Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thank you, Kevin. Hello everyone, and thanks for joining us on this quarterly conference call where we'll go over the financial results from our first quarter of fiscal 2025, a period that closed on April 28, 2024. With me today is Jeremy Hoff, who serves as our Chief Executive Officer. We're grateful that you're taking part today. Throughout this call, we might share forward-looking statements, and those carry risks along with uncertainties. You can find a discussion of the factors that might cause our actual results to differ materially from what management anticipates in the press release and SEC filing we issued announcing our fiscal 2025 first quarter results. Any forward-looking statement reflects only what we know as of today, and we assume no duty to update or revise any forward-looking statements to reflect events or circumstances arising after today's call. This morning, we announced consolidated net sales of $93.6 million for the fiscal 2025 first quarter, which represents a decline of $28 million, or 23%, relative to last year's first quarter. Each of our three reporting segments saw sales fall because demand for home furnishings is weaker, a trend weighing on a large portion of the home furnishings industry. In particular, the $7.5 million of revenue we no longer have from the Accentrics Home product line, which we exited during fiscal 2024, was responsible for roughly 25% of the drop in consolidated sales. During the quarter, we posted a consolidated operating loss of $5.2 million and a net loss of $4.1 million, or $0.39 per diluted share. Because of the macroeconomic uncertainty we currently face, and although we anticipate being profitable for the current fiscal year and beyond, we're closely examining our spending as well as our fixed cost structure, and in the fiscal 2025 second quarter we expect to complete and put into place plans to reduce costs. Starting in the second half of fiscal 2025, we anticipate achieving a 10% reduction in fixed costs. Those savings should result from a mix of consolidating certain operations and other reductions in fixed costs. I'll now hand the call over to Jeremy to discuss the fiscal 2025 first quarter results.

Thanks, Paul, and good morning to all of you. According to data from the US Census Bureau, sales at furniture stores across the country, measured against the same month a year earlier, have now declined for 14 straight months. We found our first quarter disappointing, since the soft demand affecting the entire industry, which started last year, carried on. Reporting an operating loss is not something we enjoy doing, since it's a rare occurrence for us, but the drop in sales across all of our segments accounts for nearly all of it, and we firmly believe that profitability will return as demand and revenue bounce back, even if earnings experience some near-term volatility; our confidence remains high that the operational, marketing and merchandising strategies we're executing are genuinely transformative. Situations like the current one allow us to step back, reassess and even reimagine certain areas of our business. Despite the conditions we're facing, we think the money we're putting into new showrooms, into widening the customer base we can reach, and into prioritizing strategic initiatives will position us to gain market share. Thanks to the larger showroom spaces we now operate, we've already seen traffic and visibility climb by just about 400%. There's a huge amount of room to grow as we take our flagship Hooker legacy brands — our product lines — and move them from good to great. At the recent High Point Market, our retailers, designers and sales representatives gave a warm welcome to Caroline Hipple, who stepped into the newly created role of Chief Creative Officer. She's highly respected across the industry, and she has a strong talent for drawing people together to collaborate. As part of the executive leadership team, she'll lead a collaborative merchandising approach that spans our brands, uniting case goods, upholstery and outdoor furnishings with lighting accessories and accents. During the 28 years I've spent working in this sector, the group she directs stands out as the most capable I've ever been part of. The human element is what truly drives results, and that's the reason our confidence in future growth remains so strong. By fully aligning our divisions and pushing ahead together with one creative vision—one shaped by what consumers want in terms of style, materials, color and aesthetics—we have the chance to turn into a whole home resource, delivering a product line and presentation that faces forward more directly. Paul already noted that today's conditions have forced us to resize our cost footprint, matching it to both present and anticipated medium-term demand by strategically realigning how we operate. Our plans aren't fully settled yet—we should know more at some point during the upcoming quarter. Even so, what we're projecting right now is that fixed costs overall will come down by 10%, which would be the biggest reduction we've ever made. Among the steps we intend to take: folding BOBO into Hooker Branded, shrinking our warehouse presence in Georgia even further, combining some other operations, and finding more ways to trim fixed costs. Our team is working hard to get the expense structure right without slowing down or weakening the strategic initiatives that we think will deliver a major lift to Hooker once demand returns to normal. For this fiscal year and the ones after it, we anticipate turning a profit. At this point, I'd like to hand things off to Paul, who's going to walk us through what stood out in each of our segments.

Thanks, Jeremy. Let's start with the Hooker Branded segment. Net sales fell by $8 million, which is 18%, versus the first quarter a year ago. The main driver was lower unit volume, and to a lesser degree, reduced average selling prices that came from price cuts we put in place late last year in response to lower ocean freight costs. Weak demand throughout the home furnishing industry caused a 13% drop in incoming orders for the quarter, along with a 14% decline in backlog versus the prior year quarter-end. Quarter-end backlog is still 40% above pre-pandemic levels from the end of fiscal 2020 first quarter. Over at Home Meridian, segment net sales were down by $15 million, or 37%, in the first quarter. Almost half of that revenue decline came from not having Accentrics Home liquidation sales after we exited that business last year. If you set aside the liquidation sales, core sales were down roughly 17% for the quarter. The rest of the decreases came from lower sales through major furniture change and independent furniture stores, which was driven by anemic industry demand, plus lower hospitality sales because of shipment timing. On a brighter note, fixed overhead costs came down by $2 million thanks to business restructuring and reorganization, which involved redeploying space at our Georgia warehouse to support Sunset West's East Coast expansion. Incoming orders dropped by 6% in the first quarter, while Samuel Lawrence Hospitality incoming orders more than tripled. The quarter-end backlog was 22% above the same period last year and 37% above the fiscal 2024 year-end back in January. The Domestic Upholstery segment net sales declined by $5 million, or 14%, in the first quarter because of lower volume at Bradington-Young, HF Custom and Shenandoah. By contrast, Sunset West posted a 20% sales gain versus the previous year first quarter, which we attribute to its expansion to the East Coast distribution and its new ERP system stabilizing over the past year. On top of that, Sunset West saw incoming orders rise 9% during the quarter and 31% in May. For much of the last year, Sunset West ran into some speed bumps with the onboarding of the new computer system and with building out the resources and personnel needed to expand its distribution. We believe Sunset West is now starting to hit its stride for positive trajectory going forward. While incoming orders were up by 2.8% for the quarter, quarter-end backlog for this segment declined compared to the prior year quarter end, but it did increase from the fiscal 2024 year-end. If you exclude Sunset West, order backlog was 38% above pre-pandemic levels. Now reviewing our cash, debt and inventory positions. Cash and cash equivalents were $41 million at the end of the first quarter, down $2.3 million from the end of fiscal 2024. During the first quarter, we used cash on hand and the $1.5 million generated from operating activities to fund $2.5 million in cash dividends, $1.3 million to further develop our cloud ERP system and $800,000 in capital expenditures. Beyond the cash on hand, at year-end we also held $28.3 million of available borrowing capacity through our current revolver, plus $28.7 million representing the cash surrender value of life insurance policies the company owns on its employees. With so much uncertainty hanging over both the furniture sector and the broader economy, our approach to allocating capital over the near term centers on safeguarding what we have until signs of an industry recovery appear, while at the same time defending the more than 50-year track record of quarterly dividend payments we've built and keeping up our spending on organic growth efforts. Our balance sheet, we believe, is conservative, and that should help us get through today's demand conditions, though we recognize that prudence is warranted in a business as cyclical as this one. With that, I'll hand things back to Jeremy so he can share his outlook.

Thanks, Paul. We're still seeing a mixed picture in the economy—unemployment is holding below 4%, inflation cooled a bit in April, and that helped stocks post a record showing in mid-May. On the other hand, the Consumer Sentiment Index dropped 10% during May, after several months without much change, which points to fading optimism among people of different ages, income brackets, and education backgrounds. Also, existing home sales were down on a year-over-year basis in March and again in April; in our view, sluggish home sales reflect where interest rates stand and the limited housing supply, since inventories remain far under pre-COVID levels. As long as the Federal Reserve hasn't acted to lower interest rates, we expect housing—and with it demand for home furnishings—to stay soft. We still think the investments and process improvements from the last year will serve as a springboard toward greater sales and profitability. Among those investments and improvements: the broad repositioning of Home Meridian, aimed ultimately at sustainable profitability once demand gets back to normal levels, plus the ongoing honing of our strategy and the transformative merchandising approach we intend to roll out across Hooker Legacy Brands. Because so many economic fundamentals are sound and our company is positioned well, we expect to gain when consumer confidence and industry-wide demand improve. Versus fiscal year-end in late January, our consolidated backlog has risen roughly 19% through the first quarter, and consolidated orders climbed 11%, with each segment posting higher orders than the prior quarter. Those gains give us encouragement; that concludes the formal portion of our discussion. Right now, I'll hand the call back to our operator, Kevin, so we can take questions.

Morning, and thanks for fielding these. To kick things off, since your call is happening when it is, I suppose I'll start with something more oriented toward what's ahead. Memorial Day was only a short while ago. I'm just wondering what you and your retail partners are observing — or what you're hearing from them — regarding sales around that holiday, which historically has driven a lot of furniture purchases.

Yeah, morning, Anthony; the feedback we're getting from retail partners is pretty favorable. I wouldn't describe the mood as having returned to normal, but it does appear somewhat improved compared with how things have been, and tough is the word I'd use for that.

All right, glad to hear it. And then, I suppose too, regarding those growth efforts you'd announced before, and now that Caroline Hipple has come aboard, Jeremy, has the way you think about how big a few of those efforts might be, or when they happen, shifted? I recall you'd mentioned before growing sales in interior design, e-commerce, Sunset West, and that brand appears to be performing nicely. But broadly speaking, perhaps you can help us grasp, since clearly the current climate is tough, yet with new senior talent added, what's your view on where these growth plans are headed from here?

Well, in the next few weeks I'll be able to give a more precise response to that. For the time being, though, I'd say that any sort of deceleration like what we're seeing today alters the path for a number of those efforts, and we're figuring out precisely what that entails.

All right, understood. Then, regarding those cost-cutting initiatives you mentioned, how should we model how they roll out quarter by quarter across the back half? Can you give a specific dollar figure tied to those expenses as we build them into our financial models?

If we look at it on a run rate basis, roughly 10% — our fixed overhead sits at approximately $100 million. And on that same run rate basis, we'd anticipate roughly a $10 million reduction in cost. As far as timing goes, I'd say that — part of it will land in the second quarter, but during the third and fourth quarters, we ought to capture the majority of it. I figure around $5 million across what's left of the year, likely divided in a way that's largely even between the third and fourth quarters.

All right, that helps a great deal, Paul. I appreciate it. Then I suppose I have a couple more brief items, if I may, before handing things over; so, Jeremy, it's clear you've put in substantial effort to make HMI better, but when you look further out, how do you view this segment strategically?

Well, to begin with, you're correct. We have been attempting many initiatives to build a framework for the existing business and for what we believe that business ought to be, from a support standpoint, abroad, including warehousing. We've got — as I mentioned, our attention is firmly on the main brands, which are Pulaski, Samuel Lawrence, PRI, and naturally our hospitality division. And we think, and Paul brought up, we were lower by, I think, 17% when you exclude every closeout from our figure in the first quarter; and that is closer to, in my view, where the industry stands. So we're quite encouraged by the placements we've managed to secure with new products, and we believe it's genuinely moving the right way. And we believe our cost structure will truly be appropriate for that growth and provide us an opportunity to genuinely succeed on the bottom line.

Understood. Alright, for my final question, when I look at the balance sheet, there's $22.5 million of your debt sitting in the current portion. So what's your thinking on that? Are you planning to refinance it? What's your view?

Sure, that debt is current — I mean, it would be due shortly regardless, but we tripped a covenant. Due to the operating loss, we breached one of our covenants; so as we engage with the bank, technically — accounting rules say we have to classify it as current; we absolutely anticipate — and the bank is cooperating with us. We absolutely anticipate amending that credit agreement. We don't yet know precisely how we'll structure it. There are a number of alternatives we're evaluating. So we anticipate returning to compliance, and we'll move back to the prior presentation of roughly $1 million, slightly above $1 million in current, with the rest returning to non-current beginning next quarter.

Understood. All right, then, many thanks, everyone — I appreciate it, and I wish you the best of luck.

Thank you, Anthony.

Good morning.

Good morning, Dave.

Good morning.

I just wanted to ask about volume and price. It seems like the situation mirrors what we saw in the prior quarter, where volume is what's moving things and price is still staying firm. With the macro environment the way it is, how at ease are you with your pricing as a whole? Is there any push to give in somewhat on price?

Not at all — we don’t see ourselves as being in a spot where price is a problem for any of our brands. As a matter of fact, we think we offer quite substantial value. What we need is for consumer demand to return to normal for that to come through.

As for discounting, we generally do it as a matter of course, though our view is that it isn't really the route to generating substantial demand — all it tends to do is move demand earlier.

That's right.

Got it. That's really useful. So given where the macro environment stands right now, ought we to still anticipate the usual seasonal patterns across the year, or is there anything you're noticing that could disrupt those normal patterns?

As of now, my view is that we anticipate typical seasonal patterns over the course of the year, unless the industry or the economic environment indicates otherwise to us.

That's really useful, thanks. Then I've got just one more question about the showrooms — it's encouraging to see that visitor numbers appear to be rising steadily. In what way are you monitoring how those visits turn into purchases, or would you say we're still in too early a stage to genuinely give that much thought?