-- U.S.-based home furnishings company Ethan Allen Interiors Inc.
has continued to improve its credit measures and operating performance over
-- We are raising the corporate credit rating on Ethan Allen to 'BB-'
from 'B+'. The 'BB-' issue-level rating on the company's senior unsecured
notes remains unchanged, although we revised the recovery rating to '3' from
-- The outlook is stable, reflecting Ethan Allen's improving operating
trends and our expectation that the company will continue to gradually improve
credit measures and maintain adequate liquidity.
On Dec. 14, 2012, Standard & Poor's Ratings Services raised its corporate
credit rating on Danbury, Conn.-based Ethan Allen Interiors Inc. to 'BB-' from
'B+'. The issue-level rating on the company's senior unsecured notes remains a
'BB-', while we revised the recovery rating to '3' from '2'. While a '3'
recovery rating generally reflects our expectation of recovery in the 50%-70%
range in the event of default, our recovery analysis suggests much higher
recovery for Ethan Allen's notes. However, given the change in corporate
credit rating to 'BB-', we cap the recovery rating for the unsecured notes at
'3' because the company has the potential to incur secured debt in a
The ratings on Ethan Allen reflect our opinion of the company's "significant"
financial risk profile and "weak" business risk profile. Key credit factors in
our assessment include the company's good brand awareness, strong retail
distribution network, exposure to the highly competitive residential
furnishings industry, and vulnerability to reduced discretionary spending in
an economic downturn. We believe the potential for slowing economic conditions
and continued weakness in the housing market remains a risk to further
operating performance improvement.
Ethan Allen is one of the largest manufacturers and retailers of home
furnishings and accessories in the U.S. As a vertically integrated company,
Ethan Allen designs, manufactures, sources, distributes, and sells a full
range of home furnishings under the well-recognized Ethan Allen brand. The
company's products are sold through a dedicated international network of over
300 retail stores, which we believe provides a competitive advantage. The
company maintains a leading market position with a strong brand, yet
participates in the highly fragmented residential furnishings industry.
Additionally, housing market weakness and reduced consumer spending on
furniture significantly depressed sales during the most recent recession.
Sales declined by over 12% and over 31% for the fiscal years ended June 2010
and June 2009, respectively, before improving by 15% in fiscal 2011. Sales for
the 12 months ended Sept. 30, 2012, were up about 4.7%, due to Ethan Allen's
marketing initiatives, a wide range of new product introductions, an increase
in the number of interior designers and other retail associates, the continued
repositioning of its retail network, and improving consumer confidence.
Manufacturing inefficiencies and a sharp decline in demand for the company's
products pressured margins during the most recent recession in the U.S., but
results have significantly improved in recent quarters. For the 12 months
ended Sept. 30, 2012, we estimate adjusted EBITDA improved more than 16% from
the previous-year period, yet still remains about 40% below the levels
achieved prior to the most recent recession. Similarly, EBITDA margins for the
12 months ended Sept. 30, 2012, have increased to 11.7%, from 10.5% in the
previous-year period, yet remain well below prerecessionary levels of around
15%. However, the company's results are benefiting from sales growth and the
consolidation of its manufacturing, logistics, and distribution operations, as
well as other cost-reduction actions taken in recent years. We believe EBITDA
margins could continue to improve over the next year, as the company continues
to realize the benefits of its expense reduction initiatives and improvements
in manufacturing efficiencies.
Credit protection measures have shown substantial improvement in recent
quarters, reflecting improved profitability and a post-recession volume
recovery, as well as debt reduction. For the 12 months ended Sept. 30, 2012,
we estimate the ratio of total lease-adjusted debt to EBITDA improved to about
3.4x, from 4.1x in the previous-year period, while funds from operations (FFO)
to adjusted debt was 27% compared to 24.7%. We believe these improved credit
measures are consistent with indicative ratios for a "significant" financial
risk profile, which include leverage of 3x-4x and FFO to debt of 20%-30%, and
will continue to modestly improve over the next year.
Our forecast assumptions include:
-- Ethan Allen's sales will increase at a mid-single-digit rate in fiscal
2013, as the economy and consumer spending environment continues to recover.
-- Adjusted EBITDA margins will improve by about 50 basis points,
reflecting improving manufacturing efficiencies, volume leverage, and reduced
-- Modest reduction in capital expenditures to about $20 million, from
$22 million in fiscal 2012.
Based on our forecast, we estimate that by the end of the fiscal year ending
June 2013, adjusted leverage will be close to 3x and FFO to total debt will
remain close to 27%. We forecast FFO will be more than $55 million for fiscal
We believe Ethan Allen has "adequate" liquidity to meet its needs over the
next year. This is based on the following information and assumptions:
-- We expect liquidity sources (including cash, discretionary cash flow,
and revolving credit availability) to exceed uses by more than 1.2x over the
next 12 months.
-- We expect net sources to be positive, even if there were a 15% drop in
-- As of Sept. 30, 2012, Ethan Allen had cash and marketable securities
of $84.6 million, restricted cash and investments of $15.4 million, and
availability of $49.4 million on its $50 million revolving credit facility,
which is subject to a borrowing base calculation.
-- The only financial covenant is a minimum fixed-charge coverage ratio
that applies if borrowing availability is less than $7.5 million.
-- Ethan Allen historically has not borrowed on its revolver, and
indicated it currently has no plans to use the facility other than to support
standby letters of credit, which currently total less than $1 million.
-- Ethan Allen has minimal near-term debt maturities, and we estimate the
company will generate FFO of more than $55 million over the next 12 months.
The issue-level rating on Ethan Allen Global's 5.375% senior unsecured notes
due 2015 is 'BB-', the same as the corporate credit rating on parent company
Ethan Allen Interiors Inc. The recovery rating is a '3', which is the cap for
our recovery ratings for companies with a 'BB-' or higher corporate credit
rating. (The company's $50 million asset-based loan revolver is not rated.)
For the complete recovery analysis, see the recovery report on Ethan Allen to
be published following this report on RatingsDirect.
Our rating outlook on Ethan Allen is stable. We expect Ethan Allen to further
improve operating performance and credit measures as its business continues to
recover, and sustain adjusted leverage below 4x in order to maintain the
Although unlikely over the near term, we could consider a higher rating if
operating performance continues to improve such that the company is able to
sustain its recent improvement in operating performance, and further improve
credit measures, including reducing adjusted leverage well below 3x and
increasing FFO to debt above 30%. We estimate the company could achieve this
credit measure improvement in a scenario where sales increase by more than 5%
and EBITDA margins improve by 150 basis points over the end of fiscal 2012.
We could lower the ratings if operating performance weakens such that adjusted
leverage exceeds 4.5x. We believe this could occur in a scenario in which
sales declined by 10% and EBITDA margins contracted by 200 basis points from
the levels at the end of fiscal 2012, perhaps due to weakening economic
conditions and a decline in consumer spending combined with increased input
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business And Financial Risks In The Branded
Consumer Products Industry, Sept. 10, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ethan Allen Interiors Inc.
Corporate credit rating BB-/Stable/-- B+/Stable/--
Issue rating affirmed; recovery rating revised
Ethan Allen Global Inc.
Senior unsecured BB- BB-
Recovery rating 3 2