Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Olivia, and good morning to all of you. We're glad you could join our quarterly conference call, where we'll go over the financial results for the second quarter of fiscal 2026, a period that started on May 5 and wrapped up on August 3, 2025. With me this morning is Jeremy Hoff, our Chief Executive Officer. We're grateful that you're taking part today. Please be aware that forward-looking statements may be made during this call, and those statements carry risks and uncertainties. You can find a discussion of the factors that might cause our actual results to differ materially from management's expectations in the press release and SEC filing in which we announced our fiscal 2026 second quarter results. Any forward-looking statement reflects our views only as of today, and we assume no duty to update or revise any such statement to account for events or circumstances occurring after today's call. Segment performance in the fiscal 2026 second quarter was mixed. Within the Hooker Legacy side, net sales for Hooker Branded rose 1.3% compared with the prior-year period, while Domestic Upholstery net sales matched what they were in last year's second quarter. Hooker Branded got to breakeven, an improvement from the $329,000 loss posted in last year's comparable quarter, even after absorbing $655,000 of restructuring costs tied mainly to severance. Domestic Upholstery, which booked $152,000 in restructuring costs this quarter, cut its operating loss to $408,000 from $1.3 million. These gains show the momentum of our cost-reduction and restructuring efforts. On the other hand, Home Meridian net sales fell 44.5% versus last year's second quarter, since this segment was hit hard by buying hesitancy related to tariffs and by ongoing macroeconomic strain among its value-focused customer base. On top of that, shipments in its hospitality business came in lower than the prior-year second quarter because of timing tied to the project-based character of that business. Roughly 25% of Home Meridian's sales decrease stemmed from losing a major customer that went bankrupt last year. Consequently, consolidated net sales for the second quarter came to $82.1 million, a drop of $13 million, or 13.6%, from the same period a year ago, largely because of sales declines at Home Meridian. The consolidated operating loss was $4.4 million, versus $3.1 million in the prior-year quarter, a reflection of lower sales volume and an unfavorable customer mix at Home Meridian, plus $2 million in total restructuring costs. Consolidated net loss was $3.3 million, or $0.31 per share. Through the first 6 months of fiscal '26, consolidated net sales were down $21 million, or 11.2%, from the same period last year. That decrease likewise came mainly from lower Home Meridian sales due to the factors I just mentioned, together with a modest 1.7% drop in Domestic Upholstery amid soft demand. With $2.5 million in restructuring costs recorded during the period and a significant decline in sales volume, the $8 million consolidated operating loss was in line with the prior-year period, which reflects the improvements on the legacy Hooker side. The net loss for the 6-month period was $6.3 million, or $0.60 per diluted share. I'll now hand the call to Jeremy so he can share his comments on our fiscal 2026 second quarter results.

Thanks, Earl, and good morning to all of you. Hooker Furnishings is making bold moves to get the business back to profitability. Through cutting costs and concentrating on initiatives for growth, we'll put the company in position to stay resilient in the tough environment we face today, and to seize growth strategically once demand comes back. As Earl said, Hooker Branded reached the break-even point during the quarter in spite of soft demand and $655,000 in restructuring charges, while Domestic Upholstery cut its operating loss by nearly 70%, and that's even with $152,000 of restructuring costs included. Over the past several years we've taken substantial risk out of HMI, and that work continues; weak demand in home furnishings, caused by an extremely weak housing environment along with hesitancy to buy because of tariffs in the market segment where HMI competes, has masked these efforts. We believe that by the close of our fiscal '26 third quarter, HMI's fixed cost structure will be right-sized to support what we see as a sustainable business — one where sales can be scaled up significantly from today's levels once demand comes back. Absent further tariffs or other major disruptions, we anticipate HMI's performance will be markedly better by the time the current fiscal year ends. We're confident that the steps taken — right-sizing fixed costs, bringing down debt, and rolling out compelling new product lines — create the foundation for long-term value creation. Importantly, we remain on track for our new expense structure to be largely in place by the end of the third quarter, which supports a route to profitability even at today's revenue levels. Our multi-phased plan to right-size our fixed cost structure for sustained profitability and a downturn remains on track and is starting to produce significant results. Although HMI's results faced pressure from tariff concerns and an unfavorable customer and product mix, operational results at Hooker Branded and Domestic Upholstery improved by $1.2 million during the second quarter, even with roughly $800,000 of restructuring costs included in those results. We're getting leaner and more efficient, as shown by what's happening in Domestic Upholstery, where our emphasis on bettering labor to revenue ratios is delivering early progress and is already visible in stronger factory performance metrics; we're on target with our new expense structure, lowering our fixed cost by 25% from fiscal '25, with most of it in place by the close of the fiscal '26 third quarter. We believe our stronger operating discipline will help us find a path back to profitability in future periods, even while macroeconomic challenges and uncertainties continue. Crucially, the careful, deliberate manner in which we're carrying out this restructuring won't constrain our capacity to grow, fulfill orders, or serve customers as market conditions get better. As our sweeping restructuring work goes on across all 3 segments, we keep adapting to the shifting industry and putting money into the highest growth opportunities. With our Margaritaville launch coming at the October High Point market, we're well positioned for the second half of fiscal '27. Before we even go live and start seeing the expected payoff, our new Vietnam fulfillment warehouse is already proving out what we said it could do: cutting container lead times down from 6 months to about 4 to 6 weeks, plus opening up fresh ways for customers to combine product collections on containers. On top of that, we expect these gains to bring down our total global inventory. Last, I want to address the changes we've made around tariffs on imported furniture and components. In late July, the U.S. government said it would apply a 20% tariff rate to imports from Vietnam — the primary source country for Hooker and for the home furnishings industry — effective August 1, 2025. Every one of our segments is handling the Vietnam tariffs with a different playbook. When it comes to Domestic Upholstery, the hit lands on component parts and fabrics, and we can offset it using incremental steps like sourcing new fabrics. For Hooker Branded, we remerchandised the line to deal with the 20% tariff's impact, looking at pricing SKU by SKU instead of raising prices across the board. At HMI, we feel we've put near-term mitigation efforts in place to keep the value equation balanced in that more price-sensitive and competitive segment. At this point I'd like to hand the discussion back to Earl, who will lay out the specifics of our cost-reduction strategy and talk through the highlights in each of our segments.

Thanks, Jeremy. Our multiphase cost-cutting program is now fully in motion, targeting the elimination of roughly $25 million — 25% — from our fixed cost base. That amount includes an estimated $11 million related to warehousing and distribution costs, which are recorded in cost of sales, along with $14 million in selling and administrative expenses. In fiscal '25, we identified $10 million in expense reductions, and we succeeded in delivering $3 million of savings during that fiscal year. Then, in fiscal '26, we identified an additional $15 million in expense reductions. Through the first half of fiscal '26, we delivered $3.7 million of expense reductions, even though we recorded $1.7 million in restructuring charges. We expect additional savings in the back half of the year from both sets of actions, and we believe we are still on track to achieve $25 million in annualized cost savings beginning in fiscal '27, with most of that anticipated to be in place by the end of the fiscal 2026 third quarter. Now let me walk through our segment reporting compared with the prior-year periods. Hooker Branded. In the second quarter of fiscal '26, the Hooker Branded segment produced modest growth, as net sales rose $465,000, or 1.3%. The increase was driven by higher average selling prices, partly offset by greater discounting. Over the first 6 months, sales increased $766,000, or 1.1%, on higher unit volume, partly offset by discounting used to balance inventory mix and levels. Gross profit declined $167,000 in the second quarter, with gross margins 80 basis points lower, primarily due to weaker margins on discounted items and, to a lesser extent, tariff-related product costs. Across the 6-month period, gross profit was down $560,000, with margin 100 basis points lower from those same factors. Hooker Branded achieved breakeven operating results for both the quarter and the 6-month period. Restructuring cost of $655,000 and $782,000 were recorded in those periods, respectively. Incoming orders rose almost 11% in the quarter. Backlog at quarter end was even with the prior year's second quarter end, but it was up almost 20% versus fiscal year-end. Home Meridian. Net sales for the Home Meridian segment fell $13.6 million, or roughly 44.5%, in the second quarter of fiscal '26. About 40% of that decline was attributable to the project-based hospitality business, where 2 large projects entered the shipping phase during last year's second quarter. Another 35% of the decline came from traditional furniture channels amid macroeconomic pressures and tariff-related hesitancy, while 25% of the decline resulted from losing a major customer that filed for bankruptcy last year. Average selling prices also dropped sharply because of unfavorable product mix and inventory liquidation at the Georgia warehouse ahead of its closure. Over the 6-month period, net sales fell $21.2 million, or 37.2%. Gross profit declined $4.9 million in the second quarter, mainly on lower net sales. Gross margin decreased, pressured by unfavorable customer and product mix, higher warehousing consolidation expenses, severance costs and losses from inventory liquidation at the Georgia warehouse. Looking at the 6-month stretch, gross profit dropped by $5.6 million, and gross margin contracted 590 basis points. At Home Meridian, operating losses reached $3.9 million in Q2 and $6.8 million for the first half. Restructuring charges of $1.2 million for the quarter and $1.4 million for the 6-month period were booked. A major customer's bankruptcy, combined with softer demand in traditional channels, drove a big decline in incoming orders and backlog. Beyond that softer demand, fewer orders also came in from the project-based hospitality business. Turning to Domestic Upholstery. Net sales in this segment were essentially unchanged from the prior year's second quarter. Three divisions inside the segment saw sales gains, but the outdoor brands posted a sales decrease of about 10%, linked to supply chain disruptions in Vietnam and China that settled down after the quarter closed; over the 6-month period, segment sales were down $1 million, roughly 1.7%. Segment gross profit rose $659,000 in Q2 and $1.2 million year-to-date, with margins up 220 and 240 basis points, respectively. Direct material costs stayed level, while labor and indirect costs declined, aided by improved absorption from higher sales and additional production capacity. Warehousing and distribution expenses also dropped across most categories, delivering another lift to profitability. Our Domestic Upholstery divisions keep making strides on operational efficiency. A key priority is improving labor-to-revenue ratios, and better factory performance is already showing early gains. Versus the second quarter and first half of last year, respectively, Domestic Upholstery sharply reduced operating losses — by $877,000, or 68%, and by $1.6 million, or 61%. Restructuring costs of $152,000 and $265,000 were recorded for the quarter and 6-month period, respectively. Incoming orders for the segment increased 1.6%, and quarter end backlog was up about 7% versus the prior year second quarter and year-end. I'd like to close my comments by covering our capital allocation strategy. Over the past year, we cut debt, strengthened liquidity and continued returning capital to shareholders through dividends, all supported by the broad cost-saving measures in place across the organization. These actions are improving near-term liquidity and building a base for strategic growth. As of yesterday, the company had about $1.9 million in cash, nothing drawn on its credit facility and $67.9 million of borrowing capacity available, net of standby letters of credit. That includes $1,300,000 tied to 17% of the total. Going forward this year, we'll remain focused on capital allocation strategies that generate long-term value and on balancing our cost initiatives against key growth priorities. I'll now turn things back to Jeremy for his outlook.

We witnessed positive movement in Hooker Legacy orders during both the opening and closing of the quarter, with July orders climbing 24% compared to the same period last year across both Hooker Branded and Domestic Upholstery. Looking at the full quarter, Hooker Branded orders rose almost 11%, while Domestic Upholstery gained 1.6%. Even so, the home furnishings sector keeps confronting obstacles including weak existing home sales, high mortgage rates and ongoing inflation, and these factors are pressuring consumer confidence and demand; our attention stays on what we can influence, right-sizing our cost structure to achieve profitability, getting ready for the Margaritaville collection's October launch and chasing growth in hospitality, contract and outdoor channels backed by the new Vietnam warehouse. Thanks to these efforts, we are positioned to handle short-term difficulties and seize opportunities once the market rebounds, generating long-term value for our shareholders. That concludes the formal portion of our discussion. I'll now hand the call back to our operator, Olivia, so we can take questions.

For my first question, what is behind the higher order volumes, or that upward trend, that you're noticing in Hooker Branded and Domestic Upholstery?

I believe a few modest macro-level gains are taking shape among retailers; numerous partners told us Labor Day turned out quite strong for many of our customers. And I'd say there is, as I mentioned, a somewhat modest bit of momentum. Nobody can say whether that will persist, but at least around that period of the year, it appears to have given a fairly solid boost.

Understood. All right. Yes. So of course, Labor Day is a significant holiday. So was what you heard about this holiday momentum here in September basically uniform? Or did you notice any areas of especially notable strength in certain markets compared with others?

It was actually quite even; we have a practice of speaking with as many people as possible nationwide to gauge whether it's concentrated by region or more of a broad surge, and it appeared to be quite even everywhere.

Understood. Alright, that's certainly good to hear; so you've already made plenty of moves with HMI to strengthen the business, yet — sadly, it remains, in a sense, your largest area of weakness; so how should we think about simply bringing that segment back into the black? I'm not sure there's a simple response you can give, but I mean, what level of yearly revenue would you need for that segment to reach at least breakeven?

I'll speak in broad terms because that's necessary, but the — truly, the primary factor in reaching near-term profitability, that is, say, arriving at the close of the third quarter when, as we've stated, our cost savings should be largely in place, which amounts to a 25% cut relative to fiscal '25 through the close of the third quarter. That's the amount we'll have trimmed from our total spending. A large portion of that has been taken out of the HMI overhead side; so truly, at this moment, for us, that represents a major key to what you're asking about. And once we get there, I think we have genuinely strong methods for expanding that business as well. And that truly boils down to considerable attention on the customers we propel that business with and concentrating more on what's important for generating the revenue at that company.

I see. All right, that makes sense. Okay. So for my final question, I just want a bit more clarity on a few of those restructuring effects. It seems the total came to $2 million for the quarter. Broadly speaking, what portion of that landed in cost of goods versus selling and administrative costs, in terms of how it shaped the quarter?

As far as the quarter's impact goes, roughly 2/3 fell under COGS, with 1/3 in SG&A, and the same split would hold true for the 6-month period too.