Hooker Furnishings Corporation (HOFT) Earnings Call Transcript & Summary

Thanks, Tanya, and good morning to all of you. I'd like to welcome everyone to our quarterly conference call, where we'll go over the financial results for the second quarter of fiscal 2027 — a period that started on May 4th, 2026 and wrapped up on August 2nd, 2026. With me on the call today is Jeremy Hoff, who serves as our Chief Executive Officer; we're grateful that you could join us. As part of this call, we might make forward-looking statements, and those carry risks and uncertainties. You can find a discussion of the factors that might lead our actual results to differ materially from what management expects in the press release and SEC filing we issued to announce our fiscal 2027 second quarter results. Any forward-looking statement reflects our views only as of today, and we take on no obligation to update or revise such a statement to reflect events or circumstances arising after today's call. Before we get into the results, we'd like to talk about tariffs. In our earnings release, there's a table that shows how this quarter's tariff recoveries affected each operating segment as well as the total company. Clearly, tariff recovery had a significant and favorable effect on our Q2 results. That said, it's worth noting that tariff costs also had a significant and adverse effect on our results in the prior year. Before the U.S. Supreme Court's February 2026 decision that invalidated IEEPA tariffs, we incurred an estimated $10.3 million of cumulative pre-tax costs tied to tariffs in our fiscal year 2026 results, and that amount significantly exceeded the tariff recoveries we're reporting today; in fiscal 2026, we reported a net loss of nearly $27 million. After IEEPA tariffs began to be imposed in April 2025, we chose to honor pricing on existing customer backlog and, for competitive and administrative reasons, didn't adjust pricing right away on certain other products. Our pricing reflects our total cost structure along with the competitive and macroeconomic environment we operate in, and tariffs are just one of many factors we take into account. Now, on to results. Even with ongoing weakness in the housing market, soft retail demand for furniture and home furnishings, and persistent macroeconomic challenges, we delivered consolidated net income of $1.7 million, which marks our third consecutive profitable quarter. Results got a boost 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 fell $6 million, or about 9% compared to the prior year period, reflecting lower sales across each of our operating segments. Even with that sales decline, gross profit rose $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. I'll now hand the call over to Jeremy for his comments on our fiscal 2027 second quarter results.

Appreciate it, Earl. Good morning, everyone. Those steep costs connected to the IEEPA tariff weighed heavily on the prior year's results, and we feel fortunate that during the second quarter of fiscal 2027 we recovered a portion of that cash. The enormous administrative burden those tariffs placed on our workforce across many months is not something we can get back. On top of the duties themselves, we incurred additional costs related to the IEEPA tariffs, including greater customs bond expense, legal and professional fees, financing and working capital costs, along with other administrative and supply chain expenses. Although we don't believe the tariff recoveries make us whole for the substantial cost we absorbed in fiscal 2026, I want to recognize the Hooker team for persevering and delivering outstanding effort to navigate an environment that was unprecedented and extraordinarily complex, ultimately securing these recoveries for our shareholders; we're also deeply grateful for the commitment and partnership of our suppliers and customers as we worked through this period of exceptional uncertainty for our industry; and we're happy to report that consolidated net income for the quarter reached $1.7 million, representing our third consecutive quarter of profitability and a $4.9 million improvement compared with the second quarter a year ago. These results came despite continued weakness in housing activity, soft consumer confidence, and the seasonally slower demand that's typical in the first half of our fiscal year. The improvement stems from the tariff recoveries recorded during the quarter, along with the ongoing benefit of the $17.5 million in annualized fixed cost reductions implemented across continuing operations last year; those actions have kept us profitable even while sales stay under pressure. Turning to our segments, both Hooker Branded and Domestic Upholstery delivered stronger profitability than the same quarter last year. Hooker Branded benefited from tariff recoveries and increased selling prices, while Domestic Upholstery benefited from tariff recoveries, lower imported material costs, and improved overhead absorption. Apart from tariff recoveries, Hooker Branded's profitability was influenced by shifts in channel and sales mix dynamics during the quarter. Weaker summer shipments to brick and mortar retailers, which is normal for the season, meant e-commerce accounted for a larger share, along with targeted promotional activity designed to support consumer engagement. That combination of channel mix and heavier promotions compressed margins during the quarter. We expect promotional activity to normalize in the back half of the fiscal year, similar to what we experienced in July, the final month of our fiscal second quarter. It's worth noting that our core fiscal July results, excluding any tariff recoveries, improved significantly over last year, as we had resolved many of the supply challenges referenced earlier. We believe that positive momentum will continue into the back half of the fiscal year. At this point, I'll turn it back over to Earl. He'll walk through the standout results for each of our segments, and he'll also cover where we stand on cash, debt, and inventory, along with how we're approaching capital allocation. Gross margin came in at just under 40%, an improvement of 1,000 basis points.

Thanks, Jeremy. We'll begin with Hooker Branded, where net sales fell $1.6 million, or 4.5%, during the second quarter. The main drivers were softer unit volume, deeper promotional discounts, and out-of-stocks on key SKUs caused by much longer lead times coming out of Asia. Higher average selling prices offered a partial offset to those headwinds. Inventory constraints in imported upholstery that had started in the first quarter were mostly resolved by the time the quarter closed. Even with the sales decline, Hooker Branded gross profit rose $3.2 million, and gross margin gained 1,050 basis points to just under 40%. That improvement came mostly from tariff recoveries and stronger selling prices, partly offset by promotional discounting along with greater warehousing and distribution costs. Operating income for the segment reached $870,000 this quarter, versus roughly break even in the same period a year ago. Backlog was up almost 35% against the second quarter of last year. Now on to Domestic Upholstery. Net sales dropped $1.5 million, or 5.3%, in the second quarter, as weaker sales of upscale leather and custom fabric upholstery were partly offset by double-digit gains in private label and outdoor furnishings. Gross profit rose $928,000, and gross margin improved 450 basis points to 23%, helped by tariff recoveries on imported materials, reduced imported material costs, and better overhead absorption. The segment posted operating income of $833,000, against an operating loss of $408,000 in the prior year quarter, which reflects the better gross margin plus the benefit from cost reduction actions taken earlier. Domestic Upholstery's backlog rose almost 5% versus the prior year quarter, mainly on higher private label orders. Within all other, net sales declined $2.8 million, or roughly 66%, in the second quarter, largely because of project timing in its hospitality business, since about 80% of first half shipments fell in the first quarter. The lighter second quarter shipments produced an operating loss for the quarter. Even so, the business stayed profitable across the first six months of fiscal 2027. Moving to Discontinued Operations. Even though the divestiture closed in the prior fiscal year, Discontinued Operations delivered second quarter pre-tax income of $587,000, driven by tariff recoveries, customer-related adjustments, and other post-divestiture activity. Results included roughly $1.6 million of tariff recoveries booked as a reduction of cost of sales, partly offset by about $0.6 million of customer credits recorded as a reduction of revenue. Activity in the current period also included approximately $0.5 million of additional charges stemming from a net settlement of various divestiture-related balances with the buyer. Let's now cover cash, debt, and inventory. Cash and cash equivalents totaled $18.7 million at quarter end, up $8.1 million from the close of the first quarter and up $17.5 million from the fiscal 2026 year end. Operations produced $24 million of cash over the first six months. That cash went toward repaying $3.6 million on our credit facility, paying $2.5 million in cash dividends, buying back $1.3 million of our common shares, and funding $1.1 million in CapEx. Our inventory came down $5.3 million, moving from $48.7 million at the close of fiscal 2026 to $43.4 million when the second quarter ended. Under our amended and restated loan agreement, we kept our financial flexibility intact, with $51.8 million of available borrowing capacity as of the quarter's end, net of standby letters of credit and with no balances outstanding on the facility. Cash on hand stood at roughly $21 million as of yesterday. Last, let me cover how we allocate capital. Over the first six months of fiscal 2027, we bought back 92,357 shares of our common stock, paying about $1.3 million, which works out to an average price of $13.68 per share. Approximately $3.7 million was still available at quarter end for future purchases under our $5 million share repurchase authorization. As we get the company ready for sustainable growth, the share repurchase program along with the adjusted dividend keep giving us a balanced framework for returning capital to shareholders while preserving flexibility to invest in strategic priorities. Our view is that this approach backs both near-term returns and long-term shareholder value. With that, I'll hand things back to Jeremy for his outlook.

Thanks, Earl. As we turn to the latter half of fiscal 2027, shoppers are still being picky about what they buy. Home sales activity and demand for costly discretionary items continue to be soft, and we don't anticipate any significant short-term easing in the market. That said, the adjustments we've implemented to our expense base and product lineup are producing real gains and ought to put us in a position to post better results than the same stretch a year ago, even if things stay the way they are now. Now that the biggest cost-cutting actions are finished, we're concentrating on running our core operations with discipline. Our consolidated backlog rose 6.2% versus the second quarter of last year and 8.4% from the previous quarter, with Hooker Branded and Domestic Upholstery leading the way. We're also pleased by how retailers keep responding to Margaritaville. At this point we've secured commitments for roughly 100 in-store galleries plus 10 freestanding retail stores. Shipping got underway during the second quarter and should ramp up across the back half of fiscal 2027 and on into fiscal 2028. We feel we're in a strong spot to seize opportunities once demand comes back. That wraps up the prepared portion of our remarks, and now I'll hand things back to our operator, Tanya, so we can take questions.

Thanks, and good morning to all of you, and I appreciate you taking my questions. It's definitely encouraging to see profitability improve this quarter. To start, I just wanted to ask about the effect of the key SKU out of stocks at Hooker Branded — how big was that impact? It sounds like that's behind you now, but I was hoping you could share a bit more on that subject, please.

I'm not able to share more on the specifics, but it was certainly a headwind for us, and it was largely tied to overseas lead times, which stretched out in a fairly unpredictable way. Like I said in the script, once we got to July, we felt we had begun working through it. What we saw during that month of the quarter gave us a fairly favorable sense of where we can land in the second half.

Alright, thank you. Regarding Domestic Upholstery, I'm just wondering, how does the business break down these days across private label, outdoor items, and custom upholstery? What's the current state of that business, and what's your outlook moving ahead?

Anthony, our practice is to examine things at the segment level. That's really all we're able to share right now, I believe. In outdoor furnishings we're observing strength, particularly because of seasonality. As we noted, private label is also performing well.

Also, I should add that this year in outdoor, we aren’t dealing with a warehouse relocation out of Savannah, like we were for Sunset West. There also isn’t an earlier-stage ERP transition involving D 365 happening this time, so their path is as unobstructed as it has ever been because none of those kinds of shifts are taking place. That business performs really well for us, and the category remains robust, so we’re enthusiastic about what’s ahead.

That's encouraging to hear. Alright, so I'm just wondering — you said Margaritaville shipments began toward the end of the quarter. Could you share anything about Margaritaville's revenue, and what's our thinking for the back half of the year when it comes to Margaritaville?

We're not able to give specifics there, but what I can say is that a significant portion will land in the second half, which is where we are right now. A lot of those galleries are launching across the country. I think that's about as much as I can share.

All right. I just want to ask a bit more about the galleries. On that topic, I realize you mentioned that 100 of them are now open. When it comes to what it costs to build those galleries, are you covering that, or are the retailers? I'm just curious whether you might address that and provide any further specifics.

That isn't going to matter much when it comes to how we allocate capital.

All right, understood. All right. One final thing from my side: we just wrapped up Labor Day, a key holiday for those of us in home furnishings. I realize only a handful of days have passed since then, but is there anything you can tell us regarding what your retail customers have said about Labor Day? Even little stories would be useful.

What we've heard back has been pretty encouraging. I've been doing this for, I believe, 30 years, and in each of those 30 years, it seems retailers — our partners — are always thankful to reach summer's end and get to the moment when fall can begin. So I think there's plenty of optimism about simply entering that fall selling season, and I think Labor Day came in reasonably well.

All right. Many thanks, and I wish you the best of luck.