Ethan Allen Interiors (NYSE:ETD) executives told analysts that fiscal 2026 second-quarter results were “strongly impacted” by a government shutdown that weighed on consumer confidence, reduced design center traffic, and curtailed U.S. government contract activity, according to management’s prepared remarks.
Chairman, President and CEO Farooq Kathwari said the shutdown contributed to lower traffic and lower retail orders, particularly on the contract side. He also noted that comparisons were challenging against a “very strong previous year.” Still, management said it began the third quarter with stronger traffic and positive written sales in January, which the company highlighted in its press release.
Sales trends and demand backdrop
On order activity, McNulty said retail written orders declined 17.9% and wholesaler orders were down 19.3% versus the prior year. He added that both measures declined sequentially throughout the quarter as year-ago comparisons became tougher. Management tied the demand trend to macroeconomic challenges and an 11% decline in design center traffic.
During the Q&A, McNulty said the quarterly retail order decline “blended to an average decrease of 18%,” with a stronger start in October and further deceleration later in the quarter. He pointed to the government shutdown and difficult comparisons, noting that November and December in the prior year were “very strong.”
Kathwari said January showed improvement as customers returned to stores following the period of uncertainty, adding that the company’s interior designers maintained contact with clients and helped convert opportunities that did not close during the prior quarter.
Margins, profitability, and cost actions
Despite lower demand, the company reported higher gross margin. McNulty said consolidated gross margin was 60.9%, up 60 basis points from a year ago, driven by a change in sales mix, reduced headcount, a higher average ticket price, and lower inbound freight. These benefits were partially offset by increased promotional activity, incremental tariffs, and elevated clearance sales.
Adjusted operating income was $13.5 million, representing an adjusted operating margin of 9%, McNulty said. For comparison, he noted that adjusted operating margin in the pre-pandemic fiscal 2019 second quarter was 5.4%.
McNulty said the current-year operating margin was pressured by fixed-cost deleveraging on lower sales and the impact of fulfilling orders with higher promotions, additional marketing, higher occupancy costs tied to new design centers, increased employee benefit costs, and incremental tariffs. Those pressures were partly offset by expense controls, including headcount reductions. The company ended the quarter with 3,149 total associates, down 5.1% year over year.
Adjusted diluted earnings per share were $0.44, and the effective tax rate was 25.3%, which McNulty said varied from the 21% federal statutory rate primarily due to state taxes.
Asked about the sustainability of margins, Kathwari said he believed the company had “a good opportunity” to maintain them, citing work combining “great talent and technology” across retail, manufacturing, and logistics, while noting that volume remains an important factor.
Balance sheet, cash, and dividends
McNulty emphasized the company’s liquidity position, saying Ethan Allen ended the quarter with total cash and investments of $179.3 million and no debt. He said the company generated an operating capital deficit of $1.8 million during the quarter due to working capital changes, including lower customer deposits and the timing of biweekly payroll.
In capital returns, McNulty said Ethan Allen paid a regular quarterly cash dividend of $10 million, or $0.39 per share, in November. He also said the board declared another regular quarterly cash dividend of $0.39 per share to be paid in February.
Tariffs, pricing, and contract business update
Management also spent time on tariff exposure. McNulty said recently enacted Section 232 tariffs, effective mid-October, resulted in fully manufactured upholstered wood products being subject to a 25% tariff. He added that non-U.S. manufactured case goods were subject to a 10% tariff that is partially reduced based on the consumption of U.S.-sourced materials. He said exposure is primarily concentrated in imported case goods from Indonesia, select fabrics from Asia, and imported accents such as lighting and area rugs.
To mitigate tariff impacts, McNulty outlined a three-part approach:
- Vendor cost sharing: working with partners to negotiate and share costs
- Sourcing diversification: shifting some sourcing to other countries
- Selective retail price increases: an average increase of about 5% applied to select SKUs
McNulty said the October price increases did not fully offset tariff headwinds and that the company had not yet experienced a full quarter of Section 232 tariffs. He also said the company expects to realize more benefit from price increases as more orders are delivered in future periods. He characterized Section 232 as roughly 40% of overall tariff exposure, IEEPA tariffs (which he said are under Supreme Court review) as another roughly 40%, and Section 301 tariffs as the remainder.
Kathwari added that if the IEEPA tariffs were overturned, it could affect about 40% of the company’s exposure and represent “an annual savings of approximately $8 million,” while stressing management was not counting on that outcome.
On contract sales, Kathwari said government orders “stopped” during the shutdown, and that reopening has brought orders back. He described incoming contract orders as “reasonably high,” though still below last year, and said volumes have been growing weekly as government operations, including embassies worldwide, ramp back up.
Looking ahead, Kathwari reiterated initiatives to strengthen Ethan Allen’s vertically integrated model across product development, marketing, the retail network, manufacturing, logistics, and talent supported by technology. He said the company operates 172 design centers in North America and emphasized that about 75% of the furniture it sells is made in North America, with products custom made upon receipt of orders.
About Ethan Allen Interiors (NYSE:ETD)
Ethan Allen Interiors Inc (NYSE: ETD) is a vertically integrated manufacturer and retailer of home furnishings, offering a broad range of furniture, upholstery, case goods and decorative accessories. The company designs and produces the majority of its products in its own North American manufacturing facilities, maintaining close control over quality, craftsmanship and production schedules. Through its network of company-operated and franchised Design Centers and galleries, Ethan Allen delivers a full-service offering that includes on-site interior design consultations and project management.
Founded in 1932 as a small Colonial-Revival furniture maker in northern Vermont, Ethan Allen has grown into a global brand known for its timeless styles and customization options.
