Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Gigi, and good morning, everyone. It's great to have you on this quarterly conference call, where we'll go over the financial results from our second quarter of fiscal 2022 — that period started May 3rd, 2021, and wrapped up on August 1st, 2021. With me today is Jeremy Hoff, who serves as our Chief Executive Officer. We truly value that you've taken the time to join us. As part of today's call, forward-looking statements may be made, and those come with risks and uncertainties. You can find a discussion of the factors that might cause actual results to differ materially from what management expects in our press release and in the SEC filing that announced these fiscal 2022 second quarter results. Forward-looking statements reflect only today's perspective, and we're not obligated to update or revise any of them to account for events or circumstances arising after this call. This morning, we announced consolidated net sales of $162.5 million along with net income of $7.5 million, which works out to $0.62 per diluted share, for the second quarter of fiscal 2022 that closed on August 1st. Set against the second quarter of last year, net sales rose $32 million, a gain of 25%, and net income was up $1.7 million, or 29%. Earnings per diluted share likewise climbed 29%, moving from $0.48 a year ago. Every one of our three reportable segments posted a year-over-year sales gain above 20%. Turning to the first half of fiscal 2022, consolidated net sales reached $325.4 million, an increase of $90 million, or 38%, versus the first half of last year. Net income came in at $16.9 million, or $1.40 per diluted share, against a net loss of $29 million, or $2.46 per diluted share, a year earlier — a swing driven mainly by $44.3 million, or $33.7 million after tax, in non-cash impairment charges recorded last year. At this point, I'll hand things over to Jeremy so he can share his thoughts on our fiscal 2022 second quarter results.

Thanks, Paul, and good morning to all of you; we're happy that Hooker Furnishings has delivered double-digit gains in both sales and profitability for a second quarter in a row. Every one of our reportable segments — Hooker Branded, Home Meridian, and Domestic Upholstery — likewise posted double-digit sales growth, at 29%, 23%, and 29%, respectively. Although we anticipated better results than during the pandemic's early months 1 year ago, we keep exceeding our objective of getting back onto our pre-pandemic growth trajectory. Consolidated sales rose by more than $10 million versus the second quarter of fiscal 2020, while profits climbed roughly 79% against that same quarter. Consumer and retail demand stayed historically robust, with consolidated backlogs having doubled from a year earlier and incoming orders rising 27% year over year across the six-month period. Demand throughout the industry remains elevated; even so, we confront substantial supply-side headwinds that will affect us near term. The Delta variant of COVID-19 surging has forced factories in our source countries of Vietnam and Malaysia to shut temporarily, with recent discussion of Vietnam reopening near September 15th. Beyond that, worldwide logistics difficulties — higher freight and transit costs plus reduced transportation capacity — together with raw materials inflation and certain labor shortages, continue. We are pulling every available lever to help offset these headwinds, and we stay optimistic regarding our long-term position as we navigate these transitory disruptions. At this point, I'd like to hand the discussion to Paul Huckfeldt, who will go over highlights from each of our reportable segments.

Appreciate that, Jeremy. I want to start off with the Hooker Branded segment, and that one turned in an outstanding performance for a second quarter in a row — beating what we had expected when it came to sales, profitability, product flow, and efficiency. Net sales came in $11 million higher, which works out to 29%, compared with the same period a year ago. Incoming orders were up 38%, and the backlog wound up three times larger than what we saw in last year's second quarter. Operating income for the fiscal 2022 second quarter reached $8.9 million, an operating margin of 17.9%, against $6.1 million, or a 15.7% margin, in last year's second quarter. More than 90% of consolidated operating profit for the period came from Hooker Branded; we credit the segment's lively sales and profitability results to strong demand across the industry plus the significant upgrades and broadening of our product line. This past June's High Point Market gave Hooker Branded its strongest written orders since April of 2016. We're also finding success with new lines, including the Commerce and Market collection, which delivers pricing, scale, and styling aimed at millennials and ranks among the biggest accent furniture introductions in our company's history; on top of that, our approach of rationalizing stocking inventory to concentrate on top sellers is helping us get the most out of shipping and production capacity, product flow, and cash utilization. Because bestsellers were in stock, we held our order cancellation rate down to single digits and shipped more than we had anticipated even with constraints on ocean and land shipping capacity. On top of that, we managed to raise prices to offset higher product costs stemming from climbing ocean freight expenses and inflation on goods sourced from Asia. Now let me move to the Home Meridian segment. HMI posted second quarter sales of $87 million, roughly 23% above the prior year. Continued strong retail demand lifted revenues, measured against especially weak shipments in last year's second quarter caused by COVID-19 related disruptions. Year to date, we've experienced a solid sales rebound with our traditional furniture channel retail base, since those customers are picking up share that was lost to emerging channels during the opening months of last year's pandemic shutdowns. By contrast, emerging channel sales have slipped somewhat, reflecting exceptionally strong sales in the prior year period along with global supply chain challenges. Lower allowances and reduced fixed expenses weren't sufficient to offset the impact of all-time record high freight costs. Despite higher sales, the Home Meridian segment ended the quarter at essentially breakeven because of these high freight costs. Incoming orders rose about 4% against the fiscal 2022 first quarter, yet fell by about 35% against the prior year second quarter, when business rebounded dramatically after the worst of the initial COVID-19 crisis. Backlog at quarter's end stood 62% above the prior year's second quarter, driven by strong incoming orders, though also partly the result of production and shipping delays. Our Pulaski Furniture division turned in particularly strong Q2 results, with net sales beating the prior year by 68% and operating income up $1.3 million. During Q2, 83% of PFC's shipments went out in containers delivered straight to the warehouses of big retailers. PFC's new orders and backlog stay strong, though factory shutdowns currently happening in Vietnam might disrupt shipments for at minimum the coming several months. Our value-oriented case goods arm, Samuel Lawrence Furniture, along with PRI, our promotional upholstery division, likewise posted robust double-digit sales gains in Q2, rising 38% and 75% year over year, respectively. Backlogs at both divisions are up as well versus last year, yet short-term factory shutdowns in Vietnam will hurt Q3 shipments. As noted in earlier quarterly results, SLH, our hospitality division, keeps facing a major drop in demand amid the COVID-disrupted hospitality sector. Net sales fell 48% during the period, and incoming orders were essentially absent. SLH will keep running at a loss until the contract hospitality sector finally recovers, something we anticipate starting next year. ACH, our e-commerce-focused business unit, dealt with severely unfavorable ocean freight costs in Q2. Beyond outsized freight expenses, ACH faced supply chain-related service problems and weaker order demand stemming from our attempts to pass along parts of the higher freight costs. The price-sensitive character of much of ACH's business restrained sell-through, which reduced the advantage of our price increases. Although we have measures in place to mitigate excess freight costs, we cannot remove them, so these headwinds should keep affecting ACH results through the rest of this fiscal year; within the Domestic Upholstery segment, net sales rose by $5 million, or 29%, in the fiscal 2022 second quarter versus the prior year quarter, driven by substantial sales growth at Bradington-Young and Shenandoah and, to a smaller degree, our Sam Moore division. Operating income for the fiscal 2022 second quarter came to $457,000, or 2% of net sales, against a modest operating loss in the prior year second quarter. Backlogs across all three divisions hit historic peaks, and incoming orders climbed 73% versus the prior year second quarter. There's plenty of optimism within the Domestic Upholstery segment for this year's second half. Alongside solid demand, we've observed stabilization in certain raw material problems, including foam allocation shortages that hurt us close to the end of Q1 and earlier this quarter. Our management focus is on servicing backlogs with quality product and improved speed of delivery; in all other, sales rose by $300,000, or 10%, in this second quarter compared with the prior year period, owing to an 11% sales decline at H Contract. Operating income for the quarter was $230,000, or 8.5% of net sales, versus $350,000, or 11.5% of net sales, from the prior year. As the retirement living market starts to slowly rebound, H Contract incoming orders rose 6.4% over the prior year second quarter, and the backlog sits 49% above the prior year quarter end. Wrapping up with where we stand on cash and inventory. At the close of the quarter, cash and cash equivalents came to $37.4 million, which is $28 million lower than the fiscal 2021 year end. The main driver was a $33 million rise in inventory as we keep stocking up to satisfy greater customer demand and get ready for the holiday selling season; a sizable portion of that inventory is in transit, and much of it is already sold and can go out to customers soon after it arrives at our warehouses. Accounts receivable balances grew by $15 million because net sales were higher; we drew on existing cash to pay $4.3 million in cash dividends and $3.5 million of capital expenditures, which is above what we normally spend since we're currently upgrading our end-of-life ERP systems with newer technology; we've started equipping our new, more efficient Georgia distribution center, which should go online in October of this year. Now back to Jeremy for his outlook.

Thanks, Paul. Looking forward, demand is set to rise substantially, yet we're still grappling with a lot of the same logistics and supply problems. In particular, the COVID-driven factory closures that happened recently in Vietnam and Malaysia are going to create negative ripple effects across the worldwide supply chain for some time. It's encouraging to hear recent reports that Vietnam may reopen this month. In our Hooker Branded and Domestic Upholstery segments, we can keep product moving and ship using our substantial warehousing capacity, so those areas face fewer difficulties than Home Meridian. Home Meridian mostly ships by container to larger customers, which means the shutdowns hit it faster. Thanks to our solid balance sheet and variable cost business model, we're confident about getting through this challenge affecting the whole industry right now, and that should let us capitalize on the healthy consumer demand environment, the long-term positive economic indicators, and demographic trends benefiting home related industries. Finally, I want to note that Lee Boone, most recently President of HMI, has departed Hooker Furnishings; this move is part of a broader push to reorganize and realign the Home Meridian division while lowering operating costs and boosting segment profitability. We aren't making wholesale changes at HMI, but we have adjusted some reporting relationships so they align better with strategic initiatives, shrunk the executive team, removed some unnecessary layers, and will close a high cost West Coast warehouse before the first quarter of fiscal 2023 ends, without a significant negative effect on our revenues. These steps further streamline the organization and cut cost. We're grateful for Lee's dedicated service and contributions to the company across the last nine and a half years, during which he held various roles, including President and co-president of HMI and division President of Samuel Lawrence Furniture. That concludes the formal portion of our discussion, and now I'll hand the call back to our operator, Gigi, for questions.

Thanks, and good morning. I appreciate the chance to pose some questions. To start, I suppose these are a few somewhat routine items. Regarding the second quarter, I was hoping to gain a clearer picture of pricing compared with unit volume on a consolidated basis, if that data is available.

Clearly, pricing will represent a significant portion of it. Let me take a moment.

Absolutely. No.

Actually, if you’d prefer to move ahead to your following question, I’ll search for those figures so I can provide you with the. Our Q is being filed later today.

Understood. Yeah, that's fine. Clearly, I'm aware that you've implemented price increases. I suppose I just wanted some clarity on whether additional price increases are something you intend to make, and if that's the case, would any of them apply to the backlog that already exists?

Morning, Anthony. Jeremy here.

Hello, Jeremy, good morning.

Right now, a larger share is moving via e-commerce and our ACH operation; the changes we made had to be more severe than what we initially expected. That work continues. Many of those adjustments landed at the back end, and yes, they had an impact on backlog. So that's where things stand on that point. Suppliers keep hitting us with higher costs for raw materials, almost every day. Normally, our practice across the whole company is not to push prices up on backlog orders. Naturally, if it became truly necessary, we would do that. Apart from the first item I brought up, we believe our position is fairly strong.

I see. All right, that makes sense. Is there a figure you can provide regarding the backlog? I realize it has risen in general, but can you also give a dollar figure for the backlog when the second quarter ended?

The backlog stands at $320 million.

Alright, understood. I appreciate the answer. Jeremy, on several occasions you brought up how robust industry demand is, and that's good news to hear. Could you tell us what retailers have been saying regarding the Labor Day weekend?

Sure. The feedback we got is that Labor Day weekend performed very well, and our retail partners keep sharing favorable reports with us.

Alright, Anthony, circling back to that other thing you asked. Consolidated unit volume has risen 4.4%, while average selling price has climbed 12.2%.

Understood. All right, thank you, Paul. Regarding what you mentioned, Jeremy, about pulling the levers at your disposal to lessen the supply chain pressures — could you share a bit more detail on the specific actions being taken? Clearly, we understand Vietnam remains in a shutdown state, so if you might elaborate on the steps underway to ease the supply chain constraints, that would be quite useful.

Sure. To begin with, let's distinguish the factory shutdown from the rest of it. When it comes to a factory shutdown, finding a lever is tough, and the most encouraging development so far is that there's talk those facilities might reopen in Vietnam as soon as the 15th of this month. Setting that piece apart. Let's begin with logistics. With logistics, the whole issue revolves around extra cost of goods, correct? It arrives and we shell out a particular sum, perhaps $15,000, $20,000. We've been told figures reaching $28,000. I believe $30,000 was even mentioned for a container.

What's the amount we're paying for that?

When it comes to mitigating this, we genuinely examine every one of our business units. Should it be a business with a lower price point, where paying more for a container isn't logical, we've got steps ready so that choice can be made quickly, more quickly than before. We won't simply permit an absurd container expense to land on a business that genuinely cannot bear it. That's a single major action we're taking. For the higher price points, we're able to absorb a greater share, and we must ensure there's sufficient margin and pricing to allow that; in the warehouse-supported businesses at the higher end, particularly Hooker Branded, everything hinges on having sufficient product, keeping it moving, and avoiding stockouts; we're less worried about accepting the pricier containers, and we've managed to average far above our usual level, yet our average remains below many of the higher figures you hear about. We're attempting to hold that average down as much as we can. We combined our logistics team into a single large team since it's somewhat an all hands on deck situation. It's an everyday, unrelenting effort to secure whatever rates we're able to secure; that's a key element of what I mean when I say we're attempting everything possible to lessen many of these added costs. Moving on to capacity. Capacity, naturally, from the container angle, we believe it's about staying consistent with what we book. We're attempting to keep our bookings as steady into our contract countries as possible. Naturally, all of that is somewhat disregarded with the factories currently shut down in Vietnam. That's a single thing we're genuinely attempting to do, which is maintain a steady number of containers at our major factories so we can obtain as many contract rates as possible on those containers. Another significant element is handling all the demurrage that exists. Besides it being hard to obtain containers from overseas, it's hard once they arrive in the United States, getting them to our warehouses is another significant hurdle. Many of these matters, it's focus; it's assigning sufficient people and sufficient horsepower to each issue, and ensuring you're monitoring it every day. It's not something you can ignore and then check back in a month and say, "Okay, what just happened?" Since you won't be pleased with the outcome.

Understood. All right. Yes. I appreciate you walking through all of that in such detail, Jeremy. With the sorts of supply chain pressures that exist right now, what's your strategic thinking as you move forward — are you aiming to broaden where you source from over a longer horizon, in light of everything that's taken place? I'd simply like to hear your big-picture view on it.

Yes; we constantly seek out further sourcing options so that what we do becomes more diversified. Mexico strikes us as one place we're attempting to expand into; honestly, that's simpler to say than to accomplish. Another significant one involves imported upholstery — not made here, but brought in. We've truly shifted a fair amount away from Vietnam. We have operations in Thailand and in various other places. Honestly, we've even returned to China somewhat when it's been needed. Should we perceive greater stability in some nation at a given moment, that's the direction we'll take. Relocating upholstery is simpler than doing so with case goods, and particularly once you reach the upper price tiers of our case goods, diversifying those becomes harder from a manufacturing perspective.

Understood. Alright. Regarding Home Meridian, you brought up the change in leadership there. Looking further out, what's the right way for us to frame the opportunities for HMI? There are clearly some short-term headwinds, which I certainly get. From a revenue and profit perspective, how should we think about HMI over a longer horizon?

Something we're putting a lot of attention on — and I touched on this a bit — is that adding more layers hasn't proven effective in my experience, especially when the goal is figuring out a business. First, being tighter as a team and genuinely collaborating while pulling in one direction. That, to me, matters enormously. Second, we've got some genuinely strong businesses that have been somewhat obscured by a few factors — a few operations that aren't as robust and don't serve our company as well. We've been actively addressing those, either scaling them back or adjusting pricing to where it ought to be, even when that means losing volume in that specific operation. We're really trying to amplify and put more resources into the businesses we view as genuinely strong and that present excellent opportunities now and going forward. I genuinely believe that after we execute what I just outlined, the picture will look entirely different. The encouraging part is that we have genuinely strong leadership across each of those businesses, which ties back to why I brought up layers — it practically becomes muddled when yet another layer sits above those leaders running those operations. Honestly, I feel good about where we stand. As I mentioned in the outlook. It will be difficult with factories shut down, and that hits them more rapidly. Outside of that, I'm quite optimistic.

All right, that's fantastic to hear. So my final question. Clearly, your balance sheet is in a solid position, and I realize the supply chain situation right now is tight, but I'm just curious — what's your desire when it comes to buying other companies, particularly given possible shifts in tax legislation? Are you looking at any M&A deals, or would you be open to pursuing some?

We certainly won't turn away from a chance if one appears. We're keeping our eyes and ears open, we examine opportunities, and our board of directors is receptive to that too. Growth by means of acquisition is one of our major strategies, yet that also requires doing it the right way and doing it with a company that would truly integrate well into what we already operate and be a genuine cultural and strong match for our activities. I realize I'm not providing as much detail as you'd like, but the response is, we are absolutely open to it.

I see. That makes sense. OK then. Thanks, and I hope everything goes well for you.

Well, thank you for that. Appreciate it, Anthony.

Good morning, and thanks for fielding my question. What I wanted to understand is the timing around those closures in Vietnam and Malaysia. Basically, did those stoppages last through all of the quarter, or did they only begin near the quarter's close, or can you help us see how that affected the quarter we're in now?

Morning; Jeremy here. We truly got moving along that path around the 1st of August, which is when it genuinely took shape. Malaysia was in fact a bit sooner, Paul, likely around June or July.

Yeah, Malaysia was earlier, but Malaysia's a pretty small part of it.

The scale there is smaller, plus Vietnam represents a larger presence for our company. On that question, the response would be 8/1.

It was quite a striking shift. Once the Delta variant situation emerged, we went from only a handful of cases to fairly strict shutdowns. My sense is that since Vietnam wasn't especially well vaccinated at that point, the authorities took a very forceful approach in requiring closures.

Since it happened on August 1st, the previous quarter saw no real effect from it. Looking ahead, do you think you'll be able to hit your sales targets? I'm aware that inventory has risen. Should those factories remain offline for a while, might you end up with a gap caused by sales you couldn't make?

That's a reasonable thing to ask. For Hooker Branded and Domestic Upholstery, our expectation is that we'll be in a stronger position. When it comes to HMI, because it's tied so tightly to that output and to the shipping containers coming off that output, our view is that a shortfall is possible there.

All right.

It's a short-term situation, yet before that pipeline gets replenished, it's definitely quite likely.

All right. Right now, HMI faces the greatest risk.

Understood.

In the previous quarter, roughly what share of sales was actually sourced from Vietnam?

I'd say it's likely close to 50%. Yeah, around half would be my estimate.

Roughly 50%. For that quarter, what did China come in at, approximately?

20%.