Ethan Allen Sitting Pretty, HomeGrocer Not Delivering

Ethan Allen Interiors (ETH)

Jim: Buy

Mike: Buy

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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

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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.

Jim: True, they do seem to be everywhere. These are the big trucks that have what looks like a big pear or something on the side. I’m not quite sure what that fruit or vegetable is.

Mike: It’s a peach, Jim.

Jim: Oh. You know that for a fact?

Mike: Yes, Jim. One-hundred percent sure. A pear is that thing that’s shaped like a pear. A peach is that thing that’s peach-colored.

Jim: I wondered what it was.

Mike: Yes, just pick something other than fruit salad to bring to my next potluck, OK?

Jim: Well, the fact is you’re right, those trucks seem to be everywhere.

Mike: HomeGrocer.com offers a remarkable service. You can order online from a grocery selection that’s certainly competitive in variety with your local supermarket.

Jim: It claims to have 15,000 items available, including lots of fresh stuff like meat and produce.

Mike: Everybody we know who has tried it says the stuff is actually fresh. Its customer service is excellent, and it offers free delivery for sizable orders. Plus, you can specify a delivery window of 90 minutes, which is a great convenience. I mean almost everybody, even “dot-com” executives, gets home for at least 90 minutes a week.

Jim: There are a couple of other interesting aspects about this company, which was launched in mid-’98 and went public just a couple months ago for $12 a share. One of its big investors is Amazon.com, which helps promote HomeGrocer’s site, and it recently signed a deal with America Online to be AOL’s primary provider of online groceries.

Mike: But now the bad news. This stock went public at $12, and it’s now selling for the princely sum of about $4.

Jim: If it drops much lower, it will cost the same as, what, a pear? This is despite the fact that this company came up with a novel idea in terms of online convenience, and seems to execute well. HomeGrocer.com is run by Mary Alice Taylor, who spent 17 years at Federal Express, so she knows what’s required for on-time deliveries.

Mike: But pardon my X-ray eyes: I look at this company and I see a supermarket.

Jim: What’s wrong with that?

Mike: Simply that if it’s going to move from negative profit margins--naturally it’s losing money right now--to positive by hitting the big time, that means it will enjoy the same profit margins as big supermarket chains, which happen to be one cent on the dollar.

Jim: Talk about upside potential! Plus, HomeGrocer.com already has lots of competition. There’s an online outfit called Webvan Group, whose stock has also plunged in recent months. And if HomeGrocer.com keeps growing, how long do you think it will take for the likes of Albertson’s and Kroger Co.’s Ralphs chain and others to offer the same online services?

Mike: So what we have is an expensive way to deliver merchandise in a low-profit business.

Jim: Well, that’s offset a little bit because HomeGrocer.com doesn’t pay for lots of workers or real estate, like Ralphs does.

Mike: So maybe its profit margin will be 1.5 cents on the dollar. By the way, I want to point out that as we speak I’m looking at a recent report from a securities analyst who says HomeGrocer.com is addressing “an enormous $600-billion opportunity.”

Jim: $600 billion?

Mike: I look at this and I say this is on the level of false advertising, and I’m being kind. The fact is, the entire U.S. grocery market today is $465 billion. And the researchers who specialize in online markets say that, over the next four years, maybe online grocery orders will reach $17 billion, or 3% of the total. Where do those guys get off talking about $600 billion? This is just Baloney with a capital B.

Jim: To put all this in perspective, HomeGrocer.com’s sales this year are expected to be around $150 million. Now, it also has big expansion plans for places like Dallas, San Francisco and so on, yet it appears it won’t get past the next 12 months without needing more cash.

Mike: I’m glad you brought that up. When HomeGrocer.com went public, it brought its cash hoard up to $250 million. Now it’s going through it at a rate of $20 million or so a month. Sooner or later, it’s going to need more cash from the capital markets.

Jim: And how will that happen with a $4 stock? It could issue debt, but the prime lending rate just went up, so that option is getting more expensive. So I guess there’s a lesson here, Mike. We have a leading-edge dot-com company creating this wonderful niche . . . .

Mike: Right, and its stock price shows that, despite everybody’s kvelling about “irrational exuberance,” investors have turned out to be pretty discriminating.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).