Activist Investor Bergeron Says Ethan Allen CEO Needs to Go

The battle for control of Ethan Allen comes to a head next week when it holds its annual shareholder meetings on Wednesday. Activist investor Douglas Bergeron has been pushing to kick out CEO Farooq Khan. As CEO and chair, he wants to appoint a former Neiman Marcus executive as interim CEO. He's also pushing for a board overhaul to address what he sees are fixable shortcomings at the company.

And Ethan Allen is hitting back, bringing up what it says is Doug Bergeron's own flawed track record. In a statement released this morning, it brought up Bergeron's tenure as CEO of VeriFone when the SEC investigated the company for accounting irregularities saying his financial oversight and value creation record deserve scrutiny.

Well joining Isabelle and myself now exclusively is Douglas Bergeron, DGB Investments founder. And and Doug, I should start by saying that the SEC did not charge you personally. It also dismissed both lawsuits with prejudice. And I just want to get your response to this. What do you say to Farooq and the team at Ethan Allen who say that this is evidence of flawed management?

What uh I say is they should wish for a VeriFone-like transformation at Ethan Allen. I bought VeriFone for 50 million dollars. It had been losing uh money, declining revenue from Hewlett Packard. Uh, I was there 13 years, we globalized the business. When I left, I had created 5 billion dollars in enterprise value. The 800 employees were then 6,000 employees, uh, and it's one of the proudest achievements of my life. So, uh, I would love to repeat VeriFone at Ethan Allen.

Doug, we also have questions about how you would make sure that there's accountability and oversight if you take over the board. How would you respond to that?

We have an amazing group of independent directors, um, starting with Chris Miller, who's was the former head of retail, head of consulting for the retail, um, side of Bain consulting for many, many years. She sat on many public company boards. We, we hold in board independence very, very dear to our hearts. Compared to the former board, the existing board, I should say, I guess I'm getting ahead of myself, uh, that has been supplicants to Farooq for the last 38 years. Interestingly enough, the board keeps on changing at Ethan Allen, but the deference never never stops. Uh, the current board is actually, I I used to say utterly unqualified. Now I think with this new news about Miss Sai, I should say utterly disqualified to serve. As you know, Miss Sai, uh, uh, we announced this week that was found by the New York Supreme Court and sanctioned for destroying evidence in a civil litigation regarding her termination from a a public company. So, you know, we take our independence very, very seriously and thank you for the question.

And and Doug, just for for um, full transparency, we have asked Ethan Allen and Farooq, uh their response, uh as well as uh Miss Sai uh on these allegations and I just wonder and we have not heard back and we certainly will bring them to our audience if we do. Um, you do want the full board removed, but this is something that the proxy advisory firms, they do agree with you that there should be uh a new chairman, a new CEO. Um, they have not gone so far though as to say a complete replacement of the board. Do you think this this release this morning and what you're saying about Miss Sai will move the needle?

Well, that's not correct. Um, two out of the three of the proxy advisory firms, Glass Lewis and Egan-Jones, have called for a clean sweep. They want everybody out. They understand that the problem, we know Farooq is leaving. The question is when is he leaving? Is it immediately or is it a year from now? Uh, will he stay in the boardroom as CEO after this AGM? Uh, and who, which board will be responsible for attracting the best and the brightest CEO to this company? You know, I've noticed this organizationally across my long career, uh, in in in governance and in operations that substandard managers attract even worse middle managers, and a substandard board will not be able to attract the best in class CEO. The best in class CEO is not going to leave his his position somewhere where he's doing, she's doing very well and go join this board. Uh it's just not possible.

And you argue that Ethan Allen has fallen behind on digital and Omnichannel retail. How much of this turnaround is really about technology and how quickly do you think you can close that gap, Doug?

Uh starting on day one. Our team has set out a 100-day plan. We also have a five-year plan. Uh Miss Ward is an extraordinary leader. Uh Mr. Oblock uh took Wayfair's sales using Omnichannel and digital strategies and AI um, from 250 million to 12 billion over 12 years. So, there is no question that there will be very significant changes right up front and long term as well.

So so where do you stand on the vote count for November 4th, Doug? Are you feeling confident going into this?

Yes, we're we're we're doing very well. I mean, all proxy advisors have have called for the uh the removal and two out of three of the proxy advisors have said vote for everybody. The the reality is this is a cultural revolution that we're going to have to uh embark upon. The company's been led by the same guy for 40 years. We've spoken to hundreds and hundreds of former employees and managers. They're crying for us to get there and uncork this new, this new era of growth and vitality. Uh, we will all be in Danbury, Connecticut on November the 4th. We will have our arms around senior management team, the middle management team, the whole rank and file if they want to come up and see us. We will then be on a flight to Vermont on Thursday and off to North Carolina, uh, Friday morning, and then we will be spreading across the country, uh, to all 170 locations. Each of our directors will be engaged in, in, will be, will be dividing and conquering on that to really set the, the the new stage for what's what's possible with this company. You know, there was 5,000 employees at one point, they're now down to 3,000. The company under its current leadership and its current board is on a fast track to obsolescence. We want to turn that and we think we we know we can.

And you say in this new era that investors could potentially triple their investments in three years. Walk us through that numbers. What are you going to do operationally to deliver that?

Well, the great news about this business and you know, myself, I'm not a professional activist. I know you like to say that on your intros. I'm a I'm a main street operator that used my own capital to be aligned with other shareholders and hold these shares for five or 10 years while we revolutionize this business. But when you have a 62% gross margin business with manufacturing in the US, it works two ways. If your revenue is declining, you're getting fixed cost deleveraging and your profits are going to fall faster than your revenue. So in the last uh 20 years, although revenue has fallen 46%, profits have actually fallen 67% because of all this fixed cost. The good news is it works the other way. If we can add another three or 400 million dollars of revenue to this business at 62% gross margins over the next, I don't know, three, five, seven years, I can't put a time on it right now, that will quadruple or quintuple operating income. The share price then should follow in line and then we should also get a re-rating because we'll be viewed as a credible, modern, uh retailer that's tuned into the, to the new generation of buyers and is uh led by a a great board and a great CEO.

Um, Doug, one of the other pushbacks that Ethan Allen has voiced is concern over the interim CEO, um formerly of Neiman Marcus, uh Stephanie Sen Ward. The idea that they're saying is that she lacks experience in a public company. What would you say to that?

Um, I will be there with with Stephanie. Not every new public company CEO uh has run a public company before. I was a first-time public company CEO and I know many other very successful ones um, in Silicon Valley. Um, but with the right guidance of this board, particularly Chris and myself, uh, she will be in fantastic hands to handle investor relations and shareholder communications. Listen, and that is in dire need of help. This company has released first quarter earnings every year for 20 years, the week before the AGM. So typically late October, the AGM's in early November. Another fast one pulled on shareholders two weeks ago. They said, ah, I know operating margins have declined to one percent retail operating margin collapsed to 1% in our last quarter's results. But we're going to choose not to show you results until after the AGM. I mean, that that track record of obfuscation uh just continues and continues and it's frankly should be nauseating to to most shareholders. And it, it's this new news about Miss Sai where it's now can be shown that they used reputation protecting software to obscure, obfuscate her this terrible record of being fined and sanctioned um, by the Supreme Court of of New York State, uh, is just another example of obfuscation. Shareholders deserve better. They deserve, they deserve better operations, of course, they deserve a better digital strategy, they deserve growth, not decline. I mean this company is consistent, consistently declining, and we want to change that, but this uh this pattern of obfuscation has to end.

Yeah, I it Doug, I just like it does have this feeling of things getting a little bit ugly and I understand you want to illuminate uh the the history of a board member, but of course Ethan Allen, as we talked about the top hitting back with their own allegations against you as well. I I do just want to say again, we welcome Farooq on the show to defend himself. That offer is still outstanding for the team there. But again, when we spoke to him in August, some of the pushback was his sort of claim that what you want to do changes the very DNA of the company that uh higher growth would be sort of to sacrifice what they see as this interior decorator sort of DNA. And he also hit back at this idea that he's too old to run the company. He says, I'm vivacious, I hike, I do all these things. Um before we let you go, I also just want to give you a chance to respond to those two as well.

The issue is no longer about Mr. Kathwari. He's said he's going to leave in a year. Um, the issue is who best selects the next CEO. Um, I mean, that's that's the great boards find great CEOs, terrible boards don't attract great CEOs. If you want, if Mr. Kathwari in August told you that he wants to continue the status quo DNA of this business, you will be out of business in a couple of years. You can't, you can shrink revenue from a billion to 579 million over 20 years and still protect profits, but your operating margins and your EPS are going to decline all all the way in a way that I just described a few minutes ago. But they've hit the maximum now. They're now at basically break even. I suspect why they've chosen to um not disclose their earnings before the AGM for the first time in 20 years, is they probably got negative. So if that's the DNA that Mr. Kathwari is trying to preserve, um that's not going to add shareholder value for sure.