Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Olivia. Good morning, everyone, and thanks for joining our quarterly conference call, where we'll go over what we achieved in the first quarter of fiscal 2023 — a period that started on January 31 and wrapped up on May 1, 2022. With me this morning is Jeremy Hoff, who serves as our Chief Executive Officer. We're grateful that all of you took the time to be here today. As part of this call, forward-looking statements may be made, and those carry risks and uncertainties. If you'd like a discussion of the factors that might cause actual results to differ materially from what management expects, you'll find it in our press release and the SEC filing that announces our fiscal 2023 first quarter results. Any forward-looking statement reflects only today's perspective, and we assume no duty to update or revise such a statement as events or circumstances change after today's call. This morning, we announced consolidated net sales of $147 million, which is down $15.5 million, or 9.5%, from the first quarter of last year. That decline came from lower sales in the Home Meridian and Hooker Branded segments, which were pushed down by ongoing supply chain disruptions. Partly offsetting those declines were robust sales in the Domestic Upholstery segment along with the contribution from Sunset West sales. Net income came in at $3.2 million, or $0.26 per diluted share, versus $9.4 million, or $0.78 per diluted share, during the same period a year ago. At this point, I'll hand things over to Jeremy so he can share his thoughts on our fiscal 2023 first quarter results.

Thanks, Paul, and good morning to all of you. As we anticipated and projected during the previous quarter, our first quarter performance remained constrained by the sluggish increase in casegoods manufacturing output in Asia that followed the plant closures during the latter half of last year. On a year-over-year basis, both consolidated net sales and earnings declined; even so, they came in better than the operating loss we posted last quarter and exceeded what management had anticipated for the period. The shutdown of the Asian factory and the extended ramp up cut into the inventory we had on hand for direct shipment to customers, and it also weakened our capacity to restock warehouse inventories that had been drawn down as the shutdown dragged on. By the close of the first quarter, in April, casegoods output in Asia at last hit fully capacity, so we anticipate that better conditions and results will carry forward. On top of that, we currently hold a record amount of inventory in transit, and a high percentage of it consists of sold orders that will go out as soon as those shipments reach our domestic warehouses. Backlogs continue to sit far above pre-pandemic levels; therefore, we think we will ship well as inventory availability picks up. The factory shutdowns in Vietnam and Malaysia hit the Home Meridian and Hooker Branded segments hardest, along with the sales declines that resulted, partly offset by strong sales in the Domestic Upholstery segment and by the inclusion of revenues from our recently acquired Sunset West business unit in our quarterly results. Even with ongoing supply chain disruptions and elevated transit cost, we are glad to have begun fiscal '23 with historically high backlogs, a leaner portfolio centered on our most profitable channels and products, and with the purchase of Sunset West, a leading player in the expanding outdoor furnishings market. The integration of Sunset West is going extremely well. Sunset West added more than expected to operating profitability this quarter, and it provides significant long-term growth opportunities in the outdoor furnishings category for Hooker Furnishings. Now, I would like to hand the discussion to Paul Huckfeldt, who will cover highlights for the first quarter within each of our segments.

Appreciate that, Jeremy. Now turning to Hooker Branded — our net sales were down $9 million, a decline of 17.5% compared with the same period a year ago. The whole of that decrease traces back to casegoods inventory that wasn't on hand as a result of the short-term factory closures in Vietnam. We paused production for a while during the summer and early part of fall last year, and that meant we received very few inventory shipments in the back half of fiscal '22 as well as in the quarter we just reported. The softer shipment volume in Hooker Casegoods was partially made up for by greater net sales in the Hooker Upholstery division, which benefited from quicker inventory turns. Since Hooker Branded operates with domestic warehousing, we were able to continue shipping for a longer stretch, yet ultimately those robust shipments, combined with insufficient replenishment, meant our inventory got run down. By May, things had turned positive for us. Our inventory is now over twice the level it was at the close of the fiscal year, and we have a record quantity of goods in transit coming from Asia. Beyond that, a significant share of those shipments reflect the price hikes we implemented in July 2021 as a way to offset outsized freight and logistics expenses. For the quarter, the Hooker Branded segment posted operating income of $4.1 million, along with a 9.8% operating margin. Orders coming into the Hooker Branded segment were down 13% from the same quarter a year earlier, a period when the business was recovering sharply amid unusually robust demand following the first COVID outbreak. Even so, when the quarter closed, our backlog stood 11% above where it was at the close of fiscal 2022 and 87% above the level seen at the end of the first quarter of fiscal 2022, and it has stayed at record levels. Now shifting to Home Meridian: first-quarter net sales fell by $22 million, or 26%, versus the same period a year earlier. The reasons were ongoing supply chain interruptions, our decision to leave the unprofitable Clubs channel, and softer ecommerce sales tied to recent patterns in that channel. Partly making up for those declines were the introduction of the Pulaski Upholstery division and higher sales in our hospitality business. On the earnings call, the company noted that the majority of shipments included higher prices along with freight surcharges, and those helped counterbalance the hit from rising freight expenses. Even so, earnings took a negative turn because demurrage costs came in above what had been anticipated, and the new Georgia warehouse added transition and startup expenses. On top of that, the company ran into a shortage of workers and faced greater training expenses while getting the Georgia warehouse fully operational. Those elements together produced an operating loss for the segment during the quarter. Though that result was disappointing, it matched what the company had projected. In the Home Meridian segment, order backlogs declined, a result of leaving the Clubs channel and changes some major customers made to their programmed orders. Even with that decline, backlogs remain roughly 50% above the early 2020 pre-pandemic baseline. To wrap up, our Domestic Upholstery division once again delivered a robust top-line result, marking a fifth straight quarter in which net sales grew by double digits. Looking at that division specifically, net sales climbed by $15.8 million — a 62% jump — in the fiscal 2022 quarter, fueled by powerful results at Bradington Young, Sam Moore, and Shenandoah, as well as the boost we got from Sunset West's sales. Even so, higher raw material prices and costs, together with freight surcharges, pushed product costs up, which offset part of those sales-related improvements. Consequently, despite profitability exceeding the prior-year comparable period, we were unable to fully capitalize on that sales growth. Incoming orders fell 5.4% against the prior year quarter, a reflection of current lead times and backlogs that remain historically high. When fiscal 2023's first quarter closed, the backlog sat 18% above fiscal 2022 year-end and 80% above where it stood at the close of fiscal 2022's first quarter. Moving on to cash, debt, and inventory: cash and cash equivalents came to $10 million when the quarter ended, a drop of $59 million from the year-end balance, reflecting a $30 million inventory increase and $26 million used for acquiring Sunset West. At the close of the quarter, inventories were $107 million, including a record $40 million of inventory at cost currently in transit toward our domestic warehouses. Our cash balance is seeing a near-term decrease. Since a very high percentage of that in-transit inventory is already sold, we anticipate converting a large share of it into shipments quite rapidly. By the end of the quarter, we look for our cash balances to strengthen, then get back to normal in the latter part of this year. A dividend of $0.20 per share was declared last week, equating to roughly a 4.5% dividend yield based on our present share price; additionally, this morning we reported Board approval of a share repurchase authorization worth up to $20 million. With that, I'll hand things back to Jeremy for his outlook.

Thanks, Paul. What we're observing is demand flattening out, with incoming orders having fallen from the meteoric yet unsustainable heights seen over the past 18 months. For the majority of divisions, order rates are settling at levels above fiscal 2020. HMI orders during the quarter came in below pre-pandemic levels, which mirrors our departure from the Clubs channel along with order adjustments made by some of our larger customers. Backlogs across every division are still substantial and adequate to back our sales targets for the quarters ahead. As soon as all inventory in transit arrives, we anticipate being in a near-optimum shipping position for the entirety of the second quarter, and we'll start realizing the complete benefit of Asian production running at 100% capacity. We keep monitoring inflationary pressures within the economy, and we think those are hitting consumers harder at the lower price points than at the upper-medium and upper price points. We remain optimistic regarding the housing market's strong employment levels, and about having two of the largest generational groups in their prime years for household formation and furniture purchasing. Our variable cost business model will let us adapt to shifting economic conditions, and we stay focused on multiple strategic initiatives aimed at spurring organic growth and growing market share. That concludes the formal portion of our discussion. And now, I'll hand the call back to our operator, Olivia, for questions.

Hello, and thanks for letting me ask a few things.

Good morning, Anthony.

Morning, Anthony.

Good morning. So, first just to overall backlog, can you provide consolidated backlog numbers which you had at the end of the quarter, and how did that compare versus a year ago or maybe two years ago, whatever number you have handy, that would be great?

At the close of Q1 this year, backlog stood at $283 million, versus $280 million at the same point the prior year.

Okay, got it. That helps, alright. Now, when it comes to cancellations or adjustments of orders, is this something you're observing just within HMI, or is it also showing up in the Hooker Branded or Domestic Upholstery parts of the business?

The cancellations have largely been on the HMI side, and for the most part they involve orders scheduled much further out. So as lead times begin to shorten and productivity abroad shifts, the timing dynamics of what our accounts require on order are changing; so much of that could be a result of that.

Understood, alright. And Jeremy, thank you. Then regarding Sunset West, could you tell us what portion of revenue was affected by buying Sunset West?

Hold on one moment, Anthony.

Sure. I was hoping you could give me some color on how much of that came from organic growth, and also how much came out of Sunset West.

Roughly $7.5 million.

Understood, alright, I appreciate that. Then SG&A came in 19% above the prior-year quarter. Could you explain what caused that rise, and what should we expect for SG&A costs moving forward?

Naturally, reduced volume plays a role in that; and bringing Sunset West on board definitely contributes to some of it. Beyond that, we've taken on extra labor, things like labor expenses and bonus accruals. So, I'd say — the quarter's spending was fairly standard, since roughly 5% of our SG&A is variable, while the remaining portion stays fixed. If you remove that 5% of sales, I believe you'd arrive at a run rate that's fairly typical for the remaining part of the year.

All right, understood. So there weren't any sort of one-time expenses tied to bringing Sunset West into the fold that might have pushed SG&A higher?

Beyond — are you asking beyond adding Sunset West? And naturally, I recall that in the first quarter of last year, we reversed a bonus accrual amounting to $500,000; so nothing significant there, I mean, as you put it, I believe if you stripped out or made an adjustment for the variable component of the — the variable share of SG&A, that's likely a run rate — a typical run rate.