Tom Sandell Makes Comments On Ethan Allen
Sandell Asset Management offers commentary on Ethan Allen, highlighting troubling inconsistencies between statements from Farooq Kathwari, current Chairman, CEO, and President:
- Statement: In a September 19, 2015 article in the Danbury News-Times, Farooq Kathwari is quoted as saying in an interview that he believes that Ethan Allen could be worth well more than $41 per share in the next two years. Mr. Kathwari was additionally quoted as saying: “With all that we’re doing, [the stock price] has to go higher.”
- Why It’s Troubling: A Form 4 filed by Mr. Kathwari on March 24, 2015 indicates that Mr. Kathwari effectively sold 181,401 shares of common stock on March 20, 2015 at a price of $27.98 to pay for the exercise of stock options not due to expire until the years 2018 through 2021. An economically rational individual would not sell shares that he believed were worth well more than $41 per share at such a reduced price.
- Statement: During the Company’s September 16, 2015 Investor Conference, in response to a question regarding the use of proceeds from a prospective debt offering, Mr. Kathwari stated: “We are looking at the possibility of first paying down some of the current debt, the possibility of giving a special dividend and the possibility of perhaps buying, repurchasing shares.”
- Why It’s Troubling: We question why Mr. Kathwari would choose to pay down debt in an almost record-low interest rate environment or pay out a one-time special dividend rather than repurchase shares that are trading at such a dramatic discount to his perception of true value. It is a mathematical fact that every share bought at a discount to intrinsic value increases the per share intrinsic value of the remaining shares and the Company’s current stock price of less than $30 per share is far below Mr. Kathwari’s view of its ultimate value.
- Statement: In the same September 16 meeting, Mr. Kathwari stated, “I have also said previously that this quarter and the next quarter business is going to be impacted with all this clearance that we are doing…I think we are well positioned but the next two quarters as I have said previously it is going to be impacted by all these initiatives.”
- Why It’s Troubling: This sounds like Mr. Kathwari is once again bracing investors for a disappointment and moving the metaphorical goalposts even further down the field. Recall these previous comments from Mr. Kathwari:
- “Looking ahead we have another six months of major changes” – January 27, 2015 (2nd Quarter earnings release)
- “As discussed previously, we expect another six months of some disruption” – April 14, 2015 (Announcement of 3rd Quarter earnings release date) (Note that “six months” from January 27 is now “six months” from April 14)
- “We expect some disruption in the next few months” – July 13, 2015 (Announcement of 4th Quarter earnings release date)
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