Ethan Allen's Profitability Forecast Seems Premature
On the surface, it seems like exciting news: A big player in one of retail's most notoriously difficult, recession-impacted categories -- fine furniture -- forecasts it's only six months away from seeing profits again! Sounds like the economy is humming, judging from Ethan Allen CEO Farooq Kathwari's pronouncement at the Reuters Consumer and Retail Summit in New York, which wraps tomorrow.
But hold on there a minute. It's hard to see how that prediction can come true, given the company's disappointing recent performance. And if the company does see black ink, it'll be through cost-cutting, not booming sales. A look at Ethan Allen's recent financial statements reveals sales have plummeted in the past nine months. They're down roughly one-third, from $332 million in the first three quarters of 2009 to merely $224 million. That's not a little dip -- that's nothing short of a sales implosion. More troubling, the shrink in the most recent quarter is even worse, down by nearly half, from $141 million to $75 million. All I can say is... yow.
Yes, the company has cut its losses substantially, from $36 million at this point in '09 to $18 million in the first three quarters of this year. But much of the progress comes from unsexy moves that aren't related to operations, such as the company's tax bill being $7 million less in the most recent quarter. In March, Ethan Allen also reported its order rate had slowed. Need I say that's not a good sign?
In retail, you can cut costs all you want, but if sales keep going down, you're going to be in deep trouble. The asset de-leveraging that happens as sales shrink -- especially for a company with big, fixed retail lease costs such as Ethan Allen -- is often swift and deadly. You pay the same rent on 284 furniture stores, and you still have to staff the stores and keep them full of inventory (which was up in the most recent quarter). Write that off against one-third fewer sales, and you have an equation that quickly starts to make no economic sense.
At the same time, smaller orders mean fewer vendor discounts. Some costs escalate as a business gets smaller. In all, it doesn't sound like a recipe for profits.
On the plus side, the company seems to be getting smart about its real estate. Its newest store, opened in Paducah, Ky., is just 6,000 square feet, reflecting the smaller size of the market, as compared with its 30,000-square-foot Manhattan store.
But a return to profitability seems far from a sure thing for Ethan Allen in the near term. The company might have a better shot at seeing that black ink if managers spent more time trying to figure out how to attract new customers to the staid, 78-year-old brand, and less time predicting rainbows and sunshine just around the corner.
Photo via Flickr user MACSURAK