Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Olivia. Good morning, everyone, and welcome to our quarterly conference call, where we'll review the results for fiscal 2022's third quarter — that period started on August 2, 2021, and concluded on October 31, 2021. With me today is Jeremy Hoff, our Chief Executive Officer. We truly appreciate that all of you are participating today. Throughout this call, we might make forward-looking statements, and those carry risks and uncertainties. A discussion of the factors that might cause our actual results to differ materially from what management expects appears in our press release and SEC filing announcing the fiscal 2022 third quarter results. Any forward-looking statement is valid only as of today, and we take on no obligation to update or revise any forward-looking statements so they reflect events or circumstances arising after today's call. This morning, we reported consolidated net sales of $133 million, which is a decrease of 16.3 million, or 11%, versus last year's third quarter. We reported a quarterly net loss of 1.2 million, or $0.10 per diluted share, against net income of 10.1 million, or $0.84 per diluted share, in the same quarter a year ago; for the fiscal 2022 nine-month period, consolidated net sales came to 459 million, up 74 million, or 19%, compared to last year during the same period; we reported net income of 15.7 million, or $1.30 per diluted share, this year compared to a net loss of $19 million, or $1.61 per diluted share, a year ago, which was primarily due to a 44.3 million, or 33.7 million after tax, non-cash impairment charge. Now I'll hand the call over to Jeremy to comment on our fiscal 2022 third quarter results.

Thanks, Paul, and hello everybody on this call. A robust order backlog sitting at 3 times normal levels and solid industry demand for home furnishings gave us reason for optimism, yet we still faced persistent supply chain interruptions throughout the quarter. To be specific, the slower-than-anticipated restart of furniture plants in Vietnam and Malaysia after COVID-related closures, plus sustained elevated freight expenses and logistics difficulties, dealt the heaviest blows to our sales and operating income. Our consolidated revenue decrease in the third quarter comes after 2 straight quarters of double digit gains in both sales and income at Hooker Furnishings through the first half of the year. What drove the declines this quarter was a substantial drop in shipments within the Home Meridian segment, caused by the Asian factory shutdowns that started near August 1 and stayed closed until late in the quarter, when they finally reopened at just roughly 25% capacity. Partially counterbalancing the HMI sales drop were double digit sales gains in the Hooker Branded and Domestic Upholstery segments compared with the same period a year ago. Those 2 segments have now posted 5 consecutive quarters of increased year-over-year net sales. The primary cause of both our consolidated operating loss and gross profit reductions this quarter was the lower sales volume at HMI. Elevated freight and product costs added to those decreases as well; on top of that, HMI absorbed several significant charges in the period, among them 2.6 million in one-time order cancellation costs tied to exiting the ready-to-assemble furniture category. We took that step to boost long-term profitability by getting rid of this low margin category. In addition, HMI recorded 1.9 million in chargebacks from 2 club channel customers that came in higher than anticipated; those charges were responsible for 75% of our earnings miss. Industry-wide inflationary pressures played a role in the income reduction too, along with certain decisions we made that carry a short-term negative effect but will make the company stronger over the long run; for instance, leaving the HMidea’s RTA category pushed consolidated cost of goods sold up by 200 basis points and factored into the quarterly loss. Even so, we expect this action to save roughly 10 million in product and freight costs associated with RTA products currently on order and to let us concentrate our resources where we can compete and profit most effectively. We stay confident that we're pulling every available lever to help soften global logistics problems, including factory shutdowns and diminished capacity, higher freight and transit expenses and reduced availability of shipping container space. Aiming to hold costs down and get as much product as possible shipped to customers amid these disruptions, we believe we've done as much as we can through steps like surcharges and price increases to offset higher transportation and raw material costs. Simultaneously, we're streamlining our stocking inventory to prioritize A and B level top selling products by giving them preference for production and container utilization; worth noting is that the surcharge represents an increase, since the price hikes we implement typically lag behind those received from logistics partners and suppliers by as much as 90 days. Even with everything we've done, the factors affecting supply right now can't be predicted and often shift suddenly, with little warning or none at all. Take the plants in Vietnam and Malaysia — they stayed shut for a longer stretch than we had anticipated and restarted at just 25% capacity. Our expectation is that those facilities will start moving toward 50% capacity before long, though we don't see them reaching full capacity any earlier than the second quarter. At this point, I'd like to hand things over to Paul Huckfeldt, who will walk through the highlights for each of our reportable segments.

Thanks, Jeremy. I'll begin with the Hooker Branded segment, which posted another sales increase this quarter and stays our most profitable segment, even though it took on some of the strain from higher logistics costs in the period. Inside Hooker Branded, net sales climbed 8.7 million, or 18.5%, compared with the same quarter last year, driven by stronger demand and improved inventory availability, plus fewer discounts. This segment's steady, dynamic growth stems from broadening the Hooker Branded product assortment to reach a wide range of lifestyles and price points. With the summer introduction of our new Commerce & Market accent furniture collection, along with continued momentum for our Mélange accent collection, we have considerably extended our leading position in the accent furniture category. Beyond that, our strategy of simplifying stocked inventory to focus on top sellers helps us maximize shipping and production capacity, product flow and cash utilization. While sales continue to reflect strong demand and a solid furniture retail environment, steeper ocean freight and product cost inflation pressured the segment's gross margin, offsetting the gains from higher sales this quarter. We have implemented price increases to counter rising product costs; however, given where order backlog stands today and the fact that customer price changes take effect at different times, we expect to capture more of the benefit from these price increases in future periods as a larger portion of products sold carries the new pricing. Beyond that, the segment is starting to face yet another round of increases in product and logistics costs, which will likely call for additional customer price changes. Despite these negative factors, Hooker Branded generated $6.7 million in operating income, equal to an 11.9% operating margin. Incoming orders slipped modestly, by 1.9%, against the prior year period, when business was rebounding sharply after the initial COVID-related disruption. Backlog remained at historically high levels, nearly double what it was in the prior year third quarter, when backlog was already above historical averages. Meanwhile, total backlog across the company stood at $331 million. Now let's turn to the Home Meridian segment. Net sales dropped by 27.5 million, or 37%, from the prior year third quarter, dragged down by inventory unavailability resulting from the temporary COVID-related shutdown of factories in Vietnam and Malaysia during the period. Since such a large share of Home Meridian shipments go directly from our Asian suppliers to our customers' warehouses, the factory closures and higher transit costs affected this segment much more immediately. Home Meridian recorded a $10.2 million operating loss, largely because of fewer shipments and a higher cost of goods sold, mainly from increased freight charges. In addition, chargebacks in our club channel that came in above expectations and inventory cancellation costs tied to HMidea's ready-to-assemble business were major contributors to the operating loss. Despite these disappointing financial results at HMI, we see the difficulties as short term. Turning to what's coming in the upcoming quarter, we expect to see some benefits as output rises at our plants in Asia, but we don't think we'll hit full production until the second quarter of next year. Demand has been impressively resilient—Home Meridian finished the quarter with backlogs up 12.5% compared with the third quarter a year ago, more than double the level before the pandemic. On the strategic front, we're pleased to report that in mid-October we opened our distribution center in Savannah, Georgia—a very efficient 800,000 square foot operation serving Home Meridian and its customers. Located a short drive from the Port of Savannah, this cutting-edge facility will allow us to significantly improve operational efficiency, reduce our carbon footprint, and ship orders faster. Our ambition is to be a best-in-class logistics operator, and Savannah is a major step toward that. Now for Domestic Upholstery: net sales rose 2.6 million, or 10%, in the fiscal 2022 third quarter compared with the prior-year period. All three divisions in that segment delivered sales growth around 10%. However, higher costs for most raw materials and larger freight surcharges offset the gains from those increased sales. This segment posted operating income of 1.4 million, or 5.2%, for the quarter; raw material shortages remain a challenge for us, though we saw meaningful improvement late in the quarter and expect these positive trends to continue. To protect margins, we've implemented price increases and surcharges with our major accounts. Since this segment's order backlog currently spans five to six months and no price changes were made on backlog orders, we anticipate the benefit of these higher prices will begin appearing in the second quarter of next year. All Other's net sales declined by 134,000, or 4%, during the quarter, driven by a 5.6% drop in our H Contract division. More positively, with COVID vaccines distributed, especially among seniors, H Contract's incoming orders have risen for three consecutive quarters, and the quarter closed with a backlog 150% above the prior year third quarter. Despite the sales decrease, All Other still produced a 10.7% operating margin for the quarter. Total backlog was $331 million company-wide. Finally, let me cover our cash and inventory positions. Cash and cash equivalents stood at 57.2 million at quarter end, down 8.6 million from the fiscal 2021 year-end balance, reflecting our effort to build up inventory levels that were unacceptably low at year end as we worked to meet the strong demand we've seen throughout the year. During the opening three quarters of fiscal 2022, our cash usage combined with $5 million generated from operations went toward covering $6.6 million in capital expenditures—which included $4.4 million tied to the Georgia distribution center we just opened—plus $6.4 million paid out as cash dividends and $2.6 million for our new cloud-based ERP platform. Then on Tuesday, we announced an increase of $0.02 to our quarterly dividend, lifting it to $0.20 per share, which represents an 11% raise. With a total backlog of $331 million across the entire company, the backlogs we've built up, and our proven low-fixed-cost model, we're confident in our ability to bounce back once the manufacturing and shipping difficulties we've been facing begin to subside next year. With that, I'll turn it over to Jeremy so he can walk through his perspective.

Thanks, Paul. Demand from consumers and retailers is still unusually strong, and our consolidated backlogs are close to three times what they were before the pandemic. That said, we anticipate that ongoing turmoil in the supply chain will weigh on our net sales and income in the near term, extending at minimum through the second quarter of next fiscal year. Our Hooker Branded and Domestic Upholstery segments, we believe, will stay less affected than Home Meridian, since over 70% of Home Meridian's business goes out by direct container, whereas the Hooker Branded and Domestic Upholstery segments rely on a domestic warehouse distribution model. On top of that, because HMI's product line carries lower prices, increased freight costs hit it harder as a percentage. Looking to the short to mid term, we anticipate efficiencies and cost savings from HMI's new Savannah facility. That facility positions us well to expand HMI's warehouse business. Our focus will stay on the things within our control, including creating relevant new products that serve consumer needs, improving operations, keeping overhead and costs in check, and carrying out our strategic growth initiatives; we continue to feel very optimistic about our success over the long term as we navigate a difficult environment. That concludes the formal portion of our discussion. And now I'll hand the call back to our operator, Olivia, for questions.

Morning, and thanks for fielding these. To start, I've got a few things to ask about HMI. Clearly, Q3 was a rough one, with sales falling 37%. So with the backlog where it is and Vietnam having partially reopened, what's a sensible Q4 sales figure for HMI? If you can give it a shot, that would really help.

Around $60 million.

All right.

Given how unpredictable everything is with COVID—things opening up and shutting down—it's hard to say for sure, but that's roughly the figure I have in mind.

The figure he provided comes from what we're actually receiving — capacity-wise, we're hearing what can be made available. So right now, over the near term, it's really more a budget for capacity rather than one for sales, clearly.

All right, that makes sense. Got it. And then I noticed that for HMI, you mentioned a pair among the three unusual charges — the RTA and the club channel. If I didn't overlook the third, did you provide that figure? What it consisted of?

The club channel accounted for a pair of them, while the RTA had one.

All right, understood. Fine. Then regarding that new warehouse, is there any one-time expense you'd like to highlight when it comes to launching the facility? Also, could you elaborate on the operating efficiencies you expect to gain from it in the coming year? If you could put a number on that, it would really help.

Naturally, we need to fill it, and it did cross our minds to relocate goods from the rest of our warehouses. We're leaving the California and North Carolina Home Meridian facilities. Roughly $0.5 million was spent during the quarter, largely on moving inventory. Our projection for next year indicates roughly $2 million in savings. That figure will grow in the years after. Still, as we mentioned, the warehouse has to be filled before those savings can reach their maximum.

All right, understood. And Jeremy, I realize you folks made a move regarding the RTA exit. Should we anticipate anything comparable in other segments or sub-segments of the company? Obviously, I see how the reasoning works from a cost-reduction standpoint over the long haul, but is there anything else strategically that you might be looking to leave, or are you satisfied with the business lines as they stand?

No, nothing is coming up right away regarding what you asked. I'd like to build on Paul's earlier question, or rather his response, by noting that the HMI savings for next year won't be completely achieved, but roughly 6.5 million when you factor in the West Coast warehouse, certain salaries tied mainly to the RTA division, plus the anticipated savings from Savannah by avoiding the drage from the port all the way to Madison — those are quite substantial. Out of that, approximately 5 million to 5.5 million would be captured next year.

Alright, that certainly makes a real difference. Then, regarding overall backlog, could you give us a figure for what it stood at when the quarter closed?

Across the entire company, backlog came to 331 million.

Alright, that's helpful, thanks. Now regarding those price hikes, could you walk us through what actions you took during Q3 and what you're planning moving forward? And staying on that same thread, if we suppose costs more or less level out — and I realize that's a hefty assumption — but if they did, would you anticipate that the price increases you've got planned would cover the elevated costs by Q1 of next year? Is that a fair way to look at it?

Yes. As for the price increases, the majority are coming through at this point and will be carried out over roughly a month from now. And it depends on which segment of our business we're discussing — for some operations where we simply had no room to absorb it, backlog will be impacted, while for other operations, backlog won't be affected.

Correct, so that will —

Put another way, that has a slight trailing characteristic to it.

Right now, every company in this sector is dealing with the same situation. Additional price hikes may come. What will also occur is that they will be brought in based on whether you take on backlog or whether you let backlog remain at those reduced margins. That comes down to a call each business makes.

Understood. Fine. That covers everything I wanted to ask. Many thanks, and good luck.

Thanks. We appreciate that.

Thank you, Anthony.

Good morning, and thanks for fielding my question. Since these short-term challenges affect everyone across the sector, share prices have declined as a result. The medium-term picture looks quite strong. The capital expenditure for Savannah has already been completed. With that plus a sizable net cash balance, have you considered — perhaps — a share repurchase? I saw the dividend was raised yesterday, which was great to hear. Still, any thinking around potentially repurchasing shares? Thanks.

Buybacks come up often in our conversations, clearly, when it comes to deploying capital; we're fortunate that we can have those capital allocation conversations on a fairly regular basis. We have looked at a buyback and aren't prepared to move forward with one. Our Board addresses — we address buybacks each quarterly meeting. We also discuss potential acquisitions as a way to expand the business, along with putting money into more inventory. I believe our inventory levels remain well under where they should be. They're beneath where they've historically been. Given the current demand situation, we truly need to build inventory beyond even historical norms; so I'd say we aren't ready to make a buyback commitment right now, though it's something we discuss on a pretty regular basis.

Thanks. There's one more thing I wanted to ask. Could you share any perspective on how incoming orders are trending, specifically regarding consumer response to rising costs? From what we hear anecdotally, housing sector figures look quite robust. Individuals are relocating to the suburbs, and they're shifting between states. So demand for housing is still solid, yet costs for homes have climbed, and so have furniture prices. Would you mind offering some insight into what you're observing regarding how buyers are handling that situation? Thanks a lot.

Sure. At present, among every brand, it's the premium-tier businesses that are most attuned — I'd describe them as nearest to the heartbeat — since their orders tend to be more committed. That makes them, in my view, a stronger gauge for what you're asking about. And orders at those businesses simply continue — they carry on. There's been essentially no deceleration whatsoever. For operations doing more stockpiling for warehouse purchases, those orders sit so distant on the backlog that this has naturally caused a reduction in orders for those operations, yet the backlog stands at greater than 3 times the historical norm; so I trust that addresses your inquiry.

To put things in perspective, back in February 2020 our backlog stood at $122 million. By the close of 2021, that figure had reached $240 million, and today it sits at 331 million. Another thing we're noticing is that cancellations simply aren't happening. Even with rising prices and all the other pressures — the inflationary strain on consumers — we aren't seeing orders called off, and as you mentioned, housing remains strong even at these elevated price points. We believe that pattern will hold for quite a few years; given the favorable demographics of millennials settling down, purchasing homes, relocating to the suburbs, and the new work trend, we think all of that underpins solid long-term growth.

Great. Thank you so much.

You’re welcome.

Thanks.

Morning. Appreciate you fielding these. I had one thing I wanted to dig into; you mentioned freight expenses running higher, yet which other expenses are climbing? We've discussed this before, I realize, but going forward, where do you expect the heaviest cost pressure?

It shows up on the inbound side coming from abroad, and after goods arrive, domestic trucking rates are way up too. To paint a picture, the trend keeps climbing; and at this point we're in a period where you begin asking yourself, alright, what will the contract look like? And every contract comes in higher. So honestly it's more — asking what isn't rising would be simpler. There's no area untouched. Logistics has gone up.

When it comes to raw materials, though, what's your read on the foam problem, lumber costs, everything like that — where is it heading?

For the most part, we've gotten the foam situation under control. At times it can still pose difficulties, yet it's no longer doing serious damage to what we produce, the way things stood earlier. Lumber appears to have settled down to some degree, even though a price bump could hit us as soon as tomorrow; so quite a few inputs did see sizable cost increases lately. Some of that, however, looks like it has eased, and the foam matter has clearly begun improving by a wide margin, to the point that our output is no longer being hurt.

All right. That's encouraging. You brought up inventory additions. Roughly where do you think inventory will stand when the year ends?

Honestly, we don't anticipate year-end inventory being much above where it sits right now.

I think he's saying what would we want it to be? Is that right?

Okay.