Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Michelle. Hello everyone, and thanks for joining us on this quarterly conference call, where we'll go over the financial results for our earnings in the fiscal 2023 third quarter — a period that started on August 1, 2022, and wrapped up on October 30, 2022. With me this morning is Jeremy Hoff, who serves as our Chief Executive Officer, and we're grateful that you're taking part today. Throughout this call, forward-looking statements may be made, and those carry risks along with uncertainties. You can find a discussion of the factors that might cause our actual results to diverge materially from what management expects in the press release we issued and in our SEC filings that announce the fiscal 2023 third quarter results. Any forward-looking statement is valid only as of today, and we assume no duty to update or revise any forward-looking statement so that it reflects events or circumstances arising after today's call. This morning, we announced consolidated net sales of $152 million, which is up $18 million, or 13.6%, from the third quarter a year ago. That gain came from adding Sunset West's results, plus sales growth across each of the remaining domestic upholstery divisions, along with stronger Home Meridian sales versus last year, a period when the container direct business took a severe hit from temporary COVID-related lockdowns in Vietnam and Malaysia. Partially offsetting that higher consolidated revenue was a sales decline of $1.3 million, or 2.4%, at Hooker Branded, measured against record sales in last year's third quarter. Net income came in at $4.8 million, or $0.42 per diluted share, versus a net loss of $1.2 million, or $0.10 per diluted share, a year ago; across the fiscal 2023 nine-month period, consolidated net sales fell by $7 million, or 1.5%, against the same period last year, driven by net sales declines in the Home Meridian and Hooker Branded segment, partly offset by stronger sales in the Domestic Upholstery segment and in our H Contract business. Hooker Branded sales volumes dropped because inventory was unavailable, mainly during the first quarter of this year. Home Meridian's sales decline stemmed from having no sales in the unprofitable Clubs channel, which we left at the end of last year, together with weaker sales in the e-commerce channel and lower sales with certain retailers who are pushing back shipments as a way to help rationalize inventory levels. For the nine-month period, net income was $13.6 million, or $1.14 per diluted share, compared with $15.7 million and $1.30 in the prior period. I'll now hand the call over to Jeremy so he can comment on our fiscal '23 third quarter results.

Thanks, Paul, and hello everybody. Even with macro uncertainty and a tough retail inventory backdrop, we felt thankful that a lot of what held us back in the prior year was now behind us, and we could post both revenue and earnings that came in above the third quarter of the previous year. These improvements were powered by consistent fulfillment of order backlog, production running at full capacity, inventory positions that were healthier, and better operations, and we anticipate building on them and doing even better in the coming quarter. For the quarter, the increase in profitability compared with a year ago came from higher sales and from successfully working around supply chain bottlenecks that had been a drag on us for more than 2 years. Getting our operational costs down and getting out of unprofitable businesses at HMI is starting to appear in our margins and will keep contributing to better profitability; even so, economic signals are mixed and possible headwinds exist, among them climbing interest rates, falling home sales, and consumer confidence. On the bright side, the fall High Point Market we just had drew the largest attendance of any market since the pandemic and gave us genuine momentum. Attendance at that Market was 12% above October 2019; we saw retailers who were optimistic and open to new products that, for the first time in a couple of years, they can now anticipate getting within several months of placing an order. HMI unveiled a remodeled 100,000 square foot showroom, with a 10,000 square foot section displaying the new portfolio program that offers a wide range of in-stock styles in bedroom, dining, occasional and upholstery spanning HMI brands, and it was received very well. Launching the portfolio was a successful initial move toward growing and diversifying HMI’s customer base to bring in interior designers along with a larger number of independent furniture retailers. Over at Hooker Casegoods, we introduced the Charleston collection. Retailers responded with enthusiasm to the updated traditional styling and finishes, and they see a gap in the market for timeless designs, a furnishing style that a substantial group of younger consumers in their prime furniture buying years is chasing; this collection ships ahead of the next High Point Market in spring 2023, when we eagerly anticipate the grand opening of our new Hooker Legacy showroom that takes up a full floor of the Showplace building in High Point. Now I’d like to hand the discussion to Paul, who will go over highlights in each of our segments.

Appreciate that, Jeremy. Over at Hooker Branded, net sales came in $1.3 million lower, a decline of 2.4% versus the equivalent period a year ago. Those weaker sales stemmed from short-term problems with inventory mix. Certain vendor factory shipments arrived at our warehouses as incomplete collections with items missing, and retailers held off accepting orders until collections and groups could ship in full. We've since fixed that problem and are now moving more of our backlog out the door. Our Asian suppliers are getting better on lead times, and Hooker Branded inventories currently sit roughly $44 million above where they stood at the close of last year's third quarter, which sets us up nicely for the holiday selling season. Gross profit rose approximately 100 basis points in the quarter, which helped partly counter that modest sales dip along with higher SG&A expenses, which climbed because of increased salary and benefits costs, higher commission rates, and other factors. Hooker Branded posted $5.2 million in operating income and a 9.5% operating margin for the quarter. Incoming orders at Hooker Branded fell relative to the prior year quarter, as the market steadily reverts to more normal demand levels. The quarter-end backlog came in below the prior year-end quarter, yet it remained roughly three times what it was before the pandemic in calendar 2019. Shifting to Home Meridian, segment net sales grew by roughly $4.4 million, or 9.4%, against the abnormally low volume in last year's third quarter, when container business took a severe hit from the temporary COVID-related factory shutdowns in Vietnam and Malaysia. On top of that, the hospitality division turned in strong sales as that sector keeps bouncing back from COVID-related downturns. Those sales gains were mostly offset by the absence of unprofitable clubs channel sales and by lower ecommerce sales. Walking away from the clubs channel produced meaningful improvement in returns and allowances and in gross margin. Ecommerce sales fell mainly because post-COVID consumer demand has normalized. Gross profit and margin improved substantially thanks to the absence of excess charge-backs in the clubs channel and of order cancellation costs from when we exited the ready-to-assemble furniture category last year; even so, HMI shipments came in below expectations because mass merchant retailers carrying high inventories pushed back some shipments. With sales deflated by delayed shipments and with transition and labor costs at our new Georgia distribution center running above expectations, HMI posted an operating loss of $3.2 million, which is a $7 million improvement over the operating loss in the prior year quarter. As anticipated, incoming orders and the quarter-end backlog dropped significantly owing to the absence of Club channel orders and to reduced orders from our retail customers, who are postponing orders to align inventories with current demand. Turning to the Domestic Upholstery segment, we were happy to report our seventh consecutive quarter of double-digit sales growth. Net sales rose by $14.1 million, or 48%, compared with the prior year third quarter. This rise came about because Sunset West’s results were folded in, plus we saw organic sales improvement across every one of the domestic factories we run: Bradington Young, Sam Moore, and Shenandoah. Each of those posted net sales gains in the double digits for both the quarter and the nine-month stretch. Gross profit and margin both moved up thanks to including Sunset West, favorable sales variances, improved overhead absorption from larger sales volumes, and the fact that we ran at nearly full capacity. Those gains were partly counterbalanced by higher costs for raw materials, including leather, foam, and upholstery materials. In Q3, the segment produced operating income of $3.8 million, with an operating margin reported at 8.8%. Incoming orders came in below the same quarter a year earlier, reflecting current demand, extended lead times, and a sizable backlog, though orders for the year to date were roughly level with calendar 2019. Backlog at quarter end sat below both the prior year’s quarter end and the close of fiscal 2022, a stretch when demand was extraordinarily strong and production capacity was stretched thin. Measured against calendar 2019, backlog exceeded pre-pandemic levels by more than threefold. Now shifting to cash, inventory, and debt: cash and cash equivalents totaled $6.5 million when the fiscal 2023 quarter closed, a drop of $62.9 million versus the fiscal 2022 year-end balance, mainly because inventories grew by $58.9 million and we spent close to $10 million repurchasing shares. Across the fiscal 2023 nine-month period, we bought and retired 598,000 shares of common stock through the $20 million repurchase authorization our board of directors approved earlier this year. As of December 7, purchases totaled 705,000 shares at an aggregate cost of $11.2 million, and despite putting $11 million toward buybacks so far, we have been producing cash since last quarter. Given how much lead times have come down, our goal is to cut inventories by $25 million around this time next year, which should strengthen our cash position further. We have also rolled out some focused promotions on select products to boost liquidity; and on the cash flow topic, let me spend a moment on our capital allocation priorities. On December 5, 2022, our Board of Directors declared a quarterly cash dividend of $0.22 per share, payable December 30 to shareholders of record on December 16. That 10% dividend increase marks the seventh straight year we have managed to raise our annual dividend. We see it as evidence of our ongoing confidence in our strategy and business model, and we believe our comparatively stable balance sheet along with our variable cost business model will let us adjust to economic downturns that could lie ahead. Among other capital allocation priorities are rebuilding cash reserves, completing what remains of our share repurchase authorization, and making capital investments in our ERP upgrade, which we will implement soon, plus other capital expenditures aimed at sharpening our competitive position, such as fitting out the new Hooker Legacy brand showroom ahead of its April 2023 opening. At this point, I'll hand things back over to Jeremy so he can share his perspective.

Thanks, Paul. The economic signals we're seeing right now don't point in a single direction, and we're keeping a close watch on things that could throw us off course — things like interest rates climbing, how confident consumers feel, and a housing market that's cooling off. That said, there are also plenty of reasons to feel good, since the U.S. has solid employment numbers, households are earning more, and consumer spending keeps holding up strong. On the legacy side, our backlogs remain well above where they stood before the pandemic, and Sunset West, our recent move into outdoor furniture, is doing better than we had anticipated. In our view, the home furnishings sector is moving away from depending on historical demand and toward depending on market share, and we think a lot of our initiatives — among them the launch of portfolio and our new showroom coming next spring — will help us pick up market share. From a strategic standpoint, we feel we're in a strong position to take advantage of this shift. Even with that relative optimism, we're watching economic indicators and retail trends very carefully so that our inventory planning and cost structure fit what we expect in the short to midterm, even as we keep investing in our longer term strategies. Normally our earnings calls concentrate on financial highlights; even so, as an organization we feel grateful to be able to support charitable organizations across the communities where we live and work and where great needs exist. Just recently, we got the chance to work with two key retailers in Florida to send more than 1,200 beds and supplies to assist with relief efforts for Hurricane Ian. That spirit of giving back is part of our culture and has been for nearly 100 years. Our employees take this aspect of our culture seriously and give a significant amount of their own time and resources to many of these efforts. We see this as a key differentiator for us as a company, which is why I wanted to bring it up on our call today; that concludes the formal part of our discussion, and now I'll hand the call back to our Operator, Michelle, for questions.

Morning, yes. Thanks for taking my questions — and just to correct you, my name is Anthony Lebiedzinski, not Andrew. Starting with Hooker Branded, I was hoping to understand the inventory mix problems a bit better. Could you possibly put a number on how much that affected things? I realize you mentioned shipments are improving in 4Q, so do you figure most of what was lost from those mix problems comes back during 4Q, or does it look like some of it carries into Q1 of next year?

My guess is a good chunk of it comes back. Our shipping right now is significantly better than it was for the bulk of the quarter. Jeremy?

When it comes to putting a number on it, that's somewhat difficult, though I'm aware that, for instance, the furniture segment that's on hold because it's waiting for other orders to go out was, I think, roughly in the range of $5 million to $7 million, so that's sort of — that's likely one figure we could put some quantification around. And yes, we've in fact been in — at this stage it's something we do weekly, and we believe we've worked our way through it, and we believe we'll recover that during the fourth quarter.

Understood, alright. Appreciate the answer; next, I realize you mentioned that the backlog has risen on the whole compared with before the pandemic. Could you possibly put a figure on the total backlog as of the close of the quarter, and what does that look like next to the third quarter of calendar 2019?

The combined backlog stands at $137 million at present, versus $126 million in ’19.

All right, I understand. I appreciate that.

And clearly, that figure is on a consolidated basis. On the legacy side, the difference becomes far more striking in terms of just how much bigger it is.

Right, branded is 35 versus 11.

Right.