Home furnishings company Ethan Allen (ETH 28.40, -2.85) reported its fiscal third quarter results after yesterday's close. They were disappointing. The company had plenty to share in its report, yet it made an alarming comment that summed up the challenging nature of the business environment right now for many brick-and-mortar retailers and influenced its disappointing results.
The alarming comment was this: "customer expectations of higher discounting contributed to lowering sales."
Such expectations are the bane of any business, as they point to a deflationary mindset that makes it increasingly challenging to regain pricing power.
Those consumer expectations were undoubtedly fueled by past promotional activity and what we would allude to as "situational awareness."
The business press has been littered with reports discussing the travails of the retailers, which have revolved around the rise of competition from online competitors, namely Amazon (AMZN), which provide price transparency and often lower prices and free shipping. Companies like Wayfair (W) also provide some direct competition for Ethan Allen.
Ethan Allen faces a serious challenge in changing the mindset of its customers, whose inclination to wait for more discounting fueled a 5.8% decline in third quarter consolidated net sales of $180.5 million and an 8.2% decline in comparable store sales for Ethan Allen's retail segment.
To be fair, Ethan Allen faced a tough comparison to the year-ago period when consolidated net sales increased 10% and comparable store sales for the retail segment increased 18.6%. Nevertheless, there was more to it than just tough comparisons.
Management placed some blame on the uncertain political environment, which seems to be a pretty convenient excuse at this point in time.
Ethan Allen's gross margin rate contracted 300 basis points to 52.5% of sales. That included a charge for an inventory write-down it took as part of a deliberate effort to reduce clearance and discontinued inventory. Excluding the charge, the gross margin rate was 56.0%.
On an adjusted basis, Ethan Allen's operating margin rate fell to 5.7% of sales from 8.2% in the same period a year ago. The loss of sales leverage led to a 32% decline in adjusted diluted earnings per share of $0.23, which came up shy of analysts' average expectation.
Notwithstanding the fiscal third quarter challenges, Ethan Allen said it believes it is well-positioned to grow with many initiatives that include refreshed and relevant product offerings, increased advertising, a strengthened business network, and investments in technology. Notably, it will be strengthening its distribution channels, which includes a collaboration with Amazon that will be started this summer.
The company, therefore, feels pretty good it is on the right track. Now, it just needs the operating results to convince its investors who, based on today's price action, don't have the same view of things.