Ethan Allen Interiors (ETH 26.38) reported a drop in second quarter earnings, due to higher expenses and sluggish top-line growth, but the results still managed to beat analysts' expectations. 

Shares of the Danbury, Conn.-based furniture maker, which are down about 28% in the past year, traded sharply higher in the wake of the report, climbing as much as 14% during the session.  We believe the extreme price reaction is unwarranted, however. 

Despite the better than expected results, we remain cautious about the company's near-term prospects as headwinds caused by an uncertain economy continue to weigh on results and create difficult retail conditions for the home furnishings industry.  With the housing market still in a deep slump and tighter credit conditions putting added strain on consumers, the company faces increasing sales pressures, with both consumers and businesses cutting back on big-ticket purchases. 

Although the company continues to take steps in the right direction by differentiating itself from its peers and repositioning its model to provide interior design services,  the cyclicality of the industry as a whole, along with slowing growth in the U.S., continue to present significant risks.  As such, we would not be buying shares of the company, especially given the sharp spike in prices. 

Earlier this month, Ethan Allen warned that its latest results would fall short of Wall Street's targets, amid continued weakness in the U.S. housing market and a more challenging consumer environment.  Analysts estimates had come down since then. 

For its fiscal second quarter, net income slipped  to $20.6 million, down from $22.8 million in the year ago period.  However, earnings per share were unchanged at $0.70, due to a decline in the number of shares outstanding.  The result exceeded Wall Street's revised estimate.  Analysts on average were expecting the company to post a more modest profit of $0.68 per share. 

The downturn in the housing market has weighed heavily on furniture companies. However, Ethan Allen managed to record sales growth, albeit modest, while many of its competitors have posted declines.  On the top line, revenue edged 0.8% higher to $259.5 million, also beating the consensus estimate of $258.8 million.  Net sales for Ethan Allen's retail division increased 8.6% to $192.6 million, while wholesale sales slipped 5.9% to $155.9 million.  Same store sales at the company's design centers were down 0.6%. 

Although the overall economic environment is expected to remain weak for the foreseeable future, the company said it remains cautiously optimistic about its outlook.  Ethan Allen has a long-term strategy of differentiating itself from its competition and has recently undertaken initiatives to strengthen its retail network. 

--Richard Jahnke, Briefing.com