Furniture maker and retailer Ethan Allen (NYSE: ETH ) delivered its owners a mixed bag of earnings potpourri on Wednesday. On the one hand, the company missed both analysts' earnings target and their revenue goal -- the latter by a whopping 5%. On the other hand, Ethan Allen gave furniture investors a much-needed shot of confidence when CEO Farooq Kathwari termed analysts' estimates for the current quarter "within reach."
Briefly, here's how the quarter went:
- As expected, sales declined year over year. Only the magnitude of the decline -- nearly 7% -- was unexpected.
- Profits, too, came in a bit short of Wall Street estimates, down 9% year over year.
But it could have been worse. When bricks-and-mortar retailers lose sales, they have, well, fewer sales among which to spread their high fixed costs. So ordinarily, a sales decline of "X" is expected to yield a profits decline of perhaps several times X. That didn't happen at Ethan Allen this quarter, apparently because the company walked a precarious balance between holding the line on profits and moving inventory at something higher than fire-sale prices.
Don't get me wrong -- margins did decline. In fact, operating margins fell by a good 180 basis points versus fiscal Q2 of last year, and bottom-line profitability shed 70 basis points, landing with a thud at 8.5%. But the damage was mitigated by an improvement on the gross margin on the top line -- from 50.7% last year to an even 52% this year.
Meanwhile, Ethan Allen did exactly what I'd hoped it would do, as mentioned in Monday's Foolish Forecast. It continued improving bill collection -- accounts receivable fell 34% year over year -- and inventory was down by 8%, even faster than sales were falling. Between this wonder of working-capital management and its ability to hold the line on pricing, Ethan Allen actually managed to increase its cash from operations despite selling fewer goods.
Things aren't perfect at Ethan Allen, of course. Spending more on capital improvements this quarter than last, the company saw its free cash flow dwindle to almost nothing. But things could have gone much worse. Management deserves kudos here, and its stock deserves the 2% price hike it's received.
What did we look for under Ethan Allen's cushions last quarter, and what did we see? Find out in:
How is Ethan Allen hanging together in Motley Fool CAPS? See for yourself, and add your own opinion for free at our new investing-intelligence community.
Fool contributor Rich Smith does not own shares of any company named above.
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