Annual report pursuant to Section 13 and 15(d)

Note 19 - Segment Information

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Note 19 - Segment Information
12 Months Ended
Jun. 30, 2023
Notes to Financial Statements  
Segment Reporting Disclosure [Text Block]

(19)

Segment Information

 

Ethan Allen conducts business globally and has strategically aligned its business into two reportable segments: Wholesale and Retail. These two segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. Our operating segments are aligned with how the Company, including our chief operating decision maker, manages the business. We evaluate performance of the respective segments based upon sales and operating income. The accounting policies of the operating segments are the same as those described in Note 3, Summary of Significant Accounting Policies.

 

Wholesale Segment. The wholesale segment is principally involved in the development of the Ethan Allen brand and encompasses all aspects of design, manufacturing, sourcing, marketing, sale and distribution of our broad range of home furnishings and accents. Wholesale revenue is generated upon the sale and shipment of our products to our retail network of independently operated design centers, Company-operated design centers, and other third-party contract business customers and accounted for 16.3% of net sales during fiscal 2023 compared to 15.6% in the prior year period. Our ten largest customers were all within our wholesale segment and accounted for 21% of sales within our wholesale segment during fiscal 2023 and 18% of wholesale sales during fiscal 2022. These customers were nine independent retailers and the United States government GSA, which individually represented 7% of our consolidated net sales in fiscal 2023. Our wholesale segment’s net sales include sales to our retail segment, which are eliminated in consolidation.

 

Within the wholesale segment, we record revenue information according to each respective product line (i.e. case goods, upholstery and home accents). Wholesale profitability includes (i) the wholesale gross margin, which represents the difference between the wholesale net sales price and the cost associated with manufacturing and/or sourcing the related product, and (ii) other operating costs associated with wholesale segment activities. The wholesale segment’s product line revenue, expressed as a percentage of net sales during fiscal 2023, is comprised of 49% upholstered products, 33% case goods and the remaining 18% home accents and other.

 

Our independent retailers are required to enter into license agreements with us, which authorize the use of certain Ethan Allen trademarks and require adherence to certain standards of operation, including a requirement to fulfill related warranty service agreements. We are not subject to any territorial or exclusive retailer agreements in North America.

 

The geographic distribution of manufacturing and distribution locations is disclosed under Item 2, Properties, contained in Part I of this Annual Report on Form 10-K.

 

Retail Segment. The retail segment sells home furnishings and accents to clients through a network of 139 Company-operated design centers and accounted for 83.7% of net sales during fiscal 2023 compared to 84.4% in the prior year period. Ethan Allen design centers are typically located in busy retail settings as freestanding destinations or as part of town centers, lifestyle centers, and suburban shopping malls, and average approximately 14,100 square feet in size. Over the past 10 years, 47% of our design centers are new or have been relocated as we continually evaluate our retail footprint. Other initiatives include regularly updating presentations and floor plans, strengthening the qualifications of our designers through training and certifications and combining technology with personal service in our design centers, which has also allowed us to reduce the size of our design centers. In the past five years, we have either opened or relocated a total of 18 new design centers with an average size of 8,100 square feet. These smaller footprint design centers reflect our shift from destination and shopping mall locations to lifestyle centers that better project our brand and offer increased traffic opportunities. During fiscal 2023, we strategically relocated two design centers (Skokie, Illinois and San Jose, California), to premier shopping destinations with more bright, open, modern layout designs and closed two design centers (Watermill, New York and Buckhead, Georgia). The geographic distribution of our retail design center locations is disclosed under Item 2, Properties, contained in Part I of this Annual Report on Form 10-K.

 

Retail segment revenue is generated upon the sale and delivery of our products to our retail customers through our network of home delivery centers. Retail profitability reflects (i) the retail gross margin, which represents the difference between the retail net sales price and the cost of goods, purchased from the wholesale segment, and (ii) other operating costs associated with retail segment activities. We measure the performance of our design centers primarily based on net sales and operating income on a comparable period basis. The frequency of our promotional events as well as the timing of the end of those events can affect the comparability of net sales during a given period. Due to the nature of the business in which the retail segment operates, there are no customer concentration risks. The retail segment’s product line revenue, expressed as a percentage of net sales during fiscal 2023, is comprised of 51% upholstered products, 29% case goods and the remaining 20% home accents and other.

 

Intersegment. We account for intersegment sales transactions between our segments consistent with independent third-party transactions, that is, at current market prices. As a result, the manufacturing profit related to sales to our retail segment is included within our wholesale segment. Operating income realized on intersegment revenue transactions is therefore generally consistent with the operating income realized on our revenue from independent third-party transactions. Segment operating income is based on profit or loss from operations before interest and other financing costs, interest and other income (expense), net and income taxes. Sales are attributed to countries on the basis of the customer's location.

 

Information for each of the last three fiscal years is provided below (in thousands):

 

   

Fiscal Year Ended
June 30,

 
   

2023

   

2022

   

2021

 

Net sales

                       

Wholesale segment

  $ 449,591     $ 483,842     $ 413,076  

Less: intersegment sales

    (320,764 )     (355,964 )     (282,878 )

Wholesale sales to external customers

    128,827       127,878       130,198  

Retail segment

    662,555       689,884       554,971  

Consolidated total

  $ 791,382     $ 817,762     $ 685,169  
                         

Income before income taxes

                       

Wholesale segment

  $ 68,792     $ 63,930     $ 52,281  

Retail segment

    67,256       80,496       28,824  

Elimination of intercompany profit(a)

    1,148       (6,176 )     (3,820 )

Operating income

    137,196       138,250       77,285  

Interest and other income (expense), net

    4,042       72       (393 )

Interest expense and other financing costs

    213       201       481  

Consolidated total

  $ 141,025     $ 138,121     $ 76,411  
                         

Depreciation and amortization

                       

Wholesale segment

  $ 6,328     $ 6,439     $ 6,714  

Retail segment

    9,286       9,548       9,671  

Consolidated total

  $ 15,614     $ 15,987     $ 16,385  
                         

Capital expenditures

                       

Wholesale segment

  $ 6,787     $ 8,125     $ 5,618  

Retail segment

    7,098       5,262       6,411  

Consolidated total

  $ 13,885     $ 13,387     $ 12,029  

 

(a)

Represents the change in wholesale profit contained in the retail segment inventory at the end of the period.

 

   

June 30,

 

(in thousands)

 

2023

   

2022

   

2021

 

Total Assets

                       

Wholesale segment

  $ 373,921     $ 341,466     $ 298,332  

Retail segment

    403,651       412,176       412,066  

Inventory profit elimination(a)

    (32,119 )     (33,747 )     (27,153 )

Consolidated total

  $ 745,453     $ 719,895     $ 683,245  

 

(a)

Represents the wholesale profit contained in the retail segment inventory that has not yet been realized. These profits are realized when the related inventory is sold.

 

Geographic Information

 

Our international net sales are comprised of our wholesale segment sales to independent retailers and our retail segment sales to customers through our Company-operated design centers in Canada.

 

The following table sets forth consolidated net sales by geographic area for each of the past three fiscal years:

 

   

Fiscal Year Ended
June 30,

 

Sales by Country

 

2022

   

2022

   

2021

 

United States

    97.0 %     96.0 %     94.9 %

All Others

    3.0 %     4.0 %     5.1 %

 

The following table sets forth long-lived assets by geographic area at June 30 (in thousands):

 

   

2023

   

2022

   

2021

 

United States

  $ 301,951     $ 295,747     $ 311,529  

Mexico

    20,695       15,085       15,381  

Honduras

    10,686       9,967       8,347  

Canada

    4,696       3,513       4,919  

Total long-lived assets(1)

  $ 338,028     $ 324,312     $ 340,176  

 

(1)

Long-lived assets consist of property, plant and equipment and operating lease right-of-use assets and exclude goodwill, intangible assets, deferred income taxes and other assets.