Ethan Allen Interiors NYSE: ETD executives told analysts the company navigated a difficult fiscal 2026 third quarter marked by softer contract and international activity, a choppy demand environment, and an earnings hit from tariffs—particularly on products made in its Mexico operations.
Management cites contract and international headwinds
Chairman, President and CEO Farooq Kathwari said results were “mainly impacted” by a reduction in business tied to the company’s U.S. State Department contract, “primarily due to government shutdown,” as well as lower international sales and what he described as “sluggish demand for home furnishings.”
Kathwari said North American retail written sales were flat year over year, while wholesale orders declined 7.6%, which he attributed to reduced U.S. government sales and a slowdown in international business.
Quarterly results: sales, margins, and cash flow
SVP, CFO and Treasurer Matthew J. McNulty said consolidated net sales were $136 million, benefiting from a higher average ticket price, increased clearance sales, and fewer returns. Those positives were offset by lower contract sales, a decline in delivered unit volume, and inclement weather.
On demand trends, McNulty described conditions as “choppy,” with the pace of written orders declining slightly throughout the quarter. He said retail written trends were strongest in July, though adverse weather slowed traffic late in the month and continued into February. He also noted “a pullback in demand during March following the Iran conflict.”
Wholesale backlog ended the quarter at $42 million, down 23% from a year ago. McNulty said reduced State Department and international business, along with improved customer lead times, contributed to the decline.
Gross margin was 59.4% in the quarter. McNulty said margin was impacted by incremental tariffs, increased promotional activity and higher clearance sales, partially offset by changes in sales mix, lower inbound freight, reduced headcount, and a higher average ticket price.
Adjusted operating income was $6.8 million, translating to a 5% operating margin. McNulty attributed the lower margin to higher tariffs, incremental digital and technology spending, fewer U.S. government sales, and fulfilling orders that carried higher promotional levels.
SG&A expenses declined 3%, which McNulty said helped offset additional investment spending. Total associates were 3,105 at quarter end, down 6% from the prior year, with reductions in both wholesale and retail. Adjusted diluted EPS was $0.24, and the effective tax rate was 24.2%.
Despite the pressures, McNulty emphasized liquidity and cash generation. The company ended the quarter debt-free with $181 million in total cash and investments and generated $15 million in operating cash flow, up from $10 million a year ago due to improved working capital. Through the first nine months of fiscal 2026, he said the company generated $22 million in free cash flow.
McNulty said the company paid a regular quarterly dividend of $0.39 per share in February and that the board declared another regular quarterly cash dividend of $0.39 to be paid in May.
Tariffs: what changed and how the company is responding
Tariffs were a central theme of the call. Kathwari said “the increased tariffs during the quarter of about $4 million were mainly the main reason” for reduced earnings, calling out “unexpected tariffs on our Mexico manufacturing products.” He later added that tariffs “really impacted our operating margins,” saying the decline in operating margins was “mostly because of those tariffs.”
McNulty described a shifting policy backdrop. He said that in February the U.S. Supreme Court invalidated certain IEEPA tariffs introduced the prior year. He said a new 10% global import tariff under Section 122 was put in place shortly thereafter and is effective until mid-July.
McNulty said current exposure is “concentrated” on a 25% tariff that took effect in October 2025 under Section 232 on upholstered wood products produced and exported from Ethan Allen’s Mexican manufacturing facilities. He also cited exposure to the Section 122 tariff on furniture exported from Honduras, imported wood furniture from Indonesia, select fabrics from Asia, and imported home accents. In total, McNulty estimated annual tariff exposure of roughly $15 million to $20 million.
On possible refunds, McNulty said U.S. Customs and Border Protection issued guidance on IEEPA tariff refunds and launched software on April 20 to “pro-process IEEPA refund claims at scale.” He said the company is working through the recoverability of previously paid IEEPA tariffs and expects refunds to take up to 80 days to receive.
Asked about mitigation, McNulty said the company is taking steps that include:
- Sharing costs with vendors and partners
- Sourcing diversification and identifying alternative supply sources
- Absorbing a portion of costs where they can’t be fully passed on
- Price increases, including an average 5% increase taken in November 2025
Kathwari added that because Ethan Allen owns and operates its manufacturing in Mexico, the company can ship products to the U.S. at “a relatively small margin,” which he suggested helps mitigate the impact compared with purchasing finished goods outright. Still, he said the company was “impacted substantially” by tariffs affecting Mexico and, to some degree, Honduras, as well as imported product from Asia.
State Department contract renewal and retail outlook
On the State Department contract, Kathwari said the agreement was recently up for renewal and the company has re-bid the business. He said the State Department is reviewing bids and that Ethan Allen expects to hear back “hopefully in the next couple of months.” In the meantime, he said business is still coming in under the current contract, though not at last year’s level.
KeyBanc analyst Taylor Zick asked about retail written orders into April. Kathwari said retail written orders held up during the quarter and that April had been positive so far, saying, “in April so far, it has been positive.”
McNulty said the company is “excited for the introduction of several new products this spring,” which he believes will complement existing offerings.
Store network, marketing, and operational focus
Kathwari said the company continues to strengthen its vertically integrated structure and product offering, while repositioning its retail network in North America. He said the company has 172 design centers and has been working to reduce footprints, citing technology that helps interior design associates serve clients. He also highlighted North American manufacturing, which he said produces about 75% of the company’s furniture, “almost all made custom on receipt of orders,” along with logistics capabilities that support “white glove delivery at one delivered price” in North America.
During Q&A, Kathwari discussed increased marketing investment, particularly in digital channels, and said the company has flexibility to adjust spend as it looks ahead. He also said repositioning stores and bringing in “lots of new products” required selling through existing merchandise, which “had a somewhat of an impact on our margins.”
On real estate plans, Kathwari said the company has been repositioning existing design centers and reducing store sizes by roughly 25% to 30%. He said Ethan Allen is also working on about five new locations in the U.S. and has opened one or two locations in Canada, adding that the company will continue both openings and relocations.
In closing remarks, Kathwari said he is focused weekly on five priorities: talent, technology, marketing, service, and social responsibility, which he said have helped the company maintain a strong presence across operations.
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.
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