Ethan Allen Takes a Seat

It was just about 10 years ago that the series Picket Fences gave me my first-ever television staff writing job. The money I earned allowed me to go hog-wild and purchase real adult furniture for the first time in my life.

After tromping through every furniture store in Los Angeles, I kept returning to the one store that repeatedly seemed to have the furnishings that fit my taste at a price I could afford. That store was Ethan Allen (NYSE: ETH  ) , and assisted by my (regrettably, alas) platonic gal-pal Larissa and an excellent saleswoman, I spent several thousand bucks decking out my apartment with the company's outstanding cherry wood furniture.

Ethan Allen makes great stuff. Not to take anything away from competitors like Hooker Furniture (Nasdaq: HOFT  ) , Stanley Furniture (Nasdaq: STLY  ) , La-Z-Boy (NYSE: LZB  ) , or Bombay (NYSE: BBA  ) -- I just love Ethan Allen's stuff. It has its own mills and its own warehouses. Everything is constructed of solid wood (no Ikea particle board here) and has withstood the test of time. I loved my furniture and shopping experience so much that I decided to do some research. I found out that the company was in the early stages of a turnaround led by a smart CEO named M. Farooq Kathwari. So I bought stock and nailed a solid five-bagger over the next few years. My timing was great, because since then, Ethan Allen's stock has returned only 66%. Then again, the S&P lost 27% over that period, so I can hardly fault the company.

Kathwari is still at the helm, but something must have happened over at Ethan Allen. You'd think that in the midst of this insane housing boom, the stock would have shot to the moon over the past five years. Unfortunately, recent quarterly earnings showed a decrease of about 5% in sales, 6% in comps, and 22% in both net and operating income. Over the past three years, the company has changed 70% of its product line and added 40 stores. It has also recently started buying back stock -- $60 million worth in the past nine months.

The CEO clearly has a strategy, but for whatever reason, it isn't being reflected in either sales or the stock price. It's too bad, really. The company still makes excellent products. But investors should note that sometimes, no matter how terrific a product is, retail will be retail --and that means a business is at the mercy of its customer's fickle tastes.

So, is Ethan Allen a value buy? Arguments are flying from both directions. The stock has taken a 30% hit over the past year, and that may fully discount the problems I've pointed out, including an expected earnings decrease this year. However, the more adventurous among you will note that Ethan Allen trades at a P/E of 14 vs. an analyst-projected 12% annual earnings growth rate over the next five years.

Build on this article by checking out:

Fool contributor Lawrence Meyers always checks out Ethan Allen before any other furniture store, but he owns none of the stocks mentioned.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 491835, ~/Articles/ArticleHandler.aspx, 10/25/2014 1:04:42 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement