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Why Ethan Allen Interiors Stock Dropped 14% in July

By John Ballard – Aug 9, 2021 at 10:27AM

Key Points

  • A rotation into growth stocks seems to have pulled the stock down last month.
  • The company released preliminary results in late July showing continued momentum in its recovery from the pandemic.

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The company is seeing healthy sales trends, but investors decided to chase other opportunities.

What happened

Shares of Ethan Allen Interiors (ETD 0.91%) fell 13.9% last month, according to data provided by S&P Global Market Intelligence. On July 22, the company released preliminary figures for the fiscal fourth quarter, showing better-than-expected net sales and adjusted earnings per share. The update caused a small bump in the stock's performance, but the shares still finished the month down. 

At the start of the year, investors rotated out of growth stocks and into value stocks, which benefited investors in Ethan Allen. But in June, investors started to rotate back into growth stocks, which correlates with the recent sell-off.

ETH Total Return Level Chart

ETH Total Return Level data by YCharts

So what

Investors can chalk up the recent decline to short-term noise. Ethan Allen is recovering well from the pandemic. The company furloughed approximately 70% of its global workforce last year. Now, most of its retail workforce is back. In April, during the fiscal third-quarter earnings report, management reported its manufacturing workforce was above pre-pandemic levels. 

Ethan Allen's fiscal fourth-quarter business update shows further progress to return to normal business operations. Net sales jumped 95% year over year to reach $178 million, with adjusted EPS expected to land between $0.72 to $0.74 for the quarter. That's a marked improvement over the year-ago adjusted EPS loss of $0.15. 

Retail segment written orders were up 105% over the year-ago quarter, when business was mostly shut down. The company also seems comfortable with its financial position, since it recently paid a special cash dividend and regular quarterly dividend of $31.7 million during the quarter. 

A home owner laying a matching blanket on a sofa in a living room.

Image source: Getty Images.

Now what

In a statement, CEO Farooq Kathwari cited near-term headwinds but also expressed optimism about the company's momentum in the near term.

"While we continue to work through raw material shortages and managing the increased cost of shipping, we believe we have a great opportunity to continue our growth in sales and profitability due to our strong retail network, the personal service of our interior design professionals increasingly combined with technology, our unique vertical integration whereby 75% of products are made in our North American manufacturing workshops, and our strong logistics network of national distribution centers and retail home delivery centers delivering product with white glove service to our clients' homes," he said.

Analysts expect Ethan Allen to post full-year revenue growth of 16.2% before growing 9.1% in fiscal 2022 (which ends in June). The recent sell-off makes the stock attractive as a reopening play, which now sports a cheap forward price-to-earnings ratio of 9.8 with an above-average dividend yield of 4% at current price levels. 

Investors should tune in for the company's fiscal Q4 earnings call on Monday, Aug. 9, after the market closes, where management should provide investors more details about current business trends. 

John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Ethan Allen Interiors Stock Quote
Ethan Allen Interiors
$26.68 (0.91%) $0.24

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