Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Appreciate that, Lydia. Good morning, everybody, and thank you for joining our quarterly conference call. Today we're walking through the financial results from the first quarter of fiscal 2024, a period that wrapped up on April 30th, 2023. Joining me on the call this morning is Jeremy Hoff, who serves as our Chief Executive Officer, and we're glad all of you could be with us. During today's discussion, we may issue forward-looking statements, which come with risks and uncertainties attached. If you'd like details on the factors that could lead our actual results to differ materially from what management anticipates, those are laid out in the press release and SEC filing we issued regarding our fiscal 2024 first quarter results. Anything we say about the future speaks only to right now, and we're not taking on any obligation to refresh or amend those statements if things change after this call wraps up. Earlier today, we shared our numbers for the first quarter of fiscal 2024: consolidated net sales landed at $121.8 million. That's down $25.5 million, or 17%, compared with the same quarter a year ago. Where did the drop come from? A $20 million decline in the Home Meridian segment, driven by weaker business with major furniture chains and mass merchants, plus a smaller contribution from a 15% slide in domestic upholstery following two straight years of growth in that part of the business. Meanwhile, sales in the Hooker branded segment were roughly level with the prior year. For the quarter just reported, we recorded consolidated net income of $1.5 million, equal to $0.13 per diluted share. That compares with $3.2 million, or $0.26 per diluted share, during the same period a year earlier. At this point, I'll hand things over to Jeremy so he can discuss what happened in the first quarter of our fiscal 2024.

Thanks, Paul, and good morning, everyone. During today's call, we'll go over our results for the quarter along with a number of long-term strategic initiatives that are set up to start producing organic growth. Given the softer retail climate, economic uncertainty, and our recent departure from the Accentrics Home line, we're happy to have beaten outside expectations on both sales and earnings for the quarter. Our liquidation of ACH inventories, plus other obsolete inventories at HMI, is roughly 80% done, and that's helping us shrink our domestic warehousing footprint and move closer to restoring profitability at HMI. During this quarter, we managed to strengthen the balance sheet. We brought in around $22 million of cash from operating activities, which helped drive a $12 million rise in our cash position for the quarter and covered $4.3 million of share repurchases as well as our usual cash needs. As we transitioned into May and now June, we keep building cash and bringing inventories down further. As of yesterday, we've generated nearly $16 million of additional cash since the close of our first quarter, lifting our cash balance to $46 million. Inventory levels fell by $23 million in the quarter, putting us well along the path toward our objective of cutting inventories by $30 million prior to fiscal year end. The grand opening of our new Hooker Legacy Showroom at the April High Point Market matched what we expected, as attendance nearly doubled versus a year ago, drawing new customers and giving a far more compelling presentation of our legacy brands plus the debut of our new brand M. A lot of our strategic organic growth initiatives — the ones that will let us grow our share of total addressable market and our visibility — are connected to the new showroom and Hooker Legacy brands. One such strategic growth initiative, the High Point Market launch of M, our domestically produced upholstery and imported occasional furniture brand, went beyond what we expected; this new brand, which brings together the distinctive capabilities of HF Custom Shenandoah, Bradington-Young, and Hooker Casegoods, will let us compete in a modern lifestyle aesthetic without upsetting any of those core businesses. Retailers tell us that the new M brand aligns extremely well with the up and coming casual modern lifestyle that today's younger consumer is drawn to. Rebranding Sam Moore as HF Custom at the Spring High Point Market happened at a perfect moment, since the timing let us elevate the product's look with new covered treatments in silhouettes and reveal the brand inside a heavily refreshed presentation in Showplace. Right before the April High Point Market, we finished moving our outdoor furnishings line Sunset West onto a new ERP system. Beyond that, we finished positioning the brand for East Coast distribution by stocking the line in its existing West Coast warehouse and now adding Sunset West inventory to our East Coast Savannah warehouse. During the Spring High Point Market, Sunset West made its debut with an initial full-scale presentation in the major East Coast market for our sector. We hold the belief that Sunset West's move into national distribution provides an organic growth chance in the double digits across a span of multiple years. Additionally, during April, we made public that Hooker Furnishing alongside top lifestyle and entertainment enterprise Scott Brothers Global have renewed their multiyear licensing arrangement, with HMI's Pulaski and Samuel Lawrence Furniture divisions acting as the sole suppliers of bedroom, dining, and occasional furniture for the Drew and Jonathan Home brand. At the High Point Market, HMI rolled out a 26-piece Drew and Jonathan collection in a California Casual style to broaden the product line further. Following an initial hold-up caused by the pandemic, the Drew and Jonathan Home line now possesses retail placements and demand momentum that will aid shipments both near and longer term. Our shift toward a new, leaner business model for HMI will carry on through this year as we steer clear of higher-risk operations and concentrate on our core strengths and businesses; Pulaski Furniture, Samuel Lawrence Furniture, Samuel Lawrence Hospitality, and Primary Resources International, we believe, remain on course to reach profitability within the segment by the conclusion of the fiscal year. Crucially, the HMI team is centered on our core competencies as we channel our support and resources toward our key businesses while cutting costs; at this point, I would like to hand the discussion to Paul, who will go over highlights in each of our segments.

Appreciate that, Jeremy. Starting off with the Hooker Branded segment, net sales came in roughly flat, slipping by just 0.8%, or $339,000, versus the first quarter of last year. Gross profit and gross margin were also fairly steady. The net sales figure took a hit from heavier discounting, contrasting with unusually light discounting during the same period a year ago. We did get a lift from price hikes put in place last year to offset inflationary pressure on product costs, but discounting rose 230 basis points year over year because demand was somewhat weaker this quarter. Demurrage and drayage costs, which weighed heavily on gross margin in earlier quarters, were still above the prior year first quarter, though they're moving lower. As the first quarter closed, Hooker Branded inventory was down $14 million from the close of fiscal 2023. Inventory remains elevated as of quarter end and sits above where it was before the pandemic in calendar 2019. So we keep working to bring inventory in line with today's demand; we're happy that our inventory management process is performing well, meaning we're in stock on most top-selling items and obsolete inventory hasn't been a problem. Quarter end backlog for Hooker Branded came in below the prior year first quarter end, yet it stayed 50% above the pre-pandemic low. Incoming orders fell roughly 16% versus the prior year quarter and are nearing levels like those in fiscal 2020 first quarter, which reflects demand that's more normalized after the pandemic. Moving to the Home Meridian segment, as Jeremy mentioned, the sales decline was smaller than we expected, and the operating loss of $2.1 million marked a $1 million gain versus the prior year first quarter. Net sales at HMI dropped $20 million, or 32%, against the prior year first quarter, pulled down by sales declines with some major furniture change in mass merchants amid a softer retail climate for home furnishing. Other things behind the weaker sale include retail customers delaying orders as they keep cutting their inventory, plus the absence of the clause at ACH sales businesses now that we've left those divisions. Inventories fell $9 million from the close of fiscal 2023 thanks to liquidating obsolete inventories and our push to match inventory levels with current demand. On an encouraging note SLH, our hospitality division's net sales more than doubled versus the prior year first quarter, signaling a robust recovery in hospitality following the COVID pandemic. On top of that, freight costs have gotten better as ocean freight rates stabilized. Incoming orders and quarter end backlog at HMI were below the prior year quarter and fiscal 2020 first quarter, owing to the absence of orders from the Clubs channel, which HMI exited during fiscal 2022 and the ACH business, along with fewer incoming orders from retail customers. In the domestic upholstery segment, we saw the first quarterly sales decline in over two years, following 10 consecutive quarters of year-over-year sales increases. Sales came in $6 million lower, a decline of roughly 15% versus the first quarter of last year. Gains in net sales at Bradington-Young helped offset part of the reductions at HF Custom, Sunset West, and Shenandoah. At Sunset West, the drop stems from non-recurring factors, among them slower shipments during February and March that followed the December switch to our new ERP system, plus the move of the outdoor brands into our East Coast warehouse, which brought transition costs and start-up delays at the Georgia distribution center. By the close of the quarter, those problems had mostly been worked out. In our view, a good portion of the dip in domestic inventory sales came from having worked through the big backlogs in those divisions and then seeing demand turn somewhat softer, which we don't view as a long-term condition. Even with the sales decline and the disruption, the Domestic Upholstery segment posted operating income of $1.3 million, equal to an operating margin of 3.8%. At the end of the quarter, backlog for Bradington-Young was still three times what it had been before the pandemic, at the fiscal 2020 first quarter year end. Meanwhile, backlogs at HF Customs in Shenandoah fell to levels comparable to fiscal 2020. Incoming orders at Bradington-Young and Shenandoah matched fiscal 2020 levels, whereas HF Custom saw orders below that period. And though it makes up a smaller share of our overall business, all other, which contains our H Contract Senior Living Furniture division, added $1.1 million in sales. Now let's turn to cash, debt, inventory, and capital allocation. At the close of the fiscal 2024 first quarter, cash and cash equivalents were $31 million, up $12 million from the prior year end. As Jeremy mentioned earlier, operations generated $22 million of cash during the quarter, which funded $4.3 million of share repurchases, $4.5 million of capital expenditures, including investments in our new showroom and our new ERP system, and $2.4 million in cash dividend to our shareholders, which helped — and also helped strengthen our cash position; we're happy with how far we've come in bringing inventories down, which accounted for a big share of the cash we generated in the quarter. Since the repurchase programs were announced about this time last year, we've generated approximately — we returned approximately $20 million to our shareholders and retired just under 1.2 million shares. And earlier this week, our Board approved an additional $5 million authorization as part of our capital allocation plan for the year. Beyond continuing to execute with the share repurchase plan, our capital allocation priorities for the year included building cash reserves, funding the organic growth initiatives as Jeremy noted earlier, continuing our streak of — 54-year streak of paying of dividends and funding our typical capital expenditure requirements. Beyond the cash we hold, at year end we also had $27.2 million in total capacity available through our current revolver, which could be drawn on for other working capital needs if the situation calls for it; we expect our liquidity and capital needs to get an additional boost from the liquidation sales of the excess HMI inventory that remains; at this point, I'll hand things back over to Jeremy so he can share his outlook.

Thanks, Paul. Although the retail landscape is still uneven, and there are certain economic unknowns, we've started noticing better trends when it comes to consolidated incoming orders during May, and those have continued through June so far. Our sense is that the industry is working past some of the surplus inventory problems, and we might be witnessing a turning point there. After the successful grand opening of our new showroom at the spring High Point Market, Hooker Furnishings is going to keep pushing initiatives this summer to boost visibility and expand our addressable market reach, starting with the debut of a new showroom at Atlanta market for Hooker Legacy brands. Along with launching that new Legacy brands showroom, Sunset West is also going to unveil a new showroom at the Atlanta market, since the new sponsor of the casual market for outdoor furniture is moving from Chicago. Hooker Legacy brands will also be showing at its fourth Las Vegas market this summer. Over at HMI, we anticipate that the inventory liquidations we announced earlier will be largely wrapped up by the close of fiscal 2024's second quarter. Even though we're expecting some near-term swings in sales and earnings at HMI, we still anticipate that the segment will reach quarterly profitability by the conclusion of the 2024 fiscal year. The team at Hooker Furnings keeps concentrating on organic growth possibilities via greater visibility, strategic product development, operational enhancements, and cost cuts. By zeroing in on these factors within our control, we'll be positioned as strongly as possible while the demand environment keeps getting better. That wraps up the formal portion of our discussion, and now I'll hand the call back to our operator, Lydia, for questions.

Morning, and thanks for fielding these. So to start, I've got a pair of things about the quarter, and then some on the guidance. Regarding that quarter, I realize a chunk of this will show up in your 10-Q, but could you begin by addressing how unit volumes stacked up against pricing? You folks mentioned discounting, so I'm simply curious how volumes overall compared with pricing.

Let me bring up — let me bring up the draft copy of the Q, in case you'd rather move on to a different question. We'll return to this one rather than — here it is.

Absolutely. Yeah. That's fine. Alright; and after that, — you have it? Alright.

Alright. So, when it comes to Hooker, the number of units has fallen roughly 6%, while ASP has risen roughly 8%; regarding HMI, the number of units has fallen 10% — the number of units has fallen roughly 25%, ASP has risen 13%.

Understood. Alright.

Well, we're seeing a rise across the board, though I don't have much detail to offer.

Understood. Alright. Then it was encouraging to observe consolidated gross margin rise by almost 3 percentage points overall. I realize you both mentioned discounting plus elevated demurrage expenses, yet clearly there are also reduced ocean freight costs. So, sort of — could you walk through the different positives and negatives behind what caused that gross margin gain?

Morning, Anthony. Essentially we're beginning to see cost steadily declining compared with what we dealt with throughout the pandemic. Regarding that discounting item, we're truly returning toward a somewhat more typical discount level. It became an atypical extremely small or close to zero discount level while the pandemic was happening, for understandable reasons given every supply chain difficulty and all that was occurring. And with demand at the magnitude we witnessed, there wasn't — it shifted our whole strategy and I believe the industry's strategy when it comes to discounts. Paul, would you like to contribute on a few of the others?

Okay, so even though Domestic Upholstery saw sales go down, it became more efficient. We've observed that price increases have started to show results, since — while the pandemic was happening, we didn't — even though prices were rising, and we were raising them quite substantially, we held off on increasing prices for backlog. So our updated price list has now taken effect, and all of that has contributed. I believe the strategic choice was to avoid raising prices on the existing backlog, and because that backlog was so large, it took quite a while to work through it.

And finally, on the HMI side of our operations, we've gotten rid of a great deal of the unpredictability that we had been running into, which, as you know, hurt our total gross margin while we were working through all of that.

Understood. Alright, fine; it's encouraging to see improved predictability at HMI; regarding HMI, I'm aware you discussed cutting back the warehousing footprint. What's the status on that right now, and where do you expect to be at the close of the fiscal year regarding that effort?

Regarding Savannah, as we keep moving forward — as we mentioned, we've completed 80% of the work of exiting the products we intend to exit. While we do that, the space needed in Savannah drops to far below what we required previously. So, we've already set up to give back 200,000 of the 1 million square feet, which takes effect July 1st this year — this fiscal year. We're pursuing additional plans, and our aim would be to bring that down to 500,000. We're hoping by fiscal year end, and if not, it would be soon after; but that's our priority, and every other cost reduction activity we mentioned is on schedule for this fiscal year to once again bring HMI back to profitable — quarterly profitability by the end of fiscal year.

Understood. Alright, thank you, Jeremy. And by any chance, do you happen to have the consolidated backlog figure available?

Sure. As of the quarter's close, consolidated backlog stood at $87 million.

Understood. All right, and I realize you mentioned this briefly during April's call, but regarding Sunset West, the ERP system rollout had an effect on it. My recollection is that you cited a figure of a couple of million dollars, so please set me straight if that's not accurate. Beyond that, how far along is the ERP implementation overall? And while I realize it's still ongoing, might additional problems arise with other brands during this process?

To begin, you were near the mark on Sunset West and what we described as the disruption there. At this point they've largely gotten past it, and they've also gotten past much of the transition involved in setting up East Coast distribution for them. So things are going quite well there. For the remainder of the year, we're optimistic about Sunset West. As for the ERP across the rest of the company, we have a go-live date in early July for the Hooker Legacy portion of our business. Our confidence in it is high. One reason we chose to do Sunset West first, frankly, was that we wanted to confirm that many of the systems we needed to function for the rest of the company would perform as we expected them to; so we ran a test on one of our smaller parts of our company, where we saw the issues and were able to fix them, but we're aware of those going into the larger go-lives. So we feel confident and feel good about where we're headed with our ERP system.

And should we not —

Understood. All right.

Right, that's one more solid observation. Each week we monitor where we stand regarding any problems, and visibility is quite high, and we won't launch if we detect a disruption that would hurt our business.