Three months ago, Ethan Allen (NYSE:ETH) broke a four-quarter-long streak of beating both analysts' profits estimates and its own prior-year performance. On Wednesday, the firm tries to plump the pillows on its past expectations-beating ways with a report on fiscal Q2 2007 results.

What analysts say:

  • Buy, sell, or waffle? Nine analysts follow Ethan Allen. Of these, four rate the stock a buy, four more a hold, and one a sell.
  • Revenues. On average, they expect to see quarterly sales fall 2% to $271.5 million.
  • Earnings. Profits are predicted to fall 8% to $0.71 per share.

What management says:
To mute investors' disappointment with Ethan Allen's fiscal Q1 2007 results, CEO Farooq Kathwari offered up two bones. First, the prospect that the firm would continue buying back shares, potentially up to 8% of the total outstanding. And second, an observation that Ethan Allen "saw positive trends in September" sales. Farooq noted, however, that "the retail environment remains difficult," and so promised to update investors "in the coming weeks in order to report whether we believe the trends experienced in September are sustainable throughout the second quarter."

A dozen weeks later, this Fool is still waiting for that update. There's no sign of it among the firm's filings with the SEC. Nor is there any record of an update on Ethan Allen's own website -- with the possible exception of a Nov. 8 posting announcing that Kathwari intended to present at a UBS Building & Building Products CEO Investor Conference in New York. If that's where the update took place, though, it would have been nice if Ethan Allen had shared the news with the shareholders who weren't in attendance.

What management does:
However the post-September trends turn out, at last report, the same industrywide downturn that's been ruining the finish on its competitors' performance finally caught up with Ethan Allen last quarter. Despite a continuing expansion in gross margins, the firm's selling, general, and administrative expenditures tripled the rate of sales growth over the last two quarters, sending rolling operating and net margins tumbling.

Margins %

6/05

9/05

12/05

3/06

6/06

9/06

Gross

48.6

49.2

49.7

50.3

50.7

51.1

Op.

13.6

13.4

13.8

13.7

13.8

13.5

Net

8.4

8.0

8.1

8.0

8.0

7.3
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
While margins have hit a speed bump, however, you have to admire the way Ethan Allen manages its working capital. With sales growth averaging 4% year over year in the last two quarters, we'd have been happy to see the firm hold accounts receivable and inventory growth to similar single-digit numbers. Instead, Ethan Allen has reduced A/R by an incredible 20%, and drawn down inventories by 2%.

If Ethan Allen can keep up that kind of performance on the balance sheet on Wednesday, I think investors should be able to forgive a little margin contraction on the income statement.

Competitors:

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

What did we look for under Ethan Allen's cushions last quarter, and what did we find?:

Hooker and Stanley are both Hidden Gems recommendations, while La-Z-Boy is an Income Investor selection. Pull up a chair and take a free 30-day trial to any of our Foolish newsletters.

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