Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thank you, Josh. Hello, everybody, and it's great to have you on our quarterly conference call. Today we'll review the financial results for the fourth quarter of fiscal 2021 as well as the full year; both periods ended on January 31, 2021. Joining me this morning is Jeremy Hoff, who serves as our Chief Executive Officer. We're very grateful that you could be with us today. During this call, we may make forward-looking statements, and such statements involve risks and uncertainties. A discussion of the factors that could lead actual results to differ materially from management's expectations appears in our press release and SEC filing that announced our fiscal 2021 year-end results. Anything we say about the future applies just as of now. We're not committing to refresh or amend those statements if events or conditions arise after this call wraps up. During the fourth quarter of fiscal 2021, a period running from November 2 through January 31, 2021, our consolidated net sales reached $155.3 million. Net income was $8.5 million, which is $1.5 million more than the fourth quarter a year earlier, a 22% gain. On a diluted basis, earnings per share for the quarter were $0.71, marking a 20% rise. Compared with the same quarter last year, net sales declined $9.6 million, or 5.8%. During the quarter, two of our three reportable segments posted higher sales. Hooker Branded was up just under $10 million, a 25% increase versus last year, while Domestic Upholstery gained $1.4 million, roughly 6% compared with a year earlier. On a consolidated basis, sales fell because Home Meridian declined by $20 million; there, worldwide supply chain problems constrained how much of its sizable order backlog that segment could convert. Looking at fiscal 2021, the period that began on February 3, 2020 and wrapped up on January 31, 2021, we recorded $540 million in sales. That marks an 11.6% decline compared with the previous year, and the drop was driven by a $58 million reduction in the Home Meridian segment. For that year, the company posted a net loss of $10.4 million, equal to $0.88 per diluted share. A year earlier, net sales were $610 million with net income of $17 million, or $1.44 per diluted share. The net loss was driven by a $44.3 million noncash impairment charge — $33.7 million after income tax — used to reduce goodwill and trade names in the Home Meridian segment, plus goodwill in the Shenandoah division of our Domestic Upholstery segment. During the first quarter of fiscal 2021, in the depths of the COVID-19 economic crisis, the pandemic's negative impact on first quarter orders and our stock price at that time prompted an intangible asset impairment analysis, which meant the company had to value its intangible assets. The resulting impairment charge from that valuation produced a $10.4 million loss — Hooker Furniture Corporation's first annual net loss since 1929. If you set aside the impairment charges, our operating income rose by $7.2 million for the fiscal year. Hooker finished the year strong: consolidated orders increased by almost 6%, and the backlog of orders ended up at over double the level it had been only a year before. With that, I'll turn it over to Jeremy, who will take us through the results for fiscal 2021 and the fourth quarter.

Thanks, Paul, and good morning to all of you. The COVID-19 pandemic created a volatile economic climate, and that made the past year one of the toughest in the 97 years we've been in business. Even so, we're quite happy with how we bounced back during the second half, and we feel our company came out of that adversity in a stronger position. Fiscal 2021 brought a global health crisis unlike anything seen in a century, and our industry suffered a steep decline through much of the first half, so the rebound we achieved in the second half mattered a great deal — especially when it came to profitability and demand. During Q4, our net income increased by 22%, and two out of the three segments we report had greater sales. The strong profitability we achieved in the fourth quarter built on momentum from Q3, when net income came to $10 million — a gain of $6.2 million, or 158%, compared with the same period a year earlier. Beginning in June, the company experienced record-breaking demand and backlogs, and both have remained robust. In our view, this level of demand positions us for a strong shipping year in fiscal 2022, assuming that worldwide logistics constraints — such as the lack of ocean vessels and containers, higher transportation expenses, shortages of raw materials, and diminished manufacturing capacity globally — are alleviated. One more sign of our strong second-half recovery: roughly 75% of the drop in consolidated net sales for the year happened during the first half of fiscal 2021, brought on by how severely the COVID-19-related economic crisis initially hit our company and the entire industry. Back then, many of our retail partners shut their doors for weeks, production around the world was paused, our Q1 orders fell by more than 40%, and we had to close 5 of our 6 upholstery plants temporarily for over a month. After roughly 10 weeks of much weaker demand, orders jumped as furniture became a favored sector amid the economic downturn. Within home furnishings, we saw an increase, and that category keeps profiting from demand that had been held back, a robust real estate market, and less rivalry from other optional purchase areas such as trips, eating at restaurants, clothing and leisure activities. Starting in summer 2020, we have been striving to boost production at our U.S. manufacturing sites and among our overseas vendors so that we can satisfy buyer needs. Throughout the year, our organization faced many interruptions, and we think the deliberate adjustments we implemented put us in a better spot competitively than we occupied prior to the outbreak. The size of our business, how solid our balance sheet is, and the talent and dedication of our teams both in the U.S. and abroad allowed us to navigate a terrible macroeconomic situation, and in our view that leaves us ready to take advantage of good momentum and beneficial demographics within the home furnishing sector. Over the past year, Hooker Furniture Corporation put several strategic changes in place that are here to stay. Among them: we reduced how much we depend on suppliers in China, we shortened the time it takes goods to get to market by offering customers showroom tours on video and improved photography, and we simplified our assortment of products so we get the most out of production capacity and capital utilization. Over at HMI, meaningful headway was achieved on several fronts, and that had a favorable effect on profitability for the year. HMI's operating profit came to just about $2 million for the fiscal year, which is an improvement of close to $9 million relative to the prior year and after backing out the effect of the intangibles charge; this gain in profit came mostly from the substantial cuts in spending that were put in place early last year to soften the blow of the pandemic disruptions. On top of that, the tactics HMI uses to lessen the effects of China tariffs were for the most part completed in fiscal '21. Returns and allowances that were excessive dropped significantly compared to last year. At HMI, plans focused on expansion and improving profitability have been put in place to counter supply chain challenges worldwide, and heading into fiscal 2022, the business holds record backlogs, reduced overhead, proven product sales results, strong ties with customers, and the eagerly awaited Scott Brothers brand introduction, which is still scheduled to happen this year; across the entire company over the past year, we rolled out our one company, one culture effort, aimed at bringing together the top methods, workflows, personnel, and culture from all 12 of our divisions to create a more unified and robust organization built around a shared ERP system. Project one is going to bring the whole company onto one system, and it'll also establish uniform best practices across both our company and the industry. As the year wrapped up, we adjusted our management structure, because Paul Toms, our CEO for a long time, retired. I stepped into his role on February 1, 2021, and that handover created an opening for us to combine our operations and marketing teams so they could back growth throughout our 12 distinct businesses. Every one of those 12 has its own leader product line, its own price point focus, and its own distribution channel targets, which is what sets each of them apart. Through what we call One Team, everyone here can draw on the entire breadth and reach of this company; we're deeply grateful to each and every member of our staff, who put in remarkable work during a very hard twelve months. Facing tough conditions, the team came together and delivered exceptional outcomes, discovering fresh methods of operating so they could present products and remain connected with customers as well as suppliers across the globe, all while keeping their spirits up, staying productive and involved. Personal and professional upheaval was something our people had to manage even as they worked from home or other distant places. For those unable to do their jobs remotely, many adhered to rigorous safety measures inside warehouses and factories. Every one of those adjustments came about through hard work and a collaborative attitude, which will benefit us greatly as we work toward building a single unified company and shared culture. At this point, I'd like to hand things back over to Paul, who will walk us through the notable points across each of the segments we report on.

Thanks, Jeremy. We'll now go through the key points for each segment, starting with Hooker Branded. Among all our segments, Hooker Branded bounced back from the pandemic slump more quickly than any other, with sales climbing again during the third and fourth quarters. Hooker Branded sales came in at $49.2 million in Q4, which is an increase of nearly $10 million, or 25%, versus the same period a year earlier. For the entire fiscal year, net sales were basically level, rising roughly $450,000, or 0.3%, even with the shortfalls tied to the pandemic in Q1 and Q2. Beginning in June, incoming orders grew at a double-digit pace and kept that up through the end of the year, and the segment closed the year with a backlog 3x what it was 12 months earlier. Right now, the segment is working to rebuild inventories so it can satisfy this higher level of demand. For the year, operating income in the Hooker Branded segment came to $22.8 million, which is $1.3 million more, or roughly 6%, than the previous year. Considering how the economy has been, we're particularly happy that we didn't just hold but actually raised Hooker Branded segment profitability relative to the pre-pandemic situation 12 months ago. A few factors, we think, drove the higher sales and demand. During the second half of 2019, we placed early orders for our 2020 introductions of the 3 collections that rank among the introductions we've had the strongest reception for in several years, and all 3 climbed into our top 10 best sellers. Two of those collections address style gaps in our line in soft, modern and coastal design, which means incremental business for us. We never canceled production orders for these collections, which helped with product flow and availability; in Hooker Casegoods and Hooker Upholstery, we stayed disciplined about rationalizing inventory and pushing underperforming SKUs so we could maximize production capacity around top sellers. Lower expenses combined with higher sales allowed us to improve on what was already solid profitability for Hooker Branded. Let's move on to the Home Meridian segment now. HMI Q4 sales reached $80 million, a 20% drop from the prior year. That Q4 sales decline came directly from disrupted global logistics caused by COVID-19's economic impact on manufacturing capacities, raw materials, and the cost and availability of shipping containers. Operating income in the fourth quarter was $683,000, down $1.2 million from the prior year. The profit decrease stemmed from the smaller top line versus a year ago, along with higher freight expenses and a bad debt accrual of about $600,000, which more than offset better gross margin and the operating cost cuts we made during the year. Retail demand for Home Meridian products stayed strong, and we finished Q4 with backlog more than double what it was a year ago. Orders during the quarter fell 26% compared with last year, after rising 36% in Q3. That decline, though, mainly reflects early ordering and longer shipping lead times. Full year results were also heavily affected by the pandemic-related economic downturn. For HMI in fiscal 2021, revenue fell 17% compared with the previous year, and the forces that pulled down Q4 sales were responsible. On top of that, the sharp collapse currently hitting hospitality — a sector that leans heavily on travel — caused Samuel Lawrence Hospitality's sales to drop, and that division represented 45% of the overall revenue decline in the HMI segment. Turning to business unit highlights within HMI, at Pulaski Furniture, sales declined from a year earlier because of constrained production capacity along with brand and shipping problems. Most HMI brands saw the same pattern. Even so, as with other brands, Pulaski closed out the year with a record backlog. What's notable is that apart from our hospitality business and ACH, which relies less on backlog, backlogs increased across each residential division by more than that division's sales shortfall for the year. Such comparisons indicate retail demand stayed robust and exceeded pre-COVID demand from the prior year. Over at Samuel Lawrence Furniture, while sales came in lower than the previous year, orders, backlog and profits rose substantially in FY '21; those gains confirm the value of our mega account sales strategy and our low-cost sourcing strategy. With a substantial backlog scheduled out through November, Samuel Lawrence shipments should stay strong for the whole year. As for Samuel Lawrence Hospitality, everyone knows the hospitality industry in the U.S. took a severe hit from the pandemic. Consequently, Samuel Lawrence fell short of breakeven in fiscal '21 and will keep struggling until business conditions get better. We're monitoring that segment closely. Even though Prime Resources, our imported upholstery division, has not yet reached target performance, Primary Resources delivered a major turnaround last year, ending FY '21 with backlog up 102% and operating results substantially improved. That gain stems from our strategies to exit lower profit businesses and sharply improve returns and allowances, along with targeted spending reductions. Accentrics Home, ACH, began the year strongly and gained from the consumer move toward e-commerce early in the pandemic, yet ultimately ran into service problems during the latter portion of fiscal '21. Those problems hit ACH's performance particularly hard given the unprecedented demand in the e-commerce channel. Despite service challenges, except ACH performed — performance improved substantially thanks to lower customer chargebacks and better pricing strategies. Finally, HMIdea, our business unit centered on upscale ready-to-assemble furniture at our Clubs business. We saw better orders, sales and backlogs for the year. Sadly, excessive returns and allowances from the Clubs business in earlier years weighed negatively on HMI's results for the year. So we've adopted strong measures, among them significant additional reserves, to limit the impact of these issues going forward. We believe our pricing and reserves are appropriate for the future. Also worth noting, business disruptions from the pandemic delayed and scaled back the launch of our new ready-to-assemble product category. With the robust appetite from shoppers for ready-to-assemble items, we feel confident about achieving solid advancement in that category going forward, particularly for branded offerings moved via our e-commerce platform. Now shifting to the Domestic Upholstery segment. This segment wrapped up the year strongly, with net sales climbing $1.4 million, or 6%, in Q4 versus the same period last year. Operating income rose by $1.2 million in that quarter too, since each of the 3 domestic upholstery divisions increased output during Q3 and got back to full capacity plus a typical shipping schedule in Q4. Across the entire 2021 year, net sales for the Domestic Upholstery segment fell by $12 million, or 12.5%, because of temporary plant closures and manufacturing holdups across all 3 of our Domestic Upholstery operations when the pandemic-driven economic slump first hit. Production restarted in the segment during Q2, and all 3 divisions ran at full capacity through much of Q4 and into early fiscal '22. Starting in March, output has been temporarily reduced because of an upholstery foam scarcity caused by a petroleum industry disruption. Last, within All Other, net sales dropped roughly $1 million, or 7.9%, driven by declines at H Contract, since that business unit, which serves senior living facilities, suffered negative effects from the pandemic. Those losses were balanced out by extra sales from our Lifestyle Brands business unit, which focuses on the interior design channel. H Contract incoming orders fell approximately 12% for fiscal 2021; nonetheless, the company anticipates the COVID vaccine rollout will assist the senior living industry in starting to bounce back, and H Contract's order weakening moderated during Q4. And lastly, our balance sheet continues to be solid. Cash and cash equivalents totaled $65.8 million at the close of fiscal 2021, up almost $30 million from the prior year's balance, even after we repaid $24.3 million in term loans at the end of January 2021. In addition, we can draw $28.7 million through our revolving credit facility to cover working capital requirements, plus roughly $25 million in cash surrender value from a company-owned life insurance policy. We trust that our robust financial standing can endure the anticipated near-term effects of COVID-19 supply chain interruptions, raw material costs and the broader economy. Inventory came to $70.2 million at year-end, versus $92.8 million at the previous year-end. Expanding inventory to satisfy higher demand and order backlog stays a top management priority. In early March, our directors signed off on a dividend of $0.18 per share, which at present share prices provides a dividend yield of roughly 1.9%. I'll turn — now I'll hand the discussion back to Jeremy for his outlook.

Thanks, Paul. We're heading into fiscal '22 at Hooker Furniture feeling assured and upbeat about both our business and the sector we operate in. Orders coming in are robust, rising considerably across every segment, and our backlog is now greater than twice what it was the previous year. Making the most of these elevated demand and backlog levels will be our near-term operational focus, even as we keep pushing to sustain the improved profitability momentum we built over the last 2 quarters. Looking ahead, we face what we regard as temporary headwinds — global manufacturing capacity, raw materials, logistics, and upholstery foam problems — and we consider all of them to be short to midterm constraints. As COVID vaccinations rollout, rivalry for consumers' discretionary dollars from things like travel, restaurants, and entertainment is going to grow, yet we still foresee durable, favorable market conditions for home furnishings. We feel good about the economy and our industry, and we have even greater faith in our team's capacity to carry out our plans to grow profitably across each of our 12 businesses and to handle unforeseen difficulties; that concludes the formal portion of our remarks. Right now, I'll hand the call back to our operator, Josh, so we can take questions.

Alright, to start, I have a question with multiple parts regarding Home Meridian. To begin with, I'm just wondering if any progress is showing up when it comes to the container troubles on ocean shipping? How has that whole thing moved along over recent months? Part two of that same question is about the lower overhead you mentioned — could you help us understand whether that can be quantified? Then the third piece is on the inflation remarks: are you raising prices in response, and will those hikes ideally counteract part of the inflationary pressure? After that, I've got a few more questions too.

Taking that first piece, Anthony, what I'd say is that we are observing a bit of encouraging movement when it comes to easing the bottleneck we've experienced around containers and what's available. It certainly isn't at the level we require, yet things are getting better; we're reviewing fresh contract pricing and such, and some gains are appearing, though we haven't reached the finish line; so I definitely don't want to imply that. And those remaining 2, I'll hand over to Paul.

Last year, we implemented cost cuts throughout the entire organization. Now, a portion of those — a significant portion — are only temporary. And clearly, given the better business conditions we're seeing, more of them ended up being short-term than we had anticipated. We've brought back — the vast majority of our employees have returned; as mentioned on earlier calls, we did a small number of layoffs, roughly 12 people company-wide; and we're glad the situation didn't deteriorate beyond that. So our staffing is now complete. Our facilities are typically running at maximum capacity with all positions filled. Actually, we're looking to add more workers, though at the moment there's a minor short-term hold-up due to this home situation. I'd say we've become stricter about areas like business travel. It's likely we'll never return to the amount of travel we previously did. If I had to estimate a figure, I'd say we've cut expenses by somewhere between $0.5 million and $1 million. I doubt it's larger than that, since business is currently strong. So making a direct comparison is difficult. But I'd say we've removed some overhead, though I believe it's not a massive amount.

Anthony, got it. Okay, then, to finish off that question with multiple parts — regarding inflation concerns, like you pointed out, what's the right way to view your capacity to increase prices so they counterbalance it?

Jeremy, what I'd say is that under these conditions, we're on what I would describe as an even footing given everything happening. Therefore, the factors driving inflation via raw materials along with higher logistics expenses, all the stuff we've been discussing — rivals, the whole sector is experiencing those identical circumstances; thus, implementing price increases when you aren't the only one facing these dynamics is certainly much simpler than it would be in other situations.

Understood. Alright. Turning now to Domestic Upholstery, I'm just wondering — besides the foam problems you mentioned, which I realize everyone across the industry is dealing with — are there any other problems you're noticing? And regarding foam, when do you think that situation will improve?

Well, to start with foam, allocations are loosening up, and we expect things to be close to normal again in May. The next possible problem on the horizon is plywood. We don't yet know precisely what that will mean, since we aren't there yet, but we can see it approaching. Still, we have no idea how big it will be. Foam, though, is clearly getting better already, and at this point we anticipate it being fully improved in May.

Understood. Okay. And broadly speaking — when you consider the whole company, where would you say things stand regarding how far you've gotten with your — with your e-commerce customers? I recall it was roughly 15% to 20% of your sales, as you've pointed out previously. Does that remain true?

Yes. That's essentially still within that same range, no question.

All right, understood. Then I have a few additional inquiries — just a few more items here; regarding total SG&A, it ended up above my projection. Did anything out of the ordinary occur? During this call, Paul, I believe you mentioned a bad debt accrual, so could you walk us through that, please?

Well, we set aside $600,000 for a bad debt accrual. There's a payment plan in place with that specific customer, yet we — choosing to be cautious, we recorded $600,000 for it, which — by my estimate, that explains the bulk of the $0.04 shortfall versus your figure once the tax impact is applied. Beyond that, I suspect your model probably relied on midyear costs. However, as I mentioned before, the — as volumes rise and things get so hectic, we — aside from travel, we've largely brought back the majority of our typical expenses. Everyone is on a full-time schedule, and all layoffs and furloughs have concluded. So things have essentially returned to normal operations.

Yet I'd mention too that we discovered plenty of folks we used to send abroad simply don't need to make that trip. So you've got items of that sort scattered everywhere, and honestly, I can't say what the total translates to right now when it comes to money saved, though it matters a lot. We identified numerous methods for handling product development remotely, which means fewer staff members shuttling back and forth, and the same goes for marketing. The photography we produce has improved, yet we pull it off in a manner that genuinely costs us less. It isn't shot at an outside location, and nothing leaves our showroom. Every one of those small wins accumulates, as you're aware. And once more, no figure exists for it just yet, but clearly we'll have one eventually.

Understood. Alright, and that's my final question. What's the right way to think about the tax rate and CapEx for this fiscal year at this point?

Barring a tax change, naturally, the tax rate ought to return to roughly our typical level of 23%, 23.5%. This year CapEx will run somewhat higher; we're kicking off that ERP project. So depending on how the ERP projects proceed, I'd put it at $5 million to $7 million. That's still a modest amount.

Nice work on a strong year despite a rough beginning. Could you share some thoughts on the cash sitting on your balance sheet and how you plan to put it to use, aside from the fairly clear need to restock inventory?