Stocks Fools Love
February 11, 1998

Ethan Allen
by Richard Dressner (TMF Twitty)

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Ethan Allen Drive
Danbury, CT 06811
http://www.ethanallen.com
$50 1/2 as of February 9, 1998

Falling in love with a stock is a lot like falling in love with a person. We examine the pragmatic issues first -- sufficient income, stability, lack of volatility, potential for growth, and good teeth.

In addition to the basics, we want a stock that makes us feel good about owning it. Ethan Allen is just such a stock. Founded by a red-blooded American Yankee (Nathan Ancell), the company stood for family values long before politicians made them a cliché.

Ethan Allen is in the home furnishings business, but what it is really selling is the stability of family, home, and hearth. A well-trained interior designer visits the prospective customer's home and gauges the needs and lifestyle of the family before proposing the appropriate product groups. It is this kind of personal service that justifies the high margins across the product line.

Most of its 300 stores worldwide are franchised, with the company retaining 65 retail outlets of its own from that total, most notably the flagship store at the headquarters in Danbury, Connecticut. Rarely is a location allowed to fail; the company will often buy out a distressed franchise and operate it until a new owner is found. This reinforces the stability of the brand in the local community.

Ethan Allen maintains a network of sawmills and manufacturing plants, mostly located in the Northeast and South, with regional warehouses located across the United States. By having total control of the manufacturing process, from raw material to finished product, economies of scale and consistent quality are achieved. That achievement doesn't come without a price, however -- the plants and sawmills are virtually self-insured, with the insurance deductibles in the millions of dollars.

The brand has sustained growth with limited national television and more significant print advertising supplementing the word-of-mouth and goodwill that the upscale customer base has historically given the company. Seasonal sales generate more revenue from those who are put off a bit by the higher pricing. But even then, the generous margins are hardly affected.

The leader of Ethan Allen is M. Farooq Kathwari, Chairman, President, and CEO. His remarkable vision and skills are legendary in the industry. It is a valid criticism that he wears too many hats, and his loss due to unforeseen circumstances would be catastrophic to the company. But to his credit, the machine he has inherited and improved upon could function for many years, just the way he left it. Actually, the company has benefited from a rock solid leadership, having only two CEOs in its history (founder Nathan Ancell and Mr. Kathwari).

As recently reported by Randy Befumo, Ethan Allen has beaten earnings estimates seven quarters in a row. The continued strong economic news can only be icing on the cake for this most American of businesses.

Next Stock Fools Love: Johnson & Johnson

* A Stock to Love represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.