Ethan Allen Chairman: Could Buy Retailer to Boost Brand

April 19, 2002

HIGH POINT, N.C. -(Dow Jones)- Chairman and Chief Executive Farooq Kathwari of Ethan Allen Interiors Inc. (ETH) said his company could acquire a retail chain if a good opportunity arose to help expand the company's brand, particularly outside the U.S.

"If we saw an opportunity to acquire a chain of stores, we would," Kathwari said in an interview Thursday. He said acquisition opportunities in the U.S. aren't as compelling as outside the country because Ethan Allen is already in many markets here. In Europe, however, "I think there are a lot of opportunities."

He said Ethan Allen's strategy of providing interior design consulting and a full range of home furnishings at medium prices isn't widely available in Europe, making such countries as Germany , France , Belgium , Holland and some Scandinavian countries desirable markets.

The company plans to open its first store in the United Kingdom this month under a joint venture with MFI Furniture Group PLC (U.MFI), and two stores in China are slated to open this summer.

Kathwari cautioned he has no current plans for an acquisition, saying, "It may happen, but it is not a major part of the plan."

Kathwari said he sees the opportunity to double his company's business very profitably through internal growth, and that remains his focus rather than satisfying Wall Street's craving for acquisition-fueled expansion. Resisting the temptation of growth-through-acquisition has allowed Ethan Allen "to become awfully good at what we do," he said.

Ethan Allen, Danbury, Conn ., is the most profitable U.S. furniture company, posting operating margins of 15.8% in its latest quarter despite facing a nearly 9% drop in sales among comparable stores and 2.5% drop in wholesale shipments. Through the company's March 31 -ended fiscal third quarter, Ethan Allen earned net income of $60.9 million, or $1.52 a share, on revenue of $657.5 million.

For the fiscal year that ended June 2001 , Ethan Allen generated net income of $84.0 million, or $2.08 a share, excluding items on $904.1 million in revenue. For the calendar year 2001, Et han Allen's sales fell 0.3%. That's better than other U.S. furniture retailers, which saw a 0.9% drop, and manufacturers, which experienced a 10% drop in shipments due to the economy and consumer concerns about it, according to the American Furniture Manufacturers Association.

Internal Growth Is Focus

"Our next objective is to double our business, and we have that opportunity from within," said Kathwari, who is also president of the 314-store chain and manufacturer. "If we didn't have that opportunity ... then I would say, 'Yeah, I've got to do something else.' But I say why should we do something else if we can have the opportunity of doubling from within, which is a very highly profitable way of doing it."

Kathwari believes continually reinventing Ethan Allen is the ticket to meeting his goals of growing revenue 10% and earnings 15% annually on a long-term basis. Kathwari declined to comment specifically on the Thomson Financial/First Call mean estimate among analysts that the company will earn $2.46 a share in fiscal 2003, up 16% from estimated earnings of $2.12 in the current fiscal year.

"Empires have fallen, countries have fallen, let alone companies," he said. Reinvention "is to stop the natural decay that takes place when you grow."

Industry analysts credit Kathwari for helping transform Ethan Allen over the last several years from a somewhat stodgy retailer of Colonial-styled, higher priced furniture to one carrying sleek, stylish lines at slightly lower prices in order to attract more shoppers from younger age groups.

Kathwari said with that reinvention complete, Ethan Allen will start over. While it's possible the company won't see a major impact this year, Kathwari is scrutinizing every area for change.

The first step is get consumers to think of Ethan Allen as the authority on decorating, Kathwari said. The company will do that by using its advertising to push the design services Ethan Allen's consultants offer.

Kathwari expects to spend about the same amount on advertising as this year, about $70 million, he said, but the focus of catalogs and ads will be more on decorating services than products or financing options, such as an installment loan program Ethan Allen started two years ago through an agreement with MBNA Corp. (KRB).

That program, called Simple Finance, has an average ticket that is 40% higher than tickets using other forms of credit, and MBNA has approved some $700 million in lines of credit since it began. Kathwari declined to say what percentage of lines of credit were actually tapped, but he described the conversion rate as "very good."

Ethan Allen is also looking to reinvent its stores - inside and out, even though it recently did both."The store is a billboard, and we don't want to keep the billboard too long," Kathwari said. The company's independent retailers, who operate some 212 of Ethan Allen's 314 stores, are generally in favor of making changes, despite the costs they'll incur, he said.

On the manufacturing side, Kathwari has chosen two plants in North Carolina and Vermont as crucibles for finding ways to become as competitive as their Chinese counterparts. Analysts during the company's latest quarterly conference call praised Kathwari for Ethan Allen's manufacturing efficiency gains during this recession, but Kathwari wrinkles his nose at any suggestion the company is efficient enough. "No, we have to take it to the next level of efficiency," he said.

Also, the company will introduce in the next year its first furniture for children in an effort to reach more potential customers, he said.

As for the chain's U.S. expansion, Kathwari has said he plans to open 10 to 12 stores annually, including some relocations. Ethan Allen is far from the saturation point in the U.S. , although Kathwari said Thursday he doesn't have an estimate of how many stores could be supported. Rather, he is focused on increasing Ethan Allen's share of spending by each household earning at least $ 50,000 in a particular market.

The company average is about $48 per targeted household, but Kathwari wants that figure to be anywhere from $60 to $100. In some markets, stores are generating the equivalent of $120 per targeted household.

"Even in some markets where they're doing $120 (per household), we're not saturated," Kathwari said

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