Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Joelle. Good morning, everyone, and thank you for joining our quarterly conference call, where we'll go over our preliminary financial results for the first quarter of fiscal 2021, which closed on May 3, 2020. We're glad you could be with us this morning. On the line with me today are Paul Toms, our Chairman and CEO; Jeremy Hoff, President of our Hooker Legacy Brands; and Doug Townsend, Co-President of our Home Meridian division. Our executive officers will also be on hand for the Q&A portion of the call, among them Anne Smith, our Chief Administration Officer, and Lee Boone, Co-President of Home Meridian. During this call, we might make forward-looking statements, and those carry risks and uncertainties. A discussion of the factors that could make our actual results differ materially from management's expectations appears in our press release and SEC filing announcing our preliminary fiscal 2021 first quarter results. Any forward-looking statement reflects only today's perspective, and we take on no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after today's call. COVID-19 materially affected our financial performance in the fiscal 2021 first quarter, as well as market valuations, discount rates and other inputs used in our intangibles valuation analysis. As a result, and even though we had completed a comparable intangible asset valuation in our fiscal 2020 fourth quarter, we concluded that a further intangible asset valuation was warranted in light of our performance and these shifting market dynamics. Because of the work and complexity this project involves, we need more time to finish the analysis. So the results reported this morning and that we'll discuss on this call are preliminary and exclude any noncash impairment charges on our intangible assets, which could arise from the impairment analysis now in progress. Actual results may differ materially from these preliminary unaudited results provided this morning and discussed on this call; we expect to finish the intangibles valuation and settle the amount of impairment, if any, when we file our Form 10-Q for the fiscal first quarter ended May 3, 2020, which we expect to file on or before the extended due date of July 27, 2020. Impairment charges, if any, won't affect our cash position, but they would hurt operating loss, net loss, loss per share, total comprehensive loss, deferred income taxes, intangible assets and retained earnings. Earlier today, we announced consolidated net sales totaling $104.6 million for the first quarter of our fiscal 2021, which represents a decline of 22.8%, or $30.9 million, versus the same period a year ago. For the first time since 2009, we posted a preliminary quarterly net loss amounting to $1.1 million — a drop of $3.1 million from the $2 million in net income recorded during last year's first quarter — driven by the severe adverse effects of the COVID-19 pandemic throughout all 3 of our reportable segments: Hooker Branded, Home Meridian, and Domestic Upholstery. We recorded a preliminary loss of $0.09 per share, compared with $0.17 in earnings per share the previous year. At this point, Paul Toms will share his thoughts on the results from our first quarter of fiscal '21.

Thanks, Paul, and good morning to all of you. In more than half a century of doing business, we've never seen a slump as severe as the one COVID-19 brought on. Because stay-at-home orders tied to the pandemic and an economic shutdown stretching from the middle of March through the middle of May across the United States, the company posted a double-digit drop in sales along with its first quarterly losses at both the operating and net income lines in more than 10 years. We had opened the fiscal year moving upward, with consolidated incoming orders in February running 8.3% higher than the prior-year period, but then orders fell off a cliff during March and April as a large number of our retail customers shut their doors for a while. Big accounts scrapped stock orders, while others pushed orders back; another factor behind the quarterly income loss and the squeeze on operating margin was that production stopped temporarily at 5 of our 6 domestic upholstery plants located in Virginia and North Carolina, leaving us with unabsorbed fixed costs and operating inefficiencies; even so, the disruption to the business has turned out to be less harsh than what we first anticipated. Consolidated orders dropped sharply — by more than 70% in March and by more than 65% in April; then in May we saw a meaningful month-over-month gain in consolidated order rates. During fiscal May, orders were lower by roughly 7% for the period. And from mid-May onward, consolidated orders have for the most part come in above the equivalent stretch of last year. Retailers in certain parts of the country are reporting glowing results for their business over the past few weeks, among them robust sales over the Memorial Day holiday weekend. We think a number of favorable forces are at work, among them pent-up demand, a greater emphasis on the home environment given how much time people have spent in their houses over the past few months, and reduced competition for discretionary consumer dollars from travel, dining out, and other pursuits; on top of that, Hooker's domestic upholstery manufacturing facilities for Bradington-Young, Sam Moore, and Shenandoah started ramping production back up in early May, and on a consolidated basis they are now running at about 75% of capacity, which is lifting efficiencies and cost absorption. Thinking about how the company answered the international health and economic crisis, we take pride in the way our team rode out the storm during this unmatched period of difficulty. Above all, we feel grateful that not one of our 1,000 U.S. employees — at any location — has tested positive for the virus as of today. That is a remarkable achievement and speaks to how diligently human resources put best-practice safety protocols in place at every location. Our employees likewise adhered to best practices both at home and on the job and adjusted to remote work while remaining productive, upbeat, and involved. We believe we answered with suitable mitigation steps aimed at cutting operating expenses and protecting cash, making hard but essential choices that included furloughing 600 manufacturing, warehouse and administrative employees, shuttering 5 of 6 domestic upholstery manufacturing facilities during April, temporarily trimming officer and manager salaries along with Board of Directors' fees, and postponing all noncritical capital spending. Sadly, we had to shrink our workforce by 35 employees, yet we managed to retain 97% of our employees throughout this period. We're happy to announce as well a quarterly cash dividend totaling $0.16 per share, payable to shareholders of record as of June 16, 2020. Our long-term strategies give us confidence, and we feel grateful that even under these extraordinary conditions we've been able to keep up a more than 50-year record of paying dividends without interruption. Given the steady gains in orders and shipments toward the close of the first quarter on May 3, we anticipate that our business model with low fixed costs — which worked well for us through the Great Recession — will keep working for us amid this present disruption. On top of that, our continuing approach of selling via multiple distribution channels demonstrated its value once more throughout this crisis. Although the majority of traditional bricks-and-mortar furniture retailers shut down for 2 months, other channels like e-commerce, hospitality and clubs thrived and gave us a revenue source. Just as importantly, our cash position stayed solid and has kept getting better since our fiscal year-end in early February. From operations this quarter we produced $18.9 million in cash, which helped drive a $15.2 million rise in our cash balance compared with the close of fiscal 2020. Now I'd like to hand the call over to Jeremy Hoff, President of Hooker Brands, so he can offer comments about that division.

Appreciate that, Paul. Looking at Hooker Branded, net sales were down $12.4 million, a 31% drop. Over in Domestic Upholstery, net sales fell $8.5 million, which works out to 33.7%, in Q1. Now let's dig deeper into each segment, starting with Hooker Branded. Traditional furniture stores along with small and regional chains make up the biggest portion of Hooker Brand's distribution base, and since those were shut down while the economy was closed, incoming order rates fell sharply over the quarter. Even with that sales drop, this segment's model of low fixed costs and high variable costs let it hold a 29.5% gross margin and a 4.9% operating income margin for the quarter; on top of that — the Spring High Point Furniture Market, which had been set for late April, got canceled, and High Point showrooms shut their doors. Even so, Hooker Casegoods managed to sell new collections that were meant for spring introductions through a virtual showroom presentation hosted in a password-protected section of the company's website. Prior to the showroom closing, we made it a priority to get upscale, environmental, and detailed photography of 4 new collections that are now in production; selling through the first cuttings to our retail customers through this online presentation has gone very well, which is really encouraging. Next up, we'll create a 360-degree-style video tour of the showroom collections this month; in Domestic Upholstery, incoming orders dropped 40% for the quarter. In April, the manufacturing plants at Bradington-Young and Shenandoah shut down temporarily, and Sam Moore ran at roughly 50% capacity. Workers came back to the factories and production began again the week of May 4, and right now this segment runs at about 75% capacity. Lower sales and operating inefficiencies caused by the temporary shutdown led to substantially reduced gross margins and an operating loss. As for All Other, which covers H Contract plus the newly formed Lifestyle Brands, net sales came in essentially flat, and we posted operating income of $387,000 thanks to H Contract's continued strong performance, with incoming orders up 16% and backlog 68% higher than in last year's first quarter. At this point I'd like to hand it to Doug Townsend for more detail on the HMI segment this quarter.

Appreciate that, Jeremy. Good morning, everyone. Turning to HMI, first-quarter revenue totaled $57.7 million, a decline of 14.7% compared with the same quarter last year. Our preliminary operating loss for Q1 was $2.4 million, which represents a 52% improvement over the prior year's results. Even though the global economic slump brought on by COVID-19 dealt a heavy blow to Q1 orders, sales, and profits, the better bottom line at HMI relative to last year stems from the company's fundamental turnaround strategy. A few of the indicators of this progress are: first-quarter allowances came in 21% below the prior year, contribution margin as a percentage of net sales increased 350 basis points versus the prior year, and fixed expenses were $1.5 million lower than the prior year. Management is concentrating its focus on all of these areas, along with many others. During the first half of Q1, the COVID-19 pandemic seriously disrupted our Asian supply chain. Because of the massive quarantines in Asia, our factories could not run as usual, and many production facilities had to shut down for a time. Every one of our factories in China and Malaysia was closed for a month, since those nations had country-wide shutdowns. The nationwide retail shutdowns across the U.S. that began in mid-March badly hurt our shipments for the rest of Q1. Only lately have we started to see conventional furniture retailers opening their doors again. Even so, a few bright spots beat expectations during the quarter. Let me lay it out more precisely. On the e-commerce side, we saw substantial growth that came in above all of our expectations, and it accounted for 35% of total sales during the quarter. Our results with several Mega and Mass accounts came in much stronger than what we had initially forecast. Fortunately, a number of our customers — wholesale clubs, big box stores, and mass merchants among them — were able to keep operating, whereas dedicated furniture retailers across many markets were forced to shut down temporarily. Those positive developments, combined with significant cuts to spending and other measures to control costs, enabled HMI to deliver results well ahead of the prior year. And while only 2 of our business units posted an operating profit in Q1, 4 out of 6 units outperformed the prior year. E-commerce demand surged, which benefited Accentrics Home, while Samuel Lawrence Hospitality saw gains from a solid pipeline of hotel projects already underway. Because of substantial new business with a large mass channel account and because we finished shifting sourcing for the whole product line — that is, the complete product line — out of China, PRI's upholstery sales reached 83% of the previous year in spite of the COVID-19 crisis, and gross margin rose 610 basis points compared with the prior year. PRI likewise far surpassed the weak bottom line results posted a year earlier. Samuel Lawrence Furniture also bettered the prior year's bottom line results through margin improvements and controls on spending. The economic downturn caused by the coronavirus pushed us to put many new cost-cutting steps in place. A few of the many actions now in effect include cuts to staff and pay, furloughing employees, lowering lease expenses, reducing product costs, and halting all spending and operations that aren't essential — some of these changes are temporary, while others will stay. Thanks to these steps, we've been able to offset part of what we lost when revenue suddenly fell so sharply. We've also made solid progress in reducing our inventory. When May ended, our stock levels were down by about $19 million, or 29%, from where they had been when the fiscal year began. That reduction was deliberate, but at this point we need to build our stock back up so we can keep service at an acceptable level. Our manufacturing partners have been hit hard through this tough period as well. They've dealt with materials and components arriving unpredictably, not enough workers, shutdowns ordered by the government, plus additional cancellations and delays. Even so, we couldn't be happier with how our factory partners have come through this storm and backed our business in every way they could; we feel extremely lucky to have such a remarkably strong and dependable group of suppliers, a good number of which have stood with us for 10 to 20 years. Going forward, we have a number of business growth initiatives aimed at lifting sales. To begin with, we're bringing several Mega account retailers into our showroom during the summer for private product presentations, and that should help offset the effects of the High Point Spring Furniture Market being canceled while hopefully creating new product placements; we also have a number of other initiatives meant to drive sales, among them a new branded license collection that's in development, a new partnership with a mass channel customer, the launch of our HMIdea RTA product, our efforts to regrow our club business, a reboot of our PRI upholstery business and, arguably most critical given where things stand right now, a major push to maximize sales through our e-commerce channel. Even though we think we're getting through this tough period, it's important that our teams and our shared mindset remain in sync regarding the most significant challenges we face, especially since a large portion of our workforce is currently operating from home; right now, our focus is on these areas: keeping our employees healthy and safe, bringing staff back to the office in a considerate and cautious manner when circumstances permit, maintaining ongoing transparent and honest dialogue with everyone involved, managing expenses and ensuring we remain profitable, and reshaping our company and our approaches so that we're set up well for what comes after the pandemic. Even though the financial damage caused by the coronavirus is going to continue impacting Q2 and in all likelihood the remainder of the year to some degree, we're encouraged because April and May numbers turned out much stronger than our original projections from the start of the crisis. There's cautious optimism on our end that the retail downturn has already hit its lowest point, and as we move toward summer and most of our customers reopen their retail stores, we're starting to witness greater demand for shipments. With that said, I'd now like to pass things over to Paul Huckfeldt, who can provide additional detail regarding our quarterly results.

Thanks, Doug. In the Hooker Branded and Home Meridian segments, ASPs rose within the low to mid-single digit range. Even so, because of a shift in the mix across divisions, consolidated average selling prices fell 2.1%. Unit volumes dropped in the low to mid-30% range for the two higher-priced segments, Hooker Branded and Domestic Upholstery, which was far steeper than the 18% decline seen in Home Meridian. Higher average selling prices in Hooker Branded and Home Meridian came from favorable product mix, and that helped offset a modest ASP dip in Domestic Upholstery; even so, those benefits could not fully counter the roughly 21.6% drop in unit volume, which stemmed from weaker orders in all 3 segments. Consolidated gross profit fell $6.9 million, from $25.5 million to $18.7 million, and as a share of net sales it went from 18.8% to 17.8%. Hooker Branded gross profit was lower both in absolute dollars and as a percentage of net sales, mainly because net sales declined. At Home Meridian, even though net sales were lower, gross profit rose in absolute dollars and as a percentage of net sales, which reflects some of the turnarounds Doug mentioned earlier. During the prior year period, Home Meridian's gross margin took a hit from unexpected quality-related chargebacks, plus tariff and freight costs that were not recovered. Those problems did not happen again in fiscal 2021, which we attribute to the resourcing transition to Vietnam, which has lowered product costs, and to exiting temporary warehouses, which has cut warehousing and handling costs. Domestic Upholstery's gross profit dropped substantially in absolute dollars and as a percentage of net sales, driven by the decline in net sales and by inefficiencies from running at much lower production volumes. As noted earlier, in April we temporarily shut 5 of Hooker's 6 domestic upholstery plants. Bradington-Young and Shenandoah basically had no sales reported in April, while Sam Moore's April net sales came in at just 37% of the prior year figure. Preliminary consolidated selling and administrative expenses declined in absolute dollars thanks to lower selling expenses on the smaller net sales base and cost cuts we implemented in response to the COVID-19 pandemic, including reduced employee compensation, temporary — temporary salary reductions, furloughs and the elimination of physicians, along with lower travel and furniture market-related expenses. Partially offsetting those decreases was higher bad debt expense, including recognition of current expected credit losses under the newly adopted ASC 326 accounting standard. Because of all this, preliminary operating profit for the fiscal 2021 first quarter declined $4 million, to a preliminary $1.1 million loss, versus $2 million — $2.9 million of operating income in the prior year first quarter. Operating margin went from 2.1% to minus 1.1% this quarter. Even with those operating losses for the quarter, our cash balance grew about $15 million from the fiscal 2020 year-end, to just over $51 million. Operating activities brought in $18.9 million in cash, a large portion of which came from the big drop in inventory levels since year-end, plus collections on accounts receivable, along with savings from reduced spending and from streamlining purchase orders with our suppliers. Beyond the cash we hold, we can draw almost $26 million under our revolving credit facility, and we also have just under $26 million in cash surrender value from company-owned life insurance. That provides extra financial flexibility for getting through these difficult times. Even with profitability down, our financial condition is something we feel confident about, and we believe our financial resources are sufficient to withstand the expected near-term effects of COVID-19. Accordingly, in June our Board of Directors gave approval to a dividend of $0.16 per share, which at today's share prices works out to a dividend yield of 3.2%. That said, if a crisis drags on for a long period, it could materially and adversely affect sales, earnings and liquidity down the road. I'll now hand the discussion back to Paul Toms for an outlook.

Thanks, Paul. We don't have much visibility into how the economic and health crisis might shift over the next few months, and we still confront considerable headwinds from the elevated unemployment rate, but our business is getting better and we're in a stronger spot than we thought we'd be right now. The company continues to be in outstanding financial shape. During periods like this, we feel a solid balance sheet matters even more than what the income statement shows. We appreciate how adaptable and resilient our employees have been, and we look forward to having our administrative and management team members back in the offices once the states give the go-ahead, and even more importantly, once we judge it safe given where the virus stands and the situation in the communities surrounding our corporate locations. We anticipate that the second quarter will be much stronger than the first. Assuming no second wave of infection, we anticipate that business will get better every quarter as the year progresses. We have confidence that we'll come out of this crisis as a stronger company. That concludes the formal portion of our discussion. And now, I'll hand the call back to Joelle for questions.

To start, I was hoping to better understand how your sales break down across channels. You clearly pointed out that e-commerce accounted for 35% of sales within HMI, which is far above what's usual. So I was curious what that figure looks like for the whole company? And beyond that, could you also share some thoughts on the warehouse clubs? Then, more broadly, I'd like to hear about your sales penetration with nontraditional furniture sellers — the ones that stayed open through the pandemic?

All right. Yes, there are quite a few questions packed into that one. But I'll give it a try. My sense is that Hooker's Legacy Brands didn't reach the same level of e-comm channel sales as Home Meridian did. In other words, I don't believe they made up 35% of our volume in Q1. I don't have an overall figure on hand, but my guess would put it somewhere between 15% and 20%. Our Domestic Upholstery has very little e-comm channel penetration. So that would tend to pull the overall number down; we're lucky enough to move product through e-comm. On top of that, we're lucky to operate in clubs such as Costco or Sam's or other warehouse-style clubs. We're also in other retailers that remained open throughout this period, since they carry some groceries and were deemed essential. So we had certain big-box retailers and — for customers that could also keep operating through this. I'm not certain which other parts of your question I haven't addressed, but I'll give it a try.

Yeah, I believe that, uh, yes, as part of that question with several parts, yes, I feel that, that basically, I think, addresses it. So yeah, I appreciate that, Paul.

Anthony, it's Doug here. Let me just add a bit. HMI's sales into those other growing channels — mass merchants that stayed open, clubs, plus hospitality hotels we were still building out — account for over 20% more of HMI's business, on top of e-commerce, just to give you a sense of it.

Understood. Alright, that's quite useful, okay. Alright, so then yes — Doug, you mentioned as well certain control — measures for controlling costs that you put in place. I was curious whether you might say more about that and maybe give some figures for what these are — just generally, these permanent measures for controlling costs?

Alright. Well, the way I'd describe it is that it covers all the items Paul brought up before. Paul brought up travel, cutting back — essentially trimming expenses in every place we could, and on top of that we've reduced salaries by 10% to 15%. Roughly 10% of our workforce was let go. At our corporate offices, about half the staff were placed on furloughs that rotate. So all of that together, plus simply handling expenditures in a pretty draconian manner just to be as safe as we can. And looking at the first quarter, our spending, our total fixed cost base, came down by $2 million compared with what we had budgeted to spend. Did that answer your question?

Understood. All right, that's quite useful. Now regarding how much you're exposed to China — clearly, given the tariffs, you've been cutting back on sourcing products from there; so where did things stand for you at the close of Q1?

During Q1, 12% of what we shipped originated in China, and clearly that figure was somewhat depressed since China was shut down for an entire month. When you consider the 6-month span, the figure is 18%. Looking ahead, it will likely land somewhere between those 2 numbers.

Understood. All right.

And when you consider the whole company, that figure we provided — roughly 22% of sales at the close of last year — likely won't shift much. For Q1, it could land in the high teens.

All right, understood. So, okay, then a few more things I'd like to ask, if that's fine. You mentioned, clearly, that you're seeing improved results thus far in your second quarter. Could you remind us, when considering the various areas across the country, where your greatest exposure lies? And my guess is that the Northeast will probably trail the other regions, but if you could elaborate a bit on that, it would be helpful.

That's correct. My sense is that the Northeast, and perhaps the upper Midwest, and even the Northwest, might see a slower reopening compared with sections of the South or West. Still, it's genuinely difficult to — I mean, we can examine our traditional customers and have some sense of where sales are happening, yet once you move into e-comm and catalogs, plugs, figuring out precisely where furniture lands in a given region becomes much harder. So — but I believe it would be reasonable to state that definitely, for the Hooker Branded and also the Domestic Upholstery segment, we're more heavily concentrated in the southern areas of the country, the south, let's say, in Texas and Oklahoma, the Sunbelt, rather than in the Northeast. Even so, we do have quite a strong presence in the Northeast. I think that applies to some of the other channels of distribution and likely through Home Meridian more so than through the other 2 segments.

Understood. All right. Then from an operations standpoint, it's clear you've got upholstery manufacturing facilities here in the U.S. You mentioned that you're currently running at 75% of capacity. I'm just curious on the operations side, what changes are you making when it comes to safety procedures? And also — and could you be as — I'd guess you likely can't match the efficiency you had before COVID, but I just wanted to understand how we ought to frame the extra expenses tied to simply managing COVID.

Anthony, it's Jeremy here. Naturally, we have complied with every CDC recommendation, and we're taking the utmost care. What I mean is, the safety of our workforce has been our top concern for this whole crisis, and that's going to stay where our attention is. We are — clearly we are keeping people apart physically inside our plants. We are making use of masks. As for what extra money that takes, the second half of what you asked, I don't anticipate meaningful added expense from carrying out the protective steps we've implemented.

That's fair. It's different from a meatpacking plant, where workers are basically shoulder to shoulder. In a manufacturing setting, folks are probably spaced apart a bit more by nature. That said, we can't really put a dollar figure on what choosing a safer stance has cost us.

That would suggest that it's not material < >.

A major element here is just keeping in touch, Anthony. Each week, we hold calls so that we're clear on what's happening right now, and honestly, we're doing that closer to every day than once a week. So whenever conditions shift, we shift alongside them. And we're determined to remain on top of it.

Understood. Alright, so for my final question: I've seen mention that you've clearly been selling furniture meant for home offices for quite some time. I'm just curious — with the new reality after COVID, what's your approach to fresh product categories or collections? And it would be great if you could elaborate on how much exposure you have to the home office segment.

When it comes to the Hooker Legacy part of our company, casegoods in particular, luckily we had already been preparing a big home office rollout — a brand-new program set for this fall. So obviously the timing works out well; honestly, I'd say there's a bit of luck involved. Still, we'll be really well positioned for whatever trends emerge; plus, the second piece of our big introduction is a new casual dining program too. And positive marketplace trends are showing up in both of those categories. I'd also like to — let me hand things over to Doug for his portion of the business.

Absolutely. Yeah, when it comes to home office items, sadly, that's been a pretty minor segment for us at Home Meridian. But clearly, after we noticed this shift 2 months back, we kicked off extra product development work in that segment. So we're hurrying to bring more items into that segment.