Foolish Forecast: Will Ethan Allen Crack?

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For four quarters running, Ethan Allen (NYSE: ETH) has beaten not just its analysts' best profits guesses, but its year-previous records as well. On Monday, the analysts are guessing that this furniture maker's streak will come to an end as it reports a lower year-over-year profit for fiscal Q1 2007.

What analysts say:

• Buy, sell, or waffle? Ten analysts follow Ethan Allen. Of these, five rate the stock a buy, four a hold, and there's one sell.
• Revenues. On average, they expect to see quarterly sales fall 2% to $246.6 million.
• Earnings. And profits drop a penny to $0.56 per share.

What management says:
In a Sept. 25 press release, Ethan Allen CEO Farooq Kathwari advised investors to expect $240 million to $245 million in Q1 revenues (this quarter). Assuming he knows what he's talking about, that prediction would appear to set Ethan Allen up for a fall, as the firm aims to miss consensus sales targets.

Then again, does Kathwari really know what he's talking about? It's not a rhetorical question -- he suggests it himself in the press release, warning that one year ago, the firm began an "initiative to reduce the lead time in filling customer orders. The faster backlog turnover afforded by this initiative reduces the forward visibility of delivered sales, subjecting our business to more volatility as demand levels fluctuate."

What management does:
Somehow, as the rest of the U.S. furniture industry collapsed into splinters, Ethan Allen has kept its business growing. Over the last 18 months, the firm's rolling gross margin has expanded 270 basis points, helping keep its operating and net margins pretty steady.

Margins	3/05	6/05	9/05	12/05	3/06	6/06
Gross	48%	48.6%	49.2%	49.7%	50.3%	50.7%
Op.	13.8%	13.6%	13.4%	13.8%	13.9%	13.8%
Net	7.7%	8.4%	8%	8.1%	8%	8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Can I harp on a theme here for a bit? Some time ago, fellow Fool Nathan Parmelee chastised Ethan Allen (a chastisement I echoed) for breaking with tradition and predicting its quarterly earnings for fiscal Q3 2006. Said Nathan: "It simply doesn't work well to provide guidance during good times and withhold it during the bad. And when it's all said and done, I'm always more happy to see companies abstain from the guidance game altogether."

Of course, Ethan Allen then went on to beat its own guidance -- but that just illustrates the point I want to make. According to Kathwari's own words in the press release described above, fiscal Q1 2006 marked a reduction in the company's ability to accurately predict future sales. Kathwari now seems to be using that lack of visibility to set up an excuse against the risk of an earnings miss on Monday. But that begs the question: Why did the company choose to begin forecasting its performance three months after a change in its business that made such forecasting less accurate?

Doesn't make much sense to me. Perhaps management here should stick to making furniture, and leave the inaccurate predictions to the analysts.

Competitors:

• Bassett (Nasdaq: BSET)
• Hooker (Nasdaq: HOFT)
• Herman Miller (Nasdaq: MLHR)
• Design Within Reach (Nasdaq: DWRI)
• La-Z-Boy (NYSE: LZB)
• Stanley (Nasdaq: STLY)

And how are these competitors faring? Find out in:

• Stanley Furniture: Fool by Numbers
• Hooker's Stinky Perfume
• Furniture Struggles With Its Brands

Hooker and Stanley (sounds like a law firm) are both Hidden Gems recommendations. La-Z-Boy is an Income Investor recommendation. Check out these or any of our other investing newsletters.

Fool contributor Rich Smith does not own shares of any company named above.