Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide a reader of our consolidated
financial statements with a narrative from the perspective of our management on
our financial condition, results of operations, liquidity and certain other
factors that may affect our future results and should be read in conjunction
with our 2020 Annual Report on Form 10-K, Current Reports on Form 8-K and other
filings with the Securities and Exchange Commission (the "SEC"), and the
consolidated financial statements and related notes included in this Quarterly
Report on Form 10-Q.

Our MD&A is presented in the following sections:





  - Forward-Looking Statements
  - Executive Overview including COVID-19 Update
  - Key Metrics
  - Results of Operations
  - Reconciliation of Non-GAAP Financial Measures
  - Liquidity
  - Capital Resources
  - Share Repurchase Program
  - Contractual Obligations
  - Dividends
  - Off-Balance Sheet Arrangements and Other Commitments and Contingencies
  - Foreign Currency
  - Significant Accounting Policies
  - Critical Accounting Estimates
  - Recent Accounting Pronouncements




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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES



Forward-Looking Statements



This Quarterly Report on Form 10-Q, including this MD&A, contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which represent management's beliefs and assumptions concerning
future events based on information currently available to the Company relating
to its future results. Such forward-looking statements are identified in this
report by use of certain forward-looking words such as "anticipate," "estimate,"
"expect," "project," "plan," "intend," "believe," "continue," "may," "will,"
"short-term," "target," "outlook," "forecast," "future," "strategy,"
"opportunity," "would," "guidance," "non-recurring," "one-time," "unusual,"
"should," "likely," "COVID-19 impact," and similar expressions and the negatives
of such forward-looking words. These forward-looking statements are subject to
management decisions and various assumptions about future events, including
projections about our future financial growth and trends with respect to our
business and results of operations, and are not guarantees of future
performance. Actual results could differ materially from those anticipated in
the forward-looking statements due to a number of risks and uncertainties
including, but not limited to the following: the ongoing global COVID-19
pandemic may continue to materially adversely affect the Company's business, its
results of operations and overall financial performance; additional funding from
external sources may not be available at the levels required, or may cost more
than expected; declines in certain economic conditions, which impact consumer
confidence and consumer spending; an overall decline in the health of the
economy and consumer spending may affect consumer purchases of discretionary
items; financial or operational difficulties due to competition in the
residential furniture industry; a significant shift in consumer preference
toward purchasing products online; ability to maintain and enhance the Ethan
Allen brand; failure to successfully anticipate or respond to changes in
consumer tastes and trends; global and local economic uncertainty may materially
adversely affect manufacturing operations or sources of merchandise and
international operations; competition from overseas manufacturers and domestic
retailers; disruptions in the supply chain;
fluctuations in the price, availability and quality of raw materials could result in
increased costs or cause production delays; current and former
manufacturing and retail operations and products are subject to increasingly
stringent environmental, health and safety requirements; the number of
manufacturing and logistics sites may increase exposure to
business disruptions and could result in higher transportation costs; product
recalls or product safety concerns; reliance on information technology systems
to process transactions, summarize results, and manage its business and that of
certain independent retailers; disruptions in both primary and back-up systems;
successful cyber-attacks and the ability to maintain adequate cyber-security
systems and procedures; loss, corruption and misappropriation of data and
information relating to customers; changes in United States trade and tax
policy; reliance on certain key personnel; loss of key personnel or inability to
hire additional qualified personnel; additional asset impairment charges that
could reduce profitability; access to consumer credit could be interrupted;
inability to maintain current design center locations at current costs; failure
to successfully select and secure design center locations; changes to tax
policies; hazards and risks which may not be fully covered by insurance;
possible failure to protect the Company's intellectual property; and other
factors disclosed in Part I, Item 1A. Risk Factors, in our 2020 Annual Report on
Form 10-K, and elsewhere here in this Quarterly Report on Form 10-Q.



Given the risks and uncertainties surrounding forward-looking statements, you
should not place undue reliance on these statements. Many of these factors are
beyond our ability to control or predict. Our forward-looking statements speak
only as of the date of this Quarterly Report on Form 10-Q. Other than as
required by law, we undertake no obligation to update or revise forward-looking
statements, whether as a result of new information, future events, or otherwise.



Executive Overview



Who We Are. Founded in 1932, we are a leading interior design company and
manufacturer and retailer of quality home furnishings. We are vertically
integrated from design through delivery, affording our clientele a value
proposition of style, quality and value. We offer complementary interior design
service to our clients and sell a full range of furniture products and
decorative accents through ethanallen.com and a network of approximately 300
design centers in the United States and abroad. The design centers represent a
mix of independent licensees and our own Company-operated retail segment. We own
and operate nine manufacturing facilities, including three manufacturing plants,
one sawmill, one rough mill and a lumberyard in the United States and two
manufacturing plants in Mexico and one manufacturing plant in Honduras.
Approximately 75% of our products are made in our North American plants.



Business Model. Our business model is to maintain continued focus on (i)
capitalizing on the professional service offered to our customers by our
interior design consultants in our retail design centers, (ii) investing in new
technologies across key aspects of our vertically integrated business, (iii)
utilizing ethanallen.com as a key marketing tool to drive traffic to our design
centers, (iv) communicating our messages with strong advertising and marketing
campaigns, and (v) leveraging the benefits of our vertical integration by
maintaining a strong manufacturing capacity in North America.

Our competitive advantages arise from:

? providing fashionable high-quality products of the finest craftsmanship;

? offering complimentary interior design service through our retail network;

? offering a wide array of custom products across our upholstery, case goods,


    and accent product categories;
  ? use of technology in all aspects of the business; and
  ? leveraging our vertically integrated structure.




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Marketing. Ethan Allen's marketing mission statement, "We Make the American
HomeTM," drives home our core brand values. By adopting a fresh, ever-evolving
creative approach, we extend the reach of our brand, enhancing its desirability
and visibility while driving both new and repeat client traffic to our
approximately 300 design centers network-wide and to our primary website,
ethanallen.com. We consider the breadth and depth of our product offerings,
enhanced by the countless custom options we offer, to be a key competitive
advantage. As our e-commerce sales continue increasing at double-digit rates, we
have implemented conversion rate optimization updates on both ethanallen.com and
ethanallen.ca. We consider our website to be the front door to our brand
experience where customers can research our offerings and buy online or engage
with an in-store design consultant. Improved on-site search capabilities,
expanded Live Chat services, online appointment booking capability, and product
listing and display page enhancements have elevated the online user experience.
We also invest in targeted search engine optimization and paid search marketing,
for both national and local markets, driving both referral traffic to our
website and physical traffic to our design centers. Customer acquisition
resulting from our digital outreach strategies increased our traffic to the
website and e-commerce orders by 194% for the second quarter of 2021. By
investing in digital design technologies, we have expanded our virtual design
appointment capabilities. EA inHome®, an augmented reality mobile app, empowers
clients to preview Ethan Allen products in their homes, at scale, in a variety
of fabrics and finishes. With the 3D Room Planner, our designers generate both
2D floor plans and immersive, realistic 3D walk-throughs of the designs they
create. These technologies have been pivotal to our ability to serve clients
remotely during the ongoing COVID-19 pandemic as remote shopping has gained
popularity due to increased restrictions on in-person capacities and social
distancing requirements. Clients can shop with confidence, knowing that they are
investing in beautiful, cohesive room designs and pieces that suit their space.



Impact of COVID-19 on our Business. The COVID-19 pandemic has resulted in
significant economic disruption and adversely impacted our business. For a
select period during our third and fourth quarters of fiscal 2020, we
temporarily closed our design centers and manufacturing facilities due to the
COVID-19 pandemic. As a result, we took several actions to conserve cash in the
near term, including the furlough of 70% of our global workforce, the decision
by our CEO to temporarily forego his salary through June 30, 2020, a temporary
reduction in salaries of up to 40% for all senior management and up to 20% for
other salaried employees through June 30, 2020, a temporary reduction of 50% in
the cash compensation of the Company's directors through June 30, 2020, the
elimination of all non-essential operating expenses, a delay of capital
expenditures, the temporary suspension of the regular quarterly dividend and
temporarily halted our share repurchase program. We also borrowed $100 million
under our revolving credit facility in March 2020, which was subsequently repaid
in full by September 2020, negotiated alternative terms for lease payments and
reduced merchandise purchases to lower inventory carrying levels. As of the end
of the second quarter of fiscal 2021, our manufacturing facilities and design
centers had all re-opened and the majority of our furloughed employees had
returned to work. At this time, we believe that we have sufficient liquidity to
continue business operations during this volatile period. As the COVID-19
pandemic is complex and rapidly evolving, our plans as described in this report
may change. Although we continue to actively manage the impact of the ongoing
COVID-19 crisis, we are unable to predict the impact COVID-19 will have on our
financial operations in the near and long term. We also continue to actively
manage our global supply chain and manufacturing operations, which may be
adversely impacted with respect to availability and pricing based on
uncontrollable factors. The timing of any future actions in response to COVID-19
is largely dependent on the mitigation of the spread of the virus, status of
government orders, directives and guidelines, recovery of the business
environment, economic conditions, and consumer demand for our products.
Additionally, we continue to follow enhanced health and safety protocols across
all locations to ensure our employees and our customers are well-protected.



Fiscal 2021 Second Quarter in Review(1). Despite many challenges due to the
ongoing COVID-19 pandemic, we had a strong performance during the quarter. The
increased consumer focus on the home has continued a strong demand for our
product offerings and design services. With our retail segment written orders,
including our e-commerce business, up 44.9%, it led to a record high order
backlog at quarter-end. We ended the quarter with a strong balance sheet,
including cash on hand of $80.0 million while growing our consolidated gross and
operating margins through disciplined cost and expense controls. Net sales
increased 2.4% during the second quarter of fiscal 2021 as we began to see
increased production in our manufacturing and improvements in our supply chain.
Our wholesale segment increased net sales by 10.5% and our retail segment
increased 4.1% compared to the prior year quarter. We continued to see written
orders accelerate. Our retail segment written orders grew 44.9% in the second
quarter as we continue to see increased demand for products in the home category
and increased online traffic. Wholesale segment orders, which increased 28.1%
during the quarter, while benefitting from the strong retail growth, were
negatively impacted by the timing of GSA and other government orders due to
COVID-19 pandemic related disruptions that are delaying issuance of new orders.
Excluding GSA and other government orders, wholesale segment orders booked were
up 39.7% for the second quarter. Wholesale orders from our U.S. independent
retailers increased 41.2%, while orders from our international independent
retailers contracted 10.8% due to lower sales to China and COVID-19 related
economic disruptions in many of the international markets. While the pace of our
written business since reopening has lengthened the time between customer orders
and delivery, our distribution, manufacturing and logistics teams are working
hard to reduces these lead times. Our gross margin increased 80 basis points
primarily due to expansion within the wholesale gross margin partially offset by
a decrease in the sales mix and COVID-19 related production disruptions in our
manufacturing. Operating income increased from 5.3% of sales last year to 12.6%
of sales in the current year second quarter. Adjusted operating income, which
excludes pre-tax charges from restructuring initiatives, asset impairments and
other corporate actions in both periods presented, increased to 13.1% of sales,
up from 5.4% of sales last year, primarily due to strong gross margins and cost
containment resulting in a 10.8% reduction in operating expenses. Diluted EPS
expanded to $0.67 compared with $0.27 a year ago. Adjusted diluted EPS was
$0.69, up 155.6% compared with the prior year second quarter. During the second
quarter we generated $23.7 million of cash from operating activities and had no
outstanding borrowings. In addition, on November 12, 2020, our Board of
Directors increased the regular quarterly cash dividend by 19.0% and declared a
regular quarterly cash dividend of $0.25 per share, payable on January 21, 2021.



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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES



We believe we have an opportunity to continue our growth in sales and
profitability due to our strong retail network, the personal service of
our interior design professionals, our unique vertical integration whereby 75%
of products are made in our North American manufacturing workshops and our
national distribution centers delivering product with white glove service to our
client's home. As we head into the 2021 calendar year, we will remain focused on
employee safety, continue investing in digital design and interactive
communication technologies, growing our business and generating strong cash
flow, refining and repositioning our product offerings to reach a larger client
base and leveraging our vertical integration.

(1) Refer to the Regulation G Reconciliation of Non-GAAP Financial

Measures section within this MD&A for the reconciliation of GAAP to adjusted


    key financial metrics.




CARES Act. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security
Act (the "CARES Act") was signed into law. The CARES Act provides numerous tax
provisions and other stimulus measures, including temporary suspension of
certain payment requirements for the employer-paid portion of social security
taxes, the creation of certain refundable employee retention credits, and
technical corrections from prior tax legislation for tax depreciation of certain
qualified improvement property. We elected to defer the employer-paid portion of
social security taxes beginning with pay dates on and after March 12, 2020. At
December 31, 2020, we deferred a total of $3.9 million in employer-paid social
security taxes, of which 50% was recorded on our consolidated balance sheet
within Accounts payable and accrued expenses with the remaining balance in Other
long-term liabilities because we are not required to pay any portion of the
deferred amount until December 31, 2021, at which time 50% is due, with the
remaining amount due December 31, 2022.



Key Metrics

A summary of our key financial metrics is presented in the following table (in millions, except per share amounts).





                                           Three months ended                                                                     Six months ended
                                              December 31,                                                                          December 31,
              2020        % of Sales       % Chg       2019        % of Sales        % Chg        2020        % of Sales       % of Chg       2019        % of Sales      % of Chg
Net sales    $ 178.8            100.0 %       2.4 %   $ 174.6            100.0 %      (11.5% )   $ 329.9            100.0 %        (5.3% )   $ 348.5            100.0 %       (9.5% )

Gross


profit       $ 101.3             56.7 %       3.9 %   $  97.5             55.9 %      (10.4% )   $ 187.1             56.7 %        (2.2% )   $ 191.3             54.9 %       (9.0% )

Adjusted

gross


profit(1)    $ 101.7             56.9 %       3.9 %   $  97.9             56.1 %      (10.1% )   $ 187.5             56.8 %        (4.3% )   $ 195.9             56.2 %       (6.9% )

Operating


income       $  22.6             12.6 %     145.1 %   $   9.2              5.3 %      (42.9% )   $  34.2             10.4 %         23.0 %   $  27.8              8.0 %       (0.3% )

Adjusted

operating


income(1)    $  23.4             13.1 %     146.3 %   $   9.5              5.4 %      (42.2% )   $  35.7             10.8 %         64.4 %   $  21.7              6.2 %      (23.1% )
Net income   $  16.9              9.4 %     138.3 %   $   7.1              4.1 %      (41.9% )   $  26.2              8.0 %         23.8 %   $  21.2              6.1 %         0.8 %
Adjusted
net
income(1)    $  17.5              9.8 %     139.7 %   $   7.3              4.2 %      (41.2% )   $  26.5              8.0 %         59.8 %   $  16.6              4.7 %      (22.1% )
Diluted
EPS          $  0.67                        148.1 %   $  0.27                         (40.0% )   $  1.04                            31.6 %   $  0.79              0.2 %         1.3 %
Adjusted
diluted
EPS(1)       $  0.69                        155.6 %   $  0.27                         (41.3% )   $  1.05                            69.4 %   $  0.62              0.2 %      (21.5% )
Cash flow
from
operating
activities   $  23.7                           nm     $  (0.0 )                      (100.1% )   $  65.9                           181.8 %   $  23.4                         (25.7% )
Wholesale
written
orders                                       28.1 %                                   (21.8% )                                      10.7 %                                   (10.5% )

(1) Refer to the Reconciliation of Non-GAAP Financial Measures section within

this MD&A for the reconciliation of GAAP to adjusted key financial metrics.






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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

The components of consolidated net sales and operating income by business segment are presented in the following table (in millions).





                           Three months ended                          Six months ended
                              December 31,                               December 31,
                           2020           2019          % Chg         2020          2019          % Chg
Net sales
Wholesale segment       $    101.6      $    91.9          10.5 %   $   198.9     $   193.2           2.9 %
Retail segment               144.8          139.1           4.1 %       262.9         276.4          (4.9 %)
Elimination of
intersegment sales           (67.5 )        (56.4 )                    (131.9 )      (121.1 )
Consolidated net
sales                   $    178.8      $   174.6           2.4 %   $

329.9 $ 348.5 (5.3 %)



Operating income
Wholesale segment       $     12.7      $     5.7         122.0 %   $    25.9     $    22.7          14.1 %
Retail segment                 9.9           (0.1 )          nm          11.9           1.4            nm
Elimination of
intercompany profit
(1)                           (0.1 )          3.6                        (3.5 )         3.8
Consolidated
operating income        $     22.6      $     9.2         145.1 %   $   

34.2     $    27.8          23.0 %

(1) Represents the change in wholesale profit contained in the retail segment


    inventory existing at the end of the period.

The following table shows our design center information.





                                        Fiscal 2021                                     Fiscal 2020
                         Independent       Company-                      Independent       Company-
                          retailers        operated        Total          retailers        operated        Total
Design Center
activity:
Balance at July 1                 160            144            304               158            144            302
New locations                       8              -              8                 9              5             14
Closures                          (10 )            -            (10 )              (8 )           (6 )          (14 )
Transfers                           -              -              -                (1 )            1              -
Balance at December
31                                158            144            302               158            144            302
Relocations (in new
and closures)                       -              -              -                 1              4              5

Design Center
geographic locations:
United States                      34            138            172                36            138            174
Canada                              -              6              6                 -              6              6
China                             107              -            107               104              -            104
Other Asia                         11              -             11                11              -             11
Europe                              1              -              1                 1              -              1
Middle East                         5              -              5                 6              -              6
Total                             158            144            302               158            144            302




Results of Operations



For an understanding of the significant factors that influenced our performance
for the three and six months ended December 31, 2020 and 2019, respectively, the
following discussion should be read in conjunction with the consolidated
financial statements and related notes presented in this Quarterly Report on
Form 10-Q ($ in millions, except per share amounts). Unless otherwise noted, all
comparisons in the following discussion are from the three- and six-month
periods ended December 31, 2020 to the comparable prior fiscal year periods.

Second Quarter ended December 31, 2020 compared with Second Quarter ended December 31, 2019





Consolidated net sales were $178.8 million, an increase of 2.4% compared to the
same prior year period. We experienced a strong pace of written orders during
the quarter and our manufacturing facilities are making good progress ramping up
production to meet this demand after the temporary plant closures in our fourth
quarter of fiscal 2020. While our written orders have outpaced current
production, we continue to improve capacity and work through existing backlog.
However, given our production cycle from written order to delivery, our net
sales during the just completed second quarter grew only 2.4%. Due to the impact
of COVID-19 and its effects on manufacturing productivity and increased demand
on our supply chain, we believe it will take the next couple quarters for
manufacturing to catch up to the increase in customer demand.



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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES



Wholesale net sales increased 10.5% to $101.6 million primarily due to a 19.7%
increase in sales to our Company-operated design centers combined with 33.3%
growth in sales to our North American retail network. These increases were
partially offset by a 33.4% decline in our contract business sales, including
the United States government General Services Administration ("GSA") contract
and a 15.4% decrease in sales to our international retail network primarily as a
result of COVID-19 related economic disruptions.



Retail net sales from Company-operated design centers increased 4.1% to $144.8
million. There was a 3.7% increase in net sales in the United States, while net
sales from Canadian design centers increased 15.4%. Since all of our design
centers have re-opened, whether in-person, by appointment only, or virtually, we
have continued to experience strong order trends with written orders up 44.9% in
the second quarter compared with a year ago, driven by increased demand for
products in the home furnishings category. In addition, our e-commerce business
was a strong contributor to retail net sales, growing by 115% year over year, as
our online traffic continues to increase. There were 144 Company-operated design
centers as of December 31, 2020, the same as at the end of the prior year
period.



Gross profit increased 3.9% to $101.3 million compared with the prior year
second quarter due to stronger net sales within both the wholesale and retail
segments combined with an improved wholesale gross margin. Wholesale gross
profit increased year over year primarily due a 10.5% increase in net sales and
improved operating efficiencies, which led to gross margin expansion despite
plant shutdowns and restrictions related to the ongoing COVID-19 pandemic.
Retail gross profit increased due to a 4.1% increase in net shipments.



Gross margin was 56.7% compared with 55.9% a year ago. On an adjusted basis, the
current year consolidated gross margin was 56.9% compared to a prior year gross
margin of 56.1%. The increase in consolidated gross margin was due to higher
productivity in our wholesale manufacturing and a change in the sales mix.
Retail sales, as a percentage of total consolidated sales, were 81.0% in the
current year second quarter compared with 79.7% a year ago, which positively
impacted consolidated gross margin. The wholesale gross margin expanded due to
benefits being realized from the prior year optimization project and increased
productivity.



Operating expenses decreased to $78.8 million, or 44.1% of net sales, compared
with $88.3 million, or 50.6% of net sales last year. The 10.8% decrease in
operating expenses was primarily due to lower selling costs and a reduction in
general and administrative expenses from less headcount. Retail selling expenses
were lower due to less designer selling expenses and lower compensation due to
headcount reductions. Wholesale selling costs were down due to a reduction in
advertising spending and lower compensation costs due to headcount reductions.
Total advertising expenses (combined retail and wholesale) represented 2.8% of
net sales compared with 4.8% a year ago due to lower direct mail and National TV
advertising spending. General and administrative expenses decreased due to lower
compensation costs, reduced travel expenses, occupancy cost savings and lower
regional management charges. Restructuring and impairment charges incurred
during the second quarter of fiscal 2021 were $0.4 million compared to a benefit
of $0.2 million last year.



Operating income was $22.6 million compared with $9.2 million in the prior year
second quarter. Adjusted operating income, which excludes the restructuring and
impairment charges, was $23.4 million, or 13.1% of net sales compared with $9.5
million, or 5.4% of net sales last year. Higher consolidated net sales of $4.3
million or 2.4% coupled with disciplined cost and expense controls, including
strong cost containment measures and expense management, drove operating income
growth. While we reduced our workforce by approximately 70% in April 2020, we
have been able to bring many associates back. Our ability to operate the
business with headcount down 19.2% year over year helped improve our
consolidated operating income and margin.



Wholesale operating income was $12.7 million or 12.5% of net sales, an increase
compared with $5.7 million or 6.2% of net sales last year largely due to an
increase in net sales of $9.7 million or 10.5% and 7.7% less operating expenses.
The Company was able to reduce operating expenses primarily due to lower
headcount, less marketing costs and actions taken to control and minimize
expenditures.



Retail operating income was $9.9 million, or 6.8% of sales, compared with a loss
of $0.1 million, or -0.1% of sales, for the prior year period. The retail
operating margin increased 690 basis points primarily due to the 4.1% increase
in net sales and an 11.9% decrease in operating expenses from lower selling,
administrative, occupancy and regional management costs. The decreases within
retail operating expenses were due to strong cost control measures implemented,
including a 42.2% reduction in retail headcount from a year ago.



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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES



Income tax expense was $5.3 million, an increase of $3.1 million from a year ago
due to the $12.9 million increase in income before income taxes. Our effective
rate was 23.9% in the current year second quarter compared with 23.5% last year.



Net income was $16.9 million compared with $7.1 million last year. Adjusted net
income of $17.5 million was up 139.7% from $7.3 million a year ago due to
stronger net sales, improved gross margins and strong cost containment measures
resulting in a significant reduction in adjusted operating expenses.



Diluted EPS was $0.67 compared with $0.27 per diluted share in the prior year
comparable period. Adjusted diluted EPS was $0.69, up 155.6% compared with $0.27
a year ago and driven by improved net sales, gross margin and cost containment
measures. Restructuring and other impairment charges negatively impacted diluted
EPS by $0.02 during the current year second quarter while the net impact of
prior year restructuring and impairment charges were less than $0.01 on diluted
EPS.

Six Months ended December 31, 2020 compared with Six Months December 31, 2019





Consolidated net sales were $329.9 million, a decrease of 5.3% compared to the
same prior year period. While written orders accelerated with retail segment
orders up 25.1% and wholesale segment orders up 10.7% during the first six
months of fiscal 2021 compared to the prior year, net sales were down 5.3%
primarily due to the continued impact of COVID-19, which caused temporary design
center closures in our fourth quarter of fiscal 2020, temporary closures of our
manufacturing facilities, and a negative impact on our ability to deliver
product to customers. Customer demand continues to outpace product availability
even as we continue to increase manufacturing capacity. We resumed production in
our North American manufacturing plants during the first quarter of fiscal 2021
and have ramped up to near pre-COVID-19 production levels, which we expect will
help reduce the high undelivered order backlogs and delivery lead-times.



Wholesale net sales increased 2.9% to $198.9 million primarily due to an 8.9%
increase in sales to our Company-operated design centers combined with 17.0%
growth in sales to our North American retail network. These increases were
partially offset by a 28.6% decline in sales from our contract business and a
12.1% decrease in sales to our international retail network primarily as a
result of COVID-19 related economic disruptions.



Retail net sales from Company-operated design centers decreased 4.9% to $262.9
million. There was a 5.0% decrease in net sales in the United States, while net
sales from Canadian design centers increased 0.1%. The decline in retail net
sales was primarily due to lower production and supply chain disruptions within
manufacturing as a result of COVID-19 resulting in delays in order fulfillment
which has led to higher retail order backlogs.



Gross profit decreased 2.2% to $187.1 million compared with the prior year due
to lower retail net sales of $13.5 million partially offset by an increase in
wholesale net sales of $5.7 million.



Gross margin was 56.7% compared with 54.9% a year ago. On an adjusted basis, the
current year gross margin was 56.8% compared to a prior year gross margin of
56.2%. The 60-basis point increase in consolidated adjusted gross margin during
fiscal 2021 was due to higher wholesale productivity and change in the sales
mix. Wholesale productivity improved due to benefits being realized from the
prior year manufacturing and logistics optimization project. Restructuring
charges in the prior year second quarter, which included the write-off of
inventory, higher unfavorable manufacturing variances and incremental freight
and relocation costs, negatively impacted our consolidated gross margin by 130
basis points.



Operating expenses decreased to $152.9 million, or 46.3% of net sales, compared
with $163.5 million, or 46.9% of net sales last year. Included in prior year
operating expenses was a gain of $11.5 million from the sale of the Passaic, New
Jersey property. Operating expenses decreased during fiscal 2021 due to lower
selling costs and a reduction in general and administrative expenses. Retail
selling expenses were lower due to less warehouse and delivery expenses from a
reduced volume of shipments, less designer selling expenses and lower
compensation due to headcount reductions. Wholesale selling costs were down due
to a reduction in advertising spend and lower compensation costs. Total
advertising expenses (combined retail and wholesale) represented 3.4% of net
sales compared with 4.5% last year. General and administrative expenses
decreased due to lower compensation costs coupled with lower occupancy costs,
reduced travel expenses and less regional management charges. Restructuring and
impairment charges incurred during the first half of fiscal 2021 were $1.0
million compared to a benefit of $11.0 million last year.



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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES



Operating income totaled $34.2 million compared with $27.8 million a year ago.
Adjusted operating income, which excludes restructuring and impairment charges
(gains), was $35.7 million, or 10.8% of net sales in the current year compared
with $21.7 million, or 6.2% of net sales last year. Strong cost containment
measures, including improved expense management and reduced headcount, drove
operating income growth. These benefits to operating income were partially
offset by the 5.3% decline in consolidated net sales.



Wholesale operating income totaled $25.9 million compared with $22.7 million
last year. Adjusted wholesale operating income, which includes restructuring and
impairment charges (gains), was $26.2 million, or 13.2% of net sales in the
current year compared with $16.4 million, or 8.5% of net sales last year. The
60.4% increase in adjusted wholesale operating income was primarily due to a
2.9% increase in net sales, expanded wholesale adjusted gross profit from
increased production and the prior year optimization project, lower wholesale
compensation within general and administrative expenses from reduced headcount
and lower advertising costs. The Company was able to reduce adjusted operating
expenses by 9.3% primarily due to lower headcount, less marketing costs and
actions taken to control and minimize expenditures.



Retail operating income was $11.9 million compared with $1.4 million for the
prior year period. Adjusted retail operating income, which includes
restructuring and impairment charges, was $12.9 million, or 4.9% of net sales in
the current year compared with $1.6 million, or 0.6% of net sales last year. The
increase in retail operating income of $11.4 million was due to our ability to
reduce retail operating expenses by 13.4% year over year, including lower
selling, administrative, occupancy and regional management costs. These benefits
were partially offset by a 4.9% reduction in net sales.



Income tax expense was $7.2 million compared with $6.7 million a year ago.
Income tax expense was higher due to the $5.5 million increase in income before
income taxes partially offset by a $0.9 million reduction to our valuation
allowance on retail segment deferred tax assets. Our effective rate was 21.5% in
the current year first half compared with 24.1% last year due to the discrete
tax benefit related to a reduction in our valuation allowance on retail deferred
tax assets.



Net income was $26.2 million compared with $21.2 million last year. Adjusted net
income of $26.5 million was up 59.8% from $16.6 million a year ago due to an
expanded wholesale gross profit from optimization efficiencies, strong cost
containment measures resulting in a significant reduction in adjusted operating
expenses and improving production and delivery of products to our customers.
While net sales decreased 5.3% during the first half of fiscal 2021, the second
quarter net sales improved 2.4%, which helped improve gross profit, operating
income and net income.



Diluted EPS was $1.04 compared with $0.79 per diluted share in the prior year
comparable period. Adjusted diluted EPS was $1.05, up 69.4% compared with $0.62
in the prior year. Restructuring and impairment charges, net of the valuation
allowance tax benefit, negatively impacted diluted EPS by $0.01 during fiscal
2021. The gain on the sale of the Passaic, New Jersey property partially offset
with other fiscal 2020 restructuring activities and corporate actions increased
diluted EPS by $0.17 in the prior year.

Reconciliation of Non-GAAP Financial Measures





To supplement the financial measures prepared in accordance with GAAP, we use
non-GAAP financial measures, including adjusted gross profit and margin,
adjusted operating income, adjusted wholesale operating income and margin,
adjusted retail operating income and margin, adjusted net income and adjusted
diluted earnings per share. The reconciliations of these non-GAAP financial
measures to the most directly comparable financial measures calculated and
presented in accordance with GAAP are shown in tables below.



These non-GAAP measures are derived from the consolidated financial statements
but are not presented in accordance with GAAP. We believe these non-GAAP
measures provide a meaningful comparison of our results to others in our
industry and our prior year results. Investors should consider these non-GAAP
financial measures in addition to, and not as a substitute for, our financial
performance measures prepared in accordance with GAAP. Moreover, these non-GAAP
financial measures have limitations in that they do not reflect all the items
associated with the operations of the business as determined in accordance with
GAAP. Other companies may calculate similarly titled non-GAAP financial measures
differently than we do, limiting the usefulness of those measures for
comparative purposes.

Despite the limitations of these non-GAAP financial measures, we believe these adjusted financial measures and the information they provide are useful in viewing our performance using the same tools that management uses to assess progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance.

The following tables below show a reconciliation of non-GAAP financial measures used in this filing to the most directly comparable GAAP financial measures.





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