Why Ethan Allen Interiors Inc. Stock Fell 12%

By Daniel Sparks Markets Fool.com

What happened

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Ethan Allen (NYSE: ETH) stock fell as much as 15.1% on Thursday, shortly after the company released its fiscal 2017 second-quarter results. The stock closed the trading day down 12.5%.

Image source: Getty Images.

So what

Before Ethan Allen's earnings release this week, the company had pre-announced its second fiscal quarter of 2017, which ends on Dec. 31, before the figures were finalized. At the time of Ethan Allen's early release, analysts were expecting adjusted earnings per share (EPS) of $0.59 and revenue of $213.7 million. But in its Jan. 11 update, Ethan Allen warned that it expected EPS to be between $0.38 and $0.39 and revenue to be $194.7 million.

As expected, the company's actual second-quarter results weren't far off. On Wednesday, the company said it earned adjusted EPS of $0.39 on net sales of $194.7 million. These results were down significantly from adjusted EPS of $0.55 on revenue of $207.5 million in the year-ago quarter.

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While it's not certain, shares could be trading lower on Thursday due to a comment in the earnings release from Ethan Allen CEO Farooq Kathwari about plans to expand its marketing in the third quarter.

These include a major refresh of our product offerings; expansion of our manufacturing capacities; relocation and renovation of our Design Centers; and adding technology at all levels of our enterprise to improve the customer experience. We remain cautiously optimistic, especially in view of the challenging comparison to last year's third quarter when our adjusted diluted earnings per share increased 89%.

These aggressive marketing efforts could weigh on the company's bottom line in the second half of the company's fiscal year.

The stock's Thursday sell-off could also be related to a Dougherty & Co analyst's downgrade of the stock from buy to neutral on Thursday.

Now what

Investors should keep an eye on Ethan Allen's marketing efforts throughout the year to see how they impact the company's finances. Most importantly, investors should look for the marketing efforts to actually drive results by helping revenue return to growth. But investors should also look for updates from management on the costs of these marketing initiatives.

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Daniel Sparks has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.