Key Contradictions Emerge in Q4 2025 to Q1 2026 Earnings Calls: Tariff Impacts, Marketing Strategies, and Consumer Traffic

Date of Call: October 29, 2025

Financials Results

• Revenue: $147.0M consolidated net sales; retail written orders up 5.2% YOY, wholesale orders down 7.1% YOY
• EPS: $0.43 adjusted diluted EPS
• Gross Margin: 61.4%, driven by favorable sales mix, lower raw material input costs and higher average retail ticket (partially offset by promotions, elevated designer floor sales and higher inbound freight including tariffs)
• Operating Margin: 7.2% adjusted operating margin, ~20 basis points higher than pre‑pandemic fiscal 2020 Q1

Business Commentary:

• Revenue and Sales Performance:
• Ethan Allen reported consolidated net sales of $147 million for the first quarter, with retail written orders growing by 5.2%.

• The growth was driven by improved order conversion, increased promotional activities, and new product introductions.

• Gross Margin Improvement:

• Ethan Allen achieved a strong consolidated gross margin of 61.4%, driven by a change in sales mix, lower raw material costs, and selective price increases.

• This improvement was partially offset by increased promotional activities and higher inbound freight costs.

• Operating Cash Flow and Liquidity:

• The company generated $16.8 million in operating cash flow during the quarter, with a robust balance sheet including $193.7 million in cash and no debt.

• This was due to lower inventory levels and higher customer deposits, reflecting the company's financial health.

• Market and Promotional Strategy:

• Ethan Allen maintained strategic promotional activities, with national marketing costs increasing to 3.4% of net sales, up from 2.4% last year.
• This was part of an effort to strengthen the brand, increase qualified customers, and drive retail growth despite lower traffic.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly emphasized strong results and positioning: "we are very pleased that our ... investments ... are providing strong results," highlighted a "robust balance sheet" with $193.7M cash and no debt, retail written orders up 5.2%, and a strong consolidated gross margin of 61.4%, while expressing cautious optimism about future demand and marketing investments.

Q&A:

• Question from Taylor Zick (KeyBanc Capital Markets Inc., Research Division): Can you describe the cadence of retail written order trends during the quarter, including what you saw during the Labor Day sales period and outside of that?
  Response: Traffic was down roughly 30% but customers were more qualified; order increases were steady throughout the quarter with buyers converting via designers, supporting comp strength.

• Question from Taylor Zick (KeyBanc Capital Markets Inc., Research Division): Can you talk about promotional activity — what you're seeing and expectations for the balance of the year or 2026?
  Response: Promotional activity was largely maintained (regular quarterly special savings and financing); no major new promotions were launched, which helped preserve gross margins.

• Question from Taylor Zick (KeyBanc Capital Markets Inc., Research Division): What are you seeing on tariffs and industry pricing, and have you taken any pricing actions?
  Response: Because ~75–80% of furniture is North American-made, tariff impact has been limited; management implemented selective price increases (roughly 5–10%) on affected items while non‑furniture and a SE Asia plant remain more exposed.

• Question from Cristina Fernandez (Telsey Advisory Group LLC): Retail written demand has been positive two quarters but retail sales were down ~3% this quarter — when will demand translate into growth for the retail segment?
  Response: Delivered retail was ~3.2% below prior year despite order growth; management's objective is to approach last year's sales levels and will monitor performance through November/December.

• Question from Cristina Fernandez (Telsey Advisory Group LLC): Can you discuss the state department/contract issues — was this quarter particularly impacted and will it normalize in the next quarter or two?
  Response: Contract/state department orders were delayed by the government closure; normalization depends on reopening—if orders resume they'll arrive but revenue impact would materialize mid‑to‑late in the following quarter after production lead time.

• Question from Cristina Fernandez (Telsey Advisory Group LLC): Where did the increased marketing spend go, is it reaching more customers, and where are you seeing the return?
  Response: Incremental national marketing (~44–50% increase) was allocated to paid search, paid social and additional direct mail to improve acquisition and conversion; benefits are expected over multiple quarters, not immediately.

Contradiction Point 1

Impact of Tariffs on Pricing and Cost Management

It highlights differences in the perceived impact of tariffs on pricing and cost management strategies, which can affect the company's financial outlook and competitive positioning.

How are tariffs affecting pricing trends in the industry, and have you implemented any pricing changes? - Taylor Zick (KeyBanc Capital Markets)

2026Q1: Tariffs impact our non-furniture products more than our furniture, which is primarily manufactured in North America. We have taken selective price increases, ranging from 5% to 10%, to manage costs. Some overseas partners have collaborated with us to mitigate tariff impacts. - M. Kathwari(CEO)

What are the key industry trends and quarterly developments? How have tariffs impacted the business? - Bradley Bingham Thomas (KeyBanc Capital Markets Inc.)

2025Q4: Tariff impacts were limited due to 70% of furniture production in North America. Around 30% from overseas, with Indonesia and Vietnam being mostly affected. Cost management was crucial with technology and vertical integration playing significant roles in maintaining strong margins and cash flow. - M. Farooq Kathwari(CEO)

Contradiction Point 2

Marketing Strategy and Its Impact on Retail Orders

It raises questions about the effectiveness and prioritization of marketing efforts in driving retail order growth, which is crucial for revenue generation.

Can you explain the increased marketing spend and its benefits? - Cristina Fernandez (Telsey Advisory Group)

2026Q1: The increased marketing spend was mainly on paid search, paid social campaigns, and additional direct mail. We expect benefits from these long-term investments over time, with some results anticipated in the current quarter. - M. Kathwari(CEO)

What caused the 1.6% increase in Retail orders? - Cristina Fernández (Telsey Advisory Group)

2025Q4: The increase in retail orders was due to a combination of factors, including improved consumer attitudes as the quarter progressed, a strong network of associates, and increased marketing expenditures, particularly in digital mediums. - M. Farooq Kathwari(CEO)

Contradiction Point 3

Consumer Traffic and Retail Sales Performance

It addresses differing perspectives on consumer traffic and its impact on retail sales performance during a challenging economic environment.

Can you discuss retail order trends during the quarter, specifically during and outside the Labor Day sales period? - Taylor Zick (KeyBanc Capital Markets)

2026Q1: During the first quarter, we experienced lower traffic due to government shutdowns and economic challenges. However, the customers who visited our design centers were more qualified and interested in buying. The increase in retail written orders was relatively consistent throughout the quarter. - M. Kathwari(CEO)

Could you elaborate on industry trends and your quarterly performance? Additionally, how have tariffs impacted your operations? - Bradley Bingham Thomas (KeyBanc Capital Markets Inc.)

2025Q4: Retail written orders rose by 1.6% with consumers willing to spend on higher-end items despite tariffs and a challenging environment. - M. Farooq Kathwari(CEO)

Contradiction Point 4

Impact of Tariffs on Pricing Strategy

It involves the company's response to tariffs and their impact on pricing, which directly affects cost management and profitability.

What pricing trends are you observing industry-wide due to tariffs, and have you adjusted pricing accordingly? - Taylor Zick( KeyBanc Capital Markets)

2026Q1: Tariffs impact our non-furniture products more than our furniture, which is primarily manufactured in North America. We have taken selective price increases, ranging from 5% to 10%, to manage costs. - M. Kathwari(CEO)

What caused the increase in promotions, and will it affect gross margin? - Cristina Fernandez( Telsey Advisory Group)

2025Q2: We are not increasing the price. - Farooq Kathwari(CEO)

Contradiction Point 5

Marketing Spend and its Impact

It affects the company's marketing strategy and its impact on sales and customer engagement.

How do you view the increased marketing spend and its benefits? - Cristina Fernandez( Telsey Advisory Group)

2026Q1: The increased marketing spend was mainly on paid search, paid social campaigns, and additional direct mail. We expect benefits from these long-term investments over time, with some results anticipated in the current quarter. - M. Kathwari(CEO)

What drove the increase in promotions, and will it impact gross margin? - Cristina Fernandez( Telsey Advisory Group)

2025Q2: We increased our marketing spend by 15% due to a stronger service position and the ability to deliver products on time. Historically, our marketing spend as a percentage of sales was 5%, but we've reduced it to 2.5% through technology, maintaining marketing efficiency. - Farooq Kathwari(CEO)