Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Joelle. Good morning, everyone, and welcome to our quarterly conference call, where we'll go over the financial results for fiscal 2021's third quarter — a period that started August 3rd, 2020 and wrapped up November 1st, 2020. We're glad you could join us this morning. With us today are Paul Toms, our Chairman and CEO; Jeremy Hoff, who serves as President of our Hooker Legacy Brands; and Lee Boone, President of our Home Meridian Division. Our Chief Administrative Officer, Anne Smith, will also be on hand to field questions during the Q&A portion of the call. Throughout this call, we might make forward-looking statements, and those carry risks and uncertainties. You can find a discussion of the factors that could cause our actual results to differ materially from management's expectations in our press release and SEC filing announcing our fiscal 2021 third quarter results. Any forward-looking statement reflects only today's perspective, and we assume no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after today's call. This morning, we reported consolidated net sales of $149.7 million and net income of $10 million, or $0.84 per diluted share, for our fiscal 2021 third quarter ended November 1st, 2020. Versus last year's third quarter, our net sales fell $8.5 million, or 5.4%, while net income rose $6.2 million, or 157%. Earnings per diluted share climbed more than 150%, from $0.33 a year ago. For the fiscal 2021 first nine months, consolidated net sales came to $384.8 million, a drop of $61 million, or 13.7%, from the same period last year. We reported a net loss of $19 million, or $1.61 per diluted share, versus $0.85 earnings per diluted share in the prior first nine months. Driving the year-to-date net loss was a $34 million, or $2.88 per share, non-cash intangible asset impairment charge recorded in Q1. The COVID-19 pandemic materially affected our financial performance, market valuations, and other factors during the 2021 first quarter, which triggered the need to carry out an intangible asset valuation analysis as of the end of Q1. That analysis led us to write down goodwill and certain trade names in our HMI segment, along with goodwill in our Shenandoah Furniture division of the domestic upholstery cycle. Also, on December 2nd, the company was pleased to announce that our Board of Directors declared a quarterly cash dividend of $0.18 per share, which represents a 12.5% increase over the previous quarterly dividends and marks the fifth consecutive annual dividend increase. The dividend is payable on December 31st to shareholders of record as of December 16th. Now, I'll turn the call over to Paul Toms, who will comment on our fiscal third quarter results.

Thanks, Paul, and good morning to all of you. We found plenty of reasons for optimism in our financial results for the third quarter, and we're happy about the business recovery that got underway in the middle of May and keeps building momentum. During the quarter, consolidated incoming orders rose 33.8%, and our consolidated backlog now stands at 87.5% versus the same period last year. Although we saw a slight decline in overall consolidated sales, which resulted from continuing supply chain interruptions caused by the COVID-19 pandemic, sales grew year over year in two of our four operating segments; so on a sequential basis, we're growing weekly cells and posted a $19 million, 15% rise in consolidated revenue for the third quarter relative to the second quarter. Our view is that furniture remains a favored sector within the economy, helped by renewed attention to the home, a robust housing market, and reduced competition for discretionary dollars from travel, dining out, and entertainment. To meet the strong demand for our products, we're hiring additional employees at the majority of our locations. In this climate of surging demand, supply chain bottlenecks represent the biggest business challenge we currently confront. Supply constraints include shortages of certain raw materials and components, restricted availability of shipping containers and ocean vessel space, production delays from certain import suppliers, and the effort required to ramp our domestic upholstery production back up after the factories were temporarily shut down during the economic shutdown earlier this year; on top of that, we've had to navigate some employee absences tied to COVID, all while continuing to make employee safety the highest priority. As for the challenges related to the pandemic, we're tackling and working through the supply chain disruptions and making slow but steady progress. Our overseas vendors are boosting capacity and production month by month, and all three of our domestic upholstery divisions were running at current full capacity. As the third quarter ended, we're in the midst of expanding capacity through additional personnel hires at each location; beyond the brisk incoming orders and weekly sales growth we're seeing, our profitability performance in operating and net income during the quarter was strong. Consolidated operating income grew by $8 million, or 161%, compared with the prior year third quarter. The Hooker Branded segment posted $7.7 million in operating income and reached an operating margin at a high level. The Home Meridian segment reported $2.5 million of operating income, against a $4 million operating loss in the prior year third quarter. Most of that improvement came from reduced excess costs versus the prior year, including lower returns and allowances with a major customer, reduced inventory and carrying costs, and fewer inventory right-downs. The Domestic Upholstery segment reported $2.4 million in operating income for the third quarter, which represents solid improvements compared to operating losses in the first and second quarter of the current fiscal year at the height of the initial COVID-19 crisis; with that, I'll hand the call over to Jeremy Hoff, our President of Hooker Legacy Brands, to comment on results for that division.

Thanks, Paul. Net sales for the Hooker Branded segment rose $3.6 million, which is 8.2%, during the third quarter of fiscal 2021 versus the comparable period last year. Steady sales gains came from both Hooker Casegoods and Hooker Upholstery, fueled by stronger overall demand across most residential distribution channels, with incoming orders jumping 36% against the prior year. By the close of the quarter, order backlogs had climbed 159% relative to the same quarter-end a year earlier. Our capacity to lock in manufacturing space has let the Hooker Branded segment capitalize on this extraordinary demand. Streamlining the overall assortment while directing inventory buying toward our best-performing collections has further helped us ease supply constraints. Even though COVID-19 disrupted the April and October highpoint markets, we managed to pre-cut, ship, and begin selling four major new collections. New digital marketing approaches that we built and put to use have allowed us to bring new products to market successfully. Given all the upheaval in 2020, we're happy that the Hooker Branded segment delivered $7.7 million in operating income this quarter, a 16.3% operating income margin. That sales gain, together with reduced sales and administrative spending and lower warehousing and distribution costs, powered the strong profitability. COVID-19 hit our Domestic Upholstery segment hard in the first and second quarter, and getting production back to normal levels has taken some time. We were glad to see third quarter sales recover to prior year levels, with profitability up slightly even amid material price increases and labor and efficiency issues as we ramp back up. Strong demand is evident across all three Domestic Upholster divisions, and they are scheduling selective overtime and bringing on more workers to satisfy that demand and reduce order backlogs. Now I'd like to turn things over to Lee Boone for more detail on the HMI segment this quarter.

Thanks, Jeremy. At HMI, our sales for the third quarter came in at $73.7 million, which represents a 14% decline versus the same period a year ago. We posted an operating profit of $2.5 million — that's a $6.4 million swing from the loss we reported in last year's second quarter. Several factors lifted third quarter profitability: better gross margins than the prior year, plus a wide range of expense cuts we put in place earlier this year as a response to the COVID-19 pandemic. On top of that, returns and allowances came in lower than a year ago. The drop in third quarter revenue mostly stemmed from continuing COVID-19 disruptions affecting our factories and supply chain; interruptions in the supply of raw materials, components, and labor; and severely constrained availability of shipping containers — all of which hurt our capacity to make and deliver products during the third quarter and on into Q4. Every one of those areas now represents a possible source of higher costs, and we're in negotiations with factories to keep the impact on our business as small as possible. Beyond the gains in profitability, incoming order rates remained a bright spot, coming in 36% above prior year orders on a consolidated basis. The primary factor driving those orders was big purchases from traditional retailers that were scheduled for delivery far out into the future. As a result, heavy order scheduling plus delays in factory shipments caused third quarter backlog to rise 80% versus the same period last year and 53% higher than the backlog at the close of the second quarter only three months before; together with the factory owners and our logistics providers, we are working hard to increase capacity on both the manufacturing and shipping sides. Now let's turn to divisional highlights. At Pulaski Furniture, PFC, third quarter operating profit increased 15% over the prior year despite a 23% drop in sales; the improvement in profit stems from lower spending and the overhead cost cuts we implemented in the first quarter. During Q3, Samuel Lawrence Furniture, or SLF, increased operating profit by $1.5 million despite sales remaining unchanged from the same period a year earlier. As with the prior year comparison, this outcome came from lower expenses and better margins. Prime Resources International, or PRI, recorded a modest profit in Q3, reversing a significant loss during last year's third quarter. The gain was driven by decreased returns and allowances as well as robust retail demand from a major mass channel customer. Accentrics Home, or ACH, likewise experienced a sharp improvement in operating results year over year. Operating profits for Q3 came in $1.6 million higher than the prior year, even with reduced service and stock levels resulting from production capacity and shipping issues. The difficulties we've had with production and logistics are extending into Q4 and will likely have an impact on results during the first quarter of next year. Back in October, the company shared that HMI is going to bring its East Coast warehousing operations together into a brand-new distribution facility of 800,000 square feet, placed strategically close to Savannah, Georgia's major port. Progress at that location continues. The intention is for this facility to replace a number of older, less efficient warehouse buildings in North Carolina by relying on a newly constructed, built-to-spec high cube distribution center positioned much closer to the port. Thanks to that proximity, HMI stands to gain considerable inbound freight savings relative to our current operating locations. In addition, the way the new building is laid out provides us with room that works better and is more efficient, designed to raise the standard of service we give customers and how smoothly we operate. Located near the two big interstate highways, I95 and I16, this location will allow our outbound carriers to get in and out more easily, which creates further savings on costs and gains in efficiency. We're aiming to move into the new warehouse during the third quarter of next year, and we're still on track to have it fully up and running in Q4. Attendance from customers matched what we anticipated at the September High Point pre-market, and the October High Point market was about what you'd normally see. The number of people at pre-market increased fivefold, whereas attendance at the October market declined roughly 60%. Taken together, traffic at the High Point fall market was down approximately 40%. Fortunately, we were able to meet with most of our biggest accounts, and for plenty of those who couldn't visit our High Point showrooms themselves, we set up virtual markets. As a result, our pipeline for new product launches remains robust, even while we focus on a narrower selection of our best sellers; we expect these favorably received new styles to arrive at retail late in the spring. We had been advancing significantly, creating fresh designs and marketing strategies for the spring debut of the Scott Brothers license we announced recently. Response from retailers has been extremely eager regarding the new Scott Living and Drew and Jonathan Home brands. Our collaboration with Scott Brothers should generate added revenue and earnings for several HMI divisions, starting in Q2 of the coming year. Right now, I want to hand things over to Paul Huckfeldt, who will go into more detail about the quarterly results.

Thank you, Lee. The main reason consolidated net sales fell was a drop in sales for the Home Meridian segment, which was partly counterbalanced by higher net sales in the Hooker Branded segments. On a consolidated basis, average selling price rose 12.3%, reflecting ASP gains across every reportable segment and all other. For Hooker Branded, net sales climbed because unit volume grew 6.2% and, to a smaller degree, average selling price rose 1%. The decline in Home Meridian net sales came from a 20% drop in unit volume tied to inventory availability, along with weaker sales in the Samuel Lawrence Hospitality division, which was hurt by COVID-19's negative effect on the hospitality industry. HMI average selling price rose 7.9%, yet that was not enough to make up for the lost unit volume. In Domestic Upholstery, average selling price rose 4.7%, driven by gains in the Sam Moore sandbar and Shenandoah division and by a greater mix of higher priced Bradington-Young products. Unit volumes in the Domestic Upholstery segment fell 3% because of production delays as we came out of temporary plant shutdowns, plus some shortages of raw materials and components. Consolidated gross profit rose both in absolute dollars and as a percentage of net sales, going from $28 million, or 18%, to $33 million, or 22.4%, in the fiscal 2021 third quarter. Even with a sales decline, the bulk of that improvement came from the Home Meridian segment. That segment had been hit hard by excess chargebacks with one major customer, excess inventory and carrying costs stemming from customer returns and surplus inventory, and inventory write-downs, none of which recurred this year. Hooker Branded gross profit rose mainly because sales were higher. Domestic Upholstery gross profit dipped slightly in absolute dollars and as a percentage of net sales because gross profit in our Shenandoah division declined, the result of modest material cost increases plus somewhat higher direct labor and under absorbed fixed costs as production ramped back up following the earlier slowdown. Some of our other domestic manufacturing plants dealt with similar issues during the quarter, but every plant is now running at full capacity and working to add capacity, since we expect the stronger demand to stay with us for a while. All other net sales dropped 9.4% in the fiscal 2021 third quarter, mainly because of a decline at H Contract, since senior living facilities, which make up most of H Contract's business, have been significantly affected by the COVID-19 pandemic. Gross profit fell in absolute dollars and as a percentage of net sales because of the sales decline and an unfavorable product mix. Even though it is a smaller piece of our consolidated results, all other reported and operating income and kept an operating margin above 10%. Consolidated selling and administrative expenses declined in absolute dollars and as a percentage of net sales during the third quarter because of lower selling expenses in the Home Meridian segment and the cost reduction efforts we undertook companywide in response to the COVID-19 pandemic. Higher sales incentives within the Hooker Branded segment provided some offset to those declines, and to a smaller degree so did greater bad debt expense, which included recognizing current expected credit losses tied to ASC 326, a recently adopted accounting standard. Because of all this, operating income rose $8 million in the fiscal 2021 third quarter, reaching $13 million, versus $5 million during the prior year second quarter, while operating margin went from 3.2% up to 8.7%. At the close of the quarter our cash balance was $94 million, which is an increase of almost $58 million relative to the fiscal 2020 year end; through this year so far, cash generated from operating activities totals $68 million, largely driven by lowering inventory levels and collecting accounts receivable. As mentioned earlier, we are currently rebuilding inventories so we can satisfy present demand; however, because of existing lead-times among our agent partners, we have experienced and could keep experiencing out of stocks for certain key products. We regularly revisit our sales forecasts, adjust production orders in line with incoming demand, and strategically watch our inventory levels so we can prioritize returning our top selling products to stock as fast as we can. At this point, I'll hand things back to Paul Toms for his outlook.

Thanks, Paul. Looking ahead to Q4, we feel quite positive about our substantial backlog and the strong demand coming from every residential channel. Supply chain issues are improving as our suppliers abroad and our own plants increase output so we can satisfy that heavy demand. That said, certain of these difficulties are going to keep affecting us during Q4 and into the start of next year; we're worried about the latest spike in COVID cases and hospitalizations across the country; we keep enforcing strict safety measures at every one of our sites and take pride in having seen basically zero workplace transmission anywhere. Anyone able to work from home is still doing so. Keeping our employees safe and healthy is still a leading priority. Over the coming 2 to 3 quarters, we're highly confident and think our backlog, order velocity, and momentum will let us keep producing very strong results. That concludes the formal portion of our discussion. At this point, I'll hand the call back to Joelle for questions.

Thank you, and good morning to all of you. I appreciate you fielding the question. So, just one thing, clearly — you folks have witnessed demand that's been extremely strong and robust. And thank you for supplying those figures regarding incoming orders as well as backlog. So, how do you view the demand — in your opinion, how much longer might this keep going? What's your read on that?

Anthony, Paul Toms here. That's a solid question. We hear it fairly often during — from investor presentations we've given lately. My take is that it's somewhat of a mixed bag. But on the whole, I'd say we anticipate being in a highly advantaged position; much of that will play out over the longer term, and over the short — shorter term, let's say over the coming six to nine months, I believe we keep gaining from reduced competition for discretionary spending from sectors we usually go up against, such as travel, dining out, and leisure and entertainment. That said, I suspect that once vaccination perhaps arrives by the second to third quarter of next year, a few of those sectors will recover somewhat. Even so, I'd argue a larger effect on our business comes from what's happening demographically with millennials and Gen X, who are becoming a larger share of home buying, with people leaving metropolitan areas for suburbs and more rural areas, and relocating into bigger homes. My view is that housing appears set to do well for a lengthy stretch. Inventory is clearly a difficulty, yet interest rates remain quite favorable and affordability is still solid; and I'd say housing could work in our favor for two, three, four years or even more. Not since before the recession of 2008 to 2009 has housing been this robust. So, housing trends give us encouragement, demographic trends give us encouragement, and we figure the things that have helped us in terms of rivaling other sectors for discretionary spending will likely persist for roughly another six months; and even after that, I'd expect some travel to take longer to recover than simply absent; so, we have vaccines. So, I hope that answers it.

Yes, definitely. Thank you very much for that, Paul. The gross margin we recorded during this quarter was, without question, the strongest we've ever seen. So how do you view whether this gross margin gain can hold up?

My sense is that conditions are returning to something closer to normal, though the gross margin is somewhat distorted since our Hooker Branded division carries higher gross margins than the HMI division does. As a result, our sales mix was skewed somewhat away from the usual pattern. My feeling is that this margin won't remain at this level once HMI gets its shipments back on track. Still, I believe we go back to more historical levels, and those, in my view, remain healthy. That said, 22.4% currently represents the top of the range.

Understood. All right, and thank you for that, Paul. Now regarding the distribution center you're going to launch in Georgia, could you provide some sense of the capital expenditures required, or perhaps other measurable figures? And once that facility is operational, is there a way for you folks to put numbers on the freight savings or the operational efficiencies?

Well, it appears we will likely invest $3 million to $3.5 million in CapEx during next year. There are < > expense items we intend to identify, probably somewhere in the million-ish dollar range, and we'll flag those as they are incurred — things such as moving costs, inventory relocations, some advance training. So we'll identify those once we nail those figures down. I believe we can — we ought to be capable of doing a rough calculation of freight savings. Freight is a commodity item and freight rates fluctuate, but I believe we can tally the number of containers and figure out a difference. So we can definitely quantify that. And clearly that's a key part of it, and the operational efficiencies of a new building — of a new design — building design for us are the reasons we're undertaking this in the first place.

All right, understood. Then when it comes to cash flow, you've clearly mentioned the advantages from lower inventory levels and accounts payable. So going ahead, apart from the inventory build you're planning and accounts payable returning to a typical level, what do you see as the main places cash will go? And how do you feel about possible acquisitions?

Reducing our debt will come first. Our credit facility, I believe, runs out in February, and a new revolver is being negotiated. Still, I expect we'll retire the $25 million in term debt sitting on our books; that isn't a huge sum, but in the near term it's likely among the best things we can do with our cash. On acquisitions, we've said fairly consistently that we'd like to — that growing through acquisition is something we think we can do, and we're at ease doing deals. So acquisitions are something we're pursuing. Nothing is currently in the pipeline, I can't claim otherwise, but growing through smart acquisitions is definitely among our top capital allocation objectives.

All right, thanks a lot, and good luck out there.

Appreciate it, Anthony.

Appreciate that, Anthony.

Absolutely — congrats on such a robust quarter. To build on what was asked before, your net cash position is quite high and free cash flow is solid. You mentioned acquisitions — but what about the possibility of special dividends? I've seen a number of other furniture companies declare a special dividend, so might that be something you'd look at?

Paul Toms here. Our history is one of paying a solid dividend. A few of the firms in our sector that you're seeing issue special dividends either paused or trimmed their dividend earlier in the year; however, if you examine how our dividend has paid out across time — both as a percentage of earnings and as a percentage of share price — it holds up quite well; therefore, as things stand, no, we have no plans to pay a special dividend. We just raised the dividend 12.5% for a fifth year in a row; that's an increase, I believe. We think we've been paying a dividend for 50 years now. So it has remained very steady, and even through the 2008 to 2009 downturn, we didn't cut the dividend. So our track record of paying a dividend and regularly raising it in most conditions is something we're very proud of.

Then a second question — I realize you've moved a significant portion of your imports over to Vietnam as well as other locations. The entire China tariffs matter that hit both you and the industry across the past 2 years, is it basically finished now — obviously I'm aware you've got separate supply problems, but regarding China tariffs, are those essentially in the past? Thanks.

My sense is that it's largely in the past. There's still a bit of product we bring in from China, and particularly right now, when we're struggling to obtain all the output we require, we've shifted certain items back — or some surplus output back to China, yet I'd also say we've for the most part offset the effect of those 25% tariffs by raising prices for our customers. So we're certainly less affected than was the case 1 year, 18 months ago, and at this stage it's quite manageable. Additionally, when you look at our overall output, the share of goods made in China has fallen from likely above 40% to under 20% of the total.

Lifting those tariffs would benefit our customers and the consumers though.

That doesn't seem probable to me. Yeah.

Thanks a lot.

Okay.