Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Daniel. Good morning, everyone, and thanks for joining our quarterly conference call, where we'll go over the financial results for fiscal 2025's second quarter — a period that started on April 29 and wrapped up on July 28, 2024. With me this morning is Jeremy Hoff, our Chief Financial Officer. We're glad you're with us — actually, I mean our Chief Executive Officer, my apologies; we're glad you're with us today. On this call, we might make forward-looking statements, and those carry risks and uncertainties. You can find a discussion of factors that might make our actual results differ materially from what management expects in the press release and SEC filing that announced our fiscal 2025 second quarter results. Any forward-looking statement is valid only as of today, and we're not obligated to update or revise any forward-looking statements to reflect events or circumstances arising after today's call. Even with market conditions remaining weak, second quarter sales — normally our slowest quarter — came in better than the first quarter. This morning, we reported consolidated net sales of $95 million for the fiscal 2025 second quarter, which is down $2.7 million, or 2.8%, from last year's second quarter. That low single-digit decline in sales marked a solid sequential gain over the double-digit sales drop we saw last quarter. Net sales fell by $2.3 million at Domestic Upholstery and by $1.6 million at Hooker Branded, while Home Meridian posted a $1.6 million increase, powered by strong sales in its Hospitality business, which more than made up for the $3.5 million of liquidation sales we lost from the unprofitable ACH product line we exited last year; we recorded a consolidated operating loss of $3.1 million and a net loss of $2 million, or $0.19 per diluted share. Both the operating and net losses were better than the first quarter's losses of $5.2 million and $4.1 million, respectively. Over the fiscal 2025 6-month period, consolidated net sales dropped by $31 million, or 14%, from the same period last year, again because of persistently low demand for home furnishings amid macroeconomic uncertainties. The missing $11 million in revenue from the ACH product line represented roughly 35% of that sales decline. We recorded a consolidated operating loss of $8.2 million and a net loss of $6 million, or $0.57 per diluted share, for the first half; now I'll hand the call to Jeremy to comment on our fiscal 2025 second quarter results.

Thanks, Paul, and good morning to all of you. Difficulties in the broader economy and in furniture retailing have stretched much further than we had anticipated. High interest rates, a lack of housing supply, and costly homes together have produced a housing slump that has now lasted more than 2 years. Although the retail sector generally is performing well, furniture retailing is not. Because of that, we keep concentrating on what is within our power, so that we are positioned as strongly as possible to expand once macroeconomic conditions get better. As we told you last quarter, we have started a program to cut costs, targeting a 10% decrease in fixed costs, which amounts to $10 million in yearly savings. At this point, we anticipate surpassing that goal. Roughly $5 million of those savings should be achieved during this fiscal year, divided between the third and fourth quarters. Through our cost-cutting efforts, we are concentrating on trimming non-strategic expenses while still putting money into initiatives that generate revenue and profit. The cuts will result from combining certain operations and lowering fixed costs, which includes cutting the size of the company's Savannah warehouse by half and folding the BOBO business into the Hooker Branded business, doing away with BOBO's retail store and its separate warehouse, along with other steps. Additionally, the company has just finished an early retirement offer to eligible employees and, as recently as yesterday, made further workforce reductions that will produce annualized savings of nearly $6 million. We anticipate recording $3 million in severance costs in the third quarter of our fiscal '25. Even as we keep our attention on growth, in April, industry veteran Caroline Hipple came aboard in the newly created role of Chief Creative Officer to oversee a remerchandising of Hooker legacy brands, intended to establish the company as a more unified, whole home, consumer-focused resource featuring a refined aesthetic and presentation. Although we are at an early stage of this change in our merchandising approach, customer response has been extremely favorable, as have previews of new products planned for the upcoming High Point market. The encouraging reactions from our partners have given us enough confidence to make initial cuttings ahead of the October High Point market launch. In effect, this provides us with a 3-month jump on selling these items. That heightened sense of speed to market helps make our assortment stronger for next year. We stay confident that the operational, marketing, and merchandising strategies we are following are transformative. Long downturns create chances to recalibrate and reinvent parts of our business. I'd now like to hand the conversation to Paul, who will go over highlights in each of our segments.

Thanks, Jeremy. In the second quarter, Hooker Branded segment net sales fell $1.6 million, or 4.5%, versus the prior period. That was mainly because of lower average selling prices after price cuts made in last year's second half, which came about due to reduced ocean freight costs. Unit volume, though, was up 11% over the prior year's second quarter and also improved from the first quarter. At quarter end, order backlog is still 20% above pre-pandemic levels seen at the close of the fiscal 2020 second quarter. Across the current 6-month period, net sales dropped $9.7 million, or 12%, on the same decline in average selling prices and, to a lesser degree, lower unit volume in the first quarter, reflecting persistent industry headwinds. Turning to the Home Meridian segment, several improvements stood out. HMI net sales rose $1.6 million, or 5.6%, in the second quarter, mainly on strong Hospitality division performance. For this segment, that's the first quarterly sales gain year over year in 2 years. Sales through major furniture chains and mass merchants also rose during the quarter. Those gains were partly offset by lower sales to independent furniture stores and through the e-commerce channel. Quarter end backlog came in 2% above the same period last year and 22% above the fiscal 2024 year-end back in January. Home Meridian posted higher gross profit, with a gross margin of 19.5%, among the best levels since that business was acquired in 2016. The quarterly operating loss came in under $1 million, better than the $3.4 million loss in the first quarter and the $3.3 million loss in the prior year same period. At HMI, we think we've reached a point where a significant, sustainable path to profitability lies ahead for the foreseeable future, once demand normalizes for the Home Furnishings industry. For the current 6-month period, net sales at HMI fell $13.9 million, or 19%, largely because $11 million of ACH liquidation sales were absent. The rest of the decline came from lower sales through independent furniture stores and e-commerce, partly offset by higher sales in the Hospitality business. Domestic Upholstery segment net sales dropped $2.3 million, or 7.6%, in the second quarter, mainly on lower unit volumes of Bradington-Young and HF Custom. Sunset West and Shenandoah each posted single-digit sales increases. Industry weakness keeps weighing on order rates and backlog levels, which led to reduced production at Bradington-Young and HF Custom this quarter. More positively, excluding Sunset West, order backlog is still 20% above pre-pandemic levels seen at the end of the fiscal 2020 second quarter. Sunset West's net sales rose during the quarter, after a 20% increase in revenues last quarter. With Sunset West now shifted from a distribution and supply chain focused mainly on the West Coast to one serving both coasts, that division is performing well, and we see it as a major growth driver for us going forward. East Coast demand accounts for roughly 50% at this point, and we expect that share to keep rising; over the 6-month period, net sales for this segment fell $7.4 million, or 11%, as Bradington-Young, HF Custom and Shenandoah each posted lower sales, though Sunset West delivered a 10.7% sales gain. Turning to cash, debt and inventory: cash and cash equivalents stood at $42.1 million when the second quarter closed, $1.1 million below fiscal year-end but $1.2 million above the first quarter, which wrapped up in April. Inventory came down $4.7 million during — versus year-end. Across the 6-month period, we drew on cash and cash equivalents on hand plus $5.3 million generated by operating activities to cover $4.9 million of cash dividends, $2.4 million for continued development of our cloud-based ERP system, and $1.4 million in capital expenditures. Beyond that cash balance, we had $28 million in total availability under our existing revolver when the quarter ended to meet working capital needs, along with $29.4 million in cash surrender value of company-owned life insurance. Thanks to disciplined inventory and capital expenditure management and careful expense control, we believe our financial resources are adequate to sustain business operations and extend our more than 50-year record of quarterly dividend payments for the foreseeable future; refinancing of our credit facility is underway and should wrap up soon. We also intend to retire $22 million of term debt in the third quarter, which reflects our confidence in what lies ahead for the company. I'll now hand things back to Jeremy for his outlook.

Thanks, Paul. It's encouraging to see inflation reaching its lowest point since the pandemic began, with the consumer price index easing to 2.9% in July, which opens the door to a potential rate cut in September. August has brought a notable jump in mortgage refinancing, another encouraging sign, since consumers stand to gain from more disposable income each month as payments on credit cards, homes, and cars come down. In our view, a reduction in interest rates would spur faster housing activity. Although the U.S. Department of Commerce said home furnishings retail sales fell in July for a 17th straight month, total retail sales climbed roughly 3% over that same stretch, and the University of Michigan Consumer Sentiment Index increased in August, its first rise since March. On top of that, existing home sales were up in July, snapping a 4-month streak of declines. With our solid balance sheet, financial position, and experienced management team, we can steer through what remains of this downturn while concentrating on maximizing efficiencies through the cost reductions we've planned. We'll keep putting money into growth initiatives that will set us up for better profitability and revenue growth once demand comes back; that concludes the formal portion of our remarks. I'll now hand the call back to Daniel, our operator, for questions.

It's definitely good to observe those quarter-over-quarter gains along with that balance sheet staying strong. So to start, could you both just share your thoughts on how shipments and orders trended month by month across the quarter?

My sense is that things held fairly consistent from start to finish of the quarter. What I'd add is that there's still a long way for business to climb back. We're kind of bumping along, I'd say. When it comes to orders and shipments right now, I believe that applies to each of them.

Understood. I was also curious whether you noticed any meaningful variation by region or geography when it comes to how sales trended?

Not particularly. What's interesting is that in most cases, you'd typically observe that. Yet what we're seeing, I'd describe as similarly challenging across the board. The way I'd put it at the moment is that it isn't breaking down along regional lines the way it normally does.

Understood. Jeremy, you mentioned before that your team anticipates going beyond the $10 million goal for expense reductions. Could you elaborate on that? I'm not sure whether there are any — I don't know if you're ready to provide any further figures, but if you could just — where are you discovering chances to make the business more efficient?

When we kicked off this effort and told the public we were undertaking it, our initial aim was to visit essentially each cost center across the entire company and attempt to locate any non-personnel, non-strategic expenses we could remove in order to achieve the greatest possible savings that weren't tied to personnel. After finishing that effort, we naturally turned to personnel too. And once more, even regarding personnel, we placed great emphasis on ensuring we weren't cutting strategic cost so that we could carry out our organic growth strategy that's already in place. I realize I'm not directly responding to your question, but I can tell you that when we state we're confident we will exceed the $10 million, we are extremely confident we will exceed the $10 million.

All right, that's reasonable. Fair enough. Then regarding HMI, definitely a solid gross margin there, 19.5%. And obviously this remains a difficult operating environment; so when the business does get better, what would be a reasonable margin or gross margin for HMI, in your view, once the business recovers.

Paul and I believe 20% would be a reasonable mark for our goal for HMI. And just to stress, we haven't raised prices. We've simply been able to exit businesses that were dragging that overall margin down. So that's really given us the opportunity we have to improve that number.

Right, and we've been concentrating on ensuring the margins are correct for the programs we've got.

Right.