What is it they say about the power of lowered expectations? Oh yeah: Don't underestimate it.
Lowered expectations (lowered further by the company itself) were good for a 26% surge in the price of Ethan Allen (NYSE: ETH ) shares on Wednesday, when the company reported the following exciting news:
- Second-quarter profits were flat at $0.70 per share, thanks to continued share buybacks. While net profit declined, it was divided up among 9% fewer shares this year than last, allowing the per-share results to remain stable.
- Same-store sales declined by a mere 0.6%.
- And total sales rose 0.8% (to $259.5 million).
Hurray! No, wait. Hurray?
You're both right. It was "hurray!" and "hurray?" at Ethan Allen. Because as lackluster as the news was, it sidestepped the disaster that so many investors have become accustomed to hearing about from furniture-industry peers like Stanley (Nasdaq: STLY ) , Bassett (Nasdaq: BSET ) , Furniture Brands (NYSE: FBN ) , and La-Z-Boy (NYSE: LZB ) .
That said, if I might interject a lone cry of "Boo! Hiss!" in prose form, allow me to point out one significant flaw in the quarter's news. The company burned $69.3 million of its cash off the balance sheet since last year as rising inventories outpaced sales growth. Still, the company remains free cash flow-positive to the tune of $17 million in the first half of fiscal 2008, thanks to its unqualifiedly superb performance last quarter, when it generated $29 million in free cash flow.
Back to the future
But enough about Q2. What you really want to know is what to expect in the second half of this year, right? Well, to do that, you need to read not Ethan Allen's earnings report, but rather the 8-K filing it made with the SEC a couple of weeks back. Therein, you'll learn that the company expects to record about $0.20 to $0.22 in restructuring charges over the next six months. (That's bad.) However, CEO Farooq Kathwari reassures investors that as the firm sells off the store locations being "restructured," much of these charges will be netted out by gains-on-sale over the next 12 to 15 months. (That's good.)
And the best news of all? The cash Ethan Allen gets in exchange for the stores sold, and the inventory liquidated as the stores are consolidated, will free up as much as $12 million, boosting free cash flow even further. Hurray!
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