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Why Shares of Ethan Allen Interiors Popped and Then Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Ethan Allen Interiors  (NYSE: ETH  ) were adding another level this morning, gaining as much as 16% on a strong fourth-quarter earnings report, but the stock slipped during the course of the trading day, closing down 1%.

So what: The home-furnishings retailer said adjusted earnings per share improved from $0.34 to $0.50 in the quarter, easily beating estimates at $0.40, while revenues increased 9.1%, to $198.8 million, well ahead of the consensus at $192.3 million. CEO Farooq Kathwari credited the leverage of the company's vertical structure for its strong bottom-line results. Still, the stock fell around noon when its earnings call concluded, as investors seemed to fear the increased spending management had promised for the new fiscal year. 

Now what: Kathwari said the current quarter will be a "period of transition" as the company introduces new products and remodels its stores. He also said he expects marketing expenses to increase by 30% in the new year to drive sales of the new products, and said he was "cautiously optimistic" about the brand's "major repositioning." Given Ethan Allen's strong performance in the past quarter, and its recent dividend increase, I'd say management has earned the right to take some risks with the brand. Today's correction seems exaggerated.

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Jeremy Bowman

Fool since 2011. I write about consumer goods, the big picture, and whatever else piques my interest. Follow me on Twitter to see my latest articles, and for commentary on hot topics in retail and the broad market.

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8/27/2015 4:04 PM
ETH $29.82 Down -0.17 -0.57%
Ethan Allen Interi… CAPS Rating: *