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Ethan Allen Sitting Pretty, HomeGrocer Not Delivering

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.

May 23, 2000|JAMES PELTZ and MICHAEL HILTZIK

Ethan Allen Interiors (ETH)

Jim: Buy

Mike: Buy

*

Mike: There's no more recognized or marketed brand in home furnishings than Ethan Allen Interiors, right Jim?

Jim: No question. The name comes from the Revolutionary War hero, I believe.

Mike: The leader of the Green Mountain Boys. And your $32,000 question is: What state was he from?

Jim: Vermont?

Mike: Outstanding!

Jim: Well, high school paid off for something. Anyway, Ethan Allen has about 300 stores worldwide, and it's closing in on $1 billion in annual sales.

Mike: Now, It seems to me that when talking about Ethan Allen, we are watching a felony in progress.

Jim: How so?

Mike: Because when Alan Greenspan locks and loads, it's outfits such as Ethan Allen that are in his gun sight. Would you agree?

Jim: Not entirely, but I know where you're going with this.

Mike: This company makes big-ticket items that consumers buy on time, on credit. And here we have Mr. Greenspan and the rest of the Federal Reserve raising interest rates.

Jim: Making that credit more costly, and Ethan Allen's sofas more dear.

Mike: Right, especially when you realize that these items are more or less discretionary purchases. In other words, can you sit on that couch with the sprung cushions for another television season, or do you replace it at your local Ethan Allen store, credit card in hand?

Jim: I hear you, but I'm not terribly concerned about that impact on Ethan Allen, and I'd buy the stock. First, I can't predict the future, but I feel rates aren't going much higher.

Mike: Gee, I've never heard you be so Pollyannaish.

Jim: Second, even if the rate hikes we've already had tend to slow housing sales a bit, I expect many people will opt to refurbish their existing homes. And finally, the stock is attractively priced.

Mike: It's trading for only about 11 times its expected per-share profit for its fiscal year ending in June.

Jim: That's right. Now, this stock really shot up in '96-97 after Ethan Allen overhauled its business. The company refurbished its stores and made its furnishings much more contemporary without diluting Ethan Allen's reputation for quality. It also cut prices.

Mike: Yet it still has the reputation, according to people close to me . . . .

Jim: Your wife?

Mike: Well . . . .

Jim: I'm not being cute. Turns out that 70% or so of the furniture-buying decisions are made by women.

Mike: All right then. Despite the reputation and some price-cutting, a lot of what Ethan Allen sells strikes me as overpriced. On the other hand, if they can get the money, more power to 'em.

Jim: Anyway, Ethan Allen's restructuring pumped up its sales and earnings, and the stock took off. But in the last part of '99, the stock dropped sharply as everyone sought tech stocks and thumbed their noses at stodgy businesses like furniture.

But since the tech wreck started in March, Ethan Allan has rebounded because people are again looking for value. This is a solid company with a great brand, it's selling for cheap, and Wall Street expects the company to keep cranking out those 10%-15% annual gains in earnings and sales.

Mike: Then there's its gross profit margin, which is something like 47 cents on the dollar. That's nothing to sneeze at.

Jim: OK, but I still can't tell whether you like the stock.

Mike: I'm with you--it's a buy.

Jim: Good, because I thought you were going to throw me a curve there.

Mike: I hate sounding like an economist on CNBC, but I agree that the Fed is closer to the end than the beginning of its interest rate cycle. We haven't seen the last of it, but this half-point hike last week was the big one.

And Ethan Allen's stock has a history, as do some other home furnishing stocks, of starting to move up not long after the last Fed rate hike.

Jim: There's something else I like about Ethan Allen. It's carefully expanding into two new areas of furniture: kids' rooms and for patios and the like.

Mike: I guess whatever you don't buy from IKEA you can now buy from Ethan Allen.

Jim: And you don't have to put the damn things together either! But you'll pay more, too. Anyway, Ethan Allen also has an online site where you can order furniture and then have the store handle pickups and deliveries and returns. That's another plus.

HomeGrocer.com (HOMG)

Jim: Don't buy

Mike: Don't buy

*

Mike: Let me start by telling you a little slice-of-life story. In my neighborhood, the local Lucky's was taken over by Albertson's a while back. Well, you've never heard so many complaints about a corporate changeover since Washington Mutual took over its last six banks. You cannot go to a Little League game in my town without hearing somebody in the stands grousing about that supermarket.

Jim: Your point being?

Mike: That one of the upshots of this is that all of a sudden there seem to be more HomeGrocer.com delivery trucks prowling around my neighborhood than cats. People have really taken to this company's service.

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