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Ethan Allen Interiors (ETH)

Ethan Allen Interiors (ETH). RECOMMENDATION: HOLD. Investment Thesis. Broad product range in casual and classical styles appeals to a larger customer base Vertical integration allows superior manufacturing and market efficiency

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Ethan Allen Interiors (ETH)

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  1. Ethan Allen Interiors (ETH) RECOMMENDATION: HOLD

  2. Investment Thesis • Broad product range in casual and classical styles appeals to a larger customer base • Vertical integration allows superior manufacturing and market efficiency • Uniform pricing, national advertising, and exclusive distribution system uniquely positions ETH to sell its products online • Strong balance sheet and free cash flow should allow for further growth through acquisitions, expansion, and share repurchases • Customer service focus allows for higher margins • Well-seasoned management with immense industry experience

  3. Background • Ethan Allen Inc. is a leading manufacturer and retailer of quality home furnishings in the following product categories: • The Company produces or assembles 80% of its products at its 21 manufacturing facilities and 3 sawmills.

  4. Store Network 305 Ethan Allen Stores 82 are owned by the Company 203 are independently owned Complete room Displays Style 2 categories Classic, which includes English 18th Century and 19th century Neo-Classic styling) Casual (contemporary design elements) Background

  5. Background • Ethan Allen's policy is to sell its products at the same delivered cost to all dealers nationwide, regardless of their shipping point. • The adoption of this policy has discouraged dealers from carrying significant inventory in their own warehouses. As a result, Ethan Allen obtains accurate information regarding sales to dealers to better plan production runs and manage inventory. • Having one national landed cost has permitted Ethan Allen to provide one national suggested retail price which, in turn, helps facilitate a national advertising program. Ethan Allen television advertising is aired approximately 27 weeks per year

  6. Important Shareholders

  7. Stage 2 (1999 and onward) • Goal is to make the shopping experience of customers as enjoyable and effortless as possible - New contemporary store façade - Plan is to relocate or add 10 –15 stores per year - Company owned stores represent 27% of total -New product line focuses on two different lifestyles, casual and classic (compared to four product categories in the past) - Simple finance plan - Regular sales events spread over the four quarters - Clicks and mortar

  8. Economic Environment • Furniture industry has benefited from a strong economy. • -Rising Income Levels • -Family net worth has jumped 18 %, or from $60,900 to $71,600 in past five years • -Consumer Confidence • -Wealth effect of booming equity market • -49% of U.S. families hold stock, up from 32% in 1990

  9. Economic Environment Furniture industry has benefited from a strong economy -Favorable Demographics -Baby boomers are reaching their peak earning and furniture spending years -Record Home Sales -A record 66.8% of American households owned their homes at the end of 1999

  10. Present Economy Housing Activity Slowing -Result of Fed’s tightening General Consensus: ECONOMIC SLOWDOWN Hard Landing or Soft Landing?

  11. Why Be Bullish on Furniture & Ethan Allen • Recent strength in housing should still sustain furniture demand -12 to 18 month lag between purchasing a house and furnishing the interior • Expect furniture companies to continue to report strong results - Healthy home sales levels and high consumer confidence • Furniture stocks undervalued by association with housing & economy -Furniture P/E’s are low, and near the low of historical ranges

  12. 5 Year Stock Price

  13. Financials • Moving on to Excel

  14. Word on the Street • First Union Securities has a buy rating on ETH with an estimated 2001 EPS of $2.40 and a 12 mo. price target of $30 (12.5x) • Sun Trust Equitable Securities has a buy rating on ETH with an estimated 2001 EPS of $2.43 • UBS Warburg has a buy rating on ETH with an estimated 2001 EPS of $2.35 and a 12 mo. price target of $38 (16x) • Robertson Stephens has a buy rating on ETH with an estimated EPS of $2.44

  15. Summary • Increase in EPS since 1991 (20 consecutive quarters with significant increase in sales and EPS) • Overall performing better than industry and peers with higher profit margins • Furniture demand is much less cyclical than new housing which is not currently being realized • Current furniture P/Es are shrinking and are at the low end of their historical ranges

  16. Summary (cont’d) • Stock price has unfairly been beaten (P/E to EPS growth ~ 1.0; broke through 100 and 200 moving day averages; below P/E high of 27 with current P/E at 12) • Trading at 75% P/E discount to S&P 500 (20 year average is 15% discount) • Future looks stable with growth potential and sustainability in the long term RECOMMENDATION: Hold shares

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