00:00You can't allow sales to decline every year for 20 years because you'll eat into your fixed cost and you'll
00:05get negative operating leverage.
00:07So the business is fundamentally very strong. The products are great.
00:11Farouk is correct. The domestic manufacturing is a huge advantage for the business in a tariff world.
00:17But there's been no attention paid to sales and marketing and especially digital.
00:24Part of my interview with DGB Investments founder Douglas Bergeron is he pushes for changes at Ethan Allen coming in
00:31as an activist.
00:31Investor shares are up this year of Ethan Allen and continue to rebound since hitting lows in May.
00:37Here with us now is Farouk Hathwari, Ethan Allen, chairman and CEO.
00:42Farouk, really great to see you this morning. Thank you so much for coming.
00:45And I would love to just give you the platform and the chance to respond.
00:49Bergeron there saying you're like a tobacco company. You're sitting on cash.
00:53Sales are dropping it. You're still paying out dividends.
00:56He called your company a melting ice cube.
00:59What is your response and your message to the activist investor?
01:02Well, first of all, it's good to be here.
01:04I have an office about two blocks from here, so it's not a long distance.
01:08We have an Ethan Allen design center here on 56th and Lexington.
01:13Well, you know, my perspective is that we think long term.
01:19We have been doing and Ethan Allen's been around for 94 years.
01:23I've been around there for close to 40 years.
01:25We have given in the last 20 years of close to a billion dollars in dividends.
01:30We have invested a great deal in capital expenditures.
01:34We have repositioned the company and we continue to do that.
01:37For instance, you know, all we have today are design centers.
01:42Our stores are called design centers.
01:44We have now reduced the size of our design centers by 50 percent from about close to 14,000, 15
01:52,000 feet to an average of 7,000 or 8,000 feet.
01:55And the reason I'll give the reason why we've done it.
01:57We are a vertically integrated company.
02:00We had 20 manufacturing plants only 8 or 10 years back.
02:03Today, we are focused in Vermont, North Carolina, Mexico, and Honduras.
02:09We had about 15 national distribution centers, 100 warehouses.
02:14Today, we have one national distribution center.
02:17A lot of this has been done in the last 6 or 8 years.
02:19Right.
02:19Now, because this was the time of a lot of reinvention, a lot of focus on changing the size of
02:28our design centers.
02:28We have less interior.
02:29We are business as interior designers.
02:32We have today about 30 to 40 percent less interior designers than we had four or five years back, but
02:38much stronger technology.
02:40And, Farouk, you know, that's all in well and good, but, you know, if I am channeling Douglas Bergeron, his
02:46argument would be it doesn't matter because top-line sales have decreased from 2007 to being $1 billion to nearly
02:52half of that amount.
02:53So his argument is basically something has gone wrong.
02:56Why are top-line sales then decreasing so much?
02:59Well, because of the fact that we have focused on interior design.
03:03We have not focused on selling to a mass.
03:07Now, the interior design, the customers that we have, has been more greatly impacted with the economy, has been impacted
03:13with all the issues that are faced with.
03:16Now, we could have increased our business by expanding our reach and going all over the place.
03:20We didn't.
03:21That is the reason.
03:22So we felt it was important for us to maintain the credibility of our interior designers, maintain the credibility of
03:29our customers.
03:31And that has affected.
03:33But the good news is that they're coming back.
03:37We have reduced the size of our interior design by 50%.
03:40We have reduced the size of our interior design centers by 50%.
03:43So if we had done, that is, expanded our reach to go all over the place, they said, I mean,
03:50I know the arguments were we could have sold a lot through digital mediums.
03:56We could have sold through Wayfair and all those things.
03:59We felt that we could have done that.
04:01Our sales would have gone up.
04:03But we felt that was not the right thing to do.
04:04We wanted to maintain the credibility of our – we have one of the largest interior design network.
04:10So taking care of them was important.
04:12And we said it's better for us to reduce, take care of them, and then go back.
04:17And during that period, reposition everything.
04:20We have now repositioned our design centers.
04:22They're 50% smaller.
04:23We repositioned our manufacturing, logistics, and we are now – and a lot of technology.
04:28I know there were other arguments where we are not in technology.
04:30We have a lot of technology.
04:32Well, that's one of the points that Bergeron makes.
04:34He argues that the stores are outdated and that you don't have a big digital presence.
04:39And that's where retail is going.
04:42No, we are – actually, our stores are not outdated.
04:45They're actually much more current than they've ever been.
04:49In the last four or five years, we have repositioned our design centers both in locations and size and making
04:54them look beautiful.
04:55There's one right, you know, two blocks from you here.
04:58You take a look at it.
04:59We used to have, three years back, one on 30,000 square feet right on 59th Street and 3rd Avenue
05:06next to Bloomingdale's.
05:07We have reduced the size because today technology and interior design is playing a tremendously important role.
05:13I wonder if, Farouk, because one of the things that Bergeron said was that in your 10K – and you've
05:17had kind of this boilerplate language in there for most of your annual filing –
05:20saying that if there is a consumer shift into online, it's a threat for Ethan Allen.
05:26And he says that's outdated for 2026.
05:28No, that is not the case.
05:29Because we are not – we are – our focus has been, in fact, when our customers come to our
05:36website, we encourage them to meet our interior designers.
05:40That's why our business on the website is less because we want them to interact with our interior designers.
05:46When they do that, our sale is three to five times more when a customer interacts with an interior designer.
05:52So, yes, it is the fact that we are not doing a lot of business on the website.
05:57We also decided that it was important for the customers to interact with our designers.
06:03So, encourage that.
06:04Right.
06:04And I know this has been your model, right, as you've been emphasizing sort of interior design over online.
06:09Farouk, there's one specific thing that the activist said that I want to give you a chance to respond to
06:15because he didn't just talk about the company as a whole.
06:17He talked about you yourself.
06:18And I think it's important for you to be able to respond to that.
06:21So, just for our audience, in case they didn't see, I know you saw the interview, just to show what
06:25he said.
06:25Here's specifically what Douglas Bergeron had to say on that.
06:29Farouk Khathwari deserves a lot of credit for the company that he's been running for 38 years, but he's 82
06:36years old.
06:37Farouk has managed to lose market share in good markets, good housing markets, and in bad housing markets.
06:41The press we're getting with the proxy campaign will, I think, allow us to go out and find a very,
06:47very compelling CEO that can help transform this business.
06:51I mean, he's saying he doesn't want to just replace the board.
06:54Farouk, he wants to replace you.
06:56Yeah, I know.
06:56I think that, you know, his statements are very, to me, amazing and wrong to attack personally on age.
07:05And I know that I checked him out.
07:07He's about 66, 67 years old.
07:09And I could say he looks 95.
07:11I won't say that.
07:13I won't say that.
07:14I look much younger than I am, because I am.
07:18I'm a mountain climber.
07:19I'm a sports person.
07:20I have a boat.
07:22I have a farm.
07:24So, yes, the fact is, if I believe that I don't have the energy or the ability or the mind
07:32to run a business, then I should not be doing it.
07:35Our board, everybody else, has never raised this issue.
07:38They know that I'm more active than somebody who's 30 years old.
07:41I haven't climbed any mountains recently.
07:43Just to underscore that point, I have not done that.
07:46No, no, I like hiking.
07:48In fact, my son just bought a house in Aspen, and I'm going to go there so we can climb
07:54some mountains there.
07:55That'll be fun.
07:56But where does this go in the meantime?
07:58Now, Bergeon has a rather nuclear kind of proposal on the table, and I assume that's rejected out of hand.
08:07Is there any way you work with him to do any changes?
08:10Well, look here, I mean, we're always there to talk to people, to listen to people.
08:17He had talked to me before, and I'd be happy to talk to him.
08:20I think that our board is a very distinguished, knowledgeable board, experienced board, and different areas of expertise.
08:29We have one of the strongest boards, and I know their focus is that we should do something short-term,
08:36we should build a lot of business, we should do e-commerce and everything else.
08:41I mean, we could do all of those things, but we have not done it because we want to continue
08:46the process of having an interior design network focused on great quality, great service.
08:53And we basically think of this.
08:55We deliver our products to our customers at the same price whether you're living in Seattle, Chicago, Miami, New York.
09:02Now, that doesn't happen by accident.
09:04It is one of the very strongest network of logistics, manufacturing.
09:09Our interior designers are very, very strong.
09:11Yes, in the last few years, we have been impacted with all what is taking place in the marketplace.
09:16Now, we could have increased our business by going to other channels.
09:19I said, no, we're going to continue the focus on interior design.
09:23We're very well positioned, and, you know, we give good dividends, we've got good cash, and we're going to continue
09:28to do that.
09:29Farouk, we really appreciate your time coming in and discussing this with us.
09:33I know this isn't your first time with an activist, so perhaps you have some practice going down this path.
09:38Again, thank you so much.
09:39We really appreciate it.
09:40That is Farouk Kathwari of Ethan Allen.
09:42Any mountains coming up besides Aspen?
09:44Well, no, I always like it because, you know, first of all, as I said, in Hudson, New York,
09:49I have the farm.
09:50I actually give this book.
09:52You should read it.
09:53I wrote a book which says Trailblazer, which says from the mountain of Kashmir to the summit of global business
09:59and beyond.
10:00That's my focus is I'm a mountain climber.
10:03And a good buzz marketer, too.
Comments