Meet the Street: Home Is Where the Spending Is

The CEO of furniture store chain Ethan Allen explains how Sept. 11 actually has <I>helped</I> his company's sales.
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Instead of being hurt by the terrorist attacks of Sept. 11, Ethan Allen's CEO says his company, a chain of high-end furniture and home furnishings stores, actually has benefited.


Farooq Kathwari,
Chairman & Chief Executive Officer,
Ethan Allen

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That's because the phenomenon of "cocooning," or spending more time at home after that fateful day, has led Americans to spend more on items for their homes, says Farooq Kathwari, the company's president, chairman and chief executive officer.

Kathwari talks about how his 67-year-old company also has been benefiting from other trends that have led Americans to focus on their homes, as well as his outlook for the holiday season.

TSC: Ethan Allen posted first-quarter results about a month ago. What were the most important details of those results, and how has your company been impacted by the events of Sept. 11 and thereafter?

Kathwari: For the first quarter ended Sept. 30, I believe we did well by having about the same sales as last year; we were down about 2%. Our earnings of 42 cents per share were slightly above the estimates on Wall Street. Again, we held up well. Our earnings, our operating margins are still among the highest in the industry, and our cash flow is decent.

Sept. 11 did impact us. In the first couple of weeks, traffic in our stores had substantially decreased. Since then we have seen a steady increase of people coming back. At this stage, people are going back to their normal lives -- they have to. And they are coming into our stores.

The interesting thing is that people are more focused on the home. Traveling has decreased. In tough times, home and households provide a haven. Of the more than 10,000 employees at Ethan Allen, we have over 3,000 design consultants working in more than 300 stores. A great deal of our business comes when they make a house call, which means they develop a relationship with a client. Taking a customer and turning them into a client is really a competitive advantage and, I would say, a secret of our business.

During the past couple of weeks, we have seen that people are interested in wanting to work with our design consultants. They are inviting them to their homes, which I believe is a good sign.

TSC: Sales down 2% in the first quarter from a year ago is actually very decent performance, given the rough economy we are now in. But was that really close to your guidance?

Kathwari:

Our guidance was that we could be down by 5%, so we did better than the guidance.

TSC: In terms of this cocooning phenomenon, do you expect this trend to continue?

Kathwari:

This trend of focusing on the home has been there for some time, not just after Sept. 11. It's a natural interest because, historically, people have always first addressed themselves

with things like clothing, jewelry. And then they address their transportation, whether it be carriages or horses or cars. And then they address their homes.

People at the top, the so-called elite, always had access to design and style. The interesting thing is that over the last number of years, people in the middle and upper-middle

class are also becoming very stylish due to information, communication and knowledge. Because of that, people want to have homes that reflect what they are wearing and what they are driving.

Today, when people buy a car, they don't even look at the engine. They want to know what kind of leather there is and what kind of trimmings there are. What electronics does it have, and how does the telephone work? An interest in your surroundings is an interesting phenomenon and an important impact that is taking place that has

got

to have an impact on the home.

TSC: I read somewhere that your median customer is a 52-year-old woman. Is this customer insulated from the economic downturn the rest of us are now stuck in?

Kathwari:

I wouldn't say that 50 is the median. Today, with the expansion of our products and styles ranging from the casual contemporary to the traditional, we have a much broader customer base. I don't have the definitive numbers, but if I had to make a

guess on a median, I would say most probably 38 or 40.

TSC: What about your "EA Kids" collection?

Kathwari:

The kids' program is for children, from babies to teen-agers. People, not only parents but grandparents, are interested in spending a lot of money on their children. We all are. That's why I say the median age of our customer is 38 or 40. A lot of our customers are in their late 20s and early 30s. Others are in their 50s and 60s. More than 50% of our product lines are more casual and younger.

Parents also want for their children to have products that are not only good in style, but that are good quality. Durability is important.

There's also a trend toward ownership rather than usage, which is just getting something, using it and then throwing it away. All of this is a drive toward quality. We have benefited from this trend among consumers to own less, but of better quality.

TSC: How does that dovetail with your drive for profitability and to increase profit margin? What is your strategy there to make Ethan Allen a highly profitable business?

Kathwari:

We are a profitable business, a company that is basically debt-free. We generate a lot of cash, which we are using to expand our business, to bring in technology and, when appropriate, to buy our own stock back. We are running a business based on sound principles.

Our philosophy is, we have to excel at what we do. I don't believe that today you can be profitable if you believe in mediocrity. We believe that running one business right is better than having a lot of businesses and then

having to learn a lot about how to run them. And we are fortunate that we are vertically integrated from the idea to its manufacturing execution to the consumer and their servicing. Not that many businesses have that ability.

TSC: What is your economic outlook for the Christmas season? What's your confidence level?

Kathwari:

Christmas is not a very relevant time for furniture. In fact, we do more business

after

Christmas. Our focus is, give a gift to your home, and generally that happens after

the holiday season.

TSC: Any interest in expanding your brand further into international markets?

Kathwari:

Yes, in addition to Southeast Asia and Europe, we are looking at expanding to South America. We just had some people from South America interested in working to open stores, and I told them that they must spend a few days here understanding our brand. It's not just products or stores. It is our people. How they feel about the brand

and what kind of credibility, what kind of passion, they have for the brand.

I told them, "That is the brand." If we do not convey that kind of compassion, we cannot sell it to the consumer. Today, we are not only a known brand but, I believe, a preferred brand in home furnishings. All of that takes place because of our people.

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