Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Towanda. Good morning, everyone, and thanks for joining our quarterly conference call, where we'll go over the financial results for fiscal 2024's fourth quarter and the entire year — both periods closed on January 28, 2024. With me today is Jeremy Hoff, who serves as our Chief Executive Officer. We're grateful you could be with us. Before we continue, please note that forward-looking statements may be made on this call, and those carry risks and uncertainties. You can find a discussion of the factors that might cause our actual results to differ materially from what management expects in the press release and SEC filing that announced our fiscal 2024 results. Forward-looking statements reflect only today's perspective, and we're not obligated to update or revise them for events or circumstances arising after this call. This morning we announced that consolidated net sales for fiscal year 2024 came to $433 million, which is down $150 million, or 25.7%, from last year; the drop stems from soft demand across the industry and from discontinuing unprofitable product lines within our Home Meridian segment, and that accounted for roughly $21 million of the revenue decline. Even with lower sales, profitability came in higher than the previous fiscal year, largely because this period didn't include the $24 million inventory write-down that hit our Home Meridian segment, and also because our Hooker Branded segment became more profitable. Consolidated operating income was $12.4 million, and net income was $10 million, or $0.91 per diluted share. Turning to fiscal 2024's fourth quarter, which ran from October 30, '23 through January 28, 2024, consolidated net sales fell $34 million, or 26%, landing at $96.8 million, with declines across all 3 segments and soft demand for home furnishings again playing a role; net income was $593,000, or $0.06 per diluted share, versus a net loss of $17 million — nearly $18 million, or $1.60 per diluted share — in last year's fourth quarter. That fiscal '23 fourth quarter loss came about because of the $24 million inventory write-down tied to the unprofitable ACH product line and other excess inventories in the Home Meridian segment that period; with that, I'll hand things to Jeremy to discuss our fiscal 2024 full year and fourth quarter results.

Thank you, Paul, and good morning to all of you. Throughout a demanding year, our team's achievements and discipline make us proud, as they effectively reworked our HMI business model, boosted profitability and bolstered our balance sheet. Simultaneously, we reaffirmed confidence in our strategic growth efforts by persisting with the investments required to drive expansion over the long term. During this year, we took broad steps to steer HMI toward lasting profitability, and alongside that work we also pursued several initiatives aimed at growth over the long haul — launching the new M modern lifestyle brand, opening additional showrooms, bringing in a new enterprise resource planning operating system, and acquiring BOBO Intriguing Objects so we could better serve as a whole home furnishings resource. Despite the difficult conditions the home furnishings industry faced and a 25.6% drop in consolidated sales, we posted operating income of $12.4 million and net income of $10 million, which works out to $0.91 per diluted share for fiscal year — and as Paul noted, those figures mark considerable improvement over the previous year. During the year, we strengthened both our balance sheet and overall financial standing, bringing in $24 million in cash and finishing the year above $43 million. We also brought inventory back in line with demand, cutting it by $35 million, or 36%, a decrease that included clearing out HMI's outdated stock successfully. Fiscal '24 was a turning point for us as we put the worst of the COVID emergency behind us, even though some of its impact lingers. Starting in 2020, our company has navigated a stretch of macroeconomic turbulence unlike anything we've faced across our 100 years in business. First came the pandemic's sharp opening slump. That was followed by a spike in demand for home furnishings. Then we ran into supply chain breakdowns, products that simply weren't available, ocean freight expenses at record highs, substantial inflation, rising interest rates, a housing market that has been slow, and a short-term redirection of discretionary dollars away from home furnishings. Even with all this turmoil and the soft industry demand seen lately, we have bolstered our financial standing, put money into strategic investments aimed at broadening our addressable market, and maintained a dividend payment record spanning more than 50 years — this includes our eighth straight yearly dividend hike. Additionally, we're pleased to share news about structural adjustments that we think will put us in the best possible spot to expand going forward. All merchandising across our established labels now sits with a Chief Creative Officer, a setup meant to foster top-tier creativity and bring a more unified, aspirational face to how we engage the market. Through this step, Hooker should become a full-home, shopper-focused supplier for its buyers, create stronger connections across our labels, and in the end lift both revenue and profits once demand comes back. While marking a century of operations, the flexibility that has been central to who we are since 1924 remains essential to the wins we're seeing now and will propel us as we enter our second hundred years. At this point, I'd like to hand things to Paul, who'll walk through the key points for each of our segments.

Thanks, Jeremy. Over at Hooker Branded, net sales fell by $49 million, or 24%, versus the last fiscal year. The main culprit was weak demand in home furnishings, and that drop was made even steeper because the year before had seen such strong sales, fueled by the spike in demand following the first COVID crisis along with the delivery of an unusually large backlog we carried into fiscal 2022. Even with that sales decline, gross margins rose sharply, helped both by lower ocean freight costs and by the lasting effect of price hikes put through a year earlier. During fiscal '24, Hooker Branded brought in $16.8 million of operating income, a 10.8% operating margin, against $22 million and a 10.7% operating margin the year before. In the fourth quarter of fiscal '24, net sales dropped $14 million, or 27%, from the same quarter a year earlier. Incoming orders were level with last year's fourth quarter, and the backlog sat 25% below the prior year-end, though it is still 40% above where it stood at the close of fiscal 2020. Back in April 2023, we moved and enlarged our High Point Showroom so that our Hooker Legacy and Sunset West product lines could reach a broader audience, and we also launched 2 smaller showrooms, in Las Vegas and Atlanta. The Spring and Fall High Point Markets each set attendance records, with year-over-year gains of 92% and 86%, respectively. Combined, the new showrooms we opened in those markets have increased our annual customer contacts by more than four times, and we anticipate a significant return on that once furniture demand improves. Turning now to our Home Meridian segment. Net sales for the segment fell $73 million, or 34%, compared with the prior fiscal year, driven largely by soft demand for home furnishings, which reduced sales in all channels, among them traditional furniture chains, mass merchants and e-commerce. Beyond that, about 26% of the segment's sales decrease came from exiting unprofitable operations; more encouragingly, Samuel Lawrence Hospitality saw robust sales expansion of 38% amid a solid recovery in the hospitality sector. Both revenue and gross profit declined, though gross profit landed at $24 million, compared with a gross loss of $2.6 million during the same period last year; that substantial turnaround resulted primarily from the absence of the prior year's $24 million write-down tied to ACH inventories and other excess inventory. We achieved significant progress in reorganizing HMI around its primary operations and product offerings, and that allowed this segment to become profitable during the third quarter—something that had not happened since calendar 2021—while also boosting its gross profit for the fiscal year, positioning it for ongoing profitability. This segment recorded an operating loss amounting to $5.5 million, which equals 3.9%, representing an improvement of $31.7 million compared with the previous year, and it extends a trend of narrowing losses in recent years that we believe will return this segment to profitability. Turning to the fourth quarter of fiscal 2024, our net sales were $15 million below the prior-year period, a decline of 35%. At HMI, incoming orders beat every other segment, climbing by more than $74 million, which is over twice what we saw the year before; this growing demand confirms that HMI's push to bolster its product lineup and concentrate on core profitable businesses — Pulaski, PRI and SLH among them — is paying off. The order improvement at HMI was also helped, though to a smaller degree, by the fact that we had no cancellations from exited businesses this year. Backlog at year-end ran 16% below the prior year-end, yet it was up 30% from where it stood at the close of fiscal 2024's third quarter; and after the year ended, we've watched backlog rise by roughly another $15 million. Shifting to Domestic Upholstery. This segment's net sales fell $30 million, or 19%, against the all-time record sales it posted in the previous fiscal year, a record that came from working through historically high order backlogs. Sales declined in all 4 divisions, pulled down by weaker demand for home furnishings. Gross profit and margin both declined, the result of lower net sales combined with under-absorbed overhead from running at reduced production levels throughout the year. On a brighter note, all 4 divisions saw more stable raw material costs. In fiscal 2024's fourth quarter, net sales dropped by roughly $5.5 million, or 16%, against the prior year's fourth quarter. Incoming orders rose across all 4 divisions during fiscal '24. At the close of the year, our order backlog stood 36% lower than it had been at the end of the prior year. If you set aside Sunset West, the business we bought on day one of fiscal 2023, Domestic Upholstery's backlog remains 7% higher than where it was when fiscal 2020 ended. Now let's look at the balance sheet. When fiscal '24 wrapped up, cash and cash equivalents came to $43.2 million, which is $24 million more than at the previous year-end. Compared with the earlier year-end, inventory levels dropped by $35 million, a result of the inventory planning adjustments we made in response to current demand and our business structure. During fiscal '24, our operating activities generated $55 million in cash, which went toward several things: $11.7 million for share repurchases, $9.7 million in cash dividends, $6.8 million in capital expenditures — that includes what we invested in the new showrooms in High Point, Atlanta and Las Vegas — $5 million to keep implementing our ERP system, $2.8 million covering principal and interest on our term loan, and $2.4 million for the BOBO acquisition. We wrapped up the buyback that began during the second quarter of the prior fiscal year. All told, we laid out $25 million to acquire and cancel 1.4 million shares of common stock. On top of the cash we hold, there's a total of $28.3 million we can draw from our current credit facility, plus $28.5 million in cash surrender value tied to company-owned life insurance. Aligning our inventory levels with present demand was a key factor behind the boost in cash this year, and we've put disciplines in place aimed at heading off inventory buildups down the road. At present, our priorities for allocating capital consist of continuing to put money into organic growth along with strategic initiatives, plus keeping our balance sheet strong until the demand picture gets better, all while still paying a meaningful dividend — something we've done across 53 straight years. Now I'll hand things back to Jeremy so he can share his outlook.

Thanks, Paul. Through roughly 2.5 months of the new fiscal year, demand in the home furnishings sector is extremely weak; on a year-to-date basis, consolidated orders have declined by a mid-single-digit rate versus the comparable stretch a year earlier. Even so, we think the spending and upgrades undertaken over the last year will serve as a launching pad toward greater profitability, particularly once demand picks up. The economic picture is uneven, which leaves us cautiously optimistic. Sector demand remains weak, and consumer confidence has slipped lately following a number of months of gains. Measures of how consumers view both present conditions and what lies ahead deteriorated during the past month, even with what look like promising developments, such as cooling inflation and probable reductions in interest rates. Still, certain favorable signs exist. We take encouragement from the recent robust rise in building permits and single-family housing starts, the recent drop in mortgage interest rates, ongoing favorable employment figures and the strong showing by the stock market. Since the close of fiscal '24, our consolidated order backlog has grown from $72 million to roughly $85 million; we remain confident that our strategic investments in sales channels, people, systems and products were the right ones, and that we are set to expand as the economy gathers steam. Looking ahead, we plan to rely on the strength of our balance sheet and our variable cost model to endure today's economic turbulence until consumer confidence rebounds and demand returns to normal; we look forward to the Spring High Point Market, which opens this week, and anticipate solid attendance given the exciting array of new products we are offering across divisions. At the market, we are beginning a year-long celebration to recount our 100-year history of design, leadership, culture and legacy of giving. As we get ready to enter our 100th year, we feel privileged to mark this remarkable milestone alongside our employees, our partners and our communities. In 2024, we will commemorate our anniversary through a range of activities, none more significant than those the demonstrated heritage focused on improving the lives of the people we touch. Over the years, our team has placed integrity and our philanthropic culture at the center of all we do; so it makes sense that, as the cornerstone of our 100th year anniversary sale duration, the company is introducing a signature philanthropic program, 100 Acts of Kindness, meant to magnify our spirit of giving in an even more meaningful way throughout our centennial year. This nationwide program seeks to further improve the lives of those in need, extending our reach to communities throughout the U.S. That concludes the formal portion of our discussion. And now I will hand the call back to our operator, Towanda, for questions.

First off, congrats on reaching your 100th anniversary. It's definitely good to see the balance sheet looking better too. So Jeremy, like you mentioned, the last few years since COVID have been wild, no doubt. Maybe to get us started, when it comes to the fourth quarter, could you discuss unit volumes against pricing? I mean, pricing clearly rose during COVID and afterward declined. So I was hoping for a clearer framework regarding the overall top line — what occurred with unit volumes and pricing in Q4? I've got a couple more questions too.

Sure, Anthony, give us a second, please, we're getting that ready. I appreciate what you said about the 100th year and the years we've been through. Thank you.

Okay, so the specifics are going to be in the K, and my expectation is that we file that tomorrow morning, or maybe around noon tomorrow. Broadly speaking, though, our unit volume has declined, and pricing has slipped somewhat. In HMI in particular, pricing has come down a bit. Still, what's driving most of it is unit volume — that's what has fallen at this stage.

Okay. Actually, I'll take...

Go ahead. Sorry.

Actually, what I meant was that once the 10-K gets filed, I'll check it for the specifics; but please continue, Jeremy.

Sounds good; that's exactly the approach we ought to take.

Unit volumes are down about 20-ish percent.

Understood. Okay, that makes sense. Alright, moving on — so on the whole, gross margin showed a solid gain, and that's a pretty meaningful jump compared with the prior year. Of course, it's lower than what we saw in Q3, when I think you benefited somewhat from LIFO. That said, thinking ahead, with all the different positives and negatives affecting the business, how should we view your availability — sorry, I mean your capacity to keep these gross margins at this level?

Over the course of the quarter, there were certainly some fluctuations, but I'd say the gross margin we posted in Q4 is likely a good representation of what we can maintain moving forward.

That's really useful. And after that...

What we're not observing is anything major...

All right, understood. All right. Then — you folks mentioned what you've observed thus far during this fiscal year; we're already 2.5 months into this new first fiscal quarter. According to you, orders are down mid-single digits. So in terms of revenue for the quarter, how are we supposed to think about that? Or whatever else you're able to share. I realize there can occasionally be a delay between orders and the point when they turn into revenue. So perhaps you could assist us in sorting that out? From a revenue standpoint, how should that be approached?

Anthony, when it comes to revenue, since we entered the first quarter coming off the fourth quarter carrying smaller backlogs, our outlook on that is rather cautious; even so, the rising order rate that is growing our backlog gives us encouragement. I think I gave the figure — it's roughly $15 million higher versus the same time last year. So that gives us encouragement, yet it didn't arrive — it truly didn't arrive for us until midway through the first quarter, which will likely affect the first quarter more when it comes to revenue, and after that we'll see further improvement in the second.

Right. A large portion of it sits within Home Meridian, where the order-to-shipment cycle tends to run somewhat longer, so it gets pushed down a bit.

All right. That's useful context. And moving on to what's coming in the market — you mentioned a few of the new items you're bringing out. Jeremy, is there any specific collection or anything at the market showcase that has you excited?

I walked both showrooms yesterday, and across pretty much every part of the business, our introductions are strong. When it comes to improvement, given where we've come from, HMI keeps building momentum with the new products they've launched. And as we — Pulaski has clearly been out front; in my view, they were able to begin their product-side improvement sooner. PRI and Samuel Lawrence keep building momentum too. And when you end up in the spot we did, coming from what I'd describe as a lack of focus, plus having a lot of other businesses we needed to exit — when you go through something like that, it takes time — you can't fix one thing in a market or 2 and expect to get it all back. But Samuel Lawrence is certainly making their way back, and we're seeing evidence of that in many ways, though it's our partners we talk with, the ones giving us commitments and placements, who are providing that feedback, which honestly is where I'm hearing it from, correct? So their progress and the direction they're going leave me very encouraged.

Understood. And for my final question before handing things over to the others here. Could you give more detail about the management shifts that happened lately regarding merchandising roles? Do you also anticipate some benefits on the expense side as you work to bring your merchandising approach together? Broadly speaking — I'm just curious, Jeremy, whether you might share some extra insight on this. That would be useful.

Okay, I'll address the second half of what you asked first. Saving money wasn't the reason we made this move. The reason was to put resources into what we'd describe as the area of our business that generates the most profit; and if you look back to early 2000 when the purchase began, we acquired BY, Bradington-Young, and we acquired Sam Moore. After that, naturally, HMI and Shenandoah; but when you examine that older structure with really within the Showplace building, you've got Hooker Casegoods, Hooker Upholstery, HF Custom and Bradington-Young and then Sunset West and BOBO Intriguing Objects, which adds up to quite a lot. Given how items get purchased, retailed, and perceived nowadays, along with our ability to serve as a whole home resource, it was logical for us to establish a Chief Creative Officer role so the various companies across legacy could be brought into alignment, allowing us to genuinely turn into a whole home resource. Imagine these separate skilled teams collaborating, yet lacking any real capacity to operate across those separate lines — that holds back our growth unless we find a method to truly point in the same aesthetic direction and shift forward together with greater strength.