EPS of $0.37 decreased by 25.5% from previous year
Gross margin of 61.2%
Net income of 9.61M
"We are, as I mentioned, less impacted due to these tariffs because of the fact that most of our manufacturing, especially in furniture is made in North America." - Farooq Kathwari
Ethan Allen Interiors Inc (ETD) QQ3 2025 Results: Margin Resilience, Tariff Readiness, and Strategic Growth Initiatives
Executive Summary
Ethan Allen delivered a solid QQ3 2025 performance characterized by robust gross margins, disciplined cost management, and positive operating cash flow against a backdrop of macro headwinds. Reported net sales of $142.7 million and a gross margin of 61.2% supported by lower raw material costs, reduced headcount, and a higher average ticket. Operating income reached $10.997 million with an operating margin of 7.71%, while net income came in at $9.605 million and diluted EPS at $0.37–$0.38. The company generated $10.18 million of cash from operations and finished the period with approximately $183 million in cash and investments, alongside a debt position that remains a point of discussion given the balance sheet shows total debt of $122.9 million and net debt of $57.1 million, despite management commentary about no outstanding debt on the call. Management highlighted a resilient balance sheet and ongoing capital discipline, including dividends and capex focused on retail design centers and manufacturing technology.
Overview of QQ3 2025 metrics with YoY and QoQ context where available:
- Revenue: $142.695 million; YoY change -2.54%; QoQ change -9.26%
- Gross Profit: $87.356 million; gross margin 61.2%; Gross profit YoY change -2.62%; QoQ change -7.89%
- Operating Income: $10.997 million; operating margin 7.71%; YoY change -22.38%; QoQ change -39.43%
- Net Income: $9.605 million; net margin 6.73%; YoY change -25.85%; QoQ change -35.98%
- EPS (diluted): $0.37; basic $0.38; YoY EPS change -25.49%; QoQ change -35.59%
- Cash Flow: Operating cash flow $10.18 million; free cash flow $8.20 million; capital expenditure $1.98 million; dividends paid approximately $9.97 million; cash at end of period $66.38 million; total cash and investments circa $183 million; net debt approx. $57.1 million; current ratio 2.29; quick ratio 1.34; cash ratio 0.42.
- Balance Sheet: Total assets $738.74 million; total liabilities $259.59 million; total stockholders’ equity $479.24 million; inventory $150.38 million; accounts receivable not disclosed; short-term debt $27.79 million; long-term debt $95.06 million; inventory turnover 0.368x; days inventory outstanding ~245 days; receivables turnover 19.52x; debt-to-equity ~0.26; P/B ~1.48; P/S ~4.96; dividend yield ~1.41%.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
142.70M
-2.54%
-9.26%
Gross Profit
87.36M
-2.62%
-7.89%
Operating Income
11.00M
-22.38%
-39.43%
Net Income
9.61M
-25.85%
-35.98%
EPS
0.38
-25.49%
-35.59%
Key Financial Ratios
currentRatio
2.29
grossProfitMargin
61.2%
operatingProfitMargin
7.71%
netProfitMargin
6.73%
returnOnAssets
1.3%
returnOnEquity
2%
debtEquityRatio
0.26
operatingCashFlowPerShare
$0.4
freeCashFlowPerShare
$0.32
dividendPayoutRatio
103.8%
priceToBookRatio
1.48
priceEarningsRatio
18.43
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key management takeaways from the QQ3 2025 earnings call:
- Tariff exposure and North American manufacturing: Management emphasized that approximately 75% of furniture is manufactured in North America, with Mexico and Honduras contributing minimal tariff impact. They noted exposure to overseas components (e.g., certain fabrics and accents) is limited, and sourcing partners are cooperating to absorb incremental tariff costs. This supports a relatively favorable price positioning versus peers with higher offshore exposure.
- Demand trends and promotions: Management described softer demand through March, with April softer still, and signs of stabilization in May. They indicated that promotional discounts did not drive traffic in the last quarter; instead, the company plans to maintain current offerings and promotions, emphasizing value rather than aggressive discounting.
- Marketing efficiency and SG&A: Advertising spend was about 3.4% of sales, down from 4.4% year-ago, aided by technology-enabled marketing that improves reach and efficiency. The company intends to continue increasing marketing efficiency rather than higher absolute spend.
- Backlog and capacity discipline: Wholesale backlog was discussed as $54.6 million at March 31, with improvements in lead times and a reduction in undelivered backlog weeks. They highlighted ongoing investments in new design centers and manufacturing technology to enhance service and cost management.
- Strategic initiatives: The call highlighted ongoing product relevance efforts (classic design with modern perspectives), investments in North American manufacturing, and a more integrated retail design center network (e.g., Middleton, WI and Toronto, Canada) to blend interior design services with technology.
We are, as I mentioned, less impacted due to these tariffs because of the fact that most of our manufacturing, especially in furniture is made in North America.
— Farooq Kathwari
We felt that just increasing discounts are not going to do it. So, we're going to maintain our offerings and special promotions that we do without doing anything very special.
— Farooq Kathwari
Forward Guidance
Guidance discussion is qualitative rather than numeric in the QQ3 2025 call. Management indicated:
- Tariffs will continue to be monitored, with a focus on North American production and selective overseas sourcing where feasible to limit cost impact.
- Demand environment remains uncertain but May observations show a modest improvement after softer readings in Q3; promotions will be used judiciously, prioritizing delivering traffic with a sustainable value proposition rather than broad-based discounting.
- Product introductions over the next 12 months are expected to strengthen relevance and drive ticket value. SG&A will continue to optimize efficiency using technology rather than pure spend increases.
- The company will continue to fund capex related to design centers and manufacturing technology within its cash-generative framework while maintaining a prudent capital allocation policy (dividends and selective investments).
- Key factors investors should monitor include: (1) consumer demand trajectory and housing market dynamics, (2) tariff and cross-border cost trends, (3) trajectory of backlog conversion and lead times, (4) progress on new product launches and design-center openings, and (5) SG&A efficiency gains from technology-driven marketing.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
ETD Focus
61.22%
7.71%
2.00%
18.43%
LZB
44.30%
6.74%
2.78%
16.59%
FLXS
22.20%
-4.44%
-2.37%
-12.86%
CRWS
26.10%
7.28%
1.75%
13.09%
BSET
56.20%
0.74%
0.48%
45.56%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
Commercial thesis: Ethan Allen exhibits durable gross margins and positive cash flow, supported by a resilient North American manufacturing footprint and a growing design-center network. The QQ3 2025 results reflect disciplined cost management, backlog stability, and technology-driven marketing improvements that enhance efficiency. Relative valuation appears reasonable given a P/E around 18.4x and a P/S near 4.96x, with a dividend yield of ~1.41%. The primary catalysts include: (1) successful new product introductions and design-center openings, (2) continued improvement in order intake through targeted marketing rather than broad-based discounting, (3) tariff relief and favorable USMCA-related sourcing, and (4) further margin expansion from ongoing cost controls and higher ticket prices.
Risks to consider include: (1) a renewed deterioration in consumer confidence or housing activity, (2) protracted inflationary pressures or tariff dynamics that could erode margins, and (3) competitive intensity and channel mix shifts. Given the balance of risks and the cash-generative profile, a cautious to moderate 'hold' stance is appropriate, with upside potential if demand stabilizes and the company sustains its marketing efficiency gains and product cycle execution.
Key Investment Factors
Growth Potential
Growth drivers include new product introductions over the next 12 months, expanded and modernized design-center network (e.g., Middleton, WI and Toronto), and enhanced marketing via technology-enabled omnichannel campaigns. The 75% North American production base provides a cost and margin resilience advantage, while USMCA relief in Mexico lowers exposure to tariffs. A stable cash generation profile supports ongoing dividends and selective capex.
Profitability Risk
Key risks include macro demand deterioration in the housing market, potential tariff cost pressures if overseas sourcing increases, competitive pricing pressure in a fragmented furniture market, and reliance on a consumer environment sensitive to interest rates and discretionary spending. The balance sheet shows debt exposure consistent with a mid-sized specialty retailer, which could influence leverage metrics if revenue falters.
Financial Position
The company exhibits solid liquidity with cash and investments around $183 million and a current ratio of 2.29. Net debt is reported at approximately $57.1 million, while total debt sits near $122.9 million. The balance sheet supports ongoing dividends and capex, with substantial inventory levels tied to new product introductions and design-center openings. Margins remain robust (gross margin ~61.2%), underscoring efficient cost management and favorable product mix.
SWOT Analysis
Strengths
High gross margin of 61.2% driven by favorable input costs, higher average tickets, and selective mix benefits
Vertical integration with ~75% of furniture produced in North America reduces tariff exposure and supply chain risk
Strong liquidity position with cash and investments around $183 million and robust operating cash flow
Extensive design-network and design talent (189 centers; 500 interior designers) supporting a differentiated customer experience
Technology-enabled marketing and operations driving efficiency and broader reach at lower cost
Weaknesses
Revenue decline YoY (-2.5%) and sequential softness (QoQ -9.3%), signaling sensitivity to macro conditions
Adjusted operating margin decline to 8% from 10% a year ago, indicating pressure on profitability despite cost controls
Debt presence on the balance sheet; management commentary on no outstanding debt contrasts with reported total debt of $122.9 million
Concentration in North American market leaves exposure to domestic housing cycle and discretionary consumer demand
Opportunities
12-month product launch cycle to refresh offerings and sustain ticket growth
Expansion of interior design services and integrated marketing—driving higher conversion and average spend
USMCA and diversified sourcing opportunities to further mitigate tariff exposure and reduce COGS
Backlog optimization and faster throughput from improved lead times and manufacturing efficiencies
Continued expansion of flagship design centers to enhance brand visibility and service levels
Threats
Macroeconomic softness in housing and consumer spend could dampen orders
Tariff volatility and potential escalation in offshore procurement costs
Intense competition from other furniture retailers and online marketplaces
Supply chain disruptions or cost fluctuations in key materials (e.g., upholstery fabrics, wood products)
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