Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thank you, Catherine. Hello everyone, and I appreciate you joining this quarterly conference call where we'll go over the financial results from our fiscal 2024 second quarter, a period that started on May 1 and wrapped up on July 30, 2023. With me today is Jeremy Hoff, who serves as our Chief Executive Officer, and we're glad you could take part. As part of 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 lead to actual results differing materially from what management expects in the press release and SEC filing that announced our fiscal 2024 second quarter results. Any forward-looking statement reflects only today's perspective, and we take on no duty to update or revise any forward-looking statements because of events or circumstances arising after today's call. This morning, we announced consolidated net sales of $97.8 million for the fiscal 2024 second quarter, which represents a drop of $55 million, or 36%, from last year's second quarter, and that was driven by weak demand for home furnishings across the industry along with the planned exit of unprofitable operations inside our Home Meridian segment. Net sales fell by $30 million within the Home Meridian segment, by $18 million in our Hooker Branded segment, and by $7.4 million in the Domestic Upholstery segment. Consolidated net income reached $785,000, or $0.07 per diluted share, for the quarter, versus $5.5 million, or $0.46 per diluted share, during the prior year period. Turning to the fiscal 2024 first half, consolidated net sales came to $219 million, which is down $80 million, or 26.8%, from last year's first half. Consolidated net income was $2.2 million, or $0.20 per diluted share, compared with $8.7 million, or $0.73 per diluted share, in the prior year 6-month period. Now I'll hand the call over to Jeremy so he can comment on fiscal 2024 second quarter results.

Thanks, Paul, and good morning to all of you. During today's call, we'll go over our results for the second quarter and the first half. We'll also update you on how we're strengthening our financial position amid this difficult environment and how we're strategically putting capital and other resources to work to invest in future growth and greater visibility with prospective customers. Our view is that the softer demand across the industry right now stems from retailers still working through excess inventory and from an oversupply of deeply discounted home furnishings on the market; on top of that, the year-over-year comparisons reflect our exit from the higher-risk, unprofitable operations in the Home Meridian segment. It's encouraging to us that incoming orders rose month by month through the summer relative to the prior year, and consolidated orders are up double digits compared with a year ago. During the quarter, we strengthened our financial position, producing more than $51 million in cash from operations and finishing the quarter with $50 million in cash and cash equivalents. We also brought inventory levels down by $70 million versus a year ago and wrapped up most of the targeted liquidation sales of the Home Meridian segment's discontinued inventories. Our inventory quality is far better than at the close of last year and matches expected demand. Beyond that, our investments aimed at expanding our customer base are delivering results. To illustrate, the combined effect of our new showrooms in High Point, Atlanta and Las Vegas lifted our customer contacts from roughly 3,000 to approximately 14,000 annually, quadrupling our interactions with existing and potential customers. Although we anticipate that this investment's full impact will largely be longer term, we've already opened 1,000 new accounts in the first half of the year as visibility and engagement have grown. The transformation of the Home Meridian segment into a sustainably profitable business model is well along. Most of the excess inventories tied to the business unit closures at the end of the last fiscal year have been sold, and the associated cost reduction efforts are delivering results. We also cut our Georgia warehouse footprint by 200,000 square feet during the quarter and expect to trim another 100,000 to 200,000 square feet in early calendar '24. Rightsizing our footprint so it aligns with our current demand, now that we no longer stock significant volumes of inventory for Accentrics Home, will not only lower cost, it will enhance liquidity and working capital levels. HMI posted a small operating income in fiscal July; and while we still anticipate some short-term volatility in sales and earnings, we expected to reach profitability in the second half of this fiscal year. The hard work and tough decisions we've made over the past 18 months are starting to pay off. We've lowered our overhead run rate from a peak of more than $40 million to roughly $32 million now and expect to be under $30 million by year's end. When you combine that with better contribution margin, our expectation is that Home Meridian's breakeven point will come down by more than $150 million, and we can shift our attention toward generating steady, profitable volume in that segment. We were happy during the quarter to close on our purchase of BOBO Intriguing Objects, an Atlanta-based company specializing in decorative accessories. Through this deal, our assortment grows broader, now spanning lighting, decor, textiles and wall art. With BOBO added to the brands we own, we become a more valuable and well-rounded partner for the customers we serve. As we did with last year's Sunset West acquisition, our plan is to grow BOBO by leveraging the sales, marketing and operations teams we already have, so that it becomes a meaningful contributor to our consolidated sales over the medium to longer term. At this point, I'd like to hand things over to Paul, who will walk through the highlights for each of our segments.

Thanks, Jeremy. I'll begin with Hooker Branded. During the fiscal 2024 second quarter, net sales for that segment declined by $18 million, a 34% drop, which came from reduced unit volume. Beyond that, discounting was 240 basis points higher than in the prior-year quarter, a period that had been unusually low. Turning to the fiscal 2024 first half, Hooker Branded's sales were down $18.5 million, or 19%, compared with the same 6-month span a year ago. What these declines in both periods make clear is that demand for home furnishings has weakened. Despite lower net sales, gross margin improved, largely due to better product costs from cheaper freight rates and, to a lesser extent, because warehousing expenses decreased. The segment posted operating income of $3.2 million and a 9.3% operating margin, against $6.1 million and 11.5% in last year's second quarter. Although the order backlog came in below where it stood at the end of the prior year quarter, it is still 40% above pre-pandemic levels, meaning the close of fiscal 2020's second quarter. Incoming orders climbed almost 19% from the prior year quarter. A large share of Hooker Branded's backlog is made up of orders for new products taken late last year and earlier this year, and those should ship during this year's second half, setting the segment up well for the quarters ahead. Now on to Home Meridian. During the second quarter of fiscal 2024, net sales fell by $30 million, which equals 51%. This came about because demand for home furnishings softened, and we also recorded no revenue from the higher-risk, unprofitable operations that we exited. About 70% of the decline was driven by lower sales at the major furniture chains, while roughly 15% of the decrease came from the e-commerce channel. In the 2024 second quarter, both gross profit and margin decreased as a result of the net sales drop and underabsorbed operating costs. Although product costs as a share of net sales went down because freight costs were reduced, gross margin was hurt by fixed costs from warehousing rent and labor expenses, given how much lower net sales were. During that 6-month stretch, Home Meridian's sales were down due to the very same factors. As Jeremy mentioned previously, we reduced our Georgia warehouse space by 200,000 square feet this quarter and expect to reduce it even more, which would take total square footage down to approximately 500,000 square feet by early calendar 2024, versus 1 million square feet at the same point last year; this rightsizing will bring costs down while improving liquidity and working capital. With sales dropping so sharply and operating costs underabsorbed, Home Meridian posted a $3.3 million operating loss in the quarter. Even so, its first half operating loss came in right in line with what management had expected. Backlog at quarter-end was lower than both the prior-year quarter and the second quarter of fiscal 2020. That drop stems from no orders coming out of the exited operations, along with fewer incoming orders from our retail customers, who continue to hold excess inventories they ordered during the prior year. Looking at Domestic Upholstery, our net sales fell $7.4 million, or 19%, during the second quarter. The decline came from lower sales at Shenandoah and HF Custom — formerly Sam Moore — though a 10% gain at Sunset West partly made up for it. Bradington-Young's net sales came in roughly flat versus last year's second quarter. Even with that sales drop, gross margin ran 200 basis points above the prior year, helped by lower direct costs, which included steadier raw material costs and reduced direct labor costs tied to production cuts at HF Custom in Shenandoah, partly offset by underabsorbed indirect costs; across the fiscal 2024 first half, net sales declined at HF Custom, Shenandoah and Sunset West. Over that 6-month stretch, Bradington-Young posted a modest sales gain. Incoming orders rose 36% against the same quarter last year. That said, orders in the year-ago period were fairly weak because of a bigger backlog and longer lead times. By the time the quarter closed, Bradington-Young's order book remained three times higher than it was before the pandemic — that is, the level seen in the second quarter of fiscal 2020 — whereas backlogs at HF Custom and Shenandoah had dropped to about what they were in fiscal 2020. Over in the remaining segments, net sales climbed for both the second quarter and the first half, driven by gains at H Contract as senior living continues its COVID recovery and, to a lesser extent, by net sales contributed by BOBO. Those all other segments also posted higher gross profit and margin. On the balance sheet side, we made considerable progress with our cash and inventory position as well as our strategic capital investments. At the end of the fiscal 2024 quarter, our cash and cash equivalents stood at $50 million, which is $31 million higher than the same time last year. Inventory declined by $35 million compared to year-end, and it was down $70 million versus a year ago. During the 6-month period, operating activities brought in $51 million, and those funds went toward $8.7 million of share repurchases, $4.9 million in cash dividends, $4 million of capital expenditures—including what we invested in our new showrooms—$2.6 million for building out our cloud-based ERP system, and $2.4 million related to the BOBO acquisition. Starting from when the buyback kicked off in Q2 of the prior year, we've used roughly $22 million to acquire and cancel 1.3 million common shares through the close of this quarter; when combined with our cash, that left $27 million in total capacity under the revolver we already have as of quarter end. Looking at the remainder of the year, our intentions are to further bolster the balance sheet, proceed with repurchases of stock when it makes sense, and maintain funding for organic growth avenues, which we feel will leave us well positioned as conditions keep getting better. At this point, I'll hand things back to Jeremy so he can share his outlook.

In our view, the economy is sending conflicting signals. A lack of available homes, combined with fixed mortgage rates sitting at their highest level in more than 20 years, has dampened housing market activity. Interest rates have kept climbing, and that has held down consumer confidence. Even so, retail spending overall, manufacturing sector activity, and new business formations are all in good shape, and the jobless rate is still close to a 30-year low. The opening six months of the year proved challenging, just as we had expected, because the industry had to digest excess inventory while consumer spending patterns shifted. We look for demand and business to strengthen in the back half of the year, and there are multiple reasons for that. To start, consolidated orders have grown in the mid-double digits compared with the same period 12 months earlier, and orders have been rising across every segment for the last several months. Next, a large share of Hooker Branded's backlog is made up of orders for new products introduced at the High Point market, and those are slated to ship during the second half of this year. On top of that, Home Meridian anticipates shipping to more than 1,000 retail floors in the back half, which we think would be the biggest wave of new product placements in the company's history. In our view, every necessary element is now aligned to bring Home Meridian back to profitability during the latter half of the year. Although our attention is on cutting overhead expense, maintaining a robust balance sheet, and putting capital to work prudently, we have kept investing heavily in efforts that raise our profile among prospective customers and secure growth down the road, and we believe these steps will leave us best positioned as demand keeps recovering. That concludes the formal portion of our remarks. I'll now hand the call back to Catherine, our operator, so we can take your questions.

To start, I'm just wondering how sales trended from May through July — could you speak to that pattern? Then, is it possible to share an initial take on Q3? Also, I'd like to know what you're picking up from your retail partners regarding Labor Day, since that's a key holiday for furniture.

Of course. By sales pattern, do you mean orders, or do you mean shipments?

Regarding shipments.

All right. Let me confirm we're aligned; when it comes to shipments, clearly, our backlogs had reached a point that I'd characterize as not particularly strong enough to support steady shipments across the quarter. As we moved through the quarter, orders picked up, like we said, and our backlogs are getting better, yet that's a matter of timing, and all of that certainly hurt us during the quarter. What we heard coming out of Labor Day has been quite encouraging. I'd say, in virtually every category we looked at, what came back was either ahead of the prior year or only marginally — either matching it or slightly under the prior year, and the prior year was extremely strong. So overall, we view that as a very encouraging indicator for us.

Glad to hear that, Jeremy. Nice work on the balance sheet improvements too — inventories are down and the cash position is better. So do you figure there's more room to go on inventories? Or is it that as quarters strengthen, this might be the bottom for inventories? If you could just give us a sense of where inventories head from here, that would help.

From this point, we expect inventories to level off. Our inventory position is the healthiest it's been since I came on board, especially with the ACH, given what we've done with Accentrics Home and all that's been made public. Still, from where we sit, what I'd really tell you is that among all the controllables across the whole company, I feel the most confident I have since joining. A lot of that ties to the balance sheet. A lot of that ties to inventories. On the demand side, our inventories put us in a strong spot, and our order rates have risen considerably. So everything we think we can truly influence — I feel very good about it.

Understood. All right. So if ordering speeds up, like you mentioned with the double-digit growth in orders you're seeing, does that mean shipments and sales will also rise in the back half of the year? Or do you expect there might still be a bit of a gap there? And just to clarify, I'm asking about this on a year-over-year basis.

On a year-over-year basis, I'd say we're going to hold our own quite well in the second half compared to how we performed in the first half. I can't yet claim we'll surpass the second half of last year, since that was a fairly strong shipping period — we were still somewhat elevated from pandemic-era sales; but my sense is it'll be somewhat a tale of 2 halves for us, and we'll see much stronger shipping and order rates across the second half.

And we've reduced operating costs in the same time period.

Okay, so across that half too, we're actually up against an entirely different denominator.

Got it. Okay, that makes sense. Yes. It seems like you're achieving more improvement on the Home Meridian overhead side and with their warehousing space. So Sunset West appears to have been a standout during this quarter. What's behind it? And would you consider that expansion sustainable?

We would. In fact, it ranks among our bigger growth initiatives across the entire company. From our perspective, there are multiple levels on which it represents a substantial opportunity. First, at the time of the acquisition, they were heavily focused on the West Coast. That means we can take their distribution nationwide using our sales team across all our territories — as you're aware, whether that means Florida, South Carolina, Texas, or anywhere else in the U.S., our representation is certainly broader and our relationships stronger than theirs were prior to the purchase. Second, we can place Savannah alongside Sunset West while also handling some cut-and-sew cushion work and similar needs from our HF Custom facility in Bedford. What we've built is a supply chain spanning both sides of the U.S., and that will genuinely drive growth across the eastern half of the country thanks to lower freight costs and, once again, simply the visibility. Prior to the acquisition, they had no High Point showroom. Today they're obviously in our show place. They attended the casual show in Chicago. Now they're in Atlanta. Their visibility has risen dramatically, along with their capacity to ship from either coast; so every one of those elements will play a fairly significant role in their growth.

Glad to hear that. So during the quarter you completed a modest acquisition. I'm just wondering how you feel about doing more deals.

We keep an open mind about whatever might come our way. Honestly, at this stage we're quite selective. It truly needs to be a white space; anything that would take business away from what we already concentrate on across our portfolio is off the table. But take this case, BOBO, for instance — when customers check out Hooker Casegoods, their top question is who made this lighting, and can I purchase it? The main reason we acquired BOBO is so that we can turn the no into a yes on that question.

That's very clear. All right. So I suppose — and my final item regarding the repurchase program, you folks have clearly excelled at maintaining, in my view, a nicely balanced approach to deploying capital across dividends and repurchases; therefore, do you still have a substantial amount remaining under the buyback? Or is the repurchase authorization used up? An update on this would be extremely useful.

As of the quarter's close, we had roughly $2 million — $2 million, $2.5 million remaining, I believe. Since that point, we've bought back an additional $1 million or thereabouts. So — what's left under that repurchase is just a rather modest sum, and we'll keep carrying it out through a 10b5 to 1 plan. In my view, it has performed quite effectively. However, we must weigh that against strengthening the balance sheet. There remains some uncertainty in the economy. So we're aiming to strike that balance — our approach to capital allocation while also keeping the balance sheet strong.

I'd like to begin near the top of the balance sheet. Gross profit margin appears to be higher by roughly 350 to 355 basis points. Could you explain the factors behind that compared with the same period a year ago?

At present, lower costs are helping us. As was noted during the call, our Upholstery margins have risen since costs stopped fluctuating and we've managed to achieve better labor balance; regarding imported goods, somewhat lower factory cost is a benefit, though mainly we're gaining from freight expense and from finally working through the remaining higher prices, because we've brought prices down in line with those freight reductions. However, the final portion of inventory bought at elevated prices — those greater costs — is now being cycled through. So all of that, plus getting out of certain challenging businesses. A year ago at this point, the inverted cost structure at ACH weighed on us, and that's the reason we decided to leave that business. Consequently, I'd say these margins are likely — gross margins are likely somewhat elevated relative to what lies ahead, yet closer to normal than they were a year ago at this time.

At this point, would it be fair to say that pricing is more of a factor than volumes?

Yes.

That's great. Really useful. So if we look ahead, you said orders have genuinely begun to pick up, yet suppliers further down the chain are still clearing out some stock. With orders rising, do you think we're approaching some kind of inflection point? Or should we expect the destocking to keep going?

Yes. Some of that is in fact easing, though it has certainly played a role, and it keeps playing a role. That picture looks somewhat different from one retailer to the next. So it isn't really a — giving one broad answer is tough. One retailer is working through this, while another retailer might have purchased in a different way over that period; and — so — but on the whole, we certainly sense a somewhat looser situation right now when it comes to inventory, no question. And my sense is the solid Labor Day sales will be a help to us, even though I can't claim that yet because we're — we'll find out over the coming weeks.

That's really useful. Now, circling back — Paul, I believe you brought up keeping a solid balance sheet and how crucial that is for all of you. Could you share your thoughts on how at ease you feel with the debt you're carrying right now and the availability you have on the revolver?

Sure. This organization has consistently handled its balance sheet in a fairly conservative manner. And I'd say that has benefited us greatly across nearly 100 years of the company's existence. So that is — trying to keep a strong balance sheet is a fundamental principle for us. Right now, we have $27 million of availability on our revolver. On top of that, we've got $7 million tied up. Our revolver is $35 million, and $7 million is tied up in letters of credit. But $27 million is available there. Our debt stands at $22 million; so that's a fairly low level of debt. I realize this industry is pretty dead averse, but I'd say we're still fairly comfortable with that level of debt. We've got $50 million in cash; so I think that's a pretty comfortable level; and — that's a pretty comfortable level. So — but we would like to — as we watch the economy develop over this next year — the rest of this year, I think we're going to try to manage things cautiously and then make our capital allocation decisions for next year as we see what happens the remainder of this year.

We've also consistently pointed out that our track record of distributing dividends stretches back more than five decades.

Right. Right, which dividend yield is just under 4% right now.

Right, right.

We think that's important...

That's the priority.

Yes.

Got it. If I could squeeze in one more question. Purely from a modeling standpoint, you're spending somewhere in the neighborhood of $4 million to $5 million per quarter on CapEx. Can we reasonably carry that forward through the rest of 2023 — sorry, I mean the remainder of 2023?

For what's left of this year, CapEx should land at roughly $1 million; typically, we run about $5 million or $6 million annually on CapEx. This particular year came in somewhat higher because of new showrooms tied to our ERP project. So when you build your model looking ahead, I'd suggest using $6 million per year for CapEx alone.

Nice work. I'd like to add my own praise for how you've kept your balance sheet and financial condition in such solid shape throughout what I believe has to be the most turbulent period this industry has ever gone through — and perhaps society as well.

That means a lot. Thanks.

Thanks, and it's well deserved. When I consider Hooker, this company serves the broadest range of customers when it comes to geography, how many customers there are, and the kinds of business models involved. And I wanted to ask, Jeremy, whether you might share what you're picking up from customers at different levels, and perhaps go deeper. I'm aware of the majors, who seemed to have faced a significant issue with the order book in HMI; so as you survey the country and listen to retailers, what are you noticing — what subjects are coming up for them?

That's an interesting point, Budd. It's a really good question. What I've seen and what I've picked up on is that the sort of model each customer uses to move their inventories through seems closely tied to where they've stood from an inventory perspective. So the bigger customers, naturally, are receiving containers. They're taking in bigger inventory positions. That makes it harder to reverse course fast. So the container and Casegoods approach, I'd say, has proven the hardest approach throughout our industry. When you move to manufacturers holding domestic inventory, where they can purchase items essentially one at a time, that approach has created fewer disruptions, since you could place — you could actually land some orders in certain spots that weren't in the scenario I just mentioned, which was generally perhaps more of a medium to smaller customer, plus interior designers and naturally, e-commerce. Then there's yet another segment, domestically made Upholstery, and once more, in my view, that was likely the most favorable spot to occupy during the whole situation all of us have faced, for every reason I just gave regarding inventory position. Much of it is custom order, much of it happens one at a time. So truly, the various models, in my view, shaped what kind of position each retailer found themselves in.

And moving — drilling into that around Labor Day, which you might have caught wind of, and I understand that right now it's just anecdotal. What do you — are you picking up on any variations in the way demand is returning to those retailers and to the different categories of retailers, plus the condition of the inventories you brought up? I believe the inventory appears to be — do you figure you've witnessed the conclusion of destocking? So what's the state of inventories at retail and with the big players, clearly, since the smaller ones would give you, like you mentioned, orders placed individually; so when we...

Our view is that they're moving into a far stronger situation, though I suspect Labor Day will reveal whether that truly pushed them past the — past that threshold of feeling more comfortable placing larger orders. I believe a great deal of that has impacted manufacturers abroad. Naturally, it has been sluggish. And from my perspective, and this is purely my own view, I suspect there could be somewhat of an overcorrection in allowing inventories to drop perhaps excessively low. And after that, there could be, all right, how do I obtain items fast enough, and we might face something of a bottleneck as the year winds down? I'm not certain of this, incidentally, I'm merely sharing with you what I believe could occur.

this is something the industry has witnessed previously. That has occurred in the past...