Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Norma. Good morning, everyone, and welcome to our quarterly call, where we'll go over the financial results for fiscal 2023's fourth quarter and the full year — both of those wrapped up on January 29, 2023. With me this morning is Jeremy Hoff, our Chief Executive Officer. We're glad you could join us today. Throughout this call, we might make forward-looking statements, and those carry risks and uncertainties. You can find a discussion of factors that might cause actual results to differ materially from what management expects in our press release and in the SEC filing that announced our fiscal 2023 results. Any forward-looking statement reflects only today. We have no duty to refresh or amend any forward-looking statement because of events or conditions that take place after today's call. Before we get started, I'd like to take a moment to explain why we delayed our earnings release and call from last week. As you know, when we decided to exit or restructure parts of the Home Meridian business, that involved a sizable inventory write-down, so we could sell off that inventory within a reasonably short timeframe, which in turn would allow us to reduce overhead associated with that inventory. The pricing we achieved turned out a bit stronger than we initially suggested, and the liquidation went fast. Since fresh information kept coming in during our year-end audit, it took longer than we anticipated to settle on a final reserve requirement. We get why a postponed earnings release might make people uneasy. Still, our view was that in the end, giving ourselves enough time to get confident in the figures was the more important thing. Thanks so much for bearing with us. Friday brought our consolidated net sales figure for the fiscal year: $583 million. That's a drop of $10.5 million, or 1.8%, compared with the year before. The decline traced to a 22% sales decrease in the Home Meridian segment. What drove that? No clubs channel revenue, fewer orders coming in, and shipments held up by big retail customers sitting on too much inventory — plus weaker sales in the e-commerce channel. We saw a 47% rise in domestic upholstery sales, which helped counterbalance those declines. That gain came from bringing Sunset West's results into the mix, along with double-digit sales growth at Bradington-Young, Sam Moore, and Shenandoah — marking the second year in a row for that performance. At Hooker Branded, net sales stayed basically level, down $1 million, or 0.5%, compared with the record sales this segment hit a year earlier. For fiscal 2023, we saw a consolidated operating loss of $6 million and a consolidated net loss of $4.3 million, or $0.37 per diluted share. That compares with operating income of $14.8 million and net income of $11.7 million the year before. Two things drove that swing: lower sales volume in the Home Meridian segment, plus a $24 million charge tied to leaving the ACH brand and repositioning PRI, both of which we told you about last month. Originally, we thought that charge would be $34 million, but as we worked through the year-end close, our estimates got more precise, and the final figure ended up well below what we first projected. If you set aside the write-down connected to ACH, our consolidated operating income would have reached $18.5 million, compared with $14.8 million reported during the same period last year. Consolidated net sales for the fiscal 2023 fourth quarter dropped by $3.5 million, a 2.6% decrease, which came as the Home Meridian segment saw sales fall $16 million, partially offset by gains of $6.5 million in Hooker Branded and $5.3 million in Domestic Upholstery. For that same fiscal 2023 fourth quarter, we recorded a net loss of $17.9 million, equal to $1.60 per diluted share, which was driven by the inventory write-down we took during the quarter. Once you exclude that charge, the quarter's operating income would have come to about $720,000, compared with a loss of $5.3 million during the same quarter last year. Now I'll turn things over to Jeremy, who will walk through what happened in fiscal 2023.

Thanks, Paul, and good morning to all of you. On today's call, we're going to explain how our approach has been reshaped to fit a home furnishings market that keeps evolving. With the economy and our industry moving back toward more typical conditions following the multi-year effects of COVID-19 along with disruptions in global supply chains, we currently have numerous initiatives in motion across every layer of the organization. Throughout this transitional year, we took certain hard calls in the Home Meridian segment, aiming at the company's long-term good and that of its stakeholders. Even though it hurt in the near term, we chose to leave the ACH brand, which carries low margins and high costs, instead of stretching out remedial measures over many years. This is a deliberate push to settle the matter faster and place HMI on a quicker route to profitability. As we restructure the HMI segment, we're shifting the PRI business unit toward a direct container-only model. Reworking the PRI model reduces exposure on both cash and inventory while removing needless margin pressure stemming from expenses tied to keeping domestic inventory. We have faith in our strategic course and in Home Meridian's ability to bounce back from the difficulties of recent years and add to our profitability down the road. This shift will carry on through fiscal 2024 as we step away from riskier businesses, bring down our operating cost, and concentrate on our core strengths. In our view, Hooker Furnishings starts the year in a solid position to handle a new landscape that is moving from historically high demand toward depending on market share gains. Our efforts in marketing, merchandising, and operations aim at expanding our portion of the total addressable market, along with brand positioning and visibility. A major initiative to boost our visibility and brand positioning makes its debut at the spring High Point Market this week: our nearly 120,000 sq ft new Hooker Legacy showroom, situated in a prime spot at the market's center and taking up the whole third floor of the Showplace building. With plenty of natural lighting, tall ceilings, a contemporary presentation, and an outdoor patio, this showroom will assist us in drawing new customers, becoming a more significant brand offering across all sales segments, and speeding up our various strategic growth initiatives via an engaging shopping experience; also at the High Point Market, we're introducing M, a brand of domestically produced upholstery and imported occasional furniture. The M brand, made by Sam Moore, Bradington-Young, and Shenandoah, plus imported Hooker case goods, offers a major opportunity by letting us serve a casual, comfortable, modern lifestyle, a look unlike anything in our current lineup. Beyond that, we're presenting the first comprehensive display of the Sunset West outdoor furniture product line in the Southeast U.S. Having the Sunset West line prominently and comprehensively displayed in High Point, together with setting the line up with an East Coast shipping point, will help speed our distribution expansion of the California-based product line across the U.S. Given that opportunities for strong expansion persist within the outdoor furnishings sector, and so that we might capitalize on Hooker Furnishings' brand equity while delivering a smoother buying journey for both shoppers and retailers, Sam Moore has been rebranded as HF Custom. Internally, along with at the Virginia factory and headquarters, the Sam Moore name is being kept, yet this outward-facing shift allows us to raise how the upholstery line is valued in perception, aligning it with the upper middle fashion image that Hooker Furnishings carries. Beyond that, it positions Hooker Furnishings as one unified source for home furnishings beneath a single Hooker brand, solidifying our standing as a whole home provider of high style, high-quality furnishings. A further positive sign has come from how the long-awaited, previously postponed introduction of the Drew & Jonathan Home License Collection has been received at retail, surpassing our expectations in terms of sales along with the excitement shown by consumers and retailers. During February, Scott Brothers Global together with national retail giant Rooms To Go revealed a multiyear partnership in which HMI is supplying RTG with exclusive bedroom and dining room collections, completing their whole home offering. We take pleasure in having delivered double-digit sales gains in domestic upholstery across a second straight year, and in finishing strongly at Hooker Branded thanks to a 15% sales increase in the fourth quarter. Contributing further to this positive momentum, H Contract and SLH, our contract and hospitality furnishings businesses, kept bouncing back from the pandemic's negative effect on these categories over the past two years. At this point I'd like to hand the discussion to Paul, who will cover highlights within each of our segments.

Thank you, Jeremy. To begin with Hooker Branded, we achieved a 15% increase in sales during the fourth quarter once our inventory mix was brought into balance, which allowed us to ship out the robust backlogs we were holding. Moving forward, we're now in a position to ship those backlogs and meet the greater demand we expect from our growth initiatives; net sales for this segment dropped $1 million, or half a %, for the fiscal year compared with the peak sales from the prior year, which came after the initial COVID crisis; at the start of the fiscal year, this segment had unusually low inventory due to temporary COVID-related factory closures in Vietnam in late calendar 2021. Shipments faced temporary delays in the third quarter because of inventory mix problems; those issues were resolved later in the year as inventory grew by about $35 million compared with the prior year-end and more than doubled relative to pre-pandemic levels in fiscal 20 and 21. Gross profit and margin for Hooker Branded were down versus the prior year due to higher demurrage expenses and increasing warehouse labor costs, driven by the large inventory volumes as well as port and warehouse congestion in the U.S. while our Asian suppliers worked through open orders and shipped heavily after COVID shutdowns ended. Incoming orders came in below the demand surge from the prior year, and a substantial portion of last year's large backlog was completed, resulting in solid shipments for the year. At year-end, our ordered backlog was 76% higher than pre-pandemic levels at the close of fiscal 2020. Turning now to Home Meridian, where net sales at HMI dropped by $62 million, or 22%, compared with the prior year. The segment recorded an operating loss of $37 million, driven by lower sales volume, the $24 million inventory valuation charge, and the continued effect of high ocean freight costs; a year earlier, HMI lost roughly $21 million. The ACH brand, which focuses on lower-priced items, accounted for about 13% of Home Meridian's total revenue, but it was responsible for over 50% of its operating loss even before we chose to write down the inventory and exit the business. That unit's business model required substantial inventory investment and high handling costs to meet quick ship demands. These lower-priced, lower-margin ACH inventories carried historically high freight costs from the prior year. Given the inventory levels, industry discounting, and weak demand, we concluded that a profitable market for these products didn't exist, and we weren't willing to continue incurring additional lease, warehouse labor, and other costs to store and sell aging inventory below cost going forward. So we determined that exiting the brand was the best course of action. As part of this restructuring, we intend to reduce the physical footprints of our Savannah, Georgia distribution center and our High Point, North Carolina administrative offices during the current fiscal year. This is going to bring down our lease, warehouse, and associated costs. In connection with these actions, we recorded charges of $12.5 million and $13.3 million. We expect to reduce the capital investment in HMI inventory by 60% by the close of the fiscal year, and that ought to deliver a significant lift to our cash flow ROI, while also lowering HMI's overhead by over $12 million during the two-year period beginning in fiscal 2023. Over 30% of the net sales decline was attributable to HMidea, which targeted the clubs channel and was shut down at the end of fiscal 2022. We made the decision to exit HMidea in the prior fiscal year due to persistent losses driven by slim margins and excessive chargebacks. Even though revenue declined as a result, the exit generated a substantial improvement in returns and allowances. Another factor behind the segment's sales decrease was a pullback at PRI and SLF, which cater to major furniture chains and mass merchants. This segment received fewer orders as retail customers focused on drawing down their own excess inventories by delaying incoming shipments. On a more positive note, net sales at Samuel Lawrence Hospitality rose by over 80% compared with the prior year as the hospitality and contract markets continued to recover, as Jeremy mentioned earlier. Going forward, we intend to steer working capital toward the product lines that matter most to our partners. That means focusing entirely on our core businesses, Pulaski, Samuel Lawrence, PRI, and SLH. With these companies, we believe there is a considerable opportunity to establish a sustainable profit center at HMI, free from the unpredictable swings we've experienced before. As mentioned earlier, we expect HMI to become profitable later this fiscal year — and notably, with the $12.5 million to $13.3 million range in mind. Within our Domestic Upholstery segment, we extended a positive trajectory for a second consecutive year, with double-digit sales gains at Bradington-Young, Sam Moore, and Shenandoah. Combined with the inclusion of Sunset West results for the full year, performance across the Domestic Upholstery divisions drove the segment to a sales increase of nearly $50 million for the year. Even as it more than doubled its California production and warehousing space and brought a new ERP system online, Sunset West exceeded our growth expectations in the first full year of ownership; we're eager to participate in the expanding outdoor furniture space and believe Sunset West is well positioned to capture significant market share. Gross margin in the Domestic Upholstery segment came in at 20.8% versus 19.5% a year earlier. Greater sales volume and running at close to full capacity sharply enhanced overhead absorption and direct labor efficiency. Even so, raw material price inflation and higher freight surcharges weighed on profitability during the year. Incoming orders in the segment fell because of a slowdown in demand, part of which we attribute to extended delivery times stemming from the surge in pandemic demand. Shortages and inconsistent deliveries of certain raw materials also ceased to be an issue, which let us fill orders and bring down the historically high order backlogs carried over from the prior year. As we wrapped up fiscal 23, our order backlog — if you set Sunset West aside — remained 57% higher than its pre-pandemic level, comparing against the close of fiscal 2020. Lead times in Domestic Upholstery continue to come down and are nearing typical levels. We expect additional improvement in those lead times as the year progresses. Let's now turn to cash, debt, and inventory. At the end of fiscal 23, cash and cash equivalents totaled $19 million, which is $12.5 million more than our Q3 finish, though it's $50 million lower than the fiscal 22 year-end number. Some of the cash on hand, along with cash collected from accounts receivable, helped fund a $19 million rise in inventory, $13 million of share repurchases, $9.6 million in cash dividends, $5.4 million for our new cloud-based ERP system, and $4.2 million in other capital expenditures. During fiscal 2023, we borrowed $25 million to restore cash that had been used for the Sunset West acquisition. We also established a $20 million share repurchase authorization, and about $3.5 million of it remains available as of today. As we sell through inventories we had previously written down, we'll carry a much smaller inventory position going forward, which will generate cash and reduce our working capital needs later on. At present, our cash is in the mid $30 million range, and since the year closed we've purchased an additional $3 million under our stock repurchase plan. For this year, our capital allocation objectives include building a cash reserve and, where it makes sense, continuing the share repurchase program as a standard part of our financial strategy, reducing debt, and maintaining our dividend, which yields roughly 4.5% at current share prices. I'll turn it back to Jeremy for his outlook.

Thank you, Paul. The signals we're seeing from the economy are still a mixed bag. On the positive side, we're heartened that global supply chain conditions have settled down, inflation has eased somewhat, and hiring remains robust. What worries us, though, is the potential for trouble in worldwide banking, in interest rates, and in the equities market. Additional challenges we face include retailers pushing back deliveries because their inventories are temporarily too high, plus the lack of regulatory clarity around anti-tipping requirements for bedroom storage furniture. In our view, that situation hurt the rate of incoming orders during the first quarter of fiscal 2024, particularly among bigger customers within our Home Meridian segment. Given how things have unfolded lately, the tip over matter looks close to being settled, and we don't anticipate any long-term effect on either demand or what our products cost. As the sector moves back toward normal demand patterns and supply chain bottlenecks keep easing, ocean freight rates that were once extremely high have come down and seem to have leveled off. We anticipate starting to capture cost savings and better margins as the year goes on, as we work through the more expensive inventory we're currently holding and restock with products that carry cheaper freight charges. With our new Hooker Legacy showroom now open and our first spring High Point Market taking place in the refurbished HMI and portfolio showrooms, we're looking forward to a lively, well-attended furniture market next week. Thanks to our new showrooms in High Point and Las Vegas, along with our intention to exhibit at the Atlanta Market this summer, we think we'll have the chance to put our brands before more customers and prospects over the next 12 months than we ever have before. We also see considerable momentum building at Home Meridian, with significant new placements secured among major customers. We anticipate that the product commitments customers have made will benefit the present fiscal year, which should help set HMI on a course toward strong, lasting profitability. That concludes the prepared portion of our remarks, and now I'll hand the call back to our operator, Norma, so we can take your questions.

Thanks, and good morning to you, Jeremy and Paul. I appreciate you taking my question. So, you know, to start off, I guess a broader, you know, kind of question. Now that you've gotten out of ACH and RTA as well as the club channel business, would you say you're basically finished pulling out of the lower margin sales channels and product lines at this point?

Hello there. Morning, Anthony. Yes, that's correct. It feels to us like we've gotten this down to a sustainable core of businesses that are able to get to that sustainable profitability, just as we've discussed.

Understood. All right, and yes, I appreciate that, Jeremy. Regarding the anti-tipping regulations, my understanding is that things aren't entirely settled at this point. Do you have any kind of rough idea how big an effect that had on the quarter, or on the first quarter up to now?

Honestly, I'm not able to provide you with anything close to a solid figure there. It's more a situation where, whenever you attempt to work through that kind of question, buyers just want reassurance — fine, will the items you're delivering right now comply with what the new regulations require? Naturally, those regulations have remained uncertain, since a vote is taking place today, and our expectation is that it will favor moving toward the STURDY Act, which benefits our sector; we should have additional clarity later today, though I genuinely lack a number for that. Truthfully, this is a brief disruption, and it isn't a hold-up that will carry any lasting impact for us.

Understood. All right, I appreciate that. Now that demand has eased and the expense of moving goods across the ocean has fallen back to far more typical levels, how sure are you that you can hold the line on what you charge for your items? What's the right way for us to frame that?

I'd say the situation really breaks into three pieces, since there are basically three distinct models to consider. Take the Hooker Branded model: at present, our warehouses are still stocked with goods carrying those extra freight-related expenses, and working that through will take some time. Once we sell through that inventory and start to see the benefit of the reduced cost, our focus will remain on offering strong value to customers while hitting the margin we want. We'll need to keep reviewing that continuously. One thing I can tell you is that we have no intention of giving up any of our overall margin. Then, with HMI, a large share of those added costs fell more on the direct portion of the operation, which was largely the contract side involving the customer. For those direct customers, that simply declines on its own as container freight rates have shifted. That's essentially what's happening at HMI; when it comes to domestic upholstery, we honestly haven't observed many reductions across a lot of components or the various raw materials. Those costs have remained somewhat elevated. At this point they've leveled off. We're no longer facing those cost hikes that seemed to arrive every single day. From a pricing perspective, I don't expect much movement in domestic upholstery.

Understood. Alright, I appreciate the answer. Could I ask a few additional questions?

Of course.

Turning to HMI, considering how that operation has evolved across the past several years, if I examine the backlog they hold. At the close of the latest fiscal year, your consolidated backlog stood beneath where it was at the fiscal year concluding in January of 2020, just ahead of the pandemic. The backlog has declined when viewed on a consolidated basis. If you break down what makes up that backlog, HMI is really the sole piece that has fallen. Each of the remaining three segments has risen. I suppose on a like-for-like comparison, since clearly you no longer have the club business, Accentrics Home is gone as well, and so forth. On a like-for-like comparison, taking today's HMI and how it runs at present against, I suppose, HMI before the pandemic, if you were to account for those operations that have been removed, would you describe your backlog as? Similar, or only where HMI is concerned?

My take is that it sits somewhat beneath pre-pandemic levels, though not in a way that worries us; we feel fairly confident that this will shift in our favor, and do so fairly quickly, given the various placements and other developments taking place at HMI. I think it's reasonable to describe it as somewhat beneath where things were before the pandemic.

Yeah.

on the core businesses that are left.

Yeah, the clubs business tended to inflate backlogs...

Yeah.

because of the long order cycle.

Sure, that's possible. Basically, when it comes to clubs alone, the backlog might sit somewhere between $50 million and $75 million.

Right.

You know? Yeah, exactly.

Beyond that, I'd say yes, it seems somewhat lower to me. On an adjusted basis, my sense is that it has declined.

Anthony, is that of any assistance?

Indeed, definitely. Yeah, I appreciate it. I suppose this is my final inquiry prior to handing things off to another person in this room. Regarding Sunset West, it appears as though a minor snag occurred involving the ERP system rollout. Can you folks venture an estimate regarding, well, what that amounted to in terms of, you know, the effect on revenue, and I believe that matter has been settled at this point, though I simply hoped to gain a clearer picture of it.

Correct. Our estimate puts the revenue hit at approximately $3 million for Sunset West while working through the ERP. Additionally, they had relocated into a different building just prior to that; we caused considerable disruption to that operation, you know, as we worked to get them truly well-situated. The positive side is that we believe they now sit in a strong position to capitalize on the fresh showroom we are launching this market along with the Savannah shipping point from which we have now formally begun shipping Sunset West. There is a great deal happening that we expect will significantly accelerate that business in a favorable direction.

Okay, that sounds great. Yes, I can't wait to check out the new showroom.

Same here — we can't wait to have you there.

All right. Thank you.

Yeah. Thank you, Anthony.

Morning, Paul. Morning, Jeremy. Thanks for taking my questions. If I just take a look at that $96 million inventory at year-end, what portion of it is tied to the discontinued inventory? Is that still included in that figure?

It's included, though it's carried at net. I'd estimate the effect is roughly $5 million to $6 million net, because.

Oh.

Because the reserve.

The number I had in mind was $6 million.

Correct — because that also accounts for the $80 million reserve.

Right.

All right. If you strip that out and compare like for like, inventory would come in at roughly $90 million.

Correct.

All right; regarding that stock, what portion of it comes from higher demurrage and freight expenses? How do those affect revenues and gross margin once you sell through that inventory carrying those increased freight and demurrage costs?

Budd, we estimate that figure at roughly 10%, and that represents extra freight that, in our view, won't persist.

Right.

The system, once we've sold through what's there and begin restocking at those reduced freight rates.

What that tells me is, once those expenses are normalized — normalized, along with that inventory and that product — you'd be sitting at $80, $80, $81 million. Should we be looking at it that way?

Yes, I'd call that fairly reasonable.

All right. Regarding ACH, or when you examine HMI with the restructuring factored in, I recall your statement that consolidated profitability is anticipated to appear at a later point this year. Is that Q3 or Q4? That's basically what I'm asking, or possibly Q2. When you break down the components, do they generate profit? Which of them sit at profitability levels you'd consider acceptable?

To be clear, on a consolidated basis, our expectation is profitability across the entire year. If the question is about HMI as a segment turning profitable, our belief is that in Q3 we ought to begin seeing gains of that kind and building—really building positive momentum as we head into Q4 and on into the following fiscal year.