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Ethan Allen Is a High-End Furniture Retailer With a Low-End Stock. Make Room for It.

Ethan Allen Interiors has about 300 stores around the world.

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Iconic American retail brands like Lord & Taylor and J.C. Penney had to seek bankruptcy protection during the pandemic, but a few others managed to thrive. One was


Ethan Allen Interiors
,
a furniture company that started in 1932 and whose stock looks like a bargain at current prices.

At $24.86, Ethan Allen (ticker: ETD) trades for 8.1 times its expected earnings over the next year, below that of competitors like


La-Z-Boy

(LZB), at 8.6 times, and Restoration Hardware parent


RH

(RH), at 15.9. And its dividend yield of 4.6% is more than triple that of the average small-cap. If its valuation grew to the low double-digits, where it regularly traded before the pandemic, Ethan Allen could trade above $30 and return over 25% to investors.

Ethan Allen did seem vulnerable at the start of the pandemic. The company, based in Danbury, Conn., had to close stores and manufacturing plants. And, unlike other furniture brands, its operations were less web-focused. Its online strategy had aimed to direct people to its stores to work with salespeople. That strategy needed to change when lockdowns forced almost all commerce online.

Recent Price:$24.7652-Wk Change: 5.2%Market Value (mil):$6262023E Sales (mil):$7832023E Net Income (mil):$782023E EPS:$3.082023E P/E:8.0Dividend Yield:4.6%

Note: E=estimate. Estimates for fiscal 2023 ending in June.

Source: Bloomberg

To preserve cash, its CEO, Farooq Kathwari, temporarily stopped taking a salary, and other employees took pay cuts of up to 40%. The company even suspended its dividend and buyback plan in the middle of 2020.

Ethan Allen found other ways to reach customers, including using its 3-D digital technology to help people design their homes remotely. It was able to get 60% of its stores in North America up and running less than two months into the pandemic.

In the fiscal year that ended on June 30, 2020, sales fell to $590 million from $747 million the year before. By this June, analysts expect sales to rise to $788 million, the best result for the company since 2016. And its order backlog is up 50% from a year ago. The company reinstated its dividend before the end of 2020 and has since raised it and even twice added a special dividend of 75 cents last year.

Unlike most American furniture retailers, Ethan Allen makes most of its own products, starting at a company-owned sawmill and lumberyard. It owns nine manufacturing facilities in the U.S., Mexico, and Honduras. That gives the company more control over its supply chain, a clear advantage at a time when retailers in various industries are struggling to get products to consumers on time.

The company has still dealt with delays. It sources about 25% of its products from outside facilities, primarily from Asia. But having more control over costs and timing of deliveries has helped the company increase sales.

“Right now, it’s been an advantage in that they don’t have to bring a lot of products from overseas, particularly from Asia,” Telsey Advisory Group analyst Cristina Fernandez tells Barron’s. “So they’ve been able to have a little bit more control of those lead times.” And while raw-materials shortages have hurt the company, its delivery times are improving.

Ethan Allen has about 300 stores around the world. A little over half of them are operated by independent licensees. Beyond just selling furniture, Ethan Allen has embedded itself into the customer decision-making process.

CEO Kathwari considers the company “the leading, if not the largest, interior design company.” That allows associates to sell customers a lot more than a single couch.

Ethan Allen’s business model has been disrupted by the internet and the emergence of lower-cost competitors, from IKEA to


Wayfair

(W). But the company continues to dominate an affluent and traditionalist-minded niche of customers that is unlikely to be wooed by lower-priced options.

The best way to spot the company’s growth is to watch its gross margins, which have expanded to nearly 60% today from under 50% a decade ago. In addition, the company’s board has authorized a buyback program that could reduce its share count by 8%. Earnings, already expected to rise above $3 a share this fiscal year, could climb to $4 without rapid expansion. At that earnings level, a $25 stock price will seem even more anachronistic.

Investors have treated Ethan Allen like that strange inherited love seat in the den. Like any American classic, it deserves a more prominent position.

Write to Avi Salzman at avi.salzman@barrons.com

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