Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Lisa. Hello everyone, and welcome to our quarterly conference call, where we'll go over the financial results for fiscal 2024's third quarter, which started on July 31 and wrapped up on October 29, 2023. With me this morning is Jeremy Hoff, our Chief Executive Officer. We're glad you could join us. On this call, we might share forward-looking statements, and those come with risks and uncertainties. You can find a discussion of the factors that might make our actual results differ materially from management's expectations in our press release and SEC filing that announced our fiscal 2024 third quarter results. Any forward-looking statement reflects only today, and we're not taking on any obligation to update or revise forward-looking statements to reflect events or circumstances that arise after today's call. This morning, we reported consolidated net sales of 116.8 million for our fiscal 2024 third quarter, which is a drop of 35 million, or roughly 23%, from last year's third quarter, caused by ongoing weak demand for home furnishings along with our exit from the Accentrics Home product line. Even with that sales decline, operating income and margin both went up, thanks to lower product costs at Hooker Branded and a better margin at Home Meridian stemming from the exit from unprofitable categories. Consolidated net income came to $7 million, or $0.65 per diluted share, for the quarter, versus 4.8 million, or $0.42 per diluted share, in the prior year period. For fiscal 2024's 9 month period, consolidated net sales fell by 115 million, or 25%, to 336 million compared with last year at the same period. Consolidated net income was 9.3 million, or $0.85 per diluted share, compared to 13.6 million, or a $1.14 per diluted share, in the prior period. Now I'll hand the call over to Jeremy to comment on our fiscal 2024 third quarter results.

Paul, thanks, and good morning everyone. On this call, we're going to walk through our third-quarter and first 9 months results, and also discuss how repositioning Home Meridian is delivering tangible results — shifting that segment from a volatile, high risk approach where revenue and profitability were unpredictable to a lower risk model with more sustainable profits. We still face headwinds from the housing market slow down, elevated interest rates, and consumers directing discretionary spending away from home furnishings, yet we're encouraged by favorable signs including normalized ocean freight rates, looser supply chain constraints, steadier raw material cost, and greater labor availability. This is the improvement we've been telling you to expect for a while — profits pick up a lot once we get into the back half of the year. For the first time since calendar year 2021, the Home Meridian segment turned in a quarterly operating profit, adding 900,000 to income during the current year third quarter, versus a 3.2 million loss in the prior year third quarter. The home furnishings industry's macro backdrop has been rough, but our team pushed through hard calls and near-term strain to build a segment business model that holds up better and earns more, and we're proud of them for it. Over the past two years, we've been repositioning HMI around its core products and businesses, so it's encouraging to see HMI post a quarterly profit—its first in two years—and add to our overall profitability. At HMI, inventory came down by 15 million versus year-end, and by 46 million versus the third quarter a year ago. On top of that, we've adjusted our inventory mix so it matches our current business plan, cut 200,000 square feet from the Georgia warehouse footprint during the second quarter, and in the third quarter signed an agreement to trim another 200,000 square feet by early next year. Cutting loose surplus stock, trimming our cost structure, and walking away from ventures that weren't turning a profit have left us considerably better off. Executing the growth plans we've laid out and concentrating on the levers within our grasp remains our top priority. Compared with earlier quarters, demand has softened, yet consolidated orders for Q3 still climbed by 12.7 million, a gain of 15.7%; across the first 9 months, those orders rose 75.8 million, or 33.5%. The Home Meridian segment accounts for the bulk of that consolidated gain, since its orders during the same stretch last year were abnormally weak; throughout this quarter we've kept strengthening our balance sheet, pulling in roughly 49 million of cash from operations during the fiscal year's first 9 months. When the quarter wrapped up, our cash and cash equivalents stood at 40 million — that's 21 million higher than where we ended the previous year. On the inventory side, we saw a drop of 32 million compared with year end, and a decline of 69 million versus the same point twelve months earlier. Looking at the recent fall High Point Market, every metric we track across the company came in positive. Raising our visibility in the marketplace ranks among our most important strategic objectives. We brought on 2 additional smaller showrooms — one in Las Vegas, another in Atlanta — and we moved our largest High Point showroom to a new location, which has drawn a much larger audience both for the products in our legacy business and for Sunset West as well. HMI also saw a healthy market, because their focus is on strengthening the product mix for Pulaski, Samuel Lawrence Furniture and PRI. Favorable retail reaction came from our HMI group's efforts to revitalize and reposition the offerings for growth, plus new placements from our key customers. As we mentioned before, the new showrooms in High Point, Atlanta and Las Vegas have combined to raise our customer contacts from roughly 3000 to about 14,000 annually, which is more than four times the number of current and prospective buyers. In the first half, we added 1000 new accounts, which we owe to greater visibility and engagement. That momentum carried into this quarter, when we averaged 150 new customers per month. Softer business conditions persist across the furniture industry overall. Still, we're quite pleased with the things we can control. Our inventory and overhead positions are healthy. Apart from warehousing, most of our cost cuts are done, and we anticipate no further personnel reductions. I'd now like to hand things to Paul, who will walk through highlights for each of our segments.

Thanks, Jeremy. To start with Hooker Branded, demand for Soft Home Furnishings along with short-term disruptions—roughly 3 million in impact—tied to rolling out our new ERP system over the Labor Day weekend, caused the segment's net sales to fall by approximately 17 million, or 31%. Absent those ERP-related disruptions, we estimate sales would have come in around 26% under the prior year. Even with that sales drop, Hooker Branded posted solid operating income of 7.3 million and an operating margin of 18.6%, which is an improvement over the 5.9 million and 10.3% from the same quarter last year. For the fiscal 2024 9-month period, net sales declined by 35 million, or 23%, on lower unit volume. These sales declines highlight weaker demand for home furnishings. Gross profit and margin both rose in the fiscal 2024 third quarter even as net sales fell, with those favorable results tied to substantially lower product costs stemming from reduced ocean freight rates. Additionally, warehousing costs came down because of lower demurrage and drainage expenses, along with reduced labor and compensation expenses from less shipping activity. The unusually high gross profit margin of 45.6% this quarter is anticipated to be temporary, reflecting the timing of lower freight and product costs plus recent price cuts across the segment. Although price reductions and promotions went into effect in August, most inventory sold during the quarter still carried higher selling prices that had been put in place in earlier years to offset enormous freight cost increases, which produced exceptionally high gross margins. We anticipate Hooker Branded margins will return to historical levels in upcoming quarters. Incoming orders rose 7% versus the prior year's third quarter and versus this year's second quarter. Even though quarter-end order backlog was below the prior year quarter end, it was up from this year's second quarter and stayed almost 70% above pre-pandemic levels at the close of the fiscal 2020 third quarter. Turning to Home Meridian, the Home Meridian segment's net sales fell by 6.9 million, or 13%, compared with the prior year third quarter, though they rose relative to the first and second quarters of the current year. Sales declines in the e-Commerce channel formerly served by Accentrics Home made up more than 40% of the segment's total decrease because of our exit from that line. The rest of the segment's decreases came from lower sales at Samuel Lawrence Furniture, PRI and Pulaski, all divisions serving independent furniture stores and major retail chains. Those decreases were partly offset by strong sales at Samuel Lawrence Hospitality, which posted sales gains of 152% and 46% for the third quarter and 9 months respectively. Despite the net sales decrease, HMI gross profit and margin improved by 940 basis points, or $3.4 million, in the fiscal 2024 third quarter. That gain was attributed to better margin as we exited unprofitable sales channels and product lines. Lower product costs and better profitability in hospitality also contributed. On top of that, reduced expenses at the Georgia warehouse plus lower wage costs stemming from organizational and personnel changes both fed into the higher gross profit margin; during the 9 month period of fiscal 2024, gross profits dipped somewhat because sales fell while gross margin climbed 530 basis points thanks to the factors I just described. Plus the prior year first quarter had warehouse transition and startup costs that didn't recur. Home Meridian posted quarterly operating income of $900,000 versus a $3.2 million operating loss in last year's third quarter. Inventory liquidation that had been written down in the fourth quarter of fiscal 2023 was basically finished during the quarter and its effect on gross profit was immaterial. Incoming orders came in 19% above the prior year third quarter, yet they were below first and second quarter orders since our retail customers are aligning their inventories and orders with today's soft demand for home furnishings. Backlog at quarter end was below the same period a year ago. At domestic upholstery, following 2 years of sales growth, domestic upholstery net sales fell by 11 million, or 25%, in the fiscal 2024 third quarter because of weaker demand. Every one of the four divisions posted sales declines for the quarter and the 9 month period. Gross profit and margin each declined in the fiscal 2024 third quarter and 9 month period, pushed down by net sales decreases. Direct material costs came in under prior year periods thanks to more stable raw material costs. Even so, those reductions were more than outweighed by under absorbed indirect costs, which ran higher than the prior year third quarter and 9 month period, mainly because of indirect labor costs. Incoming orders rose 39% against the third quarter of the prior year, with Bradington-Young, HF Custom and Shenandoah each reporting higher orders. Sunset orders were flat versus the prior year third quarter. Segment quarter end backlog edged down from the second quarter end. Bradington-Young's backlog stood at 2.5 times pre-pandemic levels. Meanwhile, backlogs at HF Custom and Shenandoah fell to levels similar to the fiscal 2020 year end. A core value here at Hooker Furnishings is keeping a strong balance sheet and financial position. As Jeremy said earlier, we generated 49 million in cash from operations across the first 9 months. That cash covered $12 million of share repurchases, $7 million of cash dividends to our shareholders, 5.7 million of capital expenditures, including investments in our new showrooms, 3.8 million for developing our cloud-based ERP system and 2.4 million to acquire BOBO Intriguing Objects in the second quarter. On Tuesday, we announced our quarterly dividend of $0.23 per share, a 4.5% increase over the previous dividend, which will result in annual dividend yield just under 5%. That bump marks the 8th year in a row that our dividend has gone up, which shows how confident we are in our business model and how dedicated we are to giving something back to our shareholders. On the same topic of shareholder value, we finished the share repurchase program in the third quarter — that program had started in the second quarter of last year. Across that stretch, we laid out $25 million total in just over a year to buy and retire 1.4 million shares of our common stock; having said that, I'll hand things back to Jeremy so he can share his outlook.

Even though economic signals are still uneven and traffic in furniture stores dropped roughly 15% between January and October 2023, the longer-range picture has gotten better. Housing activity that has slowed, along with elevated mortgage and interest rates, continues to pose difficulties, yet a number of favorable developments have appeared since the prior quarter. Core inflation sits at its — at the smallest figure since 2021, and the US economy expanded by almost 5% in the last quarter. Joblessness is still at historic lows, and the chance of a recession seems to be easing. Turning to the upcoming quarter, we anticipate unchanged sales for our Hooker legacy brands, alongside a continuing near-term decline in HMI sales until newly added retail placements start producing greater sales at some point in the first quarter of next year. Initial signs during the fourth quarter suggest that incoming order activity is getting back to stronger levels, which we saw for most of this year. We expect our growth initiatives to keep building momentum during the first half of 2024. Our emphasis on cutting costs, maintaining a solid balance sheet and prudently allocating capital, together with our investments aimed at boosting visibility and future growth, keeps positioning us as strongly as possible to take advantage of your return of furniture demand toward more normal levels. That concludes the formal portion of our discussion. And now, I'll hand the call back to our operator, Lisa, for questions.

It's great to see the bottom-line outperformance, and definitely a stronger balance sheet compared to 12 months ago. So, as far as — I suppose HMI has clearly seen a big profitability gain versus 12 months ago, with gross margin there at roughly 20%; so should we view segment gross margins this way going forward, or was there something unusual this quarter that means this rate of gross margin expansion may not be sustainable?

That's pretty much in line with our targets. There is some fixed cost in there related to our warehousing costs, so that might come down a bit if sales decline, but in a normalized environment, that's the approximate range, I think that's what you ought to be considering.

All right. That is definitely an improvement over how things were in the past, so I find that encouraging.

Well, in the past, the poor-performing operations we got out of had been masking the gross margin.

That's right. Okay, so about the gross margin on the Hooker branded side — it was unusually strong, like you mentioned. Do you expect to get any kind of lift from the products with higher prices in Q4, or do you figure you've mostly cleared all of that out during Q3?

Our view is that we've cleared a great deal of it out, though we still expect there could be a bit of benefit remaining, in part during the fourth quarter.

Should normalize customer.

Yes.

Understood. Regarding what you expect ahead, for Q4 you provided certain measurable figures for the Hooker brand. You believe revenue will be roughly level, lower at HMI, and nothing was actually said about domestic upholstery, so I suppose, since orders are arriving 16% greater, which is a positive sign, yet there's discussion of software demand. So altogether, what's the right way to view fourth quarter revenue? I mean, if we assemble all these elements?

Well, I'll address that in fairly broad terms, and afterward Paul can complete the picture, but you need to keep in mind the backlogs we were exiting from during last year compared with this year and our order, so those were very elevated. And as a result, the order rate was very depressed relative to many of those businesses. So these large percentage gains in order rates are essentially just restoring the backlogs toward what's probably closer to a normal business level rather than reflecting the sort of increases the order rate appears to suggest. Is that clear?

Yep. That sounds fine. Then finally, before I hand things over to the others, regarding the buyback — you finished the repurchase authorization — how interested are you in launching a new share buyback, or would you say you'd rather pay down any debt you're carrying, given that interest rates are higher now?

I'd say at this point our aim is to be confident in our read on the economy and perhaps hold steady, keeping the balance sheet strong and putting money into organic growth. If you've seen our investor presentation, we have quite a few fairly ambitious growth targets; we have particular strategies in place, and I believe our main focus today is to put funding behind those organic growth strategies; we have Bobo and we have Sunset West, both of which we expect to expand quite substantially. So I'd say near term, those rank above doing another share buyback. And naturally, keep up our dividend — we take a lot of pride in that dividend, and we just raised it once more, marking the eighth consecutive year. So I'd say all of those rank above doing more share repurchases.

I'd like to begin by discussing normalization and demand, and how you're thinking about productivity and capacity, particularly in the home Meridian segment. I saw that orders increased while backlog decreased. Is that simply because efficiency is rising sharply, or is there additional capacity available from that segment?

The order rate on the HMI side really didn't begin climbing until late in Q3, which, as you pointed out, resulted in a smaller backlog. That's the reason we're stating that among the many placements we have in the field, we see plenty of positive signals that they're performing well, and we're beginning to see notably higher orders in the HMI business — which is why we expect the backlog to grow over the course of Q4. That's also the reason we expect HMI to have a considerably stronger first quarter in Q1.

The Lunar New Year is also going to shift some shipping patterns.

Correct. However, when it comes to backlog and when it comes to orders, what truly matters is when those orders actually got better on the HMI side. Does that answer your question?

Yes, that's right. Thanks. And when we consider the greater visibility you're going to have moving forward as your new showrooms come online and so on, how much of a runway do you figure exists for that to lift demand and eventually convert into new orders?

Regarding visibility — and this is really about what we call the Hooker Legacy portion of the company — that greater visibility, as we said, is likewise enabling us to attempt to sell to a much larger group of customers than was possible before. Selling to that group, and the specific sorts of customers in question, requires a while before you truly understand the ins and outs of what they do at the project level, whether those are interior designers and, you know, the items we're attempting to pursue. So the first step is visibility. The second step is getting the account opened. The third step is the degree of engagement we can reach with those added accounts, and that does take time, but we — based on our track record of doing this across thousands of accounts previously — we have a rough sense that it will ultimately take hold, and we think it's a meaningful growth opportunity for us.

All right, and I have just one more thing to ask on that topic. What sort of schedule would you anticipate for the process that goes from getting in touch with people, to establishing accounts, and then to those accounts eventually producing revenue?

Starting from the point when we began increasing our visibility, my answer would be that I think there is, from this moment, a window of another 12 to 18 months before we truly witness a meaningful lift on the legacy side that comes about because of the visibility effort.