Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Shannon. Good morning, everyone, and thanks for joining us for this quarterly call, where we'll go over the financial results from the second quarter of fiscal 2023 — a period that started on May 2, 2022, and wrapped up on July 31, 2022. With me today is Jeremy Hoff, who serves as our Chief Executive Officer. We're glad you could be here. As part of today's call, we might share forward-looking statements, and those come with risks and uncertainty. If you'd like details on the factors that could lead our actual results to differ materially from what management expects, you can find that discussion in our press release as well as the SEC filing that announced our fiscal 2023 second quarter results. Anything we say that looks ahead reflects our view only as of this date, and there's no commitment on our part to refresh or amend such statements if things change or new events arise after this call. Earlier today, our results showed total net sales reaching $153 million, which works out to $9.6 million less, or a 5.9% decline, versus the same quarter a year ago. The main reason was weaker revenue from Home Meridian, though that was partly made up for by gains in the Hooker Branded and Domestic Upholstery segments, along with contributions from Sunset West and a bounce-back at H Contract. We posted net earnings of $5.5 million, which works out to $0.46 for each diluted share, versus $7.5 million, or $0.62 per diluted share, during the same quarter last year. Looking at the opening six months of fiscal 2023, our consolidated net sales came in at $300 million — a drop of $25 million, or 7.7%, from the comparable stretch a year earlier, when home furnishings and various other sectors got a lift from a spike in demand after COVID. Net income for this year's first half reached $8.7 million, or $0.73 per diluted share, against $16.9 million, or $1.40 per diluted share, a year ago. At this point, I'll hand things over to Jeremy so he can walk us through what happened in our fiscal 2023 second quarter.

Thanks, Paul, and good morning to all of you. Halfway through the year, the momentum we're seeing at Hooker Furnishings is positive. With robust backlogs, our domestic plants and Asian suppliers running at full capacity, and inventory at optimal levels, we're positioned to increase sales across all three segments in the second half versus the same period a year ago, which saw major disruption when nearly every bit of our Asian capacity was halted because of the COVID-19 pandemic. In looking at the second quarter, five key drivers, highlights, and initiatives stand out. First, production at our Asian supplier factories climbed to almost full capacity, bouncing back from the COVID-related plant closures that started late last summer and cut inventories sharply through the first quarter. Each month, inventory receipts rose at our U.S. warehouses. Going forward, with the production limitations of last year behind us, there's a clear path to speed up product flow and shipments. Right now, we have $34 million of inventory in transit, and a large share of it is already sold and should ship shortly after it arrives. Second, because inventory flows improved, we filled orders and worked down backlogs, which let us beat our own expectations for the quarter; we were happy to report sales increases in the Hooker Branded and Domestic Upholstery segments during the second quarter, and our solid backlogs and inventory give us the ability to grow all three segments as the second half unfolds. Third, the Domestic Upholstery segment posted its sixth straight quarter of double-digit sales growth, with an organic gain of 33% prior to adding Sunset West. Even though we saw some interruptions in raw material deliveries, all four upholstery divisions ran near full capacity, with shipments ahead of year-ago periods and our internal targets. Domestic upholstery backlog stands at five times the pre-pandemic levels of calendar 2019. Fourth, the $28.3 million sales decline at Home Meridian stemmed from large retailers among its customers who are right-sizing their inventories, plus some industry-wide softening in e-commerce sales. Roughly 40% of that sales drop traces to HMI's exit from the unprofitable clubs channel. Finally, in the quarter, the Home Meridian segment completed a full remodel of its High Point showroom, added space at our Savannah, Georgia, distribution center, and placed new inventory in Savannah to back the launch of the Portfolio program, which will serve additional distribution channels via a warehouse stocking program. Scheduled to debut next month at the High Point Market, Portfolio includes a selection of more than 1,000 ready-to-ship SKUs spanning four of HMI's brands, with no order minimums. This rollout will let us further diversify HMI's customer base and distribution channels, helping us reach a wide network of independent retailers. The rapidly expanding interior designer channel will also be able, for the first time, to take advantage of these HMI brands and their products. The Portfolio program calls for no extra overall inventory, just a shift in the mix. Beyond taking care of HMI accounts, this bigger distribution hub lets us store the Sunset West lineup before the year closes, which means Sunset West gains logistics backing for East Coast distribution for the very first time. Throughout this year, much like everyone else in furniture, we've dealt with economic pressures and supply-side difficulties. Even so, we believe our forward-looking actions and effective steps to lessen those impacts, together with the numerous strategic programs now in motion, have positioned us to close out this year from a place of strength. At this point I'd like to hand things to Paul, who'll walk through the standout points across each of our segments.

Appreciate that, Jeremy. To start with Hooker Branded, net sales came in $2.9 million lower, a drop of 5.8% versus the same quarter last year. Sales ticked up in both Hooker Casegoods and Hooker Upholstery during the quarter. As our Asian suppliers got production and shipping back on track following delays earlier in the year tied to COVID-related shutdowns last year, inventory receipts at our U.S. warehouses rose month by month through the quarter, which let us fill more orders and work down backlogs. When the quarter closed, inventory levels were up $33 million against the prior year end and up $15 million against the prior quarter, and within Hooker Branded we had roughly $25 million in transit. A big share of that in-transit inventory consists of sold orders, which will help us bring our backlog back toward more normal levels over the rest of the year. Turning to income, we kept profit margins solid for the quarter even as we worked through price increases and surcharges put in place last year and early this year to offset higher transportation and product costs. Incoming orders for Hooker Branded fell relative to the prior year quarter, a period when home furnishings saw dramatic yet unsustainable post-COVID demand. Backlog at quarter end was comparable to the prior year second quarter, but ran 21% below fiscal 2022 year end thanks to heavier shipments this quarter. Hooker Branded backlog remains four times what it was before the pandemic in calendar 2019. Over at Home Meridian, net sales fell $28 million, or 32%, from the prior year quarter, driven by weaker sales at mass merchants and furniture chains whose orders were pulled forward last year and who are now rationalizing inventory. On top of that, roughly 40% of the sales decline comes from HMI's exit from the unprofitable clubs channel, something we've covered in earlier quarters. E-commerce channel sales also declined, returning to pre-pandemic levels and growth rates. Partly offsetting these decreases were the ongoing recovery in hospitality and the debut of the Pulaski Upholstery division, aimed at medium price points our other divisions don't currently serve; we fully expect HMI to deliver sales growth in the second half of this year as it recovers from inventory availability issues that started in last year's second half, and as it leaves unprofitable channels behind to build a more diverse, sustainable and consistent core business. We're eager for the coming launch of the Portfolio warehouse stocking program Jeremy brought up earlier. We're in stock and set to support this program when it debuts at the High Point Market next month, and we're excited to further diversify our HMI customer base and distribution channels, reaching hundreds of independent furniture retailers and the interior design channels for the first time. During this morning’s earnings announcement, we said we’d pay a dividend of $0.20 for each share, representing a yield near 5% based on where our stock trades right now. That program got going toward the end of the second quarter, and buybacks are moving along nicely — roughly 360,000 shares, or around $6 million of company stock, have been acquired. Orders coming in and backlogs both fell sharply versus a year ago, when demand was unusually robust, buyers were placing orders well ahead of need, and those orders weren’t turning into shipments as fast as we’d anticipated. On top of that, big-box retailers keep trimming their stock levels so they align with what’s actually selling. When the quarter closed, HMI’s backlog was comparable to where it stood at the same point in calendar 2019. Now for Domestic Upholstery: that segment posted its sixth straight quarter of double-digit sales growth, with organic gains producing a net revenue rise of roughly $8 million, or 33%, versus the same quarter last year, before factoring in any contribution from Sunset West. As Jeremy mentioned, we ran into some hiccups getting raw materials delivered for production; even so, all three divisions ran close to full capacity, with shipments beating both year-ago periods and our own internal targets. Gross margins declined in the fiscal 2023 second quarter, driven by substantially higher raw material expenses, though that was partly countered by better overhead absorption from larger sales volumes and gains in labor efficiency. Incoming orders dropped because of present lead times and elevated backlogs. Backlog when the quarter ended matched the level from the prior-year quarter, yet it came in 8% below the fiscal 2022 year-end figure, since stronger shipments started whittling that backlog down. Domestic Upholstery’s backlog at quarter’s end was five times what it had been before the pandemic, back in calendar 2019. Looking at our balance sheet, cash and cash equivalents totaled $11.7 million when the second quarter closed, a drop of $57 million from the fiscal 2022 year-end balance, mostly because inventory grew by $56 million. In the second quarter, we drew $25 million in term loan proceeds to refill cash that had gone toward the Sunset West purchase early in the first quarter. At quarter’s end, inventory reached $131 million, which includes $34 million still in transit to our domestic warehouses. Given this record inventory level, our cash has temporarily fallen. Since a large share of that in-transit inventory is already sold, we anticipate converting inventory into shipments quickly, with cash balances recovering later in the fiscal year. This larger inventory position also sets us up well for the usually stronger sales in the year’s second half; beyond our cash balances, we have $27.9 million accessible through our revolving credit facility to fund working capital. Last, let me touch on capital allocation. During this morning’s earnings announcement, we said we’d pay a dividend of $0.20 for each share, representing a yield near 5% based on where our stock trades right now. That program got going toward the end of the second quarter, and buybacks are moving along nicely — roughly 360,000 shares, or around $6 million of company stock, have been acquired. I’ll now hand things back to Jeremy for his outlook.

Thanks, Paul. We're keeping a close eye on economic turbulence such as inflation, climbing interest rates, and a cooling housing market. Yet at the same time, plenty of reasons for optimism exist, since the U.S. has strong employment levels, growing household incomes, and ongoing vigor in consumer spending. We're observing another large generation reaching the years when they buy the most furniture. Although incoming orders have declined, we have sizable backlogs waiting to ship, and in our view the drop in orders from retailers is temporary and stems more from their efforts to right-size inventories than from any meaningful falloff in normalized consumer demand. From what our retail partners have told us, we anticipate sales will rise during the fall and holiday season as they typically do. We also anticipate that order rates will move closer in line with the pre-pandemic ordering environment, a pattern we've seen in recent weeks. We think organic growth will get a lift from several new strategic initiatives, among them our recent move into outdoor furniture, the broadening of our footprint in the interior design channel across all segments, plus the post-pandemic rebound in the hospitality and contract businesses. As we mentioned earlier, HMI's Portfolio program debuts at the October High Point market coming up, which we think speeds up growth of our Home Meridian customer base; we're getting ready for a strong second half of the year, and given our backlogs and solid inventory position, we're on track to grow sales in all three segments and to close the fiscal year on a positive trajectory. That wraps up the formal portion of our discussion, and now I'll hand the call to our operator, Shannon, for questions.

Hello, sirs, good morning, and thanks for fielding the questions.

Good morning.

Hello, Anthony.

Hey there, good morning. To start, regarding that backlog, could you provide a figure on a consolidated basis? What does the backlog stand at right now, and how does it stack up against a year ago or the end of the year?

When the quarter closed, the backlog came to $201 million. Versus a year earlier, the backlog was actually larger; it reached $320 million. On a more normalized view, that $200 million remains considerably above where it used to be. Let's see, when 2019 ended, the figure stood at $100 million. As you know, we're still at twice that amount, though it has fallen $100 million compared with this point a year ago — but a year ago we weren't shipping.

Got it, that makes sense. Yeah, I'm aware there were plenty of inventory limitations, and those truly began ramping up in August once Vietnam's shutdowns hit. Okay. So, the remarks you made in the press release and here on this call come across as more upbeat than what some of your competitors who've recently reported have said. What's behind that confidence, in your view? Have you gotten any early sense of how your retail partners did over the Labor Day holiday weekend?

Let me take the last part first; from our retail partners, we picked up encouraging feedback about many Labor Day sales. From where we sit, that was entirely good news. As for our optimism, well, it stems, above all, from the fact that in Q1, COVID forced 70% of our Asian capacity to shut down. When you set our current situation this year against what we went through a year ago, we lean more toward case goods. My belief is we're more concentrated in that kind of sourcing than the other companies you're likely referring to. That, I think, largely explains why we feel as hopeful as we do that we can genuinely close out this year far stronger than we managed last year.

All right. Yeah. Appreciate that, Jeremy. So then, regarding stepping away from the clubs channel, has that wrapped up entirely, or does anything remain? I realize it weighed heavily on HMI's numbers, but I just wanted clarity on whether that's now fully behind us.

What I can say is that backlog stands at zero.

All right.

Regarding your question about whether it's finished, there's a tail I've mentioned on earlier calls, and that tail might keep going for some stretch. But clearly we aren't supplying it any longer, so our feeling is that ultimately we'll get past this — though I'm simply noting that a bit more of the negative side could still show up.

We believe we're accrued properly for the sale.

Yes. Exactly.

Well, as you're aware, having followed us for quite a while, you'd recognize that this has been a... At times, that has caught us off guard.

We're saying all that, we're very encouraged by where we are in the process.

Right.

of getting cleared out.

Got it, that makes sense. So this is more of a longer-term thing regarding HMI. If we look back at calendar 2018, that segment brought in about $387 million in revenue and somewhere around $20 million in operating income. Clearly, after that point you got out of the clubs channel business, which accounted for a large chunk of total revenue, but these days you're putting your attention on sales channels that are more profitable. On top of that, you're rolling out the new Portfolio program. So over the longer haul, I mean, where ought that business to be? And with this question I'm only referring to HMI. I mean, how do you view this over the next, say, few years in terms of whether we can return to that kind of profitability in that segment? What's your take on it?

Returning there is possible; we basically needed a reset in certain businesses we'd been involved with that were causing us damage at fairly significant levels, as you're aware. What I'd say is that we're not only going to return there, but we're going to return there sitting on a far more solid base from which to grow even further. At present we're moving from what I'd describe as a somewhat unstable base involving the poor businesses toward a base that's more solid. Once that's in place, it will be far more sustainable and far more predictable. When it comes to the earnings you brought up, there were a lot of elements in there, such as closeouts, that I'd say likely inflated a portion of those earnings. Maybe that's not the best way to phrase it, but it's just that, given the story we've gone through, we've come to realize that perhaps things weren't quite what they seemed.

We built all that.

Right.

That's quite interesting.

Anthony, let me build on what you just said — what we have here is a strategy with three parts. First, we're exiting poor businesses where we're losing money. Second, we're growing our customer base, and by doing so, we'll also boost our overall contribution margin. On top of that, another point: we've cut overhead substantially on that side of the company, and that's going to let us earn far more and be far more profitable, even if this is a business doing $250-$260 million.

Your view is that, in the end, HMI's operating margins will land above the high point they reached historically — so taking into account all of your remarks, that holds true even on a reduced revenue base. Would you agree that's accurate?

Without a doubt.

All right. Understood. That's completely fine. So, shifting topics a bit, regarding Domestic Upholstery specifically, you brought up the increased raw material expenses. How significant was that impact, exactly? And what's your outlook for raw material costs over the back half of the fiscal year?

Our sense is things have somewhat stabilized. Looking at last year, it was nearly impossible to keep pace with how many price hikes were coming through across the various raw materials in our domestic manufacturing. We believe stabilization has occurred, and there are even certain areas where we see a chance to negotiate some items down that had gotten inflated because of the circumstances. On that question, we feel quite a bit better than we did last year.

Mm-hmm. Okay. Got you.

Yeah.

All right. If I could, a few additional questions. When I examine the SG&A expenses for the quarter, they declined on a sequential basis from Q1, and that happened even though revenue rose once more sequentially versus the first quarter. Did anything unusual occur in Q1 or in Q2 here? Just to help think about the expense run rate ahead.

My sense is that this quarter is likely normalized at this point. As you know, we had certain excess costs, such as exiting some of those North Carolina warehouses while shifting to Savannah. Keep in mind that roughly 6% of sales consists of variable SG&A, which is our commissions and a few other costs of that kind.

Mm-hmm.

Apart from that, my view is that what we're seeing is a fairly typical run rate. So once you make an adjustment for those variable costs, I believe you're able to make projections off of what happened this quarter.

Understood. Alright. For my final question, I'd like to ask about inventory. It's actually a two-part thing. To start, I'm aware that you mentioned. A significant amount of product is in transit, but I'm just wondering how much of the inventory's rise compared to last year can be attributed to inflation. The other part is whether you could give a rough guess for how we ought to view your inventories and where they might land when the fiscal year closes. Thanks.

Let me break this into two segments; within one portion of our operations, the HMI portion, unit inventory grew by roughly 1%, while the dollar figure rose approximately 26%. I suspect that's the figure you're after. Regarding the remaining portion of the business, units of inventory fell by around 6% or 7%, and there was, as I recall, an increase of about 27% in inventory dollars. The gap is clear, as you can see, when comparing units with dollars, it's considerable.

Gotcha.

That's great.

Understood. When it comes to your expectation for inventory levels at the close of the fiscal year, could you give us some kind of rough figure?

My expectation is that they will land either in a fairly similar range or lower by about $5 million to $10 million.

Understood. Alright. That's great. Fine. Well, thanks a lot, and wishing you the best of luck.

Alright. Thanks, Anthony.

Thank you, and good morning, gentlemen.

Good morning.

Your company has felt the same squeeze on expenses that plenty of others are dealing with, both inside your sector and well beyond it — things like freight, inputs, stock, and staffing. I realize Anthony's questions already had you covering quite a few of those, but perhaps you could simply explain how we ought to view this expense overall as we move ahead. Especially staffing, and how that could influence what you're able to do about the backlogs in Domestic Upholstery.

I believe I got what you're asking. There was a brief audio hiccup for a moment, but my sense is that you want to know whether, given the raw material disruptions we've experienced, we expect any decline in our production flow by comparison — is that basically the essence of your question?

Okay, what about raw materials, logistics, and perhaps especially labor — does that impact your capacity to operate your production facilities, especially here in the U.S.?