Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thank you, Olivia. Good morning, everyone, and thanks for joining our quarterly conference call, where we'll go over the financial results for fiscal 2025's third quarter—a period that started July 29 and wrapped up October 27, 2024. With me this morning is Jeremy Hoff, our Chief Executive Officer. We're glad you could take part today. As part of this call, forward-looking statements may be made, and those come with risks and uncertainties. You can find a discussion of the factors that might cause actual results to differ materially from what management expects in our press release and the SEC filing that announces our fiscal 2025 third quarter results. Forward-looking statements reflect only today's perspective, and we're not obligated to update or revise them because of events or circumstances arising after this call. Ongoing weak demand in the home furnishings industry hurt our fiscal 2025 third quarter and nine month results, along with charges of roughly $7.5 million all together. That figure includes about $3.1 million in restructuring costs tied to the cost savings plan the company previously announced, $2.4 million in bad debt expense stemming from one large customer's bankruptcy, and $2 million in noncash impairment charges on certain trade names within the Home Meridian segment. Those items produced an operating loss of $7.3 million and, for the third quarter, a consolidated net loss of $4.1 million, or $0.39 per diluted share. Consolidated net sales came to $104 million, down $12.5 million, or 10.7%, from the prior year's same quarter. Across the nine month period, consolidated net sales reached $293 million, a drop of $43 million, or 12.9%, versus the equivalent stretch a year earlier. That decline likewise stemmed from weak demand weighing on the home furnishings industry, plus the lack of $11 million in liquidation sales from the unprofitable ACH product line that the company exited last year. The company posted a consolidated operating loss of $15 million and a net loss of $10.2 million, or $0.97 per diluted share, driven by lower sales overall, greater ocean freight costs at Hooker Branded, under absorbed indirect costs at Domestic Upholstery, and the $7.5 million in charges noted before. I'll now hand the call to Jeremy so he can discuss our fiscal 2025 third quarter results.

Thanks, Paul, and good morning to all of you. Even with ongoing macroeconomic difficulties and the charges we took in Q3, we're encouraged by the quarter-over-quarter gain in profitability for our core business and by what our cost-cutting initiatives have achieved, which will be felt more completely starting in the fourth quarter. These gains show how our team has concentrated on what we can control and on trimming costs that aren't strategic in a tough climate, while still putting money into high-impact efforts to broaden our addressable market and growth possibilities, such as the global licensing agreement with Margaritaville that we announced recently; we're also heartened by favorable shifts in the broader economy, like inflation cooling and the rate reductions in September and November, which ought to start lifting demand for furnishings. Our October High Point Market launches got a good reception, with meaningful placements across every category; on top of that, we enjoyed our strongest retail placement market ever at Sunset West, our outdoor furniture specialist. Early reactions to three major casegoods collections for Hooker Branded gave us enough confidence to schedule initial cuttings ahead of those groups' official October debut. Because of that, shipments of the collections begin this month, with a second cutting in January, which speeds up our time to market by six months. With the product assortment we have available, this leaves us well positioned for the upcoming fiscal year. Expecting greater demand and the usually stronger fall selling period, we increased Hooker Branded inventory by $11 million, or 40%, relative to the prior quarter end; beyond that, we're producing our top collections aggressively so we'll have stock on hand throughout the first quarter of fiscal '26. These inventories consist of high-quality assortments built around our best-selling and most profitable SKUs. At this point, I'd like to hand things over to Paul, who will go through highlights for each of our segments.

Thank you, Jeremy. Starting off with Hooker Branded. Net sales fell $4 million, or 10.7%, during the fiscal third quarter versus the same period a year earlier, largely because average selling prices came down. Gross revenue for this segment dropped 6.7% against the third quarter of last year, while discounting rose 390 basis points, mostly from heavier markdowns on excess inventories. Unit volume slipped a modest 2.1% relative to last year's third quarter, yet still came in above this fiscal year's first and second quarters. For the quarter, the segment posted an operating loss of $1.7 million on third quarter net sales that were the lowest in history. Within that amount, about $1 million came from severance costs related to the plan we have to lower expenses. Compared with the same period a year earlier, incoming orders fell 13%. When the quarter ended, backlog was 30% lower than at the finish of last year's third quarter, but it remained 18% higher than levels seen before the pandemic, which refers to the close of fiscal 2020's third quarter. Over the nine months, net sales dropped $14 million, or 11.7%, once again largely because of lower average selling prices resulting from the price reductions we made last year after ocean freight costs decreased. Unit volume was essentially flat, slipping roughly 1% versus the comparable nine month span in the prior year. Now turning to Home Meridian. Compared to the same period a year earlier, third-quarter net sales fell by $5.1 million, a drop of 11.8%, driven by lower unit volume. A major customer's bankruptcy accounted for over 40% of that revenue decrease. We saw lower sales through both major furniture chains and independent furniture stores, although an 8% increase in hospitality partially made up for those losses, giving us two consecutive quarters of improved revenue. Orders received during the quarter were up 8% against last year's third quarter, while over the nine-month stretch they slipped slightly, by 2.9%, even excluding orders from the discontinued ACH product line and the bankruptcy of that large customer. Backlog at quarter-end stood 32% higher than it did in the third quarter of the prior year. Even though sales went down instead of up, Home Meridian still hit a 20.5% gross margin — the strongest it's been since the company bought the business back in 2016. The restructuring efforts at Home Meridian over the past few years have paid off in real ways when it comes to creating lasting profitability, such as a much smaller allowance, improved margins on products, and reduced fixed expenses throughout nearly the entire segment. This quarter, the segment posted a $3.7 million operating loss, which came from $2.4 million in bad debt charges related to the customer bankruptcy we talked about earlier, $2 million in noncash impairment charges on intangible assets, and $233,000 in severance tied to the cost-cutting initiative. Across those nine months, net sales declined by $19 million, a 16% drop, driven largely by the absence of $11 million in ACH liquidation sales — that accounted for about 60% of the overall sales decline and 75% of the decrease in unit volume. Over the same stretch, nearly every channel saw sales contract, though hospitality was the standout exception, notching a 23% increase. Turning to Domestic Upholstery, net sales came in $3.2 million lower, down 10% from the prior-year third quarter, as Shenandoah, Bradington-Young and HF Custom all posted weaker sales amid continued soft demand. That drop was partly offset by Sunset West, where sales rose 9%. Sunset West has now delivered year-over-year sales growth for three consecutive quarters during this fiscal year. With net sales lower, gross profit declined, though gross margin stayed flat. For the quarter, the segment posted an operating loss of $281,000, which was a sequential improvement over the $1.3 million operating loss recorded in both the first and second quarters of fiscal 2025. Those figures also reflected about $560,000 in severance costs related to the cost reduction plan. Orders received during the quarter decreased 4.8%, and backlog as of quarter-end stood 30% under the prior-year third quarter backlog. If you take Sunset West out of the picture, our order backlog at the close of the third quarter of fiscal 2020 was still tracking right around where it sat before the pandemic hit. Looking at the nine-month stretch, net sales came in $10.6 million lower, a drop of 10.8%, and once again the decline was driven by weaker sales at Bradington-Young, Shenandoah and HF Custom, though that was partly offset by Sunset West net sales climbing 10%. Turning to cash, inventories and capital: cash and cash equivalents ended the third quarter at $20.4 million, which is $22.7 million below where we were at the prior year-end in January. Inventory levels were up $4.7 million compared with year-end, largely because Hooker Branded inventories grew by $6 million. During those nine months, we used money from our cash and cash equivalents to cover $7.4 million in dividends, put $2.8 million toward continued work on our cloud-based ERP system, and spend $2.7 million on capital expenditures. In addition to what we held in cash, at the close of the quarter we had $28.3 million in total borrowing capacity through our current revolver, plus $29 million tied up in the cash surrender value of life insurance policies the company owns. We anticipate wrapping up the refinancing of our credit facility and eliminating our term debt within the next few days. Jeremy brought up that we are pushing hard to grow our stock levels. This supports three brand-new major casegoods collections, plus the SKUs that sell best and earn the most profit, so we can speed up how quickly products reach the market and stay available for this fiscal year and the one after. Another reason for stocking up: Vietnam's Lunar New Year break is anticipated to run longer than usual, and the ramp-up once it ends is also expected to take more time because of that stretched-out holiday and softer production demand in Vietnam, along with a possible strike at US East Coast ports in January of 2025. Earlier this week, we said we'd be paying our usual quarterly dividend in December, and we see that as proof of our faith in what the company can achieve going forward. At this point, I'll hand things over to Jeremy so he can share what he sees ahead.

During the past several months, the primary economic metrics affecting furniture sales have moved in a favorable direction, including reductions in interest rates, which influence home mortgage rates, along with easing inflation. In addition, during November, a prominent real estate trade organization expressed its view that the housing inventory shortage has reached its worst point and is now concluding, and it projected roughly a 10% rise in home sales for 2025, with mortgage rates settling near 6%. Furthermore, October furniture store sales on a year-over-year basis climbed for a second consecutive month. Finally, consumer sentiment increased in November, reaching its highest reading since April, and the stock market remains close to record peaks. Although the macroeconomic picture is getting better, our team has kept its attention on what we can control and the enhancements already in progress at Hooker Furnishings. Our balance sheet, financial condition and management team ought to position us well to handle any lingering difficulties as we concentrate on achieving maximum efficiencies and realizing cost reductions, while at the same time putting money into expansion strategies that will place us for revenue and profitability growth once demand comes back completely. That concludes the formal portion of our discussion. And right now, I will hand the call back to our operator, Olivia, for questions.

Can you hear me now?

Yes.

Yeah, apologies for that — I had myself muted. Morning, everyone, and I appreciate you taking my questions. First off, I'm just wondering: ever since the election, have you all observed anything significant shifting in terms of demand coming from your customers? From what I hear when I talk with other folks in the industry, they mention the election acted as a kind of distraction for the end consumer. So I'd love to hear your perspective on what you've been seeing up to now.

Yeah. What we've seen is definitely a clear uptick in order rates following the election.

That's great to hear, definitely encouraging. Now, regarding those three new casegoods collections — you mentioned speed to market, which is clearly a big driver there. How much of an impact — sorry, how impactful could this be in Q4 as you work on getting those products out to retailers?

Well, it certainly improves our chances for stronger shipments at Hooker Branded, since we'll ship first cutting in November and second cutting in January, mainly to direct container customers, and they'll be affected first. But I believe the bigger piece is that we're getting those collections positioned for the next fiscal year so they can deliver their full benefit from being on floors for the whole year rather than just half of it.

Okay, that's very clear. You folks have clearly made solid progress on HMI's gross margin. Can more gains still be made going forward? How do you see it, Jeremy?

I'd say somewhat; and let me emphasize, the bulk of those gains came just from exiting operations that never belonged in our portfolio, which naturally lifts the average considerably versus the period when we owned money-losing operations, a thin-margin unit such as the ACH business, the fact that it's behind us, it no longer weighs down that overall average. So that's what helped us most. In our view, some modest headroom does remain.

Understood. Now, regarding where things stand with inventory — you mentioned there's too much stock on hand overall, and the level you reported when Q3 closed came in above what we had modeled. So how would you characterize the inventory you're holding right now, along with how good that stock is, and is there any target you're aiming for by the time this fiscal year wraps up?

Honestly, I'd describe where we are on inventory as the strongest it has looked, Paul, in what's likely been 2 years.

Yes, I believe that's right.

What I mean by that isn't just the healthy stock position on the Hooker Branded side, where we're carrying some of our strongest SKUs — it's also that we're no longer weighed down by something like ACH on the other side, which drags on the whole inventory picture too. So at this point, honestly, we don't have that troublesome inventory sitting in our system the way we did with ACH; our growth is entirely concentrated in genuinely strong SKUs.

Correct, and I realize this may come across as somewhat contradictory. We discussed markdowns, surplus stock, and accumulating product, and our approach is to clear out that stock — removing items that don't move quickly — so we can unlock working capital and put it toward superior SKUs, new offerings, and our top-selling SKUs.

Alright. Yeah. That’s completely logical. Okay. And then the final thing from me, before I hand it over to somebody else. So Jeremy, I remember you sounded really enthusiastic regarding the Margaritaville launch when you made the announcement, I think that was in October. Could you share anything further about just how big an effect that agreement might have for your company?

Well, our view is that the impact will be substantial. The intriguing part regarding the Margaritaville license, as we see it, is that it truly touches many of our divisions. For instance, it won’t simply be a Hooker Branded matter. It will be Hooker Legacy, which we expect to benefit our contract divisions in a meaningful way. There’s substantial potential involving hospitality, and through every contract we’ll gain an edge on many of those projects, since Margaritaville is putting up a large quantity of homes in places where we’ll be involved in pricing those models and so on. So it just — it creates many opportunities that wouldn’t exist in any other case.

Understood. Thanks a lot, and good luck.