Hooker Furnishings Corporation (HOFT) Q1 2014 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call Reporting its Operating Results for the First Quarter 2014 Period. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Huckfeldt, Vice President, Finance, and Chief Financial Officer for Hooker Furniture Corporation.

Thank you, Shannon. Good morning, and welcome to our quarterly conference call to review our sales and earnings for the fiscal 2014 first quarter, which ended on May 5, 2013. We appreciate your participation this morning. Joining me today are Paul Toms, our Chairman and CEO; Alan Cole, President of Hooker Furniture; and Michael Delgatti, President of Hooker Upholstery and Executive Vice President of Sales for Hooker Furniture Corp. During our call today, 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 as contained in our SEC filings and in the press release announcing our 2014 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. On Tuesday morning, we reported higher year-over-year sales of just over $56 million for the fiscal first quarter. Net sales for the quarter increased a little more than $4.5 million or nearly 9% from the same period 1 year ago. Net income for the quarter more than doubled to $2.1 million or $0.20 per share from $1 million or $0.09 per share last year. The drivers of this improvement included decreased product discounting, higher average selling prices and much improved profitability performance in our upholstery segment. Now I'll ask Paul Toms to comment on our results.

Thank you, Paul, and good morning, everyone. Last quarter, as we ended our most recent fiscal year, we reported that every aspect of the company was trending in the right direction. With improved performances by both segments, healthy orders, good inventory availability, greater manufacturing efficiencies and a strong product lineup, this quarter, we were able to build upon that positive direction. We were able to more than double net profits year-over-year and had a nearly 9% consolidated sales increase with higher revenues across all operating units. This is the second consecutive quarter that we have reported a consolidated sales increase in the 9% range. For the quarter, both upholstery units were profitable on sales increases of 14% for Sam Moore and 7.4% for Bradington-Young. After lagging behind our upholstery division in sales performance for the past 2 years, Casegoods is beginning to grow again with this quarter's shipment increase of 8% on top of last quarter's 9.4% increase in wood furniture shipments. Thanks to the contributions of our domestic upholstery operations, higher sales and decreased product discounting, we were able to achieve a robust profitability performance even while absorbing start-up costs associated with 2 new business ventures we're launching as we leverage our assets to expand beyond our core baby boomer customer and reach consumers on each end of the age spectrum. Alan Cole, our President, will give us an update on progress with our new H Contract and Homeware product lines later in the call. As we reported in yesterday's earnings release, our start-up costs associated with both new units were approximately $440,000 before tax and $294,000 after tax or $0.03 per share in the first quarter. We project start-up costs for these important initiatives will account for approximately $0.12 to $0.15 per share for the full fiscal year. The momentum we built in both Casegoods and upholstery positions us well over the agenda of long-term growth initiatives we're implementing this year. We experienced a strong spring high point furniture markets 6 weeks ago, with Bradington-Young having its best order writing market since 2006 and Sam Moore having its fourth best market since 2007. Hooker Furniture Casegoods also had a solid market, but what has been more noteworthy is the pace of orders immediately following market as we've seen much stronger demand for our wood furniture product line this May than 1 year ago. At this time, I'd like to call on Mike Delgatti, our President of Hooker Furniture Upholstery to gives an overview of our upholstery performance this quarter. Mike?

Thank you, Paul, and good morning. Our upholstery companies are also building on the accomplishments of last year and steadily advancing in our journey towards sustainable profitability. We were gratified to have achieved, as of April 2013, the ninth consecutive month of operating profitability at Bradington-Young's domestic operations and to have enjoyed the best furniture market for written business at Bradington-Young since 2006 as Paul mentioned. While last quarter, we had a small operating loss at Sam Moore, this quarter, we can report profitability at Sam Moore, along with a 14% sales increase. I'll begin with Bradington-Young, as we look at our 3 upholstery units, Bradington-Young domestic leather upholstery, Seven Seas imported leather upholstery and Sam Moore custom upholstery one at a time. We're gratified with the good increase in shipments and orders at Bradington-Young, which was driven by improving business conditions at retail and the continued success of Comfort@Home leather retail display program. The approximately 135 dealers participating in that program had a growth pace of 25% last year, significantly outperforming the balance of our dealer base. Our concern for Bradington-Young is the rising cost of raw materials, particularly leather, and the potential this has to impact sales. We plan to implement a price increase effective this month. The rising costs are even more of a challenge for Seven Seas seating since it is positioned as a more affordable, moderately priced leather line in a much more price-sensitive niche. To some extent, these price increases have eroded our value proposition at Seven Seas. In one respect, that has helped our domestic leather business because the more narrow the gap in price between the 2 lines, the more likely retailers are to buy domestic because of these special order capabilities. Our orders were down 2.5% this quarter for Seven Seas and sales were up modestly. We attribute part of that order decrease to a lower appetite among retailers for our large container direct orders, rather they are leaning more at our inventory investments. At Sam Moore, we continue our brisk pace of growth with shipments up 14% and orders up nearly 20% for the quarter. The sustained growth at Sam Moore has really been consumer-driven. We have experienced a high level of consumer acceptance at retail as we have freshened the product line and expanded from a chair-only resource to a full-line upholstery resource offering sectionals, reclining chairs and sofas in addition to chairs. We have picked up additional floor space on current retail floors and expanded our distribution as we have opened up numerous new accounts in the last few years. Our challenge at Sam Moore continues to be the ramp-up of production capacity and improving manufacturing productivity. We are making some progress in improving service levels and fulfillment times to our customers, but it will be several months before we show significant improvement. Last quarter, we mentioned the fact that we were on the process of training 22 new manufacturing employees. We are still hiring. In fact, we have just hired 7 new upholsterers. Under the direction of our new Vice President of Manufacturing for Hooker Upholstery, Michael White, we are making some changes in our manufacturing processes to increase productivity and reduce manufacturing cycle time and, in turn, improve service and fulfillment times to our customers. Our order rate continues to outpace our manufacturing ramp-up even though we have increased capacity. We do expect that our capacity and order rates will be better aligned in the coming months and that we will be well positioned to service our demand this fall when we hit this historically strongest furniture selling season of the year. Our goal is to achieve a standard of 4 to 5 weeks of fulfillment time for shipments. Overall, across all 3 upholstery units, we believe we are well positioned for the fall selling season in terms of retail placements and are optimistic that this will be a better fall than we have experienced in some time due to the strength of the turnaround at retail driven by consumer confidence. At this time, I want to call on Alan Cole, our President, to give us an update on our 2 new business initiatives, H Contract and Homeware.

Thank you, Michael, and good morning. As we commented last quarter, the rare opportunity to start new businesses from a blank slate, with the benefit of the resources and expertise of an established company like Hooker, has been energizing to our organization and has brought us together in a very exciting and positive way. As Paul mentioned earlier in the call, we announced in our last earnings conference call, we are addressing new customer groups on each end of the age and life stage spectrum with our new business ventures. Our new Homeware product line, which will launch on 2 eCommerce websites in late summer, target young millennials in the early stages of their careers. The Homeware line offers fresh, fun, fashionable furnishings that are partial delivery shippable and easily assembled in the home with an innovative, patented connector system requiring no tools. On the other end of the age spectrum, our new H Contract brand launched in April, caters to retirees moving into senior living facilities and retirement communities whose ranks are projected to triple in the next 20 years. Our goal is to supply upholstered seating and Casegoods to upscale senior living facilities throughout the country. Initially, the H Contract line consists of Sam Moore chairs and sofas that have been modified in scale and dimensions to be appropriate to the contract market, along with occasional tables, chest and consoles, primarily from Hooker's Mélange collection. Since last quarter, we have completed our catalog and photography at H Contract and have over 50 experienced veteran sales representatives in place that are new to us. We also exhibited in our first assisted living show in Charlotte recently. The response to the line from both the sales reps and their customer base has been highly favorable. A common observation from the reps and the customer prospects alike has been that H Contract offers better and more affordable design with high levels of service and quality. Back at Homeware, we have completed the first phase of product development and are virtually complete in this first phase of product photography. Our website and social media venues are set to go live in August. Our initial focus has been on partnering with the largest home furnishings e-tailers, and we have successfully engaged the top 2 players and are planning a late summer eCommerce launch. We have begun manufacturing our Homeware products in an adjacent facility on Sam Moore's Bedford campus. As these new ventures take shape, we can really sense excitement, anticipation and energy building throughout our organization. So at this time, I'd like to call on Paul Huckfeldt, to give us more detail of the driving factors in our operating results this quarter.

Thanks, Alan. It sounds like both initiatives are progressing very well. Our quarterly results were driven by several factors. I'll review them by income statement category. Net sales increased in every business unit, thanks to strong incoming orders in our domestic upholstery unit as well as higher average selling prices in both segments, which more than offset the impact of a 3% decrease from consolidated unit volume. 4.7% decrease in Casegoods unit volume compared to last year's first quarter was somewhat mitigated by a 1% increase in the upholstery unit volume. The lower Casegoods unit volume was primarily due to lower promotional discounting this year. Consolidated average selling price increased 12%, more than offsetting the impact of the lower unit sales. Casegoods average selling price increased due to lower discounting and stronger sales in some of our higher priced product. And in the upholstery segment, average selling prices were up about 9% due to price increases as well as a shift towards higher priced products such as sofas and recliners at Sam Moore and higher grade leather products at B-Y. Gross profit margin for the first -- for the quarter increased to 24.7% in net sales compared to about 21% 1 year ago. Casegoods margins improved, primarily due to lower discounting and lower inflation impacting the cost of our imported inventory and a change in the accounting treatment of donated inventory, which we moved to administrative expense. In our domestic upholstery operations, gross margin improvement was driven by operating efficiency as well selling price increases, which have helped to offset the inflationary pressure on several key raw materials. In selling and administrative expenses, we're about $1.3 million higher than prior year, an increase as a percent of net sales from about 18% up to 19%. The increase in spending was principally due to start-up costs for our H Contract and Homeware division and higher charitable contributions expense, which was due to a change in the reporting of furniture disposals, as I just mentioned, coming out of cost of goods sold and being reclassified down into administrative expenses. Bad debt expense compared to last year -- was higher compared to last year when we reduced our allowance for doubtful accounts because of favorable collections experienced. But I'd like to add that bad debt experienced this year is still very low. And we're recording higher bonus expense this year due to higher, improved earnings performance. All these factors contributed to an operating margin increase, both as a percentage of net sales and in absolute terms in the first quarter compared to the same quarter 1 year ago. Taking a quick look at our balance sheet at quarter-end. We had cash of nearly $29 million, up about $2.4 million from year-end, thanks to lower inventories, lower accounts receivable partially offset by a lower accounts payable balance. Our inventories are close to the target levels and should be adequate to service incoming orders in the coming months. Other than normal working capital fluctuations, we expect to invest between $1.2 million and $1.7 million in phase 2 of our ERP projects over the remainder of this year. We continue to be debt-free and had about $13 million available under our revolving credit facility, which remains in place until July 2013. However, we're also currently in negotiations to extend that credit facility and expect to have a new agreement in place before the current agreements expires. And on Monday, our board declared a quarterly dividend of $0.10 per share, which represents an annualized dividend yield of 2.3%. Now, I'll turn it back over to Paul Toms for his outlook.

Thanks, Paul. As we stated yesterday in our earnings release, it would be hard not to be optimistic with all the positive news surrounding housing and rising consumer confidence in recent weeks. We're bullish about our future, both with our core businesses and our new ventures. Internally, we're well positioned to capitalize on the improving economy as we ramp up our manufacturing facilities, maintain a good inventory position and enjoy our strongest product line in several years. Although we are entering what is traditionally the slowest season of the year for furniture sales, we believe we have considerable momentum. This ends the formal part of our presentation. And at this time, I'll turn the call back over to our operator, Shannon, for questions. Thank you.

[Operator Instructions] Our first question is from Matt McCall of BB&T Capital Markets. Matthew Schon McCall - BB&T Capital Markets, Research Division: So, Paul Toms, I think you referenced that the pace of orders, you said they're up strongly. Can you compare the orders to some of the trends? I know you talked about high single-digit growth from the last couple of quarters. Are the orders pacing at that same level?

I think for the first quarter, orders were slightly above shipments for the quarter, Matt, and they're ahead of last year. Although, if you dig down just a little bit, upholstery orders are up more than Casegoods orders are up versus prior year. But I -- and you have to kind of look at the first quarter and realize last year's first quarter was not particularly good. But I think if we'd look at just orders on a per day basis and even look at them sequentially, I think what we saw in the third and fourth quarters of last year is continuing on a -- pretty close on a per day rate for Casegoods and up for upholstery. Matthew Schon McCall - BB&T Capital Markets, Research Division: Okay. So that was the reference through the first part of May that we're seeing, that same kind of pacing high-single digits.

Actually, it's improved somewhat in May in the first quarter. It's -- which is really surprising because typically the summer starts -- the summer slowdown starts late April, early May and continues through July. We haven't seen that normal turndown yet and our post-market business has been stronger than normal. Matthew Schon McCall - BB&T Capital Markets, Research Division: That kind of leads to the next question. We've heard from a couple of other folks that the late tax refund season had an impact on maybe, more than anything, the seasonality that you recognize this year. Did you hear any retailers talk about that? I know your customer is going to be less dependent on a refund, but did you hear anybody talk about that? Do you think that, that could have an impact on maybe some of the seasonality and maybe the acceleration that you've seen?

No, I haven't heard anybody reference that. I've got Mike Delgatti and Alan on the call, too, and they're as close to the customers as I am. But I don't think that -- that hasn't been mentioned as a factor. I feel it's more -- consumer confidence is really high. And I think if you look at our demographic, baby boomers, typically, affluent baby boomers, my sense is they're feeling better about their earnings potential, their wealth because of the gains in the stock market, real estate's bounced back, so that's added some value. And I just think psychologically, all of those things probably make it more likely to go out and spend for a big ticket discretionary purchase. Matthew Schon McCall - BB&T Capital Markets, Research Division: Okay, okay. And I think there was a mention about container direct business coming in a little bit or slowing a bit. Is that -- when I hear a retailer passing up better margin for I guess less inventory risk, that doesn't seem like increasing confidence, am I reading that wrong?

I think that's probably more a result of -- last year, we closed 3 warehouses in China and 1 in Vietnam. And really our container direct program was whittled down to be in the program at our largest vendor, which was over half of our container direct shipments. But with the transition of manufacturing out of China to Vietnam and Indonesia, the closing of some of the factories we were doing business within China, at just container direct out of those factories was less and less important to us and the cost of operating warehouses was increasing as a percent of the sales they were generating. So we closed those 3 or 4 facilities. I think where we are now is manufacturing for more promotional parts of our line, the good, better price points has pretty well migrated to Vietnam. We've got some factories there that we're really happy with. And I think you'll see us look at container direct with some sort of strategy out of Vietnam in the next quarter or 2. And that I think will boost our container direct business. We're still doing okay out of the one large factory in China but I think we've hurt ourselves a little bit with not having a warehouse strategy around a lot of the factories that are producing this good and better parts of our line. Matthew Schon McCall - BB&T Capital Markets, Research Division: Okay, okay, all right. And then the final one I had, there was some mention I think about, let's see, raw material price increases or cost increases, you're going to put through price increase in B-Y, can you just talk about -- and maybe this is for you Paul Huckfeldt, but the overall inflationary pressures that you saw, and talk about some of the other areas, one of them is there, I think wood products has been a little volatile. And then other than B-Y, any other pricing actions in the quarter or expected in the future?

I'm going to hand the upholstery discussion over to Mike, we think he's closer to the details. I think on the import side, import prices are -- Casegoods prices are generally pretty stable and freight costs are stable. We are expecting to see some inflation out of China.

Yes. Let me take wood first and say, Matt, that I think we have very little inflation last year in wood and we had lot less than we were expecting early in the year. This year, I think we've had a little bit more than we had last year but not so much that we wouldn't be able to offset it with a modest price increase later in the year. Upholstery is a little different situation, I'll let Mike Delgatti address that.

Matt, as you said, the 2 raw materials that have impacted the upholstery operations, the most in terms of cost increases, have been leather and plywood. The other challenge we had relates to imports, Seven Seas, as costs continue to rise in China. We're seeing it more in the costing of new product introductions at this past April market, new products came in at a higher price point level than recent markets. So while we're getting some in-line price increases, we're also seeing more aggressive costing on the part of our Chinese partners through new introductions. Matthew Schon McCall - BB&T Capital Markets, Research Division: And Mike, Paul, you seem confident to be able to cover the inflation in wood. Are you equally as confident on passing through the cost in the upholstery side?

For the most part, we will pass along the cost. However, the concern is always that as prices go up, it has the potential to impact demand. Matthew Schon McCall - BB&T Capital Markets, Research Division: Okay. And then Paul Huckfeldt, did you quantify -- was there a price cost hit or benefit in this most recent quarter?

It was a benefit. Matthew Schon McCall - BB&T Capital Markets, Research Division: Okay. And is that trend expected to continue given all the things we just talked about. Or are we going to go neutral or is there going to be a hit?

On the upholstery side, Matt, we have done a pretty good job of passing along those increases, may have been more than covered. I'll leave it at that.

I think -- what Paul said, I think in Casegoods, we'll be able to pass -- I think it will be neutral. We'll be able to pass our cost increases in price increases because they're manageable.

[Operator Instructions] Our next question is from Todd Schwartzman of Sidoti. Todd A. Schwartzman - Sidoti & Company, LLC: Toms, could you talk about the capacity utilization at the domestic upholstery plants by brand for the quarter?

For the first quarter, we were operating at full capacity of both Bradington-Young as well as Sam Moore. Sam Moore worked overtime throughout the quarter while Bradington-Young pretty much worked a 40-hour work weeks.

It served the opportunity, Mike, to increase production through adding additional labors at either facility?

Yes. We are in the process of expanding our capacity and have expanded our capacity during the first quarter at Sam Moore. We have hired several people, many of which are being trained today. So over the coming months, our capacity will continue to grow at Sam Moore and at B-Y as well. Even though our capacity is aligned with our current order rates, we do believe, with the uptick in the fall business, that the time is now to start expanding our capacity to position ourselves to service our customers well during the fall selling season. Todd A. Schwartzman - Sidoti & Company, LLC: And how far along are you in the hiring process? What percentage completion would you cite as of now?

I would say in the Sam Moore side, we're about 90% there. Recently brought on additional 7 upholsterers, planning on hiring 7 more. But we're pretty far along in the process and going through a learning curve, extensive training at this point. And at B-Y, we're real close. We may be only adding 2 or 3 more people as we approach the fall selling season. Hiring one upholstery in an operation like Bradington-Young makes a significant difference in terms of throughput. Todd A. Schwartzman - Sidoti & Company, LLC: Got it. Regarding H Contract and Homeware, you talked quite a bit in the release about the cost there continuing this year. Does that continue to next year as well for Q1 or is it pretty much contained to '14?

Alan, you want to take a stab at that or...

Yes. Todd, I think there would be, in the early part of next year, some continued investment. But as revenues build, we expect in the late going of next year to be able to cover the expenses on a normal operating basis. So I would expect that the expenses, as far as some impact, would continue until about mid next year. Todd A. Schwartzman - Sidoti & Company, LLC: Great. What can you tell us about the other non-startup related expense that led to the year-over-year increase in SG&A in the first quarter, the bonus expense, furniture disposals, bad debt, just kind of maybe rolling all that up, or if you want to treat them one by one, however you see fit? And what would be the net effect of those other items in the second quarter relative to the first?

Probably about the same. Probably -- the charitable contributions re-class, which is just a flip between margins and SG&A was about $300,000. And I would guess about $200,000 excess bonus expense next quarter like this quarter. Todd A. Schwartzman - Sidoti & Company, LLC: And Paul, can you remind us where you are now with the software installation?

We are stabilizing phase 1. I guess you never really finish a process like that. You get to a point where everybody's pretty comfortable. I think that's where we are now. And now we're putting the finishing touches on phase 1 which will continue for a while. We're in the relatively early stages of development of phase 2, which is our domestic manufacturing operation, and that will go live until next year. So we'll be working steadily on that, in developing phase 2 processes while improving phase 1, and then try to roll those 2 together next year. Todd A. Schwartzman - Sidoti & Company, LLC: And the ramp-up in headcount does not change or you'll be adequately covered, if you will, based on your initial plans for the install.

Yes. As far as we can tell, adding additional upholstery capacity, shouldn't affect the system. The system is scalable.

If I may add, in addition to hiring people, what we're doing beginning at Sam Moore is to implement a Lean manufacturing. We hired an industry veteran, Michael White, who has a lot of experience in that area. So our capacity will grow, yes, through hiring, but also through improving our processes and manufacturing efficiencies and the implementation of Lean. Todd A. Schwartzman - Sidoti & Company, LLC: Okay. Switching gears a minute. On the Homeware line, it's my understanding that the line will not be co-branded Hooker or have the Hooker name on it in any way, is that accurate?

Alan?

Yes, Todd, that's correct. It will be branded completely separately. It uses a complete different distribution model. So we felt that we were better off separating it from our core Hooker business. Todd A. Schwartzman - Sidoti & Company, LLC: How many SKUs for Homeware, both long-term and initially, are you planning now?

The initial product launch will be in the range of 50 to 60 SKUs, which may, in furniture terms, may sound pretty narrow. It's an upholstered chair, an accent chair introduction to start with. And then we have planned for the next year to phase in new product lines, which will include occasional and accent furniture casual dining and then major upholstery. So the SKUs will start out at about 60. And I would imagine, in the end, although we haven't designed the complete product line for all of next year but we're well into it, I would imagine we would be in the 250 to 300 SKU range. Todd A. Schwartzman - Sidoti & Company, LLC: By what point?

That would be by the end of next year, by the end of next fiscal year. Todd A. Schwartzman - Sidoti & Company, LLC: Got it. Last question, just going back to the first quarter and also looking at the early returns on Q2 to date, have your customers, particularly in the eastern and Midwestern parts of the country told you anything about traffic, store traffic reduction due to weather?

This is Paul Toms. And Todd, I haven't heard that from anybody. But again, Mike, is especially a little closer to the customers and out there more than we are.

I haven't. I haven't, either. One thing for sure, our retail continues to improve, albeit slowly, there are clear improvements. So most retailers are very optimistic about the fall selling season. That's certainly encouraging.

I'm showing no further questions at this time. I would like to turn the conference back over to Paul Toms for closing remarks.

Thank you, Shannon. I actually think I pretty well gave our take on things when we gave the outlook. So we're pleased to deliver the results we did this quarter. We're optimistic about the coming quarter and the balance of the year and we believe we can continue to improve our performance. So thank you for participating in today's call. Goodbye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.