Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thank you. Good day and thank you for standing by. Welcome to the Hooker Furnishings Corporation Second Quarter 2027 Earnings Webcast. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, C. Earl Armstrong III, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Tonya, and good morning, everyone. Welcome to our quarterly conference call to review financial results for the fiscal 2027 second quarter, which began on May 4, 2026, and ended on August 2, 2026. Joining me today is Jeremy Hoff, our Chief Executive Officer. We appreciate your participation. During our call, we may make forward-looking statements, which are subject to risks and uncertainties. A discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our press release and SEC filing announcing our fiscal 2027 second quarter results. Any forward-looking statement speaks only as of today, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after today's call. Before we jump into results, we want to discuss tariffs. We've included a table in our earnings release showing the impacts of this quarter's tariff recoveries by operating segment and for the total company. Obviously, tariff recoveries significantly and favorably impacted our Q2 results. However, it's important to note that tariff costs significantly and adversely affected our prior year results, too. Prior to the U.S. Supreme Court's February 2026 decision invalidating IEPA tariffs, we incurred an estimated $10.3 million of cumulative pre-tax costs related to tariffs in our fiscal 2026 results, which significantly exceeded the tariff recoveries we are reporting today. In fiscal 2026, we reported a net loss of nearly $27 million. Following the imposition of IEPA tariffs beginning in April 2025, we elected to honor pricing on existing customer backlog and for competitive and administrative reasons did not immediately adjust pricing on certain other products. Our pricing reflects our total cost structure and the competitive and macroeconomic environment in which we operate, with tariffs being only one of many factors considered. On to results. Despite continued weaknesses in the housing market, soft retail demand for furniture and home furnishings, and persistent macroeconomic challenges, we delivered a consolidated net income of $1.7 million, marking our third consecutive profitable quarter. Results benefited from tariff recoveries received during the quarter, the sustained impact of our prior cost reduction initiatives, and improved profitability in our reportable segments. Consolidated net sales decreased $6 million, or about 9%, compared to the prior year period, reflecting lower sales across each of our operating segments. Despite the sales decline, gross profit increased $2.9 million and gross margin improved 690 basis points to 31.8%, while operating income improved to $1.3 million compared to an operating loss of $0.5 million in the prior year period. Now I'll turn the call over to Jeremy for his comments on fiscal 2027 second quarter results.

Thank you, Earl. Good morning, everyone. The significant costs we incurred due to the IEPA tariffs significantly and adversely affected our prior year results, and we are grateful to have recovered some of those costs in our fiscal 2027 second quarter. The substantial administrative burden these tariffs placed on our team over many months cannot be recovered. In addition to the tariffs paid, we incurred incremental costs associated with the IEPA tariffs, including increased customs bond costs, legal and professional fees, financing and working capital costs, and other administrative and supply chain related expenses. Although we do not believe that the tariff recoveries make us whole for the significant cost incurred by us in fiscal 2026, I am grateful to the Hooker team for their persistence and extraordinary effort in navigating an unprecedented and highly complex environment and ultimately securing these recoveries for our shareholders. We are also deeply appreciative of the work that they do. of the commitment and partnership of our suppliers and customers as we navigated this period of extraordinary uncertainty for our industry. We are encouraged to report $1.7 million in consolidated net income for the quarter, marking our third consecutive quarter of profitability and a $4.9 million improvement over the prior year's second quarter. These results were achieved despite continued weakness in the housing activity, low consumer confidence, and the seasonally softer demand environment we typically experience in the first half of our fiscal year. The improvement reflects the benefit of tariff recoveries received during the quarter, as well as the sustained impact of the $17.5 million in annualized fixed cost reductions implemented across continuing operations in the prior year. These actions have helped position us to remain profitable despite continued pressure on sales. From a segment perspective, Hooker Branded and Domestic Upholstery both delivered improved profitability compared to the prior year quarter. Hooker Branded benefited from tariff recoveries and higher selling prices, while Domestic Upholstery benefited from tariff recoveries, lower imported material costs, and improved overhead absorption. In addition to tariff recoveries, Hooker Branded Profitability was impacted by shifts in channel and sales mix dynamics during the quarter. Seasonally softer summer shipments to brick and mortar retailers resulted in a greater mix of e-commerce sales along with targeted promotional activity designed to support consumer engagement. A lean out of channel mix and elevated promotional activity pressured margins during the quarter. We expect promotional activity to normalize during the second half of the fiscal year, much like we saw in July, the last month of our fiscal second quarter. It's important to note that our core fiscal July results, absent any tariff recoveries, significant improvement over prior year as we had mitigated many of the supply challenges referenced earlier. We believe that positive momentum will continue into the second half of the fiscal year. I want to turn the discussion back over to Earl, who will discuss highlights in each of our segments, along with our cash, debt, inventory, and capital allocation strategies.

Thank you, Jeremy. Starting with Hooker Branded, net sales decreased $1.6 million, or 4.5%, in the second quarter, primarily due to lower unit volume, higher promotional discounts, and key SKU out of stocks due to significantly longer lead times out of Asia. These headwinds were partially offset by higher average selling prices. Inventory constraints and imported upholstery that began in the first quarter had largely eased by quarter end. Despite the decrease in sales, Hooker Branded gross profit increased $3.2 million and gross margin improved 1,000 basis points to nearly 40%. The improvement primarily reflected tariff recoveries and higher selling prices, partially offset by promotional discounting and higher warehousing and distribution costs. The segment generated $870,000 of operating income for the quarter, compared with approximately break-even results in the prior year period. The backlog increased nearly 35% compared to the prior year second quarter. Turning now to Domestic Upholstery, net sales decreased $1.5 million, or 5.3%, in the second quarter. This lower sales of upscale leather and custom fabric upholstery were partially offset by double digit growth in private label and outdoor furnishings. Gross profit increased $928,000 and gross margin improved 450 basis points to 23%, supported by tariff recoveries on imported materials, lower imported material costs, and improved overhead absorption. The segment generated operating income of $833,000 compared with an operating loss of $408,000 in the prior year quarter, reflecting the improved gross margin as well as the benefit of previously implemented cost reduction actions. The Domestic Upholstery's backlog increased nearly 5% compared to the prior year quarter, primarily reflecting higher private label orders. In all other, net sales decreased $2.8 million or about 66% in the second quarter, primarily due to project timing in its hospitality business, with approximately 80% of first half shipments occurring during the first quarter. Lower second quarter shipments resulted in an operating loss for the quarter. However, the business remained profitable for the first 6 months of fiscal 2027. Turning to Disc Ops, although the divestiture was completed in the prior fiscal year, Disc Ops generated second quarter pre-tax income of $587,000, reflecting tariff recoveries, customer-related adjustments, and other post-divestiture activity. Results included approximately $1.6 million of tariff recoveries recognized as a reduction of cost of sales, partially offset by approximately $0.6 million of customer credits recorded as a reduction of revenue. Period activity also included approximately $0.5 million of additional charges, arising from the net settlement of various divestiture-related balances with the buyer. Turning now to cash, debt, and inventory. Cash and cash equivalents stood at $18.7 million at quarter end, an increase of $8.1 million from the end of the first quarter, and $17.5 million from the fiscal 2026 year end. Cash generated from operations during the first 6 months was $24 million. Cash was used to repay $3.6 million on our credit facility, distribute $2.5 million in cash dividends, repurchase $1.3 million of our common shares, and fund $1.1 million in CapEx. Inventory levels decreased by $5.3 million from $48.7 million at fiscal 2026 year end to $43.4 million at the end of the second quarter. We maintained our financial flexibility with $51.8 million in available borrowing capacity under our amended and restated loan agreement as of quarter end, net of standby letters of credit, and no outstanding balances on the facility. As of yesterday, we had approximately $21 million in cash on hand. Finally, I'll discuss our capital allocation strategy. During the first 6 months of fiscal 2027, we repurchased 92,357 shares of our common stock for approximately $1.3 million at an average price of $13.68 per share. Quarter end, approximately $3.7 million remained available for future purchases under our 5 million share repurchase authorization. As we position the company for sustainable growth, the share repurchase program and adjusted dividend continue to provide a balanced framework for returning capital to shareholders while preserving flexibility to invest in strategic priorities. We believe this approach supports both near-term returns and long-term shareholder value. Now I'll turn the discussion back to Jeremy for his outlook.

Looking to the second half of fiscal 2027, consumer spending remains selective. Housing turnover and big-ticket discretionary demand remain weak, and we do not expect meaningful near-term improvement in market conditions. At the same time, the changes we have made to our cost structure and portfolio are delivering tangible benefits and showing that we are moving forward. Help position us to deliver improved results compared with the prior year period, even if current conditions persist. With the major cost reduction initiatives behind us, our focus is on disciplined execution across our core businesses. Consolidated backlog increased 6.2% compared to prior year second quarter and 8.4% sequentially, led by Hooker Branded and Domestic Upholstery. We are also encouraged by the continued retail response to Margaritaville. We now have commitments for approximately 100 in-store galleries and 10 freestanding retail stores. Shipments began in the second quarter and are expected to build through the second half of fiscal 2027 and into fiscal 2028. We believe we are well positioned to capitalize on opportunities as demand recovers. This ends the formal part of our discussion, and at this time I will turn the call back over to our operator, Tonya, for questions.

Thank you. [Operator Instructions]. Please stand by while we compile our Q&A roster. And our first question will be coming from the line of Anthony Lebiedzinski of Sidoti. Your line is open.

Thank you and good morning, everyone, and thanks for taking the questions. Certainly nice to see the improved profitability in the quarter. First, just wanted to ask as far as the impact of the key SKU out of stocks at Hooker Branded. How significant was this? I mean, it sounds like it's no longer an issue, but just wanted to see if you could comment further on that topic, please.

You know, I can't comment further specifically, but it was definitely a headwind for us, and it had a lot to do with lead times overseas, which, you know, it definitely was a headwind for us. Ended kind of unpredictably. So as I mentioned in the script, the July, we feel like we started to get through that once we reached July. And our results in that month of the quarter, you know, gave us pretty positive view of where we can be in the second half.

Okay, thanks. And then, you know, as far as Domestic Upholstery, just curious, what's the mix of business nowadays between private label and outdoor products and custom upholstery? I mean, where is that business nowadays and how do you see that going forward? Yes.

We tend to look at it at the segment level, Anthony. I think that's basically all we can say at this point. I think we're seeing strength in outdoor furnishings, especially given the seasonality. And like we mentioned, private label too is doing well. Yes, I'll mention too with outdoor.

This year, we don't have a warehouse move from Savannah, for example, for Sunset West. We don't have, earlier, they had an ERP conversion with D365. So they've got, as clear of a path as they've had, you know, due to us not having those type of movements going on. So it's really good business for us, and the category is strong. So we're excited about the opportunity.

That's good to hear. Then just curious, you mentioned that shipments of Margaritaville started late in the quarter. Just wondering if you could comment on the revenue from Margaritaville and how do we think about the second half of the year as it relates to Margaritaville?

We can't get specific on that, but I will tell you that a big part of it is going to be in the second half, which we're in now. And many of those galleries are opening throughout the country, so that's probably all I can say on that.

Okay. And just to follow up on the galleries, you know, as far as those are concerned, I know you talked about 100 of those being open, but as far as, you know, the cost to do those galleries is that being done by you guys or by the retailers and like, you know, just wondering about if you could comment on that and, you know, if you could.

Share more details. That won't be significant to our capital allocation.

Okay, got you. Okay. And lastly for me, I mean, so we just had Labor Day, which is an important holiday for the home furnishings industry. I know it's only been a few days since the holiday, but, you know, can you share any comments as to what you've heard from your retail customers about Labor Day? Even small anecdotes would be helpful.