Slide 1: The Case, Candidates and Plan for Change
1 Strictly Confidential. Do Not Duplicate or Distribute. As of July 24, 2014 - Version 19 The Case, Candidates and Plan for Change November 2015 www.RedesignEthanAllen.com Re - Design
Slide 2: Re-Design Ethan Allen quote from Wall Street Journal
2 Strictly Confidential. Do Not Duplicate or Distribute. Re - Design Ethan Allen “Shareholders could fairly ask why the company got around to corporate housekeeping only after Sandell appeared” Dealpolitik: “When Archaic Takeover Defenses Get in the Way” by Ronald Barusch , The Wall Street Journal,
Slide 3: Strictly . Do Not Duplicate or Distribute. THIS PRESENTATION WITH RESPECT TO ETHAN ALLEN
3 Strictly Confidential. Do Not Duplicate or Distribute. THIS PRESENTATION WITH RESPECT TO ETHAN ALLEN INTERIORS INC. (“ETHAN ALLEN” or “ETH ” or THE “COMPANY”) IS FOR GENERAL INFORMATIONAL PURPOSES ONLY. IT DOES NOT HAVE REGARD TO THE SPECIFIC INVESTMENT OBJECTIVE, FINANCIAL SITUATION, SUITABILITY
Slide 4: Ethan Allen – America's Classic Design Brand
4 Strictly Confidential. Do Not Duplicate or Distribute. Ethan Allen – “America’s Classic Design Brand”
Slide 5: Ethan Allen Interiors Inc. – Company Overview
5 Strictly Confidential. Do Not Duplicate or Distribute. Ethan Allen Interiors Inc. – Company Overview Ŷ Ethan Allen Interiors Inc . (“Ethan Allen” or the “Company”) (NYSE : ETH), a company named after the American Revolutionary War soldier and statesman, is a truly iconic American branded manufactu
Slide 6: The Problem in a Nutshell
6 Strictly Confidential. Do Not Duplicate or Distribute. The Problem in a Nutshell “ We run it like a private company” -- Farooq Kathwari October 5, 2015 conference call with Farooq Kathwari, Corey Whitely, Tom Sandell and Richard Mansouri
Slide 7: Executive Summary – Situation Overview
7 Strictly Confidential. Do Not Duplicate or Distribute. Executive Summary – Situation Overview Ŷ Sandell has beneficial ownership of 5 . 5 % of Ethan Allen, which makes us one of the Company’s largest shareholders Ŷ We believe that the Company’s stock price does not reflect the significant value as
Slide 8: Executive Summary – Many Troubling Issues
8 Strictly Confidential. Do Not Duplicate or Distribute. Executive Summary – Many Troubling Issues ■ There are several issues associated with Ethan Allen that we believe can be traced to a stale and outmoded way of thinking about operations and finance Ƈ Central to Ethan Allen’s underperformance is
Slide 9: Executive Summary – Poor Corporate Governance
9 Strictly Confidential. Do Not Duplicate or Distribute. Executive Summary – Poor Corporate Governance ■ We believe that the preceding issues and the abysmal stock price performance associated with these issues can be traced back to one over - arching problem : Poor corporate governance Ƈ The Compan
Slide 10: Executive Summary – Candidates for Change
10 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ In our opinion, Ethan Allen desperately needs a new and improved Board of Directors that can bring fresh perspective and new ideas to the Company Ŷ The following Director candidates together possess very relevant skills in many key function
Slide 11: Executive Summary – Action Plan
11 Strictly Confidential. Do Not Duplicate or Distribute. Executive Summary – Action Plan ■ The preceding candidates, if elected and in accordance with their independent judgment and fiduciary duties, would work together to oversee a comprehensive action plan in order to enhance shareholder value Ŷ
Slide 12: Poor Shareholder Returns – A Note on Peers
12 Strictly Confidential. Do Not Duplicate or Distribute. Poor Shareholder Returns – A Note on Peers ■ While the Company has under - performed its selected peer group according to both the Company’s 2014 and 2015 proxy statements, the list at the right was chosen to include comparable companies that
Slide 13: Stock Price: Absolute Performance
13 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ The following illustrates in graphic detail the Company’s absolute stock price performance over an extended time period spanning the last 10 years Stock Price: Absolute Performance Source: Bloomberg (as of 7/8/15, the day prior to media rep
Slide 14: Stock Price: Relative Performance
14 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ The following illustrates in graphic detail the Company’s performance as it relates to total shareholder return versus variou s sets of peers, and relevant indices, over the last 10 years Stock Price: Relative Performance Source: Bloomberg
Slide 15: Summary Underperformance
15 Strictly Confidential. Do Not Duplicate or Distribute. Summary Underperformance Ŷ Ethan Allen shareholders have suffered years of underperformance versus the Company’s own selected proxy peers and other home furnishing peers, along with the broader market, over almost every time period analyzed E
Slide 16: Underperformance Matrix – 1 Year, 3 Years
16 Strictly Confidential. Do Not Duplicate or Distribute. Underperformance Matrix – 1 Year, 3 Years Ŷ We have analyzed the Company’s underperformance over several time periods, using several specific dates of reference: Ɣ July 8, the day prior to media reports of private equity interest (and one wee
Slide 17: Underperformance Matrix – 5 Years, 10 Years
17 Strictly Confidential. Do Not Duplicate or Distribute. Underperformance Matrix – 5 Years, 10 Years Ŷ Ethan Allen shareholders have suffered significant long - term underperformance Source : Bloomberg . Home Furnishing Peers include BSET, HVT, LZB, PIR, RH, and WSM . Proxy Peers ( 2014 ) include B
Slide 18: Lackluster Revenue Performance
18 Strictly Confidential. Do Not Duplicate or Distribute. Lackluster Revenue Performance Ŷ The following illustrates the Company’s lackluster performance in revenue generation over the last five years versus its peer s Source: Bloomberg ($ in millions) Revenue FY2010/ FY2011/ FY2012/ FY2013/ FY2014/
Slide 19: EBITDA Follows Revenue
19 Strictly Confidential. Do Not Duplicate or Distribute. EBITDA Follows Revenue Ŷ As can be seen, lagging revenue growth translates into lagging EBITDA growth Source: Bloomberg (1) Adjusted for stock - based compensation expense beginning fiscal year of IPO (2) Adjusted for pension settlement expen
Slide 20: Revenue Growth Lagging Peers
20 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ Ethan Allen has faltered after the “Great Recession” and has fallen dramatically behind the average of its peers over the las t several years in terms of the key retailing operational metric of year - to - year revenue growth Revenue Growth
Slide 21: Revenue: Disappointing Long-Term Trends
21 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ Ethan Allen has witnessed compound annual revenue growth far below its peers over the last five years Revenue: Disappointing Long - Term Trends Ŷ The following chart graphically illustrates how so many years of poor revenue performance resu
Slide 22: Insignificant Online Presence
22 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ Ethan Allen has failed in its ability to generate e - commerce revenue and has an insignificant online presence Insignificant Online Presence Source : SEC filings and analyst estimates . Restoration Hardware’s 10 - K notes that in Fiscal 20
Slide 23: The Importance of Online Revenue
23 Strictly Confidential. Do Not Duplicate or Distribute. The Importance of Online Revenue ■ T he importance of online revenue is articulated in the following passage, which projects that 50 % of all retail sales will take place online in the not - too - distant future “The store is far from dead, b
Slide 24: A Tale of Two Retailers
24 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ Restoration Hardware’s revenue five years ago was not materially different from Ethan Allen and has subsequently grown revenue dramatically A Tale of Two Retailers Source: Bloomberg Ŷ Restoration Hardware experienced the same “Great Recessi
Slide 25: 2015 Commentary
25 Strictly Confidential. Do Not Duplicate or Distribute. 2015 Commentary ■ Note the following 2015 commentary regarding Restoration Hardware, which provides context for the dramatic revenue growth enjoyed by the company following its 2010 reinvention discussed on the previous page “It’s hard to bel
Slide 26: Analyst commentary on merchandising
26 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ The conclusion amongst the analytical community supports our belief that the Company’s stale and complacent approach to merchandising is responsible for Ethan Allen’s poor sales performance (emphasis added in the following commentary) “ Eth
Slide 27: Analyst commentary on sales
27 Strictly Confidential. Do Not Duplicate or Distribute. “ Ethan Allen is set to deliver a 4 th consecutive quarter of weak sales despite the benefit of strong retail and wholesale backlogs heading into the quarter” – Dougherty & Company, October 20, 2015 “ETH’s results have been volatile in recent
Slide 28: Diversion of Focus
28 Strictly Confidential. Do Not Duplicate or Distribute. Diversion of Focus ■ Ethan Allen manufactures 70 % of the furniture it sells in its wholly - owned North American manufacturing plants ■ Ethan Allen estimates that its manufacturing plants are currently operating at only 71 % capacity Ŷ Resto
Slide 29: Perplexing Decision
29 Strictly Confidential. Do Not Duplicate or Distribute. Perplexing Decision Rent EBITDAR Revenue EBITDA Expense EBITDAR Margin Ethan Allen $754.6 $89.6 $28.3 $117.9 15.6% Williams-Sonoma 4,698.7 657.1 222.9 880.0 18.7% Restoration Hardware 1,867.4 225.0 83.6 308.6 16.5% Average 17.6% ■ Aside from
Slide 30: Real Estate Portfolio
30 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ Ethan Allen has a vast portfolio of real estate assets encompassing retail , industrial , corporate , and hotel properties Real Estate Portfolio ▪ 70 owned retail stores Ɣ 53 wholly - owned retail stores Ɣ 17 owned retail stores subject to
Slide 31: Real Estate - Retail
31 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ Ethan Allen has several formats for its retail stores or design centers Real Estate - Retail
Slide 32: Real Estate - Corporate
32 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ The Ethan Allen Corporate Headquarters is a 144,000 square feet building that sits on 18.0 acres of land Real Estate - Corporate
Slide 33: Real Estate - Hotel
33 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ The Ethan Allen Hotel and Conference Center has 200 rooms and occupies 5.4 acres of land Real Estate - Hotel
Slide 34: Real Estate - Industrial
34 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ The Company owns eight manufacturing facilities occupying almost 3 million square feet of industrial space, as well as two distribution and fulfillment centers Real Estate - Industrial
Slide 35: Unrecognized Real Estate Value
35 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ The following valuation was summarized based on estimates from an analysis conducted by CBRE, Inc. (CBRE is a global commercial real estate services firm with 372 offices in 44 countries that advised on approximately $285 billion of real es
Slide 36: Arguments against monetizing real estate
36 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ Farooq Kathwari’s uses the same specious argument for refusing to monetize the Company’s vast real estate assets that we have heard CEOs seek refuge in before, namely his belief that the Company’s pursuit of a sale - leaseback or other form
Slide 37: Bob Evans Farms real estate example
37 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ Our history as one of the largest investors in Bob Evans Farms, Inc. is an illustrative example of the value that can be extr a cted from a company’s non - retail real estate properties Ŷ While Bob Evans was primarily known as a restaurant
Slide 38: Inefficient Balance Sheet
38 Strictly Confidential. Do Not Duplicate or Distribute. Inefficient Balance Sheet Ŷ For years, Ethan Allen has been operating with what we believe is a highly - inefficient balance sheet, with recent net leverage actually negative Ŷ On September 2 , 2015 , Ethan Allen announced that it intends to
Slide 39: A Stale Board – Before our Active Engagement
39 Strictly Confidential. Do Not Duplicate or Distribute. A Stale Board – Before our Active Engagement Ŷ The Ethan Allen Board of Directors (the “Board”) consisted of many long - tenured Directors before our active engagement with the Company, with four Directors serving for over 10 years, and three
Slide 40: Board additions after Sandell engagement
40 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ It would seem that Ethan Allen “coincidentally” decided that it would add a new Board member shortly after our active engagement with the Company began in April of 2015 , and decided to add another Board member shortly after we nominated ou
Slide 41: The "dead hand" provision in the Certificate of Incorporation
41 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ The Company’s Certificate of Incorporation has contained for 22 years a truly outrageous entrenchment device, known as a “dead hand” provision . This provision, which is “Article Fifth” in the Certificate of Incorporation, can strip the rig
Slide 42: Dead hand entrenches current directors
42 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ The Company’s “dead hand” provision allows Farooq Kathwari and the current Directors who were present on April 1 , 1993 , and only subsequent Directors that they themselves approved, to entrench themselves in a manner that gives them effect
Slide 43: Credit agreement dead hand provision
43 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ The Company’s credit agreement had another “dead hand” provision which was removed only after our public outcry Ŷ Farooq Kathwari’s stated commentary illustrates how even he, the Chairman of the Company (and CEO and President), and presumab
Slide 44: The Imperial CEO
44 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ We believe Farooq Kathwari is the prototypical Imperial CEO, as he serves not only as CEO, but also as Chairman and President Ŷ This type of arrangement creates an inherent conflict of interest, leads to a reduction in management accountabi
Slide 45: Damning Commentary
45 Strictly Confidential. Do Not Duplicate or Distribute. “ We run it like a private company” -- Farooq Kathwari Damning Commentary October 5, 2015 conference call with Farooq Kathwari, Corey Whitely, Tom Sandell and Richard Mansouri
Slide 46: Action Plan: Retailing, Finance and Governance
46 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ We believe our nominees should embrace an action plan plan that contemplates change across three key areas – Retailing, Finance and Governance Action Plan Retailing Ɣ Increase revenue through re - branding efforts and the pursuit of enhance
Slide 47: Retailing: Brand opportunities
47 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ We believe that the Ethan Allen brand name has great resonance with consumers, yet existing management has failed to capitalize on the multivariate opportunities that exist to derive value from the brand equity associated with the Company’s
Slide 48: Retailing: Driving Increased Revenue
48 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ We believe there may be several near - term opportunities for the Company to pursue in order to drive increased revenue and associated EBITDA. Note that this analysis does not include any longer - term revenue potential from re - branding o
Slide 49: Retailing: Driving Increased Revenue levers
49 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ There would appear to be many opportunities or levers to increase revenue Retailing: Driving Increased Revenue Opportunity / Value Lever Financial Opportunity ($MM) (% of FY2015 ) Comments Revenue EBITDA Pricing $44 (6%) $44 (49%) • Based o
Slide 50: Retailing: Pricing and Offering Expansion
50 Strictly Confidential. Do Not Duplicate or Distribute. Retailing: Pricing and Offering Expansion Average Purchase Value $1,700 1 $3,700 2 80 th Percentile Price Differential Ratio * 1.0 1.6 Price Normalized Purchase Value $1,700 $2,342 Purchase Value Differential – Increase in Product Purchases $
Slide 51: Retailing: Broaden Sales Channels
51 Strictly Confidential. Do Not Duplicate or Distribute. Retailing: Broaden Sales Channels Direct Channel Opportunity FY 2015 Revenues ($MM) $755 Direct Channel Opportunity (as % of Total Revenue) 15% Current Direct Revenue (as % of Total Revenue) 5% Additional Revenues* ($MM) $76 2015 EBITDA as %
Slide 52: Retailing: Store Expansion
52 Strictly Confidential. Do Not Duplicate or Distribute. Retailing: Store Expansion State Median Income ($000's ) House - holds (Millions) Furniture Stores (1) Density ( Stores/MM HH) Initial View - Store Potential (2) NY $58.9 7.28 56 7.7 21 IL $57.4 4.77 40 8.4 11 WA $61.4 2.68 20 7.5 8 PA $53.2
Slide 53: Finance: Assessment of Real Estate (Retail Assets)
53 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ Ethan Allen has employed a different real estate strategy than its peers with respect to their retail operations, as the Company owns significantly more retail stores than any of its peers . This strategy has not proven successful in terms
Slide 54: Finance: Corporate headquarters and hotel
54 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ The Company owns its corporate headquarters, which consists of a 144 , 000 square feet office building that sits on 18 . 0 acres of land . Adjacent to its headquarters is the wholly - owned Ethan Allen Hotel and Conference Center, which has
Slide 55: Finance: Balance Sheet Optimization
55 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ We do not believe that Ethan Allen has optimized its balance sheet/capital structure for many years Finance: Balance Sheet Optimization » It is our view that Ethan Allen must continually assess its capital structure to maintain an appropria
Slide 56: Governance: Modernize Policies
56 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ We believe that Ethan Allen must take steps to materially enhance and modernize its governance policies to allow for greater accountability to shareholders Ŷ The following are but a few of the governance enhancements that we believe the Com
Slide 57: Governance: Management succession planning
57 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ A key role of the Board of Directors is to ensure that there is a robust plan in place to ensure an orderly management succes s ion process. We believe the following should be part of a proper process to develop and implement succession pla
Slide 58: Governance: Continuity and Transition Planning
58 Strictly Confidential. Do Not Duplicate or Distribute. Governance: Continuity and Transition Planning Ŷ Should management be unwilling or unable to work constructively with the highly - qualified nominees that we hope to have elected to the Board, we have contingency plans in place to ensure an o
Slide 59: Governance: "Public" versus "Private"
59 Strictly Confidential. Do Not Duplicate or Distribute. Ŷ While we believe that Ethan Allen with a reconstituted Board has the ability to create significant value for shareholders on i ts own while maintaining its publicly - traded status , we cannot ignore Farooq Kathwari’s history with the Compa
Slide 60: Governance: "Public" versus "Private" (Cont'd)
60 Strictly Confidential. Do Not Duplicate or Distribute. Governance: “Public” versus “Private” (Cont’d) Ŷ Given the very real possibility of a take - private transaction involving Ethan Allen, we believe it is imperative that the Boar d has independent (read non - management) Directors with actual
Slide 61: Edward Glickman
61 Strictly Confidential. Do Not Duplicate or Distribute. ■ Edward Glickman – Currently the Executive Chair of FG Asset Management US, an asset management and investment firm, since 2013 , Edward Glickman has over 25 years of real estate experience encompassing both operations and finance . He was t
Slide 62: Kathy Herbert
62 Strictly Confidential. Do Not Duplicate or Distribute. ■ Kathy Herbert – With 35 years of experience in human resources and operations in the retail space, Kathy Herbert brings a wealth of practical expertise to solve complex, cross - functional business problems . Ms . Herbert was Executive Vice
Slide 63: Richard Mansouri
63 Strictly Confidential. Do Not Duplicate or Distribute. ■ Richard Mansouri – As a Managing Director at Sandell Asset Management Corp . since 2013 , Richard Mansouri is responsible for the research and analysis of numerous publicly - traded equity securities and has been instrumental in expanding S
Slide 64: Annelise Osborne
64 Strictly Confidential. Do Not Duplicate or Distribute. ■ Annelise Osborne – Senior Vice President in the Commercial Real Estate Finance Group at Moody’s Investor Service, Annelise Osborne has 16 years of finance experience that encompasses the evaluation of a wide range of transactions . Ms . Osb
Slide 65: Ken Pilot
65 Strictly Confidential. Do Not Duplicate or Distribute. ■ Ken Pilot – Ken Pilot has over 30 years of experience across all aspects of the retail business including merchandising, operations, e - commerce, logistics, sourcing and production and has particularly valuable expertise in home furnishing
Slide 66: Alex Wolf
66 Strictly Confidential. Do Not Duplicate or Distribute. ■ Alex Wolf - As a former Partner/Managing Director in the Private Equity Group at Cerberus Capital Management, L . P . where he worked from 2001 to 2012 , Mr . Wolf has been involved in the acquisition and post - acquisition management of nu
Slide 67: Legend
67 Strictly Confidential. Do Not Duplicate or Distribute. Legend Sandell Asset Management Corp., Castlerigg Master Investments Ltd., Castlerigg International Limited, Castlerigg Internationa l Holdings Limited, Castlerigg Offshore Holdings, Ltd., Castlerigg Active Investment Fund, Ltd., Castlerigg A