Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Liz. Good morning, everyone, and thanks for joining us on this quarterly conference call, where we'll go over the financial results from the first quarter of our fiscal 2022, which closed on May 2, 2021. With me today is Jeremy Hoff, who serves as our Chief Executive Officer. We're glad you could all be with us this morning. On this call, we might make some forward-looking statements, and those carry risks as well as uncertainties. You can find a discussion of the factors that might lead our actual results to differ materially from what management expects in our press release and the SEC filing that announced the results for the first quarter of fiscal 2022. Forward-looking statements are only valid as of today, and we're not obligated to update or revise any of them to reflect events or circumstances that come up after today's call. For the first quarter of fiscal '22, which started on February 1, 2021, and wrapped up on May 2, consolidated net sales came to $163 million, which is up $58 million, or 55%, from the first quarter of the prior year. Revenue went up in all 3 of the company's reportable segments: Home Meridian sales rose $27 million, or 46%; Hooker Branded sales climbed $24 million, or 89%; and Domestic Upholstery sales increased $7.7 million, or 46%, versus the first quarter of the prior year. Net income came in at $9.4 million, or $0.78 per diluted share, versus a net loss of $34.8 million a year ago, which mostly stemmed from a $44.3 million noncash impairment charge, or $33.7 million after tax. At this point, I'll hand the call to Jeremy so he can discuss our first quarter results.

Thank you, Paul, and good morning to all of you. For this quarter, we set out to get back onto the growth path we had been following before the worldwide pandemic and the economic slump. That objective has been exceeded, and we're delighted about it. We anticipated a considerable uptick in sales versus the initial quarter of last year, since that's when the downturn caused by the pandemic started in the middle to latter part of March, yet what we achieved this quarter also marks a robust gain relative to the first quarter of fiscal 2020. Compared with the first quarter 2 years back, sales have risen 20%. Across every segment, profitability has gotten much better, and the pace of incoming orders stands at over twice what we normally see. Indeed, for the company's fiscal first quarter, both our quarterly revenues and our net profit figures set new records for sales and earnings. My pride in our team is particularly strong, because they produced this powerful recovery a year after the pandemic struck, and they did so even with logistics problems throughout the industry, such as increased costs for ocean and freight transit, bottlenecks in shipping equipment, shortages of raw materials, and inflation. During the quarter, the Hooker Branded segment set the pace, posting a sales gain of almost 90% versus a year earlier, while the Home Meridian and Domestic Upholstery segments each came in with sales growth of roughly 46%; we credit these double-digit improvements to strong consumer appetite for home products across the industry, plus dramatic enhancements and broadening of our product lines and a streamlining of our stocking inventory that helped us get the most out of shipping and production capacity, along with better cash utilization. Because of travel restrictions that were in effect earlier this year, the High Point Spring Market was formally moved to June. Instead, the Hooker Branded, Home Meridian and Domestic Upholstery segments took part in a High Point Pre-Market event during late April. For Hooker furnishings, the Pre-Market produced exceptionally strong results when it came to traffic, buying activity and how new product introductions were received. Attendance at the High Point pre-market set a record for us, with customers responding very positively to a number of introductions, among them Hooker Casegoods collections, the new brand launches of the Scott Brothers' licensed collections, Commerce & Market and accent furniture line with pricing, styling and materials to reach Millennials and Gen X and Hooker Upholstery's launch of the upscale Aspire motion seating brand. Consolidated operating income for the quarter came to $12.2 million, versus a $45.4 million operating loss during the same period a year ago. That loss last year stemmed mainly from $44.3 million in noncash impairment charges tied to a write-down of goodwill and trade names in the Home Meridian segment and goodwill in the Shenandoah division, which the COVID-19 downturn's effect on our financials last year brought about. At this point, I'd like to hand the discussion to Paul Huckfeldt, who will go over highlights in each of our reportable segments.

Jeremy, thank you. I want to start with our Hooker Branded segment, since that's what drove the record sales and earnings we posted in the first quarter. Net sales rose $24 million, which works out to roughly 90%, while incoming orders were almost twice what we saw in the same quarter a year earlier, when the pandemic was weighing on results. We closed the quarter with a backlog 3x larger than in the first quarter of last year. Since a large share of this segment's products ship from distribution centers in the U.S., and customers place orders steadily every week, we had inventory on hand, so we managed to ship more than we'd anticipated even with constraints on ocean vessel space and trucking capacity. Our approach of putting bestsellers first let us get the most out of our ability to perform despite serious operational constraints. And with demand for home furnishings surging across the industry, we were able to clear out some slow-moving inventory in that favorable environment. So the Hooker Branded segment stayed highly profitable, helped by higher revenues and less discounting, and it delivered more than 75% of consolidated operating profit for the quarter. The work we've done to make our product lineup stronger these last two years — which includes putting more attention on lifestyle collections and taking a new approach to the value we offer across all our product categories — is now clearly driving significant improvement in both our top and bottom line results. Now I'd like to discuss the Home Meridian segment. At HMI, first quarter sales reached $84 million, which represents a 46% increase over the same period a year ago. The sales improvement in Q1 reflected sustained, robust retail demand compared with the soft demand experienced in the opening weeks of last year, when the economy shut down because of COVID. Had we not faced difficulties with inventory availability and shipping constraints, Q1 sales would have been even higher. For the first quarter, we posted operating income of $866,000. That's up $3.3 million compared with the pre-impairment loss we booked a year ago, when the industry shut down. The gains came from stronger sales, lower allowances, and a decrease in fixed expenses. What weighed on Q1 profitability was a sizable amount of excess freight cost during the period. Sadly, we anticipate these pressures will continue to impact our results for the next few months. The supply chain challenges we are up against truly cannot be exaggerated. A number of things are contributing, among them a broad rise in worldwide demand for imported goods, especially home goods; major disruptions to shipping equipment tied to the COVID pandemic as well as the recent Suez Canal blockage; unloading logjams right now at the majority of U.S. ports; and the swift displacement of empty containers. Every one of those elements is making things worse. Finding room on a vessel is nearly impossible no matter what you pay, and freight costs have climbed so high that retailers hold back on picking up their cargo. That sets off yet another problem: once factories can't ship out the goods they've finished, they soon have nowhere left to work, so they must halt or reduce output even while customer appetite for furniture sits at an all-time high. Broadly speaking, HMI's service levels saw a modest Q1 gain, since incoming freight restocked items that had run out. Even so, shipping and logistics bottlenecks will probably keep service under some degree of pressure through the rest of the year. During our previous conference call, we noted that rising costs for materials and products are pushing our cost of goods sold higher. We are making a concerted effort to pass along these increases in product and freight costs to our customers. The great majority of our retail customers grasp the circumstances and are agreeing to these higher prices. Even so, there are timing delays that hurt margins in the near term. We are still addressing this matter and anticipate getting back to target margins sometime later this year. Now looking at results by business unit. During the first quarter, net sales increased substantially for Pulaski Furniture, Samuel Lawrence Furniture, Prime Resources International, and HMIdea. The primary drivers were favorable year-over-year comparisons and strong demand in the current year. At Accentrics Home, the business unit focused on e-commerce, sales were unchanged, which reflected service limitations along with robust online sales during the same period last year. Our hospitality division, SLH, encountered much softer demand as the pandemic's ongoing adverse impact continued to weigh on the hospitality industry. Overall, first-quarter profits rose significantly across every business unit except SLH. We anticipate that the hospitality business will continue to confront difficulties for at least one additional quarter. Even so, we're beginning to notice signs that things will improve in the back half of the year. Orders in Q1 came in at $85 million — that's up $44 million, or 108%, compared with the unusually weak order volume from the same period last year, during the pandemic's first few weeks. Both incoming orders and backlog are still well above normal levels, driven by a combination of robust retail demand and ongoing shipping bottlenecks. HMI participated in the High Point Pre-Market event held in late April. One thing that stood out was the overwhelmingly positive response to our Scott Brothers' brands, Scott Living and Drew and Jonathan Home, both of which are scheduled for official launch later this year. A lot of our big dealers are already signing on to buy the branded launches and get them onto their showroom floors the moment we can ship. Even though the High Point Market hasn't started yet—it kicks off tomorrow—and none of the Scott Brothers' furniture is on store floors so far, we're already getting word of shoppers asking which retailers carry these items. Every one of these encouraging reactions makes clear just how big the opening is that we gain by bringing together HMI, among the biggest home furnishings suppliers, and Scott Brothers Global, the leading celebrity lifestyle brand in our industry. When you combine the Scott Brothers brand's ability to connect with people through print, TV, streaming, social platforms and other digital channels with everything HMI brings to the table in design, product, development, sourcing, sales and distribution, you get a powerful pairing that should keep consumers buying enthusiastically for many years ahead. Turning next to Domestic Upholstery. Net sales for this segment rose $7.7 million, which works out to 46%, in the first quarter of fiscal '22, driven by much stronger sales across all 3 divisions. A year earlier, as COVID-19 restrictions and lower order volumes took hold beginning in March, the Bradington-Young and Shenandoah plants were idled for about a month in that prior-year first quarter, while Sam Moore operated at roughly 50% capacity. So because of that, those divisions posted much weaker revenue numbers for that stretch. Even though incoming orders for the Domestic Upholstery segment gave us reason for optimism in the quarter, we began running into foam allocation shortfalls along with rising costs for some raw materials — foam, lumber, plywood, fabric and mechanisms — in the back half of the quarter. Those supply chain and production limitations caused a — caused output to come down, and that hurt unit volume and operating efficiencies through a large portion of the quarter; we anticipate these difficulties will persist near term; and within All Other, net sales fell $368,000, or 12%, versus the same period last year, mainly reflecting a 17% drop at H Contract, which serves the senior living and retirement industry. As you're aware, the senior living sector took an especially severe hit from the COVID crisis and still hasn't bounced back; even so, we think continued momentum — progress with vaccinations will bring better conditions to the majority of senior living communities. On the H Contract side, orders we received during the quarter were up 9.5%, while backlog stood 35% higher than it did twelve months earlier. Despite the drop in revenue, H Contract is still going to turn in operating income for the quarter. Lifestyle Brands, which we introduced back in fiscal 2019, also managed to eke out a small profit. Finally, let me speak to where we stand on cash and inventory. Compared with where things ended last year, our inventory is up about $10 million. That increase is divided about equally between product still in transit and product sitting in our warehouses, and it should help us get back to serving our backlog better and make us stronger on having best sellers in stock. When the first quarter of fiscal '22 wrapped up, our cash and cash equivalents stood at $61.6 million — that's a $4.2 million decline compared with where we finished fiscal '21. On the inventory side, we saw $81.5 million on a consolidated basis, up $11.3 million from the $70.2 million we reported at fiscal year-end. Looking ahead over the coming months, we expect those cash balances to decrease to some degree, driven by continued strong sales activity and the inventory build we're doing to meet higher customer demand. With that, I'll turn it over to Jeremy, who'll walk through the outlook.

Thank you, Paul. As we move toward the summer months, our consolidated orders and backlogs stand at over twice what they historically have been. Because of that strong position, we're cautiously optimistic when we take into account the shortages and inflation affecting supply chains, logistics and raw materials across the industry; we think we've mitigated these dynamics to the greatest extent possible via surcharges and price increases, but these supply side factors can't be predicted and may bring unexpected shifts that happen nearly every day. A number of macroeconomic factors offer a solid runway for growth, including the continuing strength of the housing market and favorable demographics, with the huge millennial generation becoming deeply involved in forming households and buying home furnishings. On the negative side, as COVID-19 vaccinations keep rolling out, we anticipate more competition for consumers' discretionary income from sectors like travel, apparel and events. Although we expect the extraordinary levels of demand for home furnishings to lessen somewhat, we also expect that demand for home furnishings will settle at a level higher than it was before the pandemic. Consumers won't stop loving their homes, and we are positioned to help them improve those homes with comfortable, stylish and quality home furnishings. We believe our company is strongly positioned to win in this environment; that concludes the formal portion of our discussion. And at this time, I'll hand the call back to our operator, Liz, for questions.

First off, I was hoping you folks might be able to put a number on how orders have been trending, or perhaps you could put a figure on the backlogs you're currently looking at as the first quarter wrapped up — that would be really useful.

Let's take a look, our consolidated backlog stood at $280 million when the quarter closed, versus $91 million during the same period a year ago.

All right, understood. All right. Now regarding price hikes, clearly we're in a remarkable stretch because of inflation. So could you explain the number of rounds of pricing adjustments you've implemented across roughly the last 12 months? Alternatively, perhaps also, what might the total impact be from those price increases observed during the recent few quarters?

Anthony, it's Jeremy here. What I'd say is that this truly differs based on which among the 12 brands you mean. Thus, within Domestic Upholstery, you're dealing with raw material cost growth and foam scarcity along with various shifts in the — various shifts among moving components in furniture that rise too; hence for Domestic Upholstery, roughly 2 separate rounds of increases would likely be a correct figure for that segment. If you consider the import divisions more, freight has really — it's proven impossible to predict at best, and typically it's a reactive approach rather than what you'd prefer, which is acting ahead of time. Therefore you learn at the close of — clearly, at the close of every month, all right, what's occurred with freight by then. So that's been somewhat more reactive using a surcharge approach, and that surcharge has likely shifted 3 or 4x among our various import companies. Beyond that, there have also been initial cost hikes from factories that differ according to the brand of imported goods too. Consequently, I can't honestly claim it's uniform since they're distinct for every single one. Yet we've got anything from 2 separate adjustments to 0 adjustments so far regarding factory increases.

Understood. All right, yeah. So when it comes to trimming your SKUs, clearly that helped you during the quarter. Could you possibly share additional specifics regarding what kind of gain you realized in that period? And after that, how do you see things shaping up ahead when it comes to what you get from that SKU reduction effort?

Yeah. Thankfully, we got going fairly far along with that initiative on the biggest warehouse program we have, which is essentially the Hooker Branded product; and that truly turned into an ABC way of thinking, not to make it too simple, but genuinely working to ensure we weren't putting cash into Cs, working to keep obsolescence at extremely low amounts, which we've managed to accomplish and genuinely directing every bit of our capacity and all of our use of container space toward As and Bs; and that has without a doubt assisted us in getting through the storm we're facing, no question. And it's meaningful. And it's going to stay meaningful since we take a highly disciplined stance regarding the way we will use our cash for these stocked items.

Yes, it allowed us to shift at the levels.

Correct. Correct. Correct.

Understood. All right. Therefore, your belief is that this will be advantageous to you folks for the remainder of the year regarding the SKU rationalizing?

Yeah. What this fundamentally accomplishes is, whenever we possess a sizable transfer product, we would really like to have the ability to hold more items in our warehouses. However, whenever sizable transfers do occur, the majority of it gets sold; so — and that — those are SKUs that are — clearly they're superior SKUs. So — and we aren't accumulating SKUs that are irrelevant.

Understood. Alright, so just this past Monday, Memorial Day weekend wrapped up, and for retailers that's usually a big selling period. So I'm just wondering, now that Memorial Day is behind us, what are you hearing from your retail partners when it comes to the demand outlook?

Extremely strong. Each of the people we've talked to has told us that over Memorial weekend, the very strong demand environment we're in carried on. So that was encouraging; really, demand hasn't shown much of a slowdown at all going back to right after the pandemic began.

All right, that's wonderful to learn. Now I've got a few additional items I'd like to ask about; so Jeremy, back when you came aboard as CEO at the start of February, one item you put into place is project one, one company, one culture; so I was hoping to understand more clearly what you've accomplished. What results have you observed from that effort? And how ought we to view it for the rest of the year?

Well, benefits have come into view quickly, in my view, thanks to every one of our operations uniting and truly backing each of the 12 businesses by leveraging our scale. So we have one team that's HMI group, another that's Hooker Branded in another drive, so we gathered all those genuinely talented individuals. And by the way, this was not — this wasn't an effort to cut costs; it was an effort to improve; it was about us growing more efficient and improving at what we do and attempting to be the finest sourcing company we can be, the finest quality company and the finest safety; so we work very hard to ensure everyone is headed the same way and focused on what we need to focus on with all the capable people we have; and that's what it has truly accomplished.