Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Appreciate it, Liz. Good morning, everybody, and thanks for joining our quarterly conference call. Today we'll walk through how we did financially for fiscal 2022 overall, plus the fourth quarter — both of those periods closed on June 30, 2022. Jeremy Hoff, who serves as our Chief Executive Officer, is here with me this morning. It's great to have all of you with us today. During this call, we may make forward-looking statements, and those come with risks and uncertainties. If you'd like details on what could cause our actual results to differ materially from what management expects, we've laid that out in the press release and SEC filing that disclosed our fiscal 2022 year end results. Anything we say about the future represents our thinking as of right now only, and we are not committing to come back later and change or refresh those statements if events or conditions emerge after this call concludes. Earlier today, our consolidated net sales came in at $594 million, an increase of $53.5 million, or 10%, compared with the prior year. That growth was driven by sales rising more than 20% year over year in both the Hooker Branded segment and our domestic Upholstery segment. Partially countering those gains was a 1% drop in sales for the Home Meridian segment. On the bottom line, net income this year was $11.7 million, or $0.97 per diluted share, compared with last year's net loss of $10 million, or 88% per diluted share. The prior year's shortfall featured an impairment charge of $44 million that was non-cash and hit tangible assets, amounting to $34 million in net effects. COVID-driven plant closures in Vietnam and Malaysia dealt a severe blow to the fourth quarter, spanning November 1, 2021 through January 30, 2022, resulting in a 13% drop in consolidated sales for that period. Consolidated net sales totaled $135 million during the quarter, with the downturn attributable to a 24%, or $19 million, revenue decline at HMI alongside a 12%, or $5.8 million, sales drop at Hooker Branded. Partially counterbalancing those weaker sales was a $3 million, or 13.5%, gain in the domestic Upholstery segment. Looking at the fourth quarter of 2022, we posted a consolidated net loss of $4 million, which works out to $0.33 per diluted share. That compares with net income of $8.5 million dollars, or $0.71 per diluted share, in the fourth quarter of fiscal 2021. The operating loss for the quarter came primarily from a $12 million operating loss at Home Meridian. Several things drove the fourth quarter loss: inventory unavailability caused by COVID related Asian factory shutdowns from August through late in the year, continued high freight costs, decline in ecommerce and hospitality furniture sales and cost of approximately $5 million for the company's planned exit from unprofitable businesses and channels. At this point, I'll hand things over to Jeremy so he can share his thoughts on our fourth quarter and fiscal 2022 results.

Thanks, Paul. And good morning, everybody. Through a large portion of the year, we managed to offset a great number of broad economic difficulties while still expanding revenue, staying in the black, and carrying out strategic moves meant to transform the company and set it up for long-term growth; that was especially the case for the Hooker legacy portion of our operations and, in the opening six months, for every segment. Across that first half, each segment posted sales gains in the double digits, and with the proper product mix and inventory in place, we could serve demand closer to what we had seen historically. Among the broad economic difficulties we encountered were skyrocketing ocean freight expenses and shipping logjams throughout the year, along with shortages of materials and component parts, staffing, and firm capacity. Over the past 18 months, transportation expenses have risen by more than three times, sharply driving up our cost of imported goods sold; we held these forces in check until late summer, when an unanticipated COVID-related closure of Asian plants started in August and ran until late in the year. Even though incoming orders stayed robust and backlogs sat at record levels, that lost production capacity essentially stopped a large share of our imported product supply. Home Meridian felt this right away, and it even started producing out-of-stock problems and weak inventory receipts at Hooker Branded in the fourth quarter, despite that segment's US warehousing model. Every one of these elements fed into the 13.2% decline in consolidated sales for the fourth quarter. In recent months, Asian factories have started raising output once more and presently run at roughly 85% to 90% of capacity, getting better each week. Although we are certain that output of imported goods will hit 100% of capacity before long, the complete effect of greater production will not be felt by us until the second quarter, just as we projected late last year. Our deliberate departure from unprofitable businesses and channels at HMI, which included inventory write-downs, chargebacks from the Clubs channel, and order cancellation expenses as we close out our RTA furniture operation, produced one-time costs exceeding $5 million in the fourth quarter, and that was a key reason for our consolidated net loss in the year's final quarter. Still, we think these deliberate exits will assist in lifting profitability ahead, since they let us concentrate on more profitable businesses and stable channels that drive long-term growth. Even while economic forces outside our control pounded our financial results starting last summer, we kept building long-term momentum and chasing new chances to grow the business; we carried out strategic moves like launching the biggest facility in our company's history, an 800,000 square foot distribution center in Savannah, Georgia, to help HMI lower costs and shorten delivery times for our customers. Other bold moves in the second half featured joining the Las Vegas furniture market with an 8,500 square foot showroom to serve interior designers throughout the Western US. We moved into the fast-expanding outdoor furniture space on January 31, 2022, by acquiring the upscale resort brand Sunset West. That gives us a chance for added sales, since we're now a participant in a furnishings category of rising importance, with prospects for continued growth. Last, we're very enthusiastic about our intention to relocate every Hooker legacy division's showroom at the High Point market starting next April, when our businesses will take up the whole 113,000 square foot third floor of the Showplace building; our Hooker legacy companies will gain immediate increases plus the exposure required to achieve our organic growth initiatives. I'd now like to hand the conversation to Paul Huckfeldt, who will cover the highlights for each of our segments.

Thanks, Jeremy. I’ll go segment by segment and explain how each one did, beginning with Hooker Branded. In fiscal 2022, net sales increased by $38 million, a gain of 23.5% compared with the prior year. We attribute that revenue improvement to a better product lineup, good control of our supply chain and logistics, and strong consumer demand. Across the first nine months of the year, Hooker Branded handled fairly volatile economic conditions well, posting double-digit sales growth and better profitability. We chose to automatically set prices on the backlog, which put near-term pressure on margins. Even with that, by the time fiscal 2022 ended, most merchandise flowing through Hooker Branded carried higher prices. Those price increases went into effect in July 2021 to offset higher ocean freight costs and inflation in what we pay for goods. Unit sales did fall in the fourth quarter, though, because we had less inventory available, and that caused operating income to come in under the fiscal 2021 fourth quarter result. Incoming orders increased 24% from the same stretch a year earlier — a time when the business had already recovered sharply from the initial COVID shock. Our backlog remains high by historical standards, and it is nearly double where it stood at the end of last year — and that year-end level was already high. Part of that improvement, however, reflects the fact that we shipped less in the fourth quarter. Turning to Home Meridian: net sales fell 1% from the same period a year ago, driven by lower unit volume because of COVID-related factory shutdowns in Vietnam and Malaysia, which resulted in fewer shipments. In the fourth quarter of fiscal 2022, HMI’s sales dropped by $19 million, or 23.7%, from the fourth quarter of the previous year. At HMI, the sales gains in the first and second quarters were more than erased by volume losses in the second half. Because of higher freight expenses, one-time costs related to exiting the RTA furniture category, and a large chargeback from the Clubs distribution channel, HMI recorded a loss of $21 million for the year. In fiscal 2022, gross margin was hurt by 530 basis points as freight costs rose, and those costs were the primary driver of higher product costs. Since freight costs now and in the future are expected to weigh on potential profit margins, we decided to rethink entering the RTA furniture products category. HMI consequently exited the RTA category, which resulted in one-time order cancellation costs of $2.6 million. In addition, because profitability continued to lag and chargebacks were $2.9 million too high for the year, HMI elected to leave the Clubs channel. Exiting both operations also produced write-downs related to clearing out inventory that was obsolete and more than we needed. That resulted in $0.88 per diluted share. Every one of those moves took a bite out of earnings and helped push this segment to an operating loss. These days, we have greater latitude to steer working capital and resources into robust operations like Pulaski, Samuel Lawrence, ACH and PRI, with the goal of keeping product available in our new 800,000 square foot warehouse, so we can support expanding channels such as brick and mortar retailers, the interior design trade and ecommerce, while still growing our mega accounts where it makes sense. In fiscal 2022, net sales for the domestic Upholstery segment climbed $18.6 million, or 22%, fueled by double digit sales increases in all three divisions. Domestic upholstery sales were up $3 million in the fiscal 2022 fourth quarter, roughly 13.5%. In every quarter of the fiscal year, domestic upholstery recorded year-over-year sales gains. That said, gross margins fell back to pre-pandemic levels relative to the prior year, since this segment ran into manufacturing constraints that pinched profitability — among them a shortage of phones early in the year, higher costs for raw materials and freight, and labor shortfalls along with associated inefficiencies. The segment's operating income was $4.3 million, a 4.2% operating margin, versus a 12.4% operating loss the year before stemming from $16 million in non-cash intangible asset impairments. Incoming orders rose 38%. And the segment ended the year with a backlog 123% above the prior year, a stretch when backlog had already hit record highs. Our manufacturing capacity grows each week, which will help us work through this much larger backlog. Now to our all other segment: net sales rose $200,000, equal to 1.7% growth over the prior year. Higher sales in our lifestyle brands division drove most of that — a business we started in fiscal 2019 to go after the Interior Design channel. That operation is still small, yet net sales into the growing Interior Design channel jumped 80% year over year. In the fiscal 2022 fourth quarter, all other net sales climbed $1 million, or 46%, as H contract net sales rose 44%, which more than made up for sales declines in the first three quarters. H contract incoming orders were up 27% in fiscal 2022, and the year finished with a backlog 126% above the prior year. In closing, our financial position is still strong. We ended fiscal 2022 with $69 million in cash and cash equivalents, a modest increase over where we finished the 2020 to 2021 fiscal year. Operations generated $19 million during fiscal 2022, and we put part of that toward $8.8 million in cash dividends and $6.7 million in capital expenditures — mainly for our new Georgia distribution center plus upgrades to our facilities and other systems. Inventories remain below optimal levels given service demand and backlogs, though we have a substantial amount of inventory in transit. On a per-share basis, that worked out to $0.88 per diluted share. Looking ahead, we expect inventory positions to get better step by step during the first quarter of fiscal 2023, and then much more meaningfully in the second quarter. There's one additional item worth noting: early in fiscal 2023, we drew on $25 million of the cash we held on hand to acquire the assets and businesses of Sunset West. With that, I'll turn things back to Jeremy so he can walk you through his outlook. Also, earnings came in at $0.88 per diluted share.

Thanks, Paul. Across the majority of our divisions, incoming orders and backlogs remain solid. What worries us are the persisting worldwide logistics bottlenecks and the economic pressures hitting consumers—things like inflation, elevated gasoline costs, and the conflict in Ukraine—which might dampen near-term demand. As noted previously, we anticipate that our Asian suppliers' production capacity will climb substantially, hitting 100% at some point in the first quarter. That said, the complete financial benefit of better inventory readiness will not materialize until the second quarter. Following the close of the Spring High Point market last week, our attendance came in at 26% versus the June 2021 High Point market and roughly 12% versus the 2021 fall market. With the market feeling about as close to normal as anything we've experienced since before the pandemic, we introduced major new product placements across every brand at Hooker legacy and HMI. Big Sky, a 60-piece whole home collection featuring rustic finishes within Hooker casegoods and drawing inspiration from the American wilderness's natural beauty, was the market's standout. Beyond that, customers showed real enthusiasm upon seeing the Sunset West outdoor furniture line displayed for the first time at High Point market. Meanwhile, Pulaski, Samuel Lawrence, and PRI all landed very significant new placements with their major customers. Long-term trends keep us optimistic—namely housing demand, a renewed and sustainable emphasis on home interiors and exteriors, and the prospect of the two largest demographic groups in history entering their prime earning and household formation years. Even as we navigated a wide range of challenges throughout the year, our team stayed focused on numerous strategic growth initiatives, many of which will benefit us positively within the next six to 12 months. That wraps up the formal portion of our discussion, and now I'll hand the call back to our operator Liz for questions.

Morning, and thanks for taking my questions. I've got a handful of things to ask. To start with, could you put a number on the backlog? And have there been any order cancellations that stand out?

We closed out the year with a consolidated backlog of $340 million. There have been some cancellations. They're mainly over at Home Meridian, and Home Meridian's backlog remains quite supportive.

What's behind those HMI order cancellations? Are these retailers simply unwilling to hold out that long — how would you characterize what drove them?

Anthony, good morning — it's Jeremy. Once the factories went down, a lot of retailers ended up sitting on extra stock, and that created problems with space. On top of that, their model relies heavily on planning things well in advance at every stage, so every one of those containers gets mapped out ahead of time. Given all of that, seeing some cancellations wasn't a shock to us, considering everything that was happening.

Understood, all right. So clearly, HMI has been a source of frustration for your team for some time now. At this point, are you basically finished with the expenses tied to the RTA exit and the problems in the Club channel, or could some of that carry into Q1 or the remainder of the fiscal year?

Yeah, so we believe we addressed many of the items we discussed regarding the unprofitable businesses. Exiting those, in our view, is largely behind us. What's left is really just roughly $1.7 million of RTA inventory, which is quite small relative to where we'd have been had we canceled every one of those orders.

And a portion of that we mentioned, you know, we're doing a stocktake at this moment. So we ought to hold back regarding wasted time for the next phase, and that's all. So, yeah, we're rolling it back.

All right, so regarding that $1.7 million — will the entire amount land in the first quarter? Or has it already been set aside? I'm just hoping for a bit more clarity on that point.

That won't — the $1.7 million — I'm not indicating that any kind of write-down is coming. What I'm saying is simply that this represents the amount of inventory still sitting in RTA, which we intend to sell, and not necessarily the cash.

We also set aside reserves for that inventory, so once we move those units, there shouldn't be any effect on our results.

Okay, got it.

Very low and almost gone.

Yes. We're basically finished.

All right, understood. Appreciate the explanation. Now, before the pandemic and those tariff problems, HMI's segment operating margins were usually in the mid-single digits; so can we realistically return to margins like those at the segment level? And if we can, what would be a sensible time frame for that.

Well, every margin figure you've observed from HMI clearly encompassed the Clubs channel and encompassed the RTA mess and encompassed all the things we've discussed that we're nearly finished with. So once you strip those awful margins out of that blended average, we had solid businesses beneath them that will surface now; so I think we're in — HMI will deliver a fairly respectable margin over the coming quarter or two and continuing afterward, since we won't find ourselves in those high risk situations where we don't know what surprise comes next.

HMI had a harder time of it, particularly when you consider that the tariffs hit them first — responding to those tariffs was more difficult for them. Still, my sense is that by this point they've taken that in.

To drive this home even more: Pulaski, Samuel Lawrence, and PRI were all meeting their budgets prior to the shutdown at the 8-1 factory. Because of the factors I just mentioned, nobody is able to observe that.

Understood. Alright, with the Clubs channel business now behind you, could you share what amount of revenue that segment brought in during the fiscal year? And with those sales gone, do you consider them lost, or do you think sales to other customers might make up for at least part of it?

Sure. It came to about $20 million. In prior years it reached as high as $90 million, and we had fallen to $20 million; obviously now it heads to zero. This year it won't quite hit zero, though we'll be nearer, considerably nearer to fully winding it down. Regarding how we make up for it, we believe first of all that it had been a capacity limitation on our other businesses. So we sense a great deal, a large portion of that could shift to PRI, for instance, in terms of production capacity. So honestly, we don't anticipate losing $20 million of revenue simply because we exited the Clubs business.

All right, understood. Yeah, I appreciate that. So regarding the expense challenges, you clearly highlighted the freight expenses, which have been affecting not only your company, but the whole sector. After the fiscal year ended, have any shifts occurred in those expenses, be it ocean freight or something else you'd like to mention?

What I'd say is there's been some slight easing, though it isn't significant enough to describe in such an upbeat manner — that's how I'd put it — and being in the season isn't a solid plan. Still, we're optimistic that these expenses will decline as the year moves forward. However, at this moment, the logistics, the freight circumstances, everything involved remains quite challenging. I should mention, throughout the whole year, the previous fiscal year, we offset and handled that situation quite effectively, in terms of profitability for the company as a whole, up until we encountered a single factory closure. So I believe our team believes positively and hopefully about what we can accomplish if the factories simply keep operating as they do today and shortly at full capacity.

Understood. All right, I appreciate that, Jeremy. So considering when this call is taking place, you're roughly just 2.5 weeks away from wrapping up Q1. What are you able to share regarding revenue and bottom line patterns for the current quarter? Assuming you fellows — I realize you fellows don't provide guidance, I mean, simply sort of offer, if you might offer us additional detail about what you're observing so far, that would be quite useful.

I don't believe we're in a position to provide a truly solid response regarding the quarter yet and where we expect it will land. Paul?

Yeah, I’d have to say the same — when you consider that we’ll have just 2.5 weeks once everything is put together, my sense is that it’s likely about what we’ve been expecting, though beyond that I really can’t add anything.

All right, that makes sense. All right. And clearly, you folks have a solid balance sheet and are producing positive free cash flow. So what's the right way for us to frame Euro's cash flow priorities, and I'm especially curious about how you see the potential for buybacks?

This comes up constantly. Given that the economy still has uncertainty at the moment, I'd say we're careful when it comes to what we say. I'm aware that when it comes to our stock, we truly think it's a fantastic purchase. But I'd also say we're careful — being careful has defined this company across 98 years. And at this moment, I'd say our top priority is strengthening the balance sheet; we recently used $25 million on an acquisition we consider excellent. We've discussed that previously. And I think step one is strengthening the balance sheet in case — only in case — some of those macroeconomic developments fail to calm down soon, with both the war and the freight problems; Jeremy said we believe freight will steady, but I think right now the main goal is ensuring we hold a robust balance sheet so we can endure whatever comes about over the next few months.

Yes, and good morning. I appreciate you taking my question. I have two things I'd like to ask. Could you share some thoughts regarding price hikes? Across the entire industry, companies are raising prices, and how does demand elasticity look in terms of whether buyers are willing to accept those higher prices? Also, home values have climbed significantly. Is there some kind of crowding-out effect where people are putting so much of their money or their budget toward the house that furniture buying still occurs but perhaps in a different manner? Maybe you could offer some thoughts on that, please?

Regarding the first portion of what you asked, it's clear to us that these price increases have been happening for some time. For a period, especially when it came to raw materials connected to our domestic manufacturing, it felt as though things were rising on a daily basis in various forms; we've clearly responded to that from a pricing perspective. And truly, when you examine the gap, or the delta, between raw materials and factory cost hikes, compared with how much of our own increases stem from freight, the freight portion of the equation has grown dramatically relative to what's occurred with actual inflation on manufacturing costs and raw materials and so forth, which has pushed prices upward. So when it comes to that inflection point, and the stage at which it begins to cause us harm from a demand perspective, I genuinely cannot claim to know that. What I do know is that these challenges exist not only within our sector but throughout the globe, clearly; and we believe we're competitively aligned on every front. In terms of those we'd compete against and what they've been forced to do and how they've been forced to respond. Naturally, we gain Intel from watching prices rise in the marketplace; and we recognize where our pricing stands relative to where others are; so I believe we've taken the necessary steps given the costs that have arrived from all sides; however, I'm not sure I can provide you with a truly solid answer about where demand is headed as a result of pricing.

Let me just note that the only reason we've raised prices is to attempt to stay even with the rising costs we're facing. We are definitely not treating this moment as a chance to grow our margins. In fact, at times the price increase actually lags behind, which I believe we mentioned earlier on this call.

Right. Does that address your question, Sandy?

Yeah. Could there be some kind of crowding-out effect where, since home prices keep climbing, folks still have budgets for furniture and will spend, but perhaps it gets postponed or squeezed somewhat?

That hasn't shown up so far. True, housing prices remain elevated. Demand for housing is still enormous; and, yes, you're correct. Absolutely everything costs far more. Furniture costs more as well; but I believe that given the housing demand, and I think we mentioned during our call, millennials and Gen Z, moving into peak earning years and forming households, our view remains that this demand will persist. People might change how they buy things. But no evidence of that has appeared yet; though I'm certain there's somewhat of an inflection point.

On top of that, I want to point out that our team, in my view, essentially acted as though we weren't operating in the strong-demand conditions that have surrounded us. We've also been pushing forward on many efforts that will genuinely land in a favorable manner for us over the coming 6 to 12 months. That, we feel, hands us plenty of grounds for optimism — considering all the things we have in motion, which will benefit the business when it comes to market share too.

Thanks a lot. I had two or three questions. First, you mentioned Vietnam and Malaysia, but could you remind us which countries you source from, roughly by percentage, so we get a sense of where the product originates?

Good morning; we can provide a fairly general response to that. Is that okay? I will give —

Yeah, I'm just trying to get a handle on it, right.

So Vietnam clearly plays a big role in where we source from. Roughly 75% would be about the Vietnamese figure for the amount of product we've been getting out of that nation, and after that it breaks down between China and Malaysia. Malaysia's likely number two, and then you move into China, Mexico, India — we've got a bit in Portugal too. There are some items we're examining in Eastern Europe, though naturally we're reconsidering that whole line of thinking. But that's really where our strength lies; and obviously, our US domestic footprint matters a great deal to us too.

Understood. That clears things up nicely. Moving to my second point, we touched briefly on freight expenses, and because those costs mostly climbed over the course of the prior year — if we compare, roughly speaking, the budget for the whole of this year against the whole of last year, do you have any sense of the percentage increase we ought to factor into our assumptions?

So what you're getting at is, perhaps, the figure we averaged across last year, set against the figure we might expect to average across this year, expressed as a percentage?

That's right, yes — I realize we've come down from the peak, say with spot rates and so on, but my understanding is that contract rates for this year are above where they were a year ago; and once you sort all of that out again, I'm only thinking directionally here — ought we to expect double digits, or a single digit, in whatever category, for freight on a year-over-year basis?

Well, if you look purely at contract rates — and throughout this entire challenge, the pattern so far has centered on the contract rate — you've got that, and naturally, you can't secure sufficient capacity at the contract rate, so you wind up with spot rates that pull that figure upward for the company as a whole. So we aren't certain. And I doubt anybody is certain whether the contract rate will average higher or average lower this year, which would mean our spot rates begin to decline and spot rates end up pushing the whole company average lower; so I'd begin — replying to that requires beginning with the fact that we don't know which way it might go when it comes to the average. But if you look purely at contract rates, on a contract rate basis we're probably going to average roughly 40% above what we did a year ago.

Understood. Then let me ask one more thing related to that. Not trying to forecast the current year, of course. Thinking back to last year, what share fell under contract and what share did you need to source on the spot market? Do you have a ballpark sense of that?

Paul, I'd put it at 50% for both last year.

Understood, all right, and thank you; that was quite useful. My last question, then: I completely share your view that the demographic picture looks favorable. Yet a potential counterweight might be demand that got pulled forward during the pandemic, when everybody's attention was on the home and consumer durables, and travel wasn't possible, and so forth. So when you consider your business, how do you approach that? Is there some method to keep tabs on what's happening? Do any of your customers provide you with POS data? Whatever you could tell us about your thinking there would be terrific. Many thanks.

Happy to. How we see it is that we certainly recognize a COVID-related surge in demand, and nobody, I think, would consider that pace maintainable. And honestly, I'm not aware of any company that could actually meet that level of demand in an efficient way; so our team has kept a close eye on things relative to 2019, before the pandemic, to figure out where we stand, where we think we are when it comes to market share, and once more, to try to advance those strategic initiatives we believe will assist us in picking up market share on the way to our organic growth too.

When it comes to protecting ourselves, there's an S&OP process in place. So incoming orders, incoming demand, and shipments are being watched all the time, so my sense is we won't end up stuck holding too much inventory; it's possible if business slows down. My sense is the systems we have are sufficient to catch that, so we won't end up stuck; there could be a small bump in inventory, but ending up stuck with enormous, massive excess inventory isn't going to happen.

Great. And only one more thing to ask about that. When you place an order with a factory in Asia, what's your typical supply schedule like from Asia to the US — when is it roughly set to arrive in the US? What's the length of that period?

Well, to begin with, it varies by factory, it varies by country, and it varies by many other factors. But broadly speaking, lead times have begun to decrease, and we literally just heard about this recently. That's really encouraging, since it determines how much safety stock we clearly need to hold. So factories are clearly starting to get better at capacity and at our lead times. I mean, across many of our factories, we might have been 1 year out or more than 1 year out on many items, while now we're seeing things closer to that 5 or 6 months kind of range, and we can absolutely manage — we can deal with that. That fits a bit better with what we've historically been used to.

I'd say that when you factor in those year-outs, our typical lead times increased, and a number of the largest companies had been sitting at roughly nine to ten months, and now they've come down to —

It’s prior somewhere over a year.

Yes.