Hooker Furnishings Corporation (HOFT) Q1 2013 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to Hooker Furniture's quarterly investor conference call reporting its operating results for the fiscal first quarter 2013. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Paul Huckfeldt, Chief Financial Officer. Mr. Huckfeldt, you may begin.

Thank you, Tyrone. Good morning, and welcome to our quarterly conference call to review our sales and earnings for the fiscal 2013 first quarter, which ended on April 29, 2012. We certainly appreciate your participation this morning. Joining me today is Paul Toms, our Chairman and CEO; and Alan Cole, President of Hooker Furniture. During our call today, we may make forward-looking statements which are subject to risks and uncertainty. A discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our SEC filings and in the press release announcing our 2013 first quarter results. Any forward-looking statements speaks only as of today. We undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after today's call. On Sunday, we reported lower year-over-year net sales of just under $52 million for the fiscal first quarter. Our net sales for the quarter decreased almost $7 million or 11.4% from the same period last year. Net income for the quarter increased about $0.5 million to $1 million from $523,000 last year. The drivers of this improvement included decreased product discounting, lower selling and administrative cost and significant gains in the profitability performance of our upholstery segment. Now I'll ask Paul Toms to comment on our results.

Thanks, Paul, and good morning, everyone. As we stated in our press release on Monday afternoon, our underperformance in shipments this quarter was disappointing, especially given the progress we've made in many other facets of our business during the last year. Despite the sales decrease that was driven by out-of-stock positions on some best-selling collections and items, there are several important accomplishments this quarter worth noting. On the positive side, we're gratified to have improved profitability despite the sales decrease, to have maintained and improved gross margins on a consolidated basis. This quarter's results are essentially the opposite of last year's first quarter results, when deep discounting drove a double-digit sales increase but lowered profitability. In the current quarter, we nearly doubled net income despite lower sales. We're also glad to have successfully worked through the heavy product discounting that negatively impacted profitability during the first 3 quarters of last year. On a consolidated basis, product discounting as a percentage of net sales decreased approximately 370 basis points this Q1 compared to Q1 last year. On the flip side of the discounting activity, we're finding that we are doing consistently well with our premium higher-margin casegoods collections, such as Sanctuary, Grandover and occasional products, including Mélange accents. This trend continued at the recent spring furniture market completed in late April when we introduced a new premium casegoods and upholstery collection called Rhapsody that met with an exceptionally strong dealer reception and placement. Overall, our attendance was up 20% compared to a year ago, and we enjoyed an upbeat market for Hooker, Sam Moore and Bradington-Young. Our redesigned new showroom uniting all 3 brands in the same showplace for the first time generated a lot of excitement and affirmation from our customers. In addition to the Rhapsody collection, our other main product introduction was a comprehensive fabric sofa program from Sam Moore, which is an avenue for incremental upholstery business. Both introduction surpassed expectations with enthusiastic reception and dealer placements. This most recent marketing continued the strong retailer acceptance of fresh new product direction we've taken over the last several introduction cycles. As these newer products begin to fill the pipeline, we'll be in a strong position to regain the momentum we've lost. We're confident that our out-of-stock challenges in casegoods are manageable and short term. We've addressed the issues by strengthening our team in Asia, which we expect will result in improved vendor performance and alignment and improved product quality and delivery times. Our inventory availability should improve by the middle of the second quarter. In fact, over the next 3 weeks, we're receiving large shipments of containers for any well-placed products and bestsellers, both in-line products as well as new introductions, from October 11 market. Our inventory position will strengthen steadily as we move through the summer and prepare for the fall selling season. Just as we believe our top line challenges on the casegoods side are manageable and short term, we also believe that the significant improvement in our upholstery profitability performance is sustainable. Of all the results this quarter, we are extremely pleased to have recorded a small operating profit in the upholstery segment. To elaborate on this accomplishment and make some other remarks, I'd like to now call on Alan Cole, our President.

Thank you, Paul, and good morning. When we think about where we were a year ago in our upholstery segment compared to where we are today, it's gratifying to see the progress. As we recorded in our first quarter release, we were able to reduce operating losses by about 90% in domestic upholstery compared with the same period a year ago. We turned around an over $1 million operating loss in last year's first quarter to a slight profit for the upholstery segment in the current quarter. A year ago, we were taking the difficult but necessary steps to position us for this improvement, which included some workforce reductions at Bradington-Young and the consolidation of Bradington-Young's manufacturing and administrative headquarters from Cherryville, North Carolina to Hickory, North Carolina. The transfer of our headquarters from an older, inefficient plant to a newer and more efficient factory in Hickory was disruptive and costly in the short term but has placed us in our current position for sustained profitability. We've now rightsized our domestic capacity at Bradington-Young to match our incoming business with the capacity utilization up at or above 90%. In addition to reaping the benefits of more efficient domestic production at Bradington-Young, we've accomplished these improvements in upholstery profitability by purging the business of non-value-added cost. The introduction of creative and innovative marketing programs and products at higher gross margins and our sales growth at Seven Seas Seating and Sam Moore have also contributed. The trend at Sam Moore is quite exciting. We grew our sales and custom fabric upholstery line approximately 9% this quarter compared to a year ago, making the fifth consecutive quarter of year-over-year sales increases. Just as encouraging, Sam Moore's orders were up almost 13% this quarter compared to a year ago. Our Seven Seas Seating imported leather line has essentially doubled in size over the last couple of years. During this most recent quarter, sales were down about 2% from a strong shipping quarter a year ago that was driven partially by discounting to reduce excess inventory. As a result, profitability this year was much improved over the prior year quarter. Domestically produced leather shipments at Bradington-Young were also down about 2%, but thanks to cost containment efforts throughout fiscal 2012, profitability is significantly better than the same year -- same period a year ago. We believe that Bradington-Young's domestic line has made great strides this year in adjusting to the leather raw material price increases and the saturation of the retail market with lower-priced leather substitutes. Through strategies such as our Comfort@Home store display program, Bradington-Young has been able to stabilize sales and set a solid path forward. To reiterate what Paul said about the recent spring furniture market, we were really very energized and enthused, not only from the strong reception to new introductions but also from the positive feedback and affirmation from our dealers on the new showroom and our overall company direction. Successful product introductions on the magnitude of our Rhapsody collection and our new Sam Moore sofa program will generally impact business favorably for at least a few years, so we expect these introductions to have a noticeable impact by this fall and beyond. In spite of the challenges we have in the short term, we have exciting expectations for the future. Now I'm going to turn the call back over to Paul Huckfeldt, who has some detailed comments on our results and an update on our balance sheet.

Thanks, Alan. Our quarterly results were driven by several factors. I'll review them by income statement category. Sales volume decreased due to out-of-stock positions on several best-selling collections and as reported last quarter, due to vendor shifts from China to Vietnam and then Indonesia, which resulted in delayed shipments of several well-placed new casegoods products. Consolidated unit volume decreased 22%. Both segments showed decreased volume compared to the prior quarter, but this decline was driven by the decrease in casegoods unit volume, which was down nearly 29% from last year's volume. However, last year sales were driven by heavy discounting, which had an adverse effect on profitability. Average selling prices increased 15% at the same time period, offsetting some of the impact of the loss of sales. In the upholstery division, unit volume for leather upholstery was down by slightly over 5% but increased almost 3% in our upholstery fabric seating division. Average selling prices were up 11% in upholstery due to selling price increases on domestic products and the elimination of the heavy discounting on imported upholstery, very similar to what affected our casegoods business last year. Gross profit margin for the quarter increased to 21% of net sales compared to about 19% a year ago, primarily due to lower discounting that we mentioned earlier but also lower cost of goods sold due to moderation in the freight cost on imported inventories for both casegoods and imported upholstery; to a lesser degree, lower returns allowances and the improvement in gross margins on our domestic upholstery operations compared to the prior year first quarter, due primarily to improved operating efficiency as well as some selling price increases, which tended to offset the cost increase. Our selling and administrative expenses were about $890,000 lower than the prior year quarter but increased as a percentage of sales from about 17.5% to slightly over 18% due to the drop in sales this year. The absolute decrease in spending was principally due to lower commissions on lower sales; lower charitable contributions expense due to a change in the way we've accounted for donated furniture this year; lower bad debt expense thanks to -- due to lower AR balances and continued favorable bad debt experience and to a lesser degree, lower salary and benefits expenses. All these factors combine to contribute to an operating margin increase for the first quarter compared to the same quarter a year ago, mostly attributable to the upholstery segment reporting operating income this year versus an operating loss of slightly over $1 million last year. Our balance sheet remains strong and continues to help cushion us from the impact of some of the challenges to our profitability. At quarter end, we had cash of $48 million, up $7.5 million from year end thanks to lower inventories and accounts receivable and higher accounts payable. We expect to invest $8 million to $10 million in working capital to increase our inventories back to more appropriate levels and to support the receivables on the sales rebound we expect as we get back in stock on key products. We also continue to be debt free. We have over $13 million available on our revolving credit facility, which remains in place until July of 2013. Thanks to our cash position and our long-term belief in our business model, we continue to maintain a quarterly dividend of $0.10 a share, and we also recently announced a $12.5 million share repurchase authorization, details of which we're still working through at this point. Now I'd like to turn the discussion back to Paul Toms for his outlook.

Thanks, Paul. Retailers we've spoken with over the last several weeks have reported a noticeable slowing of business in March, April and early May, which has reflected in weaker incoming orders during our first quarter. They have reported better business in late May and over the Memorial Day weekend. In the second quarter, we will still be working through the temporary impact of not being able to convert some of our backlog into shipments. However, we expect to begin shipping some new and in-line key collections this month. As the summer progresses, we expect our in-stock position will improve steadily. It may take a little longer to regain some of the floor space we've lost, but we are positioning ourselves to recapture it and fully intend to in time. Because we're entering a time of year that is typically weaker, the summer is usually the slowest season in our industry, we don't expect a significant improvement in demand until fall. We are, however, encouraged by positive developments in the economy, such as a gradual improvement in the housing market, relatively stable employment and the adjustment of the consumer to a new normal. We expect the consumer will continue to regain confidence to spend on larger ticket deferrable purchases but also believe that recovery will be slow and choppy. At this point, that concludes our formal remarks. We'll turn the call back over to Tyrone for questions. Thank you.

[Operator Instructions] We have a question from Matthew McCall from BB&T Capital Markets.

This is actually Jack Stimac filling in for Matt today. So just on your last commentary about late -- you mentioned that improved in late May, kind of over Memorial Day, is that relative to the weakness earlier in the year? Or is that -- do you have a feel if it's actually an improvement year-over-year versus the Memorial Day holiday last year?

You know, Jack, that’s a good question. I would – I don’t know that I specifically asked the retailers I’ve spoke with whether they were comparing to prior year or to the last several months, but my gut feeling is that’s compared to what they were experiencing in March, April and early May. So, it’s a fiscal improvement more than year-over-year.

And so when – I guess, could you quantify the impact of -- well, first of all, were the -- the stockout that you experienced, was that entirely due to vendor changes? Or were there other issues, maybe some production issues in Asia that prevented you from having a fully stocked inventory?

It is partially driven by vendor shifts and moving new products from China to Indonesia and Vietnam, but it's not totally a result of that. I think it's just -- there's a number of other factors. Maybe right at the top would be just it seems like the lead times from our existing vendors on in-line groups have gotten extended a little bit. We've had quality issues on a few collections that we've -- that forced us to delay shipments to our customers by 4 to 6 weeks on average. I think we've probably not done as good a job in overseeing or forecasting, anticipating longer lead times as we need to. So some of it was just -- honestly, just not ordering enough. And we've had another occurrence, which I don't think is anything more than a piece of the equation, but as we were unable to ship some of the newer collections, we saw sales rates on our in-line bestsellers accelerate. So I think our sales representatives and some of our customers, when they couldn't get products that they were expecting, then they went to what we did have, and that accelerated sales rates on some of our in-line, in-stock bestsellers. And as we -- if we get out of stock on something or we experience a spike in sales rates on a few items, the response time is fairly long. It takes us 4 months, typically, to replenish.

Do you have an idea of -- are you able to quantify maybe what the impact was from kind of revenue loss from stockouts during the quarter?

It's really hard to quantify, Jack, because when we're out of stock on an in-line group, if it's not going to be back in stock in really short order, we'll lose floor placements. We lose with the turns that that would have generated. But also, as sales associates at retail go to -- they're working with the customer that's in the store. Maybe they want to special order something that's not on their floor, or in their warehouse. If they're looking at an item from us and it's out of stock for several months, they'll go to somebody else's item. And it's -- really, lost demand or unfulfilled demand is hard to measure. So I would say generally though, if you look at our quarter -- and the out-of-stock is primarily a casegoods phenomenon. It's not domestic upholstery, which is made to order. Import upholstery was impacted somewhat, but it's generally casegoods which drives 2/3 of our volume. Well, it will -- I think it will improve over the next several weeks. We're starting to see receipts get much heavier. And I think as we get through the quarter, we'll be back in stock on many of our best-selling items. We also have some new collections that will be received, one from October, that's late shipping, but finally being shipped as we speak and will be an impact on our second quarter. And then some of the collections, a major collection we talked about in the call, Rhapsody, that was introduced in April, we expect will ship in late July and August, which will impact our third quarter.

Okay. Good. And then lastly for me, I think you talked about how freight rates were lower and kind of were a good guide during the quarter. Could you talk a little bit how they're trending and maybe when you have renewals coming up kind of over the rest of the year?

Sure. Freight rates are very stable right now for us, contrary to what we heard and expected earlier in the spring. We signed contracts in early May, and the contracts are generally at rates that we've been paying for most of the last 9 months or so. Let me go back to an earlier comment too. I kind of got sidetracked with another thought. But our casegoods performance in the first quarter, if you look, a year ago, casegoods was up 22%, but it was driven by discounting excess slow-selling inventory. And I think it was an abnormally high quarter for casegoods, maybe to the tune of $2 million or $3 million additional volume. In the second, third and fourth quarter, it dropped back down to more typical levels. I would say in the quarter that we just completed and reported on, half of the shortfall was not having to go out and discount at significant discounts a fairly large amount of inventory. And the other half was driven by our just being out of stock on some key items and groups and also, late delivery on some of our new collections.

[Operator Instructions] I'm showing no further questions at this time. I'd like to turn the call over to management for any closing remarks.

All right. Thank you, Tyrone. As we said during the call, we're disappointed in our top line performance this quarter and gratified with the improvements we've seen in upholstery. We think our challenges are very manageable. We expect our inventory position to improve significantly in the second quarter. And we've got plenty of challenges, but I don't think being under inventory will be one of them as we get through the second quarter. We appreciate your participation in the call and look forward to being back with you in about 90 days to report the second quarter results. Thank you for joining us.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.