Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call reporting its operating results for the fourth quarter 2020 earnings. [Operator Instructions] It is now my pleasure to introduce your host, Paul Huckfeldt, Vice President, Finance and Chief Financial Officer for Hooker Furniture Corporation.

Thank you, Joel. Good morning, and welcome to our quarterly conference call to review our financial results for the fiscal 2020 fourth quarter and full year, which ended on February 2, 2020. We certainly appreciate your participation this morning. Paul Toms, our Chairman and CEO; Jeremy Hoff, President of our Hooker Legacy Brands; and Lee Boone, Co-President of our HMI division, are joining me today for prepared remarks. For the question-and-answer portion of the call, our other executive officers will be available to take questions as well, including Anne Jacobson Smith, Chief Administration Officer; and Doug Townsend, Co-President of HMI. During our call, we may make forward-looking statements, which are subject to risks and uncertainties. A discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our press release and SEC filing announcing our fiscal 2020 year-end results. Any forward-looking statement speaks only as of today, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after today's call. Before we get into the results, a word about our operating segments. In the fourth quarter of 2020, we updated our operating segments. Our domestic upholstery business units, Bradington-Young, Sam Moore and Shenandoah were moved out of all other and aggregated into a new segment called Domestic Upholstery. All Other now consists of H Contract and Lifestyle Brands. Our 2 largest segments, Hooker Branded and Home Meridian were unchanged. We believe doing this better aligns our segment reporting with the accounting guidance. This morning, we reported consolidated net sales of $610 million and net income of $17 million or $1.44 per diluted share for our 2020 fiscal year ended February 2, 2020. Earnings per diluted share for fiscal 2020 decreased 57% from $3.38 in the prior year. For the year, net sales decreased 10.6% or $73 million compared to last year, and net income decreased 57% or $22.8 million. For the fiscal fourth quarter, beginning November 4 and ending on February 2, consolidated net sales were $165 million with net income of $7 million or $0.59 per diluted share. Net sales decreased $35.6 million or 17.8% compared to last year's fourth quarter due to net sales decreases across all 3 reportable segments: Hooker Branded, Home Meridian and Domestic Upholstery and were essentially flat in All Other. Net income for the quarter decreased 52% or $7.7 million. Contributing to the consolidated revenue decrease for both the quarter and the year was 1 week less of sales compared to the previous fiscal year. Fiscal 2019 had 53 weeks while fiscal 2020 had 52 weeks. The additional week in the prior year contributed approximately $13 million to consolidated net sales based on an average net sales per day of shipping day. Paul Toms will now comment on our fiscal 2020 and fourth quarter results.

Thank you, Paul, and good morning, everyone. I apologize ahead of time, there's a fellow right outside my window mowing the grass, so if you hear some background noise, that's what it is. The world has changed a great deal since our fourth quarter and fiscal year ended on February 2. A little over a month later, on March 11, the COVID-19 virus was classified as a global pandemic by the World Health Organization. Shortly thereafter, federal, state and local governments in the U.S. and elsewhere began imposing restrictions on travel and business operations, and advising or requiring individuals to limit or eliminate time outside their homes. Temporary closures of businesses have also been ordered in many states, and other businesses have temporarily closed on a voluntary basis. Consequently, the COVID-19 outbreak has severely restricted the level of economic activity in the U.S. and around the world. Before we review our fourth quarter and fiscal year results in more detail, I'd like to address the company's response to the COVID-19 health and economic crisis. We're carefully monitoring the evolving updates and advisories from the CDC and believe we are adhering to their best practice recommendations regarding the health and safety of our employees. To limit the possibility of spreading infection, most of our administrative staff are telecommuting. For those administrative staff not telecommuting and for our warehouse and domestic manufacturing employees, we've implemented appropriate physical distancing policies and have stepped up facility cleaning at each location. Nonessential domestic travel for our employees are ceased and international travel has been completely prohibited. Testing and treatment for the COVID-19 is covered 100% under our employee medical insurance. And counseling is available through our Employee Assistance Plan to support those with financial, mental and emotional stress related to the virus and other issues. In addition, we're offering temporary paid leave to employees diagnosed with the virus or those associates with another diagnosed person or persons in their household and are working to accommodate associates with childcare needs related to school or daycare closures. To address the financial impact of the virus and to conserve cash, we are eliminating all noncritical spending and are postponing all nonessential capital projects, which represent about $3 million of our $5 million capital planned this year. We've reduced the CEO and CFO salaries by 20%, other NEO salaries by 15% and officer and certain other company managers pay by 10%. Our Board of Directors voted last week to reduce their own pay by 20%, all in the cash portion of their fees. We are significantly reducing marketing and product development spending as well as most travel, domestic and international. We're reviewing all orders previously placed with our manufacturing partners and canceling, adjusting or delaying those orders based on our latest demand projections. Additionally, based on our belief that this downturn will continue well into the second half of this year, we made the difficult decision to reduce headcount and eliminate 27 positions in the Hooker HMI administrative offices and 6 in the HMI warehouses. We're furloughing approximately 500 manufacturing and warehouse employees as necessary based on current reduced demand. We believe the difficult decisions we are making today are both necessary and appropriate to ensure the survival of the company. We will continue to pursue options to preserve cash and reduce costs including pursuing applicable government-sponsored programs, evaluating the continuation of our quarterly dividend and approaching our business partners, including factories, landlords and other service providers for assistance navigating these difficult times. At the end of the call, during the outlook, I'll comment further on how we expect the unprecedented economic challenge of COVID-19 pandemic to impact us in the next quarter and beyond. Now turning to the most recently completed fiscal year and fourth quarter. This past fiscal year was a very challenging year. We faced the headwinds of 25% tariffs on finished goods and component parts imported from China and industry-wide weak retail demand. The tariffs created a chain reaction of higher product costs, higher selling prices to our customers and supply chain and inventory disruptions. We deployed significant management and financial resources to shift certain parts of our production to factories in nontariff countries, and successfully reduced our reliance on Chinese factories by half during the year. Our top line was hit by tariff-related price increases to our customers that reduce retailer and consumer demand for our products and our bottom line was adversely impacted by higher costs, which lowered margins. Adding to these external disruptions, we encountered an unexpected quality-related issue with a single large Home Meridian customer resulting in significant excess chargebacks and loss revenues. The sales decrease in chargebacks from a single customer accounted for nearly 80% of Home Meridian's sales decline for the year. We met the challenges presented to us and finished the year on a more positive note in the fourth quarter, which was our strongest quarter of the year. While sales were down versus a record fourth quarter in the prior year, the shorter fiscal year compared to the last year that Paul mentioned earlier, accounted for about 40% of the 17.8% decline in revenue for the quarter. Sequentially compared to the third quarter, consolidated fourth quarter sales were up over 4%, and net income was up nearly 80%. Compared to the previous year-end, our backlog was up over 9%. Also in the fourth quarter of fiscal 2020, we put the excess chargebacks with the single large HMI customer behind us and resolved the quality issue. Throughout the year, we successfully executed our tariff mitigation and resourcing strategies and reduced the amount of product we import from China by about half, with factories in Vietnam and Malaysia picking up most of the production moved out of China. And importantly, it generated over $41 million in cash from operations, paid down debt on schedule, ended the year with $25 million more in cash compared to the prior year, and we've grown cash another $15 million since year-end through April 13. During the year, we launched new divisions, new product lines and merchandising programs and strengthened our management team. Together, we overcame challenges on multiple fronts. At this time, I'll ask for Jeremy Hoff, our Hooker Branded President, to comment on results for the Hooker Legacy brands.

Thanks, Paul. In the Hooker Branded and Domestic Upholstery segments, we were pleased to maintain profitability at close to the same solid levels as the prior year and slightly increased profitability in all other despite the tariff headwinds and lower demand. Turning to a more detailed look at each of our segments, I'll begin with the Hooker Branded segment. Net sales for the Hooker Branded segment decreased $16.7 million or 9.4% in fiscal 2020, with Hooker Casegoods reporting an 11% sales decrease partially offset by a modest sales increase at Hooker Upholstery. Despite the impact of the tariffs and soft retail demand throughout the year, we were pleased that the segment reported operating income of $21.5 million or 13.3% as a percentage of sales. Hooker Upholstery's positive sales despite the industry-wide downturn were driven by a broader line of well-received product offerings and a favorable product mix, including higher-priced sofas and sectionals, leading to a 9% increase in incoming orders as compared to the prior year and a 37% increase in backlogs at year-end. While sales were down at Hooker Casegoods, products and collections introduced to the last several market cycles, such as Ciao Bella, LaGrange and Sanctuary II have quickly made their way into our top 10 selling collections. In the Domestic Upholstery segment, net sales decreased $10.9 million or 10.2% due to reduced unit volume as a result of soft retail conditions. Bradington-Young and Sam Moore experienced reduced incoming orders throughout fiscal 2020, while Shenandoah's incoming orders picked up in the fourth quarter versus the first 3 quarters of fiscal 2020. Despite decreased net sales, Domestic Upholstery's operating margin was essentially unchanged as compared to fiscal 2019. All Other net sales increased $2.1 million or 20.7%, primarily due to strong net sales at our H Contract division. H Contract, which serves senior living facilities and retirement centers, continued a growth trajectory with a 15% increase in incoming orders in fiscal 2020 and finished the year with backlogs 28% over the previous period. The nearly 20% sales growth at H Contract along with 40% growth in our other nonresidential business unit, HMI's Samuel Lawrence Hospitality affirms our strategy to diversify our business beyond residential furnishings to include contract furnishings as well. Now I'd like to call Lee Boone to give more detail on the HMI segment this quarter.

Thanks, Jeremy. Beginning our summary with the fourth quarter results, Home Meridian was pleased to report $1.8 million in operating income despite a $21.1 million or 17.5% sales decrease, and we finished fiscal year 2020 with a backlog 8.3% over the previous year. While our fourth quarter results are still well below our past performance, they are a significant improvement over the first 3 quarters, indicating that most of last year's problems are behind us, and our turnaround strategies are delivering positive results. For fiscal year '20, net sales in the Home Meridian segment decreased $47.2 million or 12.2%. The sales decline was mostly attributable to one large customer. However, we also experienced modest sales declines with many of our largest traditional furniture retailers. The large sales decline, excess tariff costs and higher resourcing transition costs as well as higher inventory storage and handling costs and the quality issue discussed earlier led to a $7.2 million operating loss for the year. HMI also experienced a significant negative impact on profitability from tariffs due to the nature of the company's distribution base because many of our products are shipped directly from Asian manufacturing partners rather than stocked in U.S. warehouses, HMI was unable to build inventory before the 25% tariff was enacted. In addition, we were unable to recover all the excess tariff costs through price increases due to the more price-sensitive nature of many of our large customers. For the year, Samuel Lawrence Furniture, SLF; and Pulaski Furniture Company, PFC, turned in the strongest performances of the HMI divisions. Although both business units experienced low double-digit sales decreases versus the prior year, both units delivered contribution margins close to budget and posted over $3 million in operating profit each. This performance is the result of less impact from the China tariffs, less exposure to the issues with a single large customer and some positive results from new sales and marketing initiatives as well as a new Vietnam-based inventory mixing warehouse. Samuel Lawrence Hospitality, SLH, recorded a 40% year-over-year sales increase as our hospitality division capitalized on favorable business conditions in the segment while also unwinding an unprofitable venture into the kitchen cabinet business. SLH participated last year in significantly more model room projects in which hotels create prototype rooms to finalize their refurbishing plans. Since the volume of model rooms is a reliable leading indicator in the business, this bodes well for the future. Unfortunately, SLH's bottom line profitability did not improve with the top line sales increases, much of which is the result of the issues with the kitchen cabinet business we exited as well as unrecovered tariffs on contracts already in process. Our reorganization of SLH work processes implemented midyear is also enhancing output and performance. PRI, our Motion Upholstery division, was almost 100% sourced in China and was consequently significantly disrupted by the tariffs. PRI also experienced significant sales and profit losses with the large customer mentioned before. The combination of these problems resulted in a significant financial loss for the division for the year. On a positive note, PRI delivered its best quarterly performance of the year in Q4 in terms of sales, contribution margin and bottom line results. While the division is still in rebuilding mode, the improved Q4 results indicate that our reorganization and mitigation strategies are working. Furthermore, we expect both our new leadership team and our new license agreement with NFL Legend, Terry Bradshaw, to create new customer and sales opportunities for PRI in fiscal year '21 and beyond. Accentrics Home, ACH, our e-commerce-focused business unit, was also negatively impacted by the product return from the single large customer as well as the China tariffs. The corresponding price increases necessitated by the 25% tariffs, combined with reduced business with a large customer, slowed growth in our e-commerce sales in the second half of the year. Countermeasures to improve sales and profitability are underway. For example, more than half of the ACH products originally sourced from China have already been resourced to other countries. On another positive note, recent trends indicate that our e-commerce sales will be further advantaged by a change in consumer buying habits due to the coronavirus as consumers shift their shopping activities from brick-and-mortar stores to online retail. Finally, our recently launched Mass Channel and Clubs Channel business unit, HMIdea, is expected to deliver incremental sales growth via our Mass Channel customers, primarily fueled by upscale, ready to assemble, or RTA furniture, a new product category for HMI. HMIdea is now fully staffed with clubs and mass business specialists, which will provide us the expertise and focus to begin regrowing both of those businesses this year. After years of consistent growth and profitability, fiscal year '20 was especially difficult for HMI, one in which we faced unique challenges that forced us to examine every aspect of our business for improvement. We changed some leadership, reorganized certain business units, launched a new business unit, moved away from a few nonperforming manufacturing partners and reemphasized our merchandising and sales strategies on winning products, customers and sales channels. We believe we are entering fiscal year '21 as a vastly more capable and leaner company, and we expect significant improvement once the international health, economic and social crisis of the COVID-19 pandemic begins to stabilize. At this time, I'd like to turn the call over to Paul Huckfeldt, who will elaborate further on our quarterly results.

Thanks, Lee. Consolidated average selling prices increased 1.3%, due to increased ASPs in the Hooker Branded segment, Domestic Upholstery and All Other, which is attributable mostly to price increases necessitated by the imposition of and subsequent increase in tariffs as well as favorable product mix. All these offset a small decrease in ASP at Home Meridian. These factors were not sufficient to offset the overall 12.7% unit volume decrease, which resulted in lower order volumes across all 3 reportable segments. Unit volume declines were relatively consistent across all of our reportable segments. Consolidated gross profit decreased $33 million to $114 million in fiscal 2020 and from 21.5% to 18.7% as a percentage of net sales. Hooker Branded gross profit decreased modestly in absolute terms and as a percentage of net sales due to lower sales, the impact of tariffs and modestly higher freight costs, partially offset by price increases in this segment to mitigate the tariff impact. In the Home Meridian segment, gross profit declined significantly in absolute terms and as a percentage of net sales. Home Meridian's gross profit was negatively impacted by lower sales, higher chargebacks as well as unrecovered tariff and freight costs and some lower-margin sales programs that we've been working to improve or discontinue. Unrecovered tariff costs and the write-down of inventory, with quality issues had an approximately $12 million adverse impact on gross profit. Other factors affecting gross profit included higher freight, handling and warehouse -- warehousing costs of about $1.6 million due to higher-than-planned inventories. Despite a $10.9 million or about 10% sales decline in our Domestic Upholstery segment, gross margin increased as a percentage of net sales due, primarily, to lower material costs and lower benefits expenses. These decreases were partially offset by higher direct labor and overhead as a percent of sales attributable to the reduced order volume. Although a small part of our consolidated results, All Other contributed approximately $1 million of increased gross profit, which is attributable to strong sales and favorable product mix at H Contract. Consolidated selling, general and administrative expenses decreased in absolute terms but increased as a percentage of sales due to decreased selling expenses and compensation costs on lower net sales base in fiscal 2020, partially offset by higher costs related to the Asian sourcing transition and about $660,000 in start-up costs for 2 new business units. For these reasons, operating income in fiscal 2020 decreased $30 million to $22.7 million. Operating margin decreased from 7.7% to 3.7%. The balance sheet. Our cash balance has increased about $25 million from fiscal 2019 year-end to $36 million. Despite the sales decline, we generated $41 million in cash from operating activities, much of it from the collection of accounts receivable and reduced inventory levels and $1.4 million in proceeds from the sale of a former distribution facility, which we had owner financed. And by the way, when looking at our balance sheet, please remember that the adoption of ASC 842, the new lease accounting standard, at the beginning of this year, put about $40 million of new assets and a similar liability on our balance sheet and affects the comparison to last year's balance sheet. At the end of fiscal 2020, we had access to almost $26 million on our revolving credit facility and $25 million of cash surrender value of company-owned life insurance, which gives us some additional financial flexibility. Despite the lower profitability in fiscal 2020, we continue to have confidence in our business model and the steps we're taking to return to historical profitability. So in early March, our directors approved a $0.16 per share dividend, which at current share prices gives us a dividend yield of about 3.8%. Now I'll turn the discussion back to Paul Toms for his outlook.

Thanks, Paul. The COVID-19 virus pandemic presents an economic challenge of unprecedented proportions with an uncertain time frame. In the last several weeks, we've seen an erratic stock market, spike in unemployment claims, supply chain disruptions and the cancellation of business, social, sporting, academic and religious gatherings, including the High Point Premarket and the postponement of the Spring High Point Furniture Market. Some of our customers have temporarily closed due to stay-at-home orders across the country. We've seen an industry-wide decrease in demand and expect our sales, earnings and liquidity to be down material in the fiscal 2021 first quarter compared to the prior year period, but are unable to estimate the extent of those decreases. We also have limited visibility on the extent to which our businesses may impact -- be impacted by the outbreak. But we are preparing for a significant downturn lasting anywhere from 4 to 8 months, with strategies in place to preserve cash and reduce operating expenses. The situation is very fluid and further delays in the receipt of goods, other unanticipated impacts to our supply chain, including on direct imports or components purchased domestically, or on our retail customers could have a more significant impact on our future business. We are thankful to be part -- to be in a strong financial position, having built significant cash last year and enhancing our cash position further so far this year. Our lower fixed cost, broad distribution business model gives us more flexibility to scale our business up or down. We're also fortunate to have a strong presence in e-commerce since that channel is holding up during the crisis so far. In our 95 years of business, our company has been through recessions, a depression, a world war, terrorist attacks, natural disasters and every other type of crises imaginable. We've endured each time by coming together, working as a team, making prudent business decisions and not letting fear cripples. I'm proud that our team is coming together to meet these challenges just as we came together to meet multifaceted challenges last year. This ends the formal part of our discussion. At this time, I'll turn the call back over to Joel for questions. Thank you.

[Operator Instructions] Our first question comes from Anthony Lebiedzinski with Sidoti & Company.

So I guess first, just to take a step back, I appreciate all the color about the different segments. So looking at Home Meridian, obviously, has a number of challenges. Can you just kind of remind us as to the extent of all the costs that you had, all the sales chargebacks and demurrage costs and everything. Can you just refresh our memory as to what the extent of that was? Just to give us a sense as to what those costs that you don't think will repeat in your fiscal '21?

Paul Huckfeldt, do you want to take a stab at that?

Sure. In the aggregate, I think we're looking at about $10 million of costs that were unique to the year. About half of that, maybe a little more was related to a large chargeback and also the related inventory write-downs on a return -- on the return related to that chargeback. We had a couple -- I think I mentioned in the call, we had about $1.6 million of additional warehousing-related costs as -- having entered the year with more inventory than -- because of the slowdown in the early part of the year and the fact that many of our customers loaded up on inventory at the end of fiscal '19. We came into the year with more inventory than anticipated, and that was approaching a couple of million dollars more. And then we also had another couple of million in excess freight and storage charges on our product coming in. So I would say that there's about -- overall and combined, it's about $10 million of unique -- of unique expenses that we don't expect to recur in the current year.

Got it. Okay. So that's a meaningful number. Okay. Okay. And then as far as HMI, you guys talked about some of the reorganization that you did and your expectation that, that should do better after the COVID pandemic passes us. So just wanted to get a little bit more details as far as the HMI as far as the whole reorganization effort, if you could just give us a little bit more color on that, that would be great.

Lee?

Sure, Anthony. So we have new leadership in place now at PRI. There's a new President and a new Vice President of Sales and merchandising that were added earlier this year. Both have extensive experience and expertise in the field, and we think are very well suited to grow the PRI business and make it significantly more profitable. In addition, we hired 3 executives to stand up the HMIdea division, which are focused on the Mass Channel and the Clubs Channel and the RTA products segment that will be largely incremental business for HMI and RTA and then continuing business and growth and profitability in the Club segment. So that's 5 new executives that we added in the last 6 to 9 months going forward. We feel good about that.

Okay, great. Okay. And then as far as your reliance on China, so you cut that in half, so it's about 20%, I believe. So what is your -- obviously, with COVID, I guess it might be uncertain, but is it safe to assume that you'll continue to reduce your reliance on China with additional product sourcing being shifted away from there?

Anthony, this is Paul Toms. And yes, our intention is to continue to reduce our reliance on China as a source country. I don't think you'll see the same magnitude of reduction this year as we had last year, I would say. I think we've said somewhere in our -- one of our filings recently that maybe we get it down to 16% or 17%. There are some things that they do in China, large cuttings of product for some of our larger customers who are not feasible in other countries right now. We've got other businesses that we get paid for the tariffs and the cost of doing business in China. Our customers still want the product out of China and they're willing to pay us for it. So -- and then there are other businesses that were on the Hooker Branded side, where we're just not able to ramp up as quick in Vietnam as we'd like and rather than disrupt our supply chain, we'll just move at a little bit slower pace. But I think probably to go from 20%, 22% of our total sales sourced out of China maybe to 16% or 17% this year would be a pretty good estimate.

Got it. Okay. So you also talked about e-commerce, obviously, that stand out now. So can you give us a sense as to what your penetration is in terms of sales -- overall sales for the company or percentage of sales that go to e-commerce retailers?

Paul Toms, again, I'm going to guess that's somewhere between 12%, 13% of our total volume, maybe a little bit more, and it varies between divisions, Domestic Upholstery, almost none. Home Meridian is probably a bigger share of their business than it is of Hooker Branded, but it's, I think, north of 10% of both Hooker Branded and Home Meridian.

Got it. Okay. So obviously, you guys entered with backlog up 9%, but you talked about the order cancellations and the deferrals from customers. So given the timing where you are now, you only have about 2 weeks left to the first fiscal quarter. So I know, Paul, you did mention you expect a significant negative impact on the quarter. Is there any more -- any more color that you can provide us to how we should think about the extent of your sales and earnings for the first quarter, given that you already are -- like I said, you only have 2 weeks or so left in the quarter?

Right. So the coronavirus actually impacted us in different ways within the same first quarter. To start our fiscal year, which is typically right around the 1st of February, this year, it was February 3. If you think about that, that's when the virus was at its peak and was disrupting the return to work of employees in China and a lot of Chinese employees that are in management and supervision of factories in Vietnam. So early in the quarter, the disruption from the virus was actually on our supply side, and factories didn't ramp up as quickly as normal and there was delayed shipments. 6 weeks later, it starts to impact here. And as they put all the efforts in place here to have businesses closed, people shelter at home, things like that, it significantly reduced demand. And our large customers that have hundreds of stores that were closed or immediately canceling orders, postponing orders, asking that you don't ship anything. It just like overnight came to a halt. And that's probably going to impact the last 6 weeks of a 12-week quarter, 13-week quarter. So we're probably -- I mean our planning is -- you didn't ask about the second quarter, but we expect May to be very similar to April and business to get somewhat better in June, July, August and then hopefully better again by September. But it's hard to say what the impact is in the first quarter. February in spite of not being able to get production out of China and Vietnam that might have impacted a few direct customers where we ship containers direct from Asia to their stores. Generally, February was pretty normal, similar to the February and the prior year. March, the first 2 weeks were reasonably normal, and we started to get production back up in Asia. So the first half of March was normal. I would say, mid-March, it's when everything just kind of came to a stop. There was maybe some business that was in the pipeline that we realized by early April, really late March. We realized we didn't have sufficient orders to run our Domestic Upholstery plant's full schedules. So we furloughed 2 and probably be 3 weeks, all of our Domestic Upholstery plants. We furloughed about half of our warehouse employees because of the same reduced demand. So it's really hard at this point to say how the quarter is going to shake out, but it will definitely be behind prior year because of the disruption.

Right. Okay. Yes. So obviously, as you noted, you're reducing salaries and some other expenses, you're reducing your CapEx, just like other companies as well. So as far as -- first, I guess, on the expense side of the business, I mean, in total, I mean, how much would you say for the -- either on a quarterly basis or the annual base, however you want to do, the extent of some of these -- all these operating expense cutbacks, I mean, just wanted to see if you guys could quantify that? And I guess CapEx, I think you said about $2 million or so, I think is the CapEx for this fiscal year, but I just wanted to clarify that.

Okay. So our operating budgets and expenses that we have control are over fixed expenses that we have control over. We set a target of 15% to 20% reduction in those and about 10% in salaries and wages. And I think we are very close to that. So maybe all in, you're looking at 12% to 13% decline in spending every month. In the first month, we'll have some offsets to that severance for employees that were dislocated, would be the larger one. Some of the -- we have things. Savings will take a few months to work with landlords on any concessions and rent and some of our other vendors. But I think on the spending side, you could expect 10% to 12% less. And then some of our other costs fluctuate with sales, commissions, royalties, things like that, which will be down proportionately to sales. As far as CapEx, we have relatively small CapEx for company our size because we don't have a lot of retail stores or other large manufacturing operations of the upholstery plants are nowhere near as capital-intensive as casegoods facilities used to be. So CapEx, we have, I think, budget this year of around $5 million, and we've identified at least half of that, maybe $3 million that we could postpone into future years without any significant impact to the business.

Got it. Okay. And then last couple of questions for me, I guess is just how should we think about priority of your cash flow usage now plus also, I know your debt matures next -- early next year as far as your expectations to renew that facility. Just wanted to get your revolving credit facility as far as what is your expectation to be able to renew that, that would be great.

Paul has been working on a lot of models the last few weeks, so I'll let him take that question.

Okay. Regarding the credit facility, we fully intend and expect to renew it. We've had discussions with our bank. Obviously, there are no firm commitments. But we're working closely with our bank to make sure that they understand our situation. They'd like many of their other clients. Fully intend to renew that. I think that right now, the cost that -- we can start renewing it now, but the costs are pretty high. So we just continue to monitor that. We've done a lot of cash flow forecasting and believe that we have sufficient liquidity to get through this crisis. Of course, it's early in the crisis. And we -- there are a lot of developments yet to be seen. So I think over the next couple of months, we'll have a clearer picture of our total cash needs and where we need to go with that. But I think we are comfortable now. I think we've mentioned a couple of times, we entered this year with a solid cash balance, and we've built the cash balance since then. So we have the advantage of having the time to evaluate the situation before making more -- any more deeper or more drastic adjustments. I know that was kind of a vague answer, but at this point, there's a lot of uncertainty.

Right, right. But I guess the other -- what I was trying to also ask as far as dividend versus debt reduction, I know you guys paid the dividend during the last recession, unlike a lot of the companies, which did not pay the dividend. So just wanted to get a better sense of how you're thinking about dividend payments versus debt reduction?

Debt reduction, we plan to make our regularly scheduled debt payments. And I think that what I was getting at when I said the luxury of not having to pull levers too soon is that we obviously need to evaluate the dividend based on how things develop. We'll have to have conversations about our next dividend in early June, and I think we'll have more clarity. Obviously, it's got to be on the table, but it's not something that we relish doing. So I think that we have the luxury of a couple more months of -- or, yes, a couple more months of visibility before we have to make a decision about the dividend. It's not our intention to cut it, but the survival and liquidity is the most important consideration.

I think 50 years, we've had a consistent history of paying dividends even through the last financial crisis 2008 and '09, '10. So we're -- we definitely put a priority to maintaining the dividend. But everything remains to be seen in terms of demand from our customers for our products and how our customers pay us for the products we have already shipped them. And we're just -- I think in 6 weeks, we'll have more visibility than we have today. So we've postponed the decision on the late June dividend until early June.

Our next question comes from JP Geygan with Global Value Investment Corp.

You spoke on it a little bit, but I'm hoping you might elaborate on your cost structure, specifically the variable component versus the fixed component and specifically how you can scale the business?

We did. Paul, you want to take a stab at that or I will?

Yes. About 5% of net sales is maybe just a little bit under that or in that ballpark, 5% of net sales are variable SG&A costs. That's commissions designed royalties and expenses and some more flexible marketing costs. Beyond that, most of our operating costs are fixed or semi-fixed, which is -- that's the area that we've focused on trying to make cost reduction decisions, whether it's layoffs or looking for vendor concessions or just reducing spending in cases like some marketing spend. So that's -- the scaling of the business, some of it naturally scales with variable costs. The rest of it are the hard decisions that we've had to make, whether it's, like I said, layoffs or furloughs or going to our vendors and partners for additional contributions.

This is Paul Toms. I think what's helped us in past downturns is that our cost of goods sold doesn't vary hardly at all in really high sales or low sales periods. Our cost from our vendors, which is about 85% of what we sell is sourced outside of our owned plants. And those costs just don't change as opposed to when we had manufacturing facilities, and if you're underutilizing and the cost of products produced went through the roof. Our upholstery plants, 15% of our total business is upholstery produced domestically in our plants. And the costs will go up on those products. But labor is the key component there. And we don't have as many fixed costs for machinery and equipment in those plants as within the casegoods facility. We're also thankful at this time that we don't have retail stores. A reason for not having retail stores was it limited our ability to sell into a multitude of other distribution channels. But I think right now, we're grateful we don't have the cost of leases and other costs related to retail stores.

Then in your 8-K, when you referenced your low fixed cost broad distribution business model, it gives you the flexibility to scale the business up or down, you're referencing your distribution model in the lack of a retail footprint and/or your fixed cost structure relative to revenue, not necessarily fixed cost as a portion of your cost of goods sold?

Cost of goods sold pretty much stays the same. And...

Right. Most of the cost of goods sold is variable. That's right, Paul.

Great. Thank you for the clarification. My second question is, given the unique and fluid market situation right now, can you talk about where you see opportunity?

That's a good question. I mean I think this has shown that e-commerce, which is a significant part of our business, I think we're further along in developing e-commerce than most of our peers is certainly an area we want to continue to grow. But honestly, at this point, we're more focused on trying to navigate our way through a significant downturn in sales and all the impacts of trying to reduce the amount of product coming from overseas and just making sure our employees are safe and trying to see what we can do to take care of them during this time, but we haven't been as focused on opportunities. We've got things that are in works, have been in works for probably most of our business units, new products, new programs, new categories to be in, new licensing opportunities. They're all out there even launching HMIdea, new ready-to-assemble casegoods line that'll be sold through Mass Channel that we haven't been in, in a meaningful way before. In the product category, we haven't been in at all. So those things are all in the hopper. But our focus, really, the last 4 weeks has been just what's right in front of us and navigating our way through this.

Our next question comes from John Deysher with Pinnacle.

I was just curious, back to the backlog question. I think you indicated it was up 9% at year-end. What was the number at year-end, at the end of January? And what would the number be at the end of March?

We can get you the number for the end of January. I'm not sure that the number at the end of March would be meaningful because there's still orders in the backlog that we know are not shippable in a normal time frame. Customers may have left them, but said, don't ship these until I give you a release, and that could be 2, 3 months down the road. So I don't have the number. It's not a number that we typically provide, other than to say up or down by a certain percent. But I can tell you, the backlog at the end of March is going to be less than it was at the beginning of the year. And I'm not sure that the backlog if we gave you the number, I'm not sure that, that even is an accurate number of what we could actually ship today of that backlog.

Okay. That's fair. But the year-end will be disclosed in the 10K?

It will.

Okay. Good. What were the quality issues that led to the decline with the large customer? And how have those been fixed at this point?

Doug or Lee, would you like to answer that?

Sure. I'll do that. This is Doug Townsend. The quality issue was a manufacturing defect that was in a very small percentage of a very large cutting. It was less than 0.5%. But because it was a defect, we had to return the whole thing. It was a -- it was an inspection issue, and we've dealt with it in terms of the quality management team that's over there and the management of the factory.

So because it was less than 0.5% of, I guess, the total order size, you had to take back the whole inventory?

Yes.

Interesting. And what country was that? Do you know?

Yes, it came out of Vietnam.

Vietnam, okay. But you're confident that's been solved at this point?

Yes. We've put in new procedures, new management, new team here.

Okay. All right. Good. That's encouraging. And the large customer that you referenced, are you still doing any business with them at a lower level? Or you are?

Yes. It's at a lower level, but they're still a significant customer.

Okay. All right. Good. So the door still stays open there. All right. That's good news. And I guess the question is we're talking about the rolling returns in terms of the economy opening up, depending on which areas are most impacted. In terms of your customer base, how would you say that those are positioned for that rolling, reopening of the economy. I think we all know where the hotspots are, but how would you say your customer base is positioned as we go forward?

John, this is Paul Toms. I would say we're positioned probably as well as anybody could be because of the broad distribution we have. I mean we're selling retailers in 25, 26 different channels of distribution from some that haven't been as impacted or have actually been advantaged by this, like e-commerce, catalogs. We're selling regional powerhouses, Havertys in the southeast, rooms to go in the southeast and across, I guess, parts of the -- part of the country. Macy's is a customer that's national. Of course, they've had their own challenges through this. We're selling to other department stores. We're selling a lot of independent furniture retailers, some that are single store mom-and-pops, and it remains to be seen, how they've fared through all of this. Others that are strong in particular markets like the Berkshire Hathaway Furniture divisions. So I think we are so broadly distributed that it will come back kind of as the country comes back. There's not really a pocket of the country that we're more concentrated in than elsewhere.

Okay. And remind us again, what was the total e-commerce side of the business last year as a percentage of the total roughly?

Paul Huckfeldt, you can help me here, but I'm thinking company-wide about 12% to 13% of sales.

Yes, that sounds about right. Of course, that's pure play. There's the omnichannel. So probably more of it sold by the Internet, but that's -- that 12% is probably about right for pure-play e-commerce.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Paul Toms for closing remarks.

All right. Thank you, Joel. I really have nothing additional to add. As we've said multiple times in this call, these are really unprecedented times. I have no doubt the company will get through them. We've got a strong management team. Everybody is focused on doing what we need to, to get through this crisis. And I look forward to reporting back to you in about 2 months how we're doing and having much more visibility into the impacts of the coronavirus crisis. Thank you for joining us today. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.