.9
Return on Invested Capital %
15.71
17.21
14.96
10.03
8.51
-11.09
-10.73
4.26
9.22
5.49
The reason for the bullish sentiments regarding Ethan Allen is rooted primarily on the company's strategy and how it intends to leverage strong future trends. First, the housing recovery is still moving forward at a steady, albeit tepid pace. The macro environment is well poised for an economic recovery in regards to housing. Housing is unique as it is the foundation for the entire economy in many respects. Not only do individuals need to purchase a house, but they also need to purchase furniture, bedroom sets, dining sets, appliances and so forth. As such, as consumers continue to purchase available inventory, Ethan Allen will indirectly benefit. This is particularly true as the company now has a profound focus on millennial that are increasing their purchasing power at a rate that directly corresponds to the low interest rate environment. As such, many young adults are entering the workforce at precisely the right time in regards to affordability. As such, home purchases are very attractive to millennial workers looking to purchase their first home. This will likely bode well for Ethan Allen who is heavily dependent on housing to foster growth. Another look at Chart 2 indicates this. The company had its strongest ROE figures during the best years of the housing cycle. The company had ROE's from the mid...
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