| ETHAN ALLEN INTERIORS INC Item 1A Risk Factors The following information describes certain significant risks and uncertainties inherent in our business that should be carefully considered, along with other information contained elsewhere in this report and in other filings, when making an investment decision with respect to us |
| If one or more of these risks actually occurs, the impact on our business, including our financial condition, results of operations, and cash flows could be adversely affected |
| We face changes in global and local economic conditions that may adversely affect consumer demand and spending, our manufacturing operations or sources of merchandise |
| Historically, the home furnishings industry has been subject to cyclical variations in the general economy and to uncertainty regarding future economic prospects |
| We are currently confronted with the risk of increased expenses and decreased demand from customers as a result of recent natural disasters and other unfavorable weather conditions, the war in Iraq, armed conflicts and terrorist attacks |
| These global uncertainties, as well as other variations in global economic conditions such as rising fuel costs and increasing interest rates, may continue to cause inconsistent and unpredictable consumer spending habits, while increasing our own fuel, utility, transportation or security costs |
| These risks, as well as industrial accidents or work stoppages, could also severely disrupt our manufacturing operations, which could have a material adverse effect on our financial performance |
| We import a portion of our merchandise from foreign countries |
| As a result, our costs may be increased by events affecting international commerce and businesses located abroad, including changes in international trade, central bank actions and other governmental policies of the US and the countries from which we import a portion of our merchandise |
| The inability to import products from certain foreign countries or the imposition of significant tariffs could have a material adverse effect on our results of operations |
| Competition from overseas manufacturers continues to increase and may adversely affect our business, operating results or financial condition |
| Our wholesale business segment is involved in the development of our brand, which encompasses the design, manufacture, sourcing, sales and distribution of our home furnishings products, and competes with other US and foreign manufacturers |
| Our retail business segment sells home furnishings to consumers through a network of Company-owned IDCs, and competes against a diverse group of retailers ranging from specialty stores to traditional furniture and department stores, any of which may operate locally, regionally and nationally |
| We also compete with these and other retailers for appropriate retail locations as well as for qualified design consultants and management personnel |
| Such competition could adversely affect our future financial performance |
| Industry globalization has led to increased competitive pressures brought about by the increasing volume of imported finished goods and components, particularly for case good products, and the development of manufacturing capabilities in other countries, specifically within Asia |
| The increase in overseas production capacity in recent years has created over-capacity for many US manufacturers, including us, which has led to industry-wide plant consolidation |
| In addition, because many foreign manufacturers are able to maintain substantially lower production costs, including the cost of labor and overhead, imported product may be capable of being sold at a lower price to consumers, which, in turn, could lead to some measure of industry-wide price deflation |
| We cannot provide assurance that we will be able to establish or maintain relationships with certain manufacturers, either abroad or domestically, to supply us with selected case goods, upholstery and home accessory items to enable us to maintain our competitive advantage |
| In addition, the recent emergence of foreign manufacturers has served to broaden the competitive landscape |
| Some of these competitors produce furniture types not manufactured by us and may have greater financial and other resources available to them |
| This competition could adversely affect our future financial performance |
| 11 Failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition |
| Sales of our products are dependent upon consumer acceptance of our product designs, styles, quality and price |
| We continuously monitor changes in home design trends through attendance at international industry events and fashion shows, internal marketing research, and regular communication with our retailers and IDC design consultants who provide valuable input on consumer tendencies |
| Such tastes and trends can change rapidly and any delay or failure to anticipate or respond to changing consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition |
| Fluctuations in the price, availability and quality of raw materials could result in increased costs or cause production delays which might result in a decline in sales, either of which could adversely impact our earnings |
| We use various types of wood, foam, fibers, fabrics, leathers, and other raw materials in manufacturing our furniture |
| Certain of our raw materials, including fabrics, are purchased both abroad and domestically |
| Fluctuations in the price, availability and quality of raw materials could result in increased costs or a delay in manufacturing our products, which in turn could result in a delay in delivering products to our customers |
| For example, lumber prices fluctuate over time based on factors such as weather and demand, which in turn, impact availability |
| Production delays or upward trends in raw material prices could result in lower sales or margins, thereby adversely impacting our earnings |
| In addition, certain suppliers may require extensive advance notice of our requirements in order to produce products in the quantities we desire |
| This long lead time may require us to place orders far in advance of the time when certain products will be offered for sale, thereby exposing us to risks relating to shifts in consumer demand and trends, and any downturn in the US economy |
| Our business is sensitive to increasing labor costs, competitive labor markets, our continued ability to retain high-quality personnel and risks of work stoppages |
| The market for qualified employees and personnel in the retail and manufacturing industries is highly competitive |
| Our success depends upon our ability to attract, retain and motivate qualified craftsmen, management, marketing and sales personnel and upon the continued contributions of these individuals |
| We cannot provide assurance that we will be successful in attracting and retaining qualified personnel |
| A shortage of qualified personnel may require us to enhance our wage and benefits package in order to compete effectively in the hiring and retention of qualified employees |
| Our labor costs may continue to increase and such increases may not be recovered |
| In addition, some of our employees are covered by collective bargaining agreements with local labor unions |
| Although we do not anticipate any difficulty renegotiating these contracts as they expire, a labor-related stoppage by these unionized employees could adversely affect our business and results of operations |
| The loss of the services of key personnel or our failure to attract additional qualified personnel could have a material adverse effect on our business, operating results and financial condition |
| Our success depends upon our brand, marketing and advertising efforts and pricing strategies, and if we are not able to maintain and enhance our brand, or if we are not successful in these efforts, our business and operating results could be adversely affected |
| Maintaining and enhancing our brand is critical to our ability to expand our base of customers and may require us to make substantial investments |
| We cannot provide assurance that our marketing, advertising and other efforts to promote and maintain awareness of our brand will not require us to incur substantial costs |
| If these efforts are unsuccessful or we incur substantial costs in connection with these efforts, our business, operating results and financial condition could be adversely affected |
| 12 We may not be able to maintain our current IDC locations at current costs |
| We may also fail to successfully select and secure IDC locations |
| Our IDCs are typically located in busy urban settings as freestanding destinations or as part of suburban strip malls, depending upon the real estate opportunities in a particular market |
| Our business competes with other retailers and as a result, our success may be affected by our ability to renew current IDC leases and to select and secure appropriate retail locations for existing and future IDCs |
| We depend on key personnel and could be affected by the loss of their services |
| The success of our business depends upon the services of certain senior executives, and in particular, the services of M Farooq Kathwari, Chairman of the Board, President and Chief Executive Officer, who is the only one of our senior executives who operates under a written employment agreement |
| The loss of any such person or other key personnel could have a material adverse effect on our business and results of operations |
| As we expand and grow our business, we may rely on external funding sources to finance our operations and growth |
| Historically, we have relied upon our cash from operations to fund our operations and growth |
| As we expand our business, we may rely on external funding sources, including the proceeds from the issuance of debt or the dlra200 million revolving bank line of credit available under our existing credit facility |
| Any unexpected reduction in cash flow from operations could increase our external funding requirements to levels above those currently available |
| There can be no assurance that we will not experience unexpected cash flow shortfalls in the future or that any increase in external funding required by such shortfalls will be available |
| Our results of operations for any quarter are not necessarily indicative of our results of operations for a full year |
| Sales of furniture and other home furnishing products fluctuate from quarter to quarter due to such factors as changes in global and regional economic conditions, changes in competitive conditions, changes in production schedules in response to seasonal changes in energy costs and weather conditions, and changes in consumer order patterns |
| From time to time, we have experienced, and may continue to experience, volatility with respect to demand for our home furnishing products |
| Accordingly, results of operations for any quarter are not necessarily indicative of the results of operations for a full year |
| Our current and former manufacturing operations are subject to increasingly stringent environmental, health and safety requirements |
| We use and generate hazardous substances in our manufacturing and retail operations |
| In addition, both the manufacturing properties on which we currently operate and those on which we have ceased operations are and have been used for industrial purposes |
| Our manufacturing operations and, to a lesser extent, our retail operations involve risk of personal injury or death |
| We are subject to increasingly stringent environmental, health and safety laws and regulations relating to our current and former properties and our current operations |
| These laws and regulations provide for substantial fines and criminal sanctions for violations and sometimes require the installation of costly pollution control or safety equipment or costly changes in operations to limit pollution or decrease the likelihood of injuries |
| In addition, we may become subject to potentially material liabilities for the investigation and cleanup of contaminated properties and to claims alleging personal injury or property damage resulting from exposure to or releases of hazardous substances or personal injury as a result of an unsafe workplace |
| We have been identified as a potentially responsible party in connection with five sites that are currently listed, or proposed for inclusion, on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act or its state counterpart |
| In addition, noncompliance with, or stricter enforcement of, existing laws and regulations, adoption of more stringent new laws and 13 regulations, discovery of previously unknown contamination or imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could be material |
| Failure to protect our intellectual property could adversely affect us |
| We believe that our patents, trademarks, service marks, trade secrets, copyrights and all of our other intellectual property are important to our success |
| We rely on patent, trademark, copyright and trade secret laws, and confidentiality and restricted use agreements, to protect our intellectual property and may seek licenses to intellectual property of others |
| Some of our intellectual property is not covered by any patent, trademark, or copyright or any applications for the same |
| We cannot provide assurance that agreements designed to protect our intellectual property will not be breached, that we will have adequate remedies for any such breach, or that the efforts we take to protect our proprietary rights will be sufficient or effective |
| Any significant impairment of our intellectual property rights or failure to obtain licenses of intellectual property from third parties could harm our business or our ability to compete |
| Moreover, we cannot provide assurance that the use of our technology or proprietary know-how or information does not infringe the intellectual property rights of others |
| If we have to litigate to protect or defend any of our rights, such litigation could result in significant expense |