Monday, KeyBanc Capital upgraded Ethan Allen Interiors Inc. (ETH) shares to Hold from Underweight. The brokerage maintained its 2009 loss per share estimate of $0.31, its 2010 EPS estimate of $0.23, and its 2011 EPS estimate of $0.72.
Analyst Bradley Thomas said that since he initiated coverage on Ethan Allen in April 2009 with his Underweight rating, the company has missed consensus earnings in two consecutive quarters. The stock has increased 13% since the analyst's April 15 initiation, compared to an increase of 30% for the S&P Retail Index over the same period of time.
Generally, the home-related companies that the analyst follow have posted stabilization or improvement in sales trends. However, unlike many other retailers, where the worst revenue growth quarter was third quarter or fourth quarter of 2008, Ethan Allen's fourth quarter, was its worst revenue performance, with sales 41.2% lower than the prior year. Encouragingly, trends in July have improved, with revenue declining by an estimated 20%.
Furthermore, there are a number of other reasons to hope that the analyst has passed an inflection point. Sales and same-store sales comparisons get easier. Management has aggressively taken costs out of the business; with an estimated $120 million in annualized operating expense reduction and $30 million in reduced manufacturing costs.
The analyst noted that headcount is lower by 26% since June 2008, two manufacturing facilities have been consolidated and other expense control efforts have been put into place. The company's operating margin was negative 0.85% for fiscal 2009, down from 14.6% achieved within the prior five years.
While there are a number of factors that could prove to be a headwind for ETH, the analyst believes these factors contribute to a more positive outlook for the company and the stock. Still, it is important to remember that Ethan Allen caters to the middle-to-higher-end consumer, who may be under more pressure.
Furthermore, the analyst said that the company only uses very limited promotions, a strategy that is risky given the bargain-hunting mindset of shoppers today. In fact the analyst believes competitors Pottery Barn, owned by Williams-Sonoma, and Crate and Barrel, privately held, are gaining share from Ethan Allen.
The analyst noted that the company has been in an ongoing operating margin decline for more than a decade as the sales mix has shifted from independent stores to company-owned stores, who generate a lower overall operating margin for the company. Balancing these concerns against an improving consumer and housing backdrop, the analyst believes a Hold rating is appropriate.
Currently, ETH is down $0.14 or 0.90% and trading at $15.36.
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