Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Appreciate that, Joel. Morning to all of you, and thank you for dialing in to our quarterly conference call. On today's agenda, we'll walk through the financial results covering both the fourth quarter of fiscal 2020 and the entire year — each of those periods wrapped up on February 2, 2020. Great to have everyone with us today. Sitting in with me to deliver prepared remarks are Paul Toms, who serves as our Chairman and CEO; Jeremy Hoff, President of our Hooker Legacy Brands; and Lee Boone, Co-President of our HMI division. Once we move into the Q&A portion, our remaining executive officers will be available as well to take questions, including Anne Jacobson Smith, our Chief Administration Officer, and Doug Townsend, Co-President of HMI. On today's call, we could share some forward-looking statements, and those come with risks and uncertainties. A discussion of the factors that could make our actual results differ materially from management's expectations is available in our press release and SEC filing announcing our fiscal 2020 year-end results. Every forward-looking statement speaks only as of today, and we assume no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after today's call. Before we get to the results, a quick note about our operating segments. We updated those segments during 2020's fourth quarter. On this call, we're walking through a reporting change first. Three of our home-market upholstery operations — Bradington-Young, Sam Moore, and Shenandoah — used to sit inside the all other category. They've now been pulled out and combined into a single reporting segment we're calling Domestic Upholstery. What remains in All Other are H Contract and Lifestyle Brands. Meanwhile, our two biggest segments, Hooker Branded and Home Meridian, were left as they were. In our view, this realignment brings our segment disclosure more in line with the relevant accounting rules. Turning to the results we released this morning: for fiscal 2020, which closed on February 2, 2020, consolidated net sales came to $610 million, and net income was $17 million, equal to $1.44 per diluted share. That diluted per-share figure represents a 57% decline from the $3.38 we posted a year earlier. On a full-year basis, we saw net sales decline 10.6%, which works out to $73 million, versus the prior year. Net income was down 57%, or $22.8 million. Turning to the fiscal fourth quarter — that ran from November 4 through February 2 — consolidated net sales totaled $165 million, and net income reached $7 million, equal to $0.59 per diluted share. Compared with last year's fourth quarter, net sales were lower by $35.6 million, a drop of 17.8%, driven by decreases across all 3 reportable segments: Hooker Branded, Home Meridian and Domestic Upholstery, while All Other was essentially flat. Net income for the quarter declined 52%, or $7.7 million. One factor behind the drop in consolidated revenue for both the quarter and the full year was that we had one fewer week of sales than the prior fiscal year. The 2019 fiscal year contained 53 weeks, whereas the 2020 fiscal year contained 52 weeks. Using an average of net sales per shipping day, that extra week in the earlier year added roughly $13 million to consolidated net sales. Paul Toms is now going to walk us through our fiscal 2020 and fourth quarter results.

Thanks, Paul, and good morning to all of you. I want to apologize in advance — there's a man outside my window cutting the grass right now, so any noise you pick up in the background is coming from that. Since our fourth quarter and fiscal year wrapped up on February 2, a lot has shifted in the world. Just over a month afterward, on March 11, the World Health Organization declared the COVID-19 virus a global pandemic. Not long after that, governments at the federal, state and local levels in the U.S. and in other countries started putting restrictions in place on travel and business operations, and began advising or requiring people to cut back on or avoid time spent outside their homes. Many states have also ordered businesses to close temporarily, while other businesses have shut their doors temporarily by choice. As a result, the COVID-19 outbreak has sharply limited the amount of economic activity taking place in the U.S. and across the globe. Before we go through our fourth quarter and fiscal year results in greater detail, I want to talk about how the company is responding to the COVID-19 health and economic crisis. We are closely tracking the changing updates and advisories coming from the CDC and believe we are following their best practice recommendations when it comes to our employees' health and safety. To reduce the chance of spreading infection, the majority of our administrative staff are working from home. For administrative staff who are not telecommuting, along with our warehouse and domestic manufacturing employees, we have put appropriate physical distancing policies in place and have increased facility cleaning at every location. Domestic travel for our employees that isn't essential has been stopped, and international travel is entirely banned. Our employee medical insurance covers testing and treatment for COVID-19 at 100%; and counseling is offered through our Employee Assistance Plan to help those dealing with financial, mental and emotional stress tied to the virus and other matters. Beyond that, we're providing temporary paid leave to employees who have been diagnosed with the virus or to those associates who have been around another diagnosed person or persons in their household, and we're working to accommodate associates who need childcare because of school or daycare closures. To deal with the financial impact of the virus and to preserve cash, we are cutting out all noncritical spending and pushing back all nonessential capital projects, which make up roughly $3 million of the $5 million in capital we planned this year. We've cut the CEO and CFO salaries by 20%, other NEO salaries by 15% and pay for officers and certain other company managers by 10%. Last week our Board of Directors voted to lower their own pay by 20%, all taken from the cash portion of their fees. We are substantially scaling back marketing and product development spending, as well as most travel, both domestic and international. We're going through all orders we previously placed with our manufacturing partners and canceling, adjusting or delaying those orders in light of our latest demand projections. Also, since we think this slump is going to last deep into the back half of this year, we arrived at the tough choice to cut staff and remove 27 roles at the Hooker HMI administrative offices along with 6 at the HMI warehouses; roughly 500 manufacturing and warehouse workers are being furloughed as needed, given today's softer demand. The hard calls we're making right now strike us as both required and fitting if the company is to survive. We'll keep chasing ways to hold onto cash and trim expenses, among them applying for the relevant government-backed programs, weighing whether to keep paying our quarterly dividend, and going to our business partners — factories, landlords and other service providers — to ask for help getting through these hard times. Later in the call, when we get to the outlook, I'll say more about how we anticipate the unmatched economic strain of the COVID-19 pandemic to affect us over the coming quarter and after that. Moving now to the fiscal year just finished and the fourth quarter. The fiscal year we just closed was an extremely tough one. We ran into the obstacles of 25% tariffs on finished goods and component parts brought in from China, plus soft retail demand across the industry. Those tariffs set off a chain reaction: greater product costs, greater selling prices charged to our customers, and disruptions to both supply chain and inventory. We put substantial management and financial resources to work relocating certain portions of our production to factories in countries without tariffs, and during the year we managed to cut our dependence on Chinese factories by half. Tariff-related price hikes passed along to our customers hurt our top line by weakening retailer and consumer demand for what we sell, while our bottom line took a hit from greater costs, which pushed margins down. On top of these outside disruptions, we ran into an unforeseen quality-related problem with one large Home Meridian customer, which produced sizable excess chargebacks and lost revenues. At a single customer, the drop in sales and the chargebacks together made up almost 80% of Home Meridian's sales decline for the year. We stood up to the challenges in front of us and closed the year on a better note in the fourth quarter, our strongest quarter of the year. Sales came in below a record fourth quarter the year before, but as Paul noted earlier, the shorter fiscal year relative to last year explained roughly 40% of the 17.8% revenue decline for the quarter. Measured sequentially against the third quarter, consolidated fourth quarter sales rose more than 4%, and net income climbed almost 80%. Versus the prior year-end, our backlog increased by over 9%; and in the fourth quarter of fiscal 2020, we also left behind the excess chargebacks tied to that one large HMI customer and fixed the quality issue. All through the year, we carried out our tariff mitigation and resourcing strategies effectively and cut by about half the amount of product we bring in from China, with factories in Vietnam and Malaysia taking on most of the production shifted out of China. What's key is that operations brought in more than $41 million in cash, we reduced debt according to plan, closed the year holding $25 million additional cash versus the year before, and from year-end through April 13 we added another $15 million to our cash position. Over that year, we introduced new divisions, fresh product lines, and merchandising initiatives, plus we made our management team stronger. Working as one, we got past obstacles on several fronts. Right now, I'd like Jeremy Hoff, who serves as President of our Hooker Branded segment, to share his thoughts regarding how the Hooker Legacy brands performed.

Appreciate that, Paul. Across Hooker Branded and Domestic Upholstery, we felt good about holding profitability near the same healthy marks we posted a year earlier, and in every other segment we nudged profitability a bit higher, even with tariffs working against us and demand running softer. Now let me walk through each segment in more depth, starting with Hooker Branded. For fiscal 2020, net sales in that segment fell $16.7 million, a drop of 9.4%, as Hooker Casegoods posted an 11% decline in sales that was partly offset by a small gain at Hooker Upholstery. Even with tariffs weighing on us and retail demand sluggish all year long, we were glad the segment delivered operating income of $21.5 million, equal to 13.3% as a percentage of sales. Hooker Upholstery managed to grow sales while the broader industry contracted, thanks to an expanded assortment of products that customers responded to and a beneficial product mix that featured pricier sofas and sectionals; that fueled a 9% rise in incoming orders versus the prior year and a 37% jump in backlogs as the year closed. Although sales slid at Hooker Casegoods, items and collections rolled out over the last several market cycles — Ciao Bella, LaGrange and Sanctuary II among them — have moved swiftly into our top 10 selling collections; over in Domestic Upholstery, net sales declined $10.9 million, or 10.2%, on lower unit volume stemming from weak retail conditions. Bradington-Young and Sam Moore both saw incoming orders shrink during fiscal 2020, whereas Shenandoah's incoming orders strengthened in the fourth quarter compared with the first 3 quarters of fiscal 2020. Even though net sales came down, Domestic Upholstery's operating margin stayed essentially flat against fiscal 2019. At All Other, net sales rose $2.1 million, or 20.7%, driven mainly by robust net sales in our H Contract division. H Contract, which caters to senior living facilities and retirement centers, kept up its growth path, with incoming orders climbing 15% in fiscal 2020 and backlogs ending the year 28% ahead of the previous period. That sales growth of almost 20% at H Contract, together with 40% growth at HMI's Samuel Lawrence Hospitality, our other nonresidential business unit, confirms that our strategy of diversifying past residential furnishings into contract furnishings as well is working. At this point I'd like to hand things to Lee Boone for more detail on the HMI segment this quarter.

Thanks, Jeremy. Starting with how we closed out the fourth quarter, Home Meridian was happy to share that operating income came in at $1.8 million, even though sales fell $21.1 million, or 17.5%, and we ended fiscal year 2020 with a backlog that was 8.3% higher than the year before. Our Q4 numbers remain far under what we delivered in the past, but they represent a major step up from the first 3 quarters, which tells us that the bulk of last year's difficulties are now behind us and that our turnaround strategies are producing encouraging outcomes. Looking at fiscal year '20 overall, net sales for the Home Meridian segment dropped $47.2 million, or 12.2%. A single major client was responsible for the bulk of the revenue drop. Beyond that, though, we experienced slight declines with a number of our largest legacy furniture retailers. The combination of that significant revenue shortfall, extra tariff expenses, elevated resourcing transition costs, increased warehousing and handling fees, and the quality problem mentioned earlier resulted in a $7.2 million operating loss for the year. Tariffs likewise dealt a severe blow to HMI's profitability, given the way its distribution network is set up — because a large share of our goods are shipped directly from manufacturing partners in Asia rather than held in U.S. warehouses, HMI was unable to stock up before the 25% tariff went into force. Beyond that, because so many of our big accounts are far more sensitive to pricing, we weren't able to make back the full amount of those extra tariff expenses through higher prices. Across the year, the best performers within HMI's divisions were Samuel Lawrence Furniture, or SLF, along with Pulaski Furniture Company, or PFC. Sales at both of these businesses fell by a low double-digit rate versus the previous year, yet contribution margins at each came in close to plan, and each one recorded operating profit above $3 million. Several factors explain that: reduced exposure to the China tariffs, a smaller hit from the problems associated with one major customer, plus encouraging early returns from fresh sales and marketing efforts and a newly opened inventory mixing warehouse located in Vietnam. Samuel Lawrence Hospitality, which we call SLH, saw sales rise 40% compared with a year earlier. Our hospitality division benefited from good conditions in that segment, and we also wound down a kitchen cabinet venture that wasn't making money. SLH participated in many more model room projects this past year — that's when hotels construct prototype rooms so they can lock in their refurbishing plans. Since the number of model rooms is a dependable leading indicator for this business, that's a positive sign for what's ahead. Sadly, though, SLH's profitability on the bottom line didn't pick up even as sales grew on the top line. A big part of that comes from the problems in the kitchen cabinet business we got out of, plus tariffs on contracts already underway that we weren't able to recover. The changes we made to how SLH operates, which we rolled out around the middle of the year, are boosting both what we produce and how well we do. Nearly all of PRI's sourcing—PRI being our Motion Upholstery segment—came from China, so the tariffs hit it hard. On top of that, PRI suffered major declines in revenue and earnings tied to that big customer I mentioned earlier. When you add those problems together, the division ended up posting a considerable loss for the full year. Even so, one positive stood out: Q4 wound up being PRI's best three months of the year when you look at sales, contribution margin, and the bottom line. The division is still working to get back on its feet, but those improved Q4 numbers indicate that the steps we've taken to reorganize and soften the impact are delivering results. In addition, we expect that PRI will see new chances for customers and sales in fiscal '21 and afterward, thanks to both our incoming leadership group and a fresh licensing deal with Terry Bradshaw, the NFL Legend. Our e-commerce-centered unit, Accentrics Home, or ACH, was also hurt by that one big customer sending product back, as well as by the China tariffs. Growth in our e-commerce sales during the year's second half was restrained by the price hikes that the 25% tariffs forced us to make, along with reduced business from a large customer. Steps to boost both sales and profitability are already underway. To give you one illustration, more than 50% of the ACH items we once bought from China have since been shifted to suppliers in other nations. Another encouraging indicator exists too: what we've seen lately points to our e-commerce revenue getting an extra boost from a change in how consumers shop that's connected to the coronavirus, with buyers directing their spending away from physical stores and toward internet-based retail. And finally, HMIdea, the business unit for our Mass Channel and Clubs Channel that we introduced not long ago, ought to produce added sales growth via our Mass Channel clientele, largely powered by premium ready to assemble, or RTA, furniture — a product category that's fresh for HMI. At this point, HMIdea has all the personnel it needs in place for clubs and mass business specialties, which provides the know-how and concentration required to begin growing those two operations again during this year. After a stretch of steady expansion and profits, fiscal year '20 turned out to be particularly hard for HMI, a period when we faced unusual obstacles that forced us to examine each part of our operations closely in search of ways to do better. We brought in different people for some leadership roles, restructured certain business units, started up a new business unit, withdrew from a handful of manufacturing partners that weren't performing, and placed renewed emphasis on our merchandising and sales approaches centered on products, customers and sales channels that win. In our view, we're heading into fiscal year '21 as a far stronger and more efficient organization, and we anticipate meaningful gains once the global health, economic and social emergency caused by the COVID-19 pandemic starts to settle down. With that said, I'll now turn things over to Paul Huckfeldt, who'll go into more detail about what we delivered this quarter.

Thank you, Lee. Our consolidated average selling prices rose 1.3%, driven by higher ASPs in three areas: the Hooker Branded segment, Domestic Upholstery, and All Other. That gain stems largely from price hikes made necessary by tariffs being imposed and later raised, plus a beneficial product mix. Those improvements counterbalanced a slight ASP dip at Home Meridian. Even so, these elements couldn't make up for the 12.7% drop in unit volume overall, and that produced weaker order volumes in each of our 3 reportable segments. The declines in unit volume looked fairly uniform across every one of those reportable segments. Consolidated gross profit fell $33 million, landing at $114 million for fiscal 2020, and slipped from 21.5% to 18.7% when measured against net sales. At Hooker Branded, gross profit dropped somewhat both in dollar terms and relative to net sales, the result of weaker sales, tariff effects, and moderately higher freight expenses, partly made up for by price increases taken in that segment to soften the tariff hit. Turning to Home Meridian, gross profit dropped sharply in absolute dollars and as a share of net sales. Home Meridian's gross profit took a hit from softer sales, larger chargebacks, tariff and freight costs that went unrecovered, and certain lower-margin sales programs we've been trying to fix or wind down. Unrecovered tariff costs plus an inventory write-down tied to quality problems dealt roughly a $12 million negative blow to gross profit. Additional items weighing on gross profit included roughly $1.6 million in higher freight, handling, and warehousing expenses caused by inventories that came in above plan. Even though our Domestic Upholstery segment saw sales fall $10.9 million, or about 10%, its gross margin climbed as a percentage of net sales, chiefly because material costs and benefits expenses came down. Those improvements were partly erased by greater direct labor and overhead as a share of sales, which came from the smaller order volume. Though it's only a minor piece of our consolidated results, All Other added about $1 million in extra gross profit, thanks to strong sales and a favorable product mix at H Contract. Consolidated selling, general and administrative expenses went down in absolute dollars yet rose as a percentage of sales, because selling expenses and compensation costs were lower on a smaller net sales base in fiscal 2020, partly offset by greater costs tied to the Asian sourcing transition and roughly $660,000 in start-up expenses for 2 new business units. Given all of this, operating income for fiscal 2020 fell $30 million, to $22.7 million. Operating margin dropped from 7.7% to 3.7%. Now for the balance sheet. Our cash balance grew by about $25 million versus fiscal 2019 year-end, reaching $36 million. Even with sales down, we brought in $41 million of cash from operating activities, a large portion of it from collecting accounts receivable and bringing inventory levels down, along with $1.4 million in proceeds from selling a former distribution facility that we had owner financed. Also, one thing to keep in mind when you review our balance sheet: adopting ASC 842, the new lease accounting standard, took effect at the start of this year, and it added roughly $40 million in new assets plus a comparable liability to our balance sheet, which impacts how it compares with last year's balance sheet. As fiscal 2020 came to a close, we could draw on nearly $26 million through our revolving credit facility, along with $25 million in cash surrender value from company-owned life insurance, giving us extra financial flexibility. Even with weaker profitability in fiscal 2020, our confidence in the business model remains, as do the actions we're taking to get back to historical profitability. Accordingly, in early March our directors signed off on a dividend of $0.16 per share, which, based on current share prices, works out to a dividend yield of roughly 3.8%; I'll now hand the discussion back to Paul Toms for his outlook.

Appreciate that, Paul. The COVID-19 pandemic brings an economic hurdle unlike anything we've faced before, and nobody knows how long it will last. Over the past several weeks, the stock market has swung wildly, unemployment claims have jumped, supply chains have been disrupted, and gatherings of every kind — business, social, sporting, academic and religious — have been called off, among them the High Point Premarket, along with the Spring High Point Furniture Market being pushed back. Stay-at-home mandates throughout the country have led some of our customers to shut down temporarily. Demand has fallen across the industry, and we anticipate that our sales, earnings and liquidity in the fiscal 2021 first quarter will be down materially relative to the same period a year earlier, though we can't gauge how big those declines will be. On top of that, we have only limited visibility into how far our businesses might be affected by this outbreak. Even so, we're getting ready for a serious downturn that could run anywhere from 4 to 8 months, and we have strategies ready to conserve cash and cut operating costs. Things are changing rapidly, and if goods arrive later than expected, or if our supply chain takes other unexpected hits — whether to direct imports or to components we buy domestically — or if our retail customers run into trouble, the effect on our business going forward could be even larger. We feel grateful to be in a solid financial position, since we built up substantial cash last year and have strengthened that cash position even more during this year. Because our business model carries lower fixed costs and broad distribution, we have greater flexibility to expand or shrink our operations. We're also lucky to have a robust e-commerce presence, given that this channel has held up so far amid the crisis. Across our 95 years in business, this company has weathered recessions, a depression, a world war, terrorist attacks, natural disasters and just about every other kind of crisis you could think of. Each time, we've made it through by pulling together, operating as a team, taking sensible business steps and refusing to let fear paralyze us. It makes me proud that our team is rallying to handle these challenges, exactly as we rallied to handle the many-sided challenges of last year. That concludes the formal portion of our discussion. Right now, I'll hand the call back to Joel for questions. Thank you.

So I suppose to begin with, stepping back a bit, I appreciate the detail you provided regarding the various segments. When we look at Home Meridian, clearly there are quite a few difficulties. Could you remind us of the scope of all those expenses you incurred — the sales chargebacks, the demurrage costs, and all the rest? Could you just bring us back up to speed on how large that was? We're just trying to get a sense of which of those costs you believe won't happen again in your fiscal '21.

Paul Huckfeldt, would you like to give that a try?

Okay. Taken together, we had roughly $10 million in costs that only came up this year. Roughly half of that amount — possibly slightly above half — stemmed from a sizable chargeback, plus the inventory write-downs tied to a return connected with that chargeback. There were a few — as I believe I said during the call, we incurred approximately $1.6 million in extra warehousing costs, since we began the year holding more inventory than — due to the first-half slowdown and because lots of our customers stocked up on inventory at the close of fiscal '19. We started the year carrying more inventory than we had expected, and that came to nearly a couple of million dollars extra. On top of that, we had another couple of million in surplus freight and storage charges for product we were bringing in. So I'd say there is roughly — all told and added up, it's roughly $10 million in one-time — in one-time expenses that we do not anticipate showing up again in the current year.

Understood. All right, so that figure carries real weight. All right. All right. Now regarding HMI, you mentioned certain restructuring steps you've taken, along with your belief that results ought to improve once the COVID pandemic is behind us. So I was hoping for somewhat more specifics on HMI and that entire reorganization push — if you could share a bit more detail there, that would be terrific.

Lee?

Absolutely, Anthony. At PRI, we've now got fresh leadership in place. A new President, along with a new Vice President of Sales and merchandising, came on board earlier this year. The two of them bring deep experience and know-how in this area, and in our view they're an excellent fit to expand the PRI business and make it far more profitable. On top of that, we brought in 3 executives to launch the HMIdea division, which is aimed at the Mass Channel, the Clubs Channel, and the RTA products segment—business that will be mostly incremental for HMI and RTA, and then ongoing business, growth, and profitability within the Club segment. So across the last 6 to 9 months, that adds up to 5 new executives we've brought on. We're feeling good about it.

All right, sounds good. Now regarding how much you depend on China — you've already lowered that by 50%, so it sits at roughly 20%, if I'm not mistaken. Given COVID, things are probably unpredictable, but would it be reasonable to expect that you'll keep trimming that dependence, moving even more product sourcing somewhere else?

Anthony, Paul Toms here. That's right — we do plan to keep lowering how much we depend on China as a source country. That said, I don't expect the drop this year to be as big as what we saw a year ago. In one of our recent filings, I believe we mentioned possibly bringing it down to 16% or 17%. Certain items are made in China — big cuttings of product for some of our larger customers — that simply can't be done in other countries at the moment. We have other businesses where we're compensated 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. Then there are other businesses on the Hooker Branded side, where ramping up in Vietnam as quick as we'd like just isn't possible, and instead of disrupting 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.

Understood. Alright. Then you mentioned e-commerce too—clearly it's a standout at this point. Could you help us understand your penetration there, whether we're talking about overall company sales or the share of sales going to online retailers?

This is Paul Toms once more. My estimate would put it at roughly 12% to 13% of our total volume, possibly slightly higher, and by division it differs. Domestic Upholstery—close to nothing. For Home Meridian, that portion is likely larger than what Hooker Branded sees, though I believe it exceeds 10% for both Hooker Branded and Home Meridian.

Understood. All right. So clearly, you came into this with backlog rising 9%, yet you mentioned customers canceling orders and pushing things back; so considering where we are on the calendar, just about 2 weeks remain before the first fiscal quarter ends. So I realize, Paul, you said you anticipate a sizable negative hit to the quarter. Can you give us any additional detail — anything more at all — on how we ought to frame the scale of sales and earnings for Q1, since you're already — as I mentioned, roughly 2 weeks or so are all that's left in the quarter?

Correct. So within that same first quarter, the coronavirus hit us in a couple of different ways. Our fiscal year kicks off, normally around the 1st of February, and this year it was February 3. Think about that timing: that's precisely when the virus was peaking and was throwing off the return to work of employees in China along with many Chinese employees who handle management and supervision at factories in Vietnam. So the disruption from the virus early in the quarter was really felt on our supply side, and factories didn't ramp up as fast as they usually do, and shipments were delayed. 6 weeks later, it begins to hit here. And as every effort was put in place here to close businesses, have people shelter at home, that sort of thing, demand dropped significantly; and our big customers with hundreds of stores that had shut or instantly canceled orders, deferred orders, requesting that nothing be shipped. It was almost like in one night everything stopped. And that will likely hit the final 6 weeks of a 12-week quarter, 13-week quarter; so we're probably — I mean what we're planning is — you didn't ask about the second quarter, but we anticipate May looking a lot like April and business improving somewhat in June, July, August and then hopefully improving again by September; but pinning down the first quarter's impact is tough. February, even with the inability to get production out of China and Vietnam, which may have affected a handful of direct customers where we ship containers straight from Asia to their stores. By and large, February was fairly normal, comparable to the February of the year before. In March, the first 2 weeks were fairly normal, and we began getting production back up in Asia. So the first half of March was normal. Around mid-March, that's when everything sort of ground to a halt. There may have been some business in the pipeline that we figured out by early April, really late March; we figured out we lacked enough orders to run our Domestic Upholstery plant's full schedules. So we furloughed 2 and probably 3 weeks, all of our Domestic Upholstery plants. Roughly 50% of the people working in our warehouses were placed on furlough, and that step was taken for the very same reason: softer demand. Given all of this, predicting exactly how the quarter will turn out is genuinely difficult right now, though one thing is certain — it is going to come in below the equivalent period a year ago, and the cause of that is the disruption.

All right. Okay. Yes, so as you pointed out, clearly you're cutting salaries along with certain other costs, and you're bringing down your CapEx, the same way other businesses are doing. So regarding — first, I suppose, when it comes to the expense side of things, I mean, overall, how much would you say for the — whether you look at it quarterly or on an annual basis, whichever way you prefer to frame it, the size of some of these — all of these reductions in operating expense, I mean, I just was hoping you folks could put a number on that? And I suppose CapEx, I believe you mentioned roughly $2 million, I believe that's the CapEx figure for this fiscal year, but I just wanted to make sure that's right.

Okay. So the operating budgets and expenses within our control are the fixed expenses we can control. We established a goal of 15% to 20% reduction on those, plus roughly 10% on salaries and wages. And I believe we're quite near that. So perhaps all together, you're looking at a 12% to 13% decrease in spending each month; during the first month, we'll have certain offsets to that severance for employees who were dislocated, and that would be the bigger one. A few of the — we have items. Savings will require a few months to work through with landlords regarding any concessions and rent and certain of our other vendors; but I think on the spending side, you could expect 10% to 12% less. And then certain of our other costs move with sales, commissions, royalties, items like that, which will be down in proportion to sales. When it comes to CapEx, we have comparatively small CapEx for a company our size since we don't have many retail stores or other large manufacturing operations — the upholstery plants are nowhere near as capital-intensive as casegoods facilities once were. So CapEx, we have, I think, budgeted around $5 million this year, and we've identified at least half of that, perhaps $3 million, that we could push into future years with no significant impact to the business.

Understood. All right, and now for my final few questions, I suppose it's simply a matter of how we ought to view where your cash flow will be directed first, and additionally, I'm aware that your debt comes due — at the start of next year, regarding what you anticipate for refinancing that facility. I just wanted to hear about your revolving credit facility and what your expectation is for getting it renewed, that would be wonderful.

Over these past several weeks, Paul has been developing quite a few models, so I'll hand that question over to him.

All right. As for that credit line, our plan and expectation is definitely to renew it, and we've been talking with our bank. Clearly, nothing has been locked in yet. Even so, we're cooperating closely with the bank so they grasp where we stand — much like they'd want to do for plenty of their other customers. We absolutely plan to renew it. My sense is that at this moment, the expense involved — we could begin the renewal process today, but the expense involved is rather steep. So we simply keep watching it. We've run extensive cash flow projections and feel we've got enough liquidity to make it through this crisis. Naturally, we're at an early stage of the crisis. And we — plenty of things have yet to unfold. So my sense is that in the coming couple of months, we'll see more clearly what our overall cash requirements are and what direction we need to take; but my sense is that we feel fine as things stand. I believe we've said a few times that we came into this year with a strong cash balance, and we've increased that balance since. That gives us the benefit of having time to assess where things stand before we make more — before any deeper or more severe changes. I realize that response was somewhat imprecise, but at this juncture, a great deal remains uncertain.

Yes, yes. However, I suppose the other thing — what I also wanted to find out regarding dividends compared with lowering debt, I realize you folks continued paying the dividend through the previous downturn, in contrast to numerous other businesses, which stopped paying it. So I simply hoped to understand more clearly how you view dividend distributions against paying down debt?

Paying down debt, we intend to keep making our debt payments on the usual schedule. And I believe what I meant when I mentioned the benefit of not being forced to act on levers prematurely is that we clearly must assess the dividend according to how circumstances evolve. We will need to discuss our upcoming dividend in early June, and I believe we will have greater clarity then. Clearly, it must be considered, yet it isn't something we take pleasure in doing. So I believe we enjoy the advantage of a few additional months of — or, indeed, a few additional months of visibility prior to needing to reach a conclusion regarding the dividend. Reducing it is not what we aim for, yet staying alive and maintaining liquidity matters most.

Looking back across 50 years, our record of distributing dividends has been steady, including straight through the financial crisis of 2008, '09, and '10. So keeping that dividend in place is absolutely something we treat as a priority. That said, we still have to see how things play out regarding what our customers want from our products, and how those customers actually pay us for goods we've already sent them. Honestly, I'd say that once 6 weeks pass, we'll be able to see more clearly than we can right now. That's why a call on the dividend tied to late June has been pushed back to early June.

You touched on this briefly, but I was hoping you could go into more detail about your cost structure — in particular, the variable piece compared with the fixed piece, and especially how you're able to scale the business?

We did. Paul, do you want to give that a try, or should I?

Yeah. Roughly 5% of net sales—possibly a touch below that, or somewhere around there—consists of variable SG&A costs. Those include commissions, designed royalties, certain expenses, and a few more adaptable marketing costs. Past that point, the bulk of what we spend to operate is fixed or semi-fixed, and that's precisely where we've concentrated our efforts on making choices to cut costs, be it through layoffs, seeking vendor concessions, or simply trimming expenditure in areas such as certain marketing outlays. So that's—as the business scales, a portion of it scales automatically alongside variable costs. The remaining portion involves the tough calls we've been forced to make, whether that means, as I mentioned, layoffs, furloughs, or approaching our vendors and partners for extra contributions.