Ethan Allen Interiors (ETH) RECOMMENDATION: HOLD

Investment Thesis Broad product range in casual and classical styles appeals to a larger customer base Vertical integration allows superior manufacturing and market efficiency Uniform pricing, national advertising, and exclusive distribution system uniquely positions ETH to sell its products online Strong balance sheet and free cash flow should allow for further growth through acquisitions, expansion, and share repurchases Customer service focus allows for higher margins Well-seasoned management with immense industry experience

Background Ethan Allen Inc. is a leading manufacturer and retailer of quality home furnishings in the following product categories : The Company produces or assembles 80% of its products at its 21 manufacturing facilities and 3 sawmills.

Background Store Network 305 Ethan Allen Stores 82 are owned by the Company 203 are independently owned Complete room Displays Style 2 categories Classic, which includes English 18th Century and 19th century Neo- Classic styling) Casual (contemporary design elements)

Background Ethan Allen's policy is to sell its products at the same delivered cost to all dealers nationwide, regardless of their shipping point. The adoption of this policy has discouraged dealers from carrying significant inventory in their own warehouses. As a result, Ethan Allen obtains accurate information regarding sales to dealers to better plan production runs and manage inventory. Having one national landed cost has permitted Ethan Allen to provide one national suggested retail price which, in turn, helps facilitate a national advertising program. Ethan Allen television advertising is aired approximately 27 weeks per year

Important Shareholders

Stage 2 (1999 and onward) Goal is to make the shopping experience of customers as enjoyable and effortless as possible - New contemporary store façade - Plan is to relocate or add 10 –15 stores per year - Company owned stores represent 27% of total - New product line focuses on two different lifestyles, casual and classic (compared to four product categories in the past) - Simple finance plan - Regular sales events spread over the four quarters - Clicks and mortar

Economic Environment Furniture industry has benefited from a strong economy. -Rising Income Levels - Family net worth has jumped 18 %, or from $60,900 to $71,600 in past five years -Consumer Confidence -Wealth effect of booming equity market -49% of U.S. families hold stock, up from 32% in 1990

Economic Environment Furniture industry has benefited from a strong economy -Favorable Demographics -Baby boomers are reaching their peak earning and furniture spending years -Record Home Sales - A record 66.8% of American households owned their homes at the end of 1999

Present Economy Housing Activity Slowing -Result of Fed’s tightening General Consensus: ECONOMIC SLOWDOWN Hard Landing or Soft Landing?

Why Be Bullish on Furniture & Ethan Allen Recent strength in housing should still sustain furniture demand -12 to 18 month lag between purchasing a house and furnishing the interior Expect furniture companies to continue to report strong results - Healthy home sales levels and high consumer confidence Furniture stocks undervalued by association with housing & economy - Furniture P/E’s are low, and near the low of historical ranges

5 Year Stock Price

Financials Moving on to Excel

Word on the Street First Union Securities has a buy rating on ETH with an estimated 2001 EPS of $2.40 and a 12 mo. price target of $30 (12.5x) Sun Trust Equitable Securities has a buy rating on ETH with an estimated 2001 EPS of $2.43 UBS Warburg has a buy rating on ETH with an estimated 2001 EPS of $2.35 and a 12 mo. price target of $38 (16x) Robertson Stephens has a buy rating on ETH with an estimated EPS of $2.44

Summary Increase in EPS since 1991 (20 consecutive quarters with significant increase in sales and EPS) Overall performing better than industry and peers with higher profit margins Furniture demand is much less cyclical than new housing which is not currently being realized Current furniture P/Es are shrinking and are at the low end of their historical ranges

Summary (cont’d) Stock price has unfairly been beaten (P/E to EPS growth ~ 1.0; broke through 100 and 200 moving day averages; below P/E high of 27 with current P/E at 12) Trading at 75% P/E discount to S&P 500 (20 year average is 15% discount) Future looks stable with growth potential and sustainability in the long term RECOMMENDATION: Hold shares