Hooker Furnishings Corporation (HOFT) Q1 2015 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 fiscal year 2015 first quarter. [Operator Instructions] As a reminder, this conference call is being recorded. It's now my pleasure to introduce your host, Paul Huckfeldt, Senior Vice President, Finance and Chief Financial Officer for Hooker Furniture Corporation. Sir, you may begin.

Thank you, Sayeed. Good afternoon, and welcome to our quarterly conference call to review our sales and earnings for fiscal 2015 first quarter, which ended on May 4, 2014. We certainly appreciate your participation this afternoon. Joining me today are Paul Toms, our Chairman and CEO; and Michael Delgatti, our President. 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 SEC filings and the press release announcing our 2015 first 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. This morning, we reported higher year-over-year net sales of just over $61 million for the fiscal year first quarter. Net sales for the quarter increased a little more than $5 million or about 9% from the same period last year. Net income for the quarter increased to $2.8 million or $0.26 a share from $2.1 million or $0.20 per share last year, driven primarily by increased casegoods unit volume. Now I'll ask Paul Toms to comment on the results.

Thank you, Paul, and good afternoon, everyone. It was particularly gratifying to begin the fiscal year on a positive note with solid sales increases in both upholstery and casegoods. We're particularly pleased to see casegoods growing again. As we reported in our press release this morning, our 32% gain in net income was driven by increased casegoods volume. While upholstery sales have outpaced wood furniture over the last few years, we're seeing early indications of a recovery in casegoods sales as housing turnover improves. We're also seeing higher retailer confidence in their ability to sell large ticket bedroom and dining furniture. A factor helping to lead the way in the quarter's positive sales performance in casegoods was a significant increase in container-direct shipments to retailers from our Asia warehouse program. We've strengthened our container-direct offering with a strong in-stock position on a broader selection of best-selling collections. And we believe this increased willingness by retailers to invest in more inventory is indicative of their improved ability to sell large ticket casegoods. Overall, our inventory position was a highlight of the quarter. Inventories are in target range with the good composition of best-selling imported casegoods and upholstery. Service levels remain high in casegoods, and we significantly improved delivery times during the quarter for Sam Moore, which Mike will elaborate on shortly. Increased sales, lower warehousing and distribution costs in our casegoods segment and the leverage of our SG&A cost over $5 million in additional volume contributed to higher profitability. We're also pleased to see our new business ventures, H Contract and Homeware, collectively contribute $900,000 to net sales in the quarter. Operating losses associated with the new product lines were approximately $357,000, before tax; $233,000 after tax or $0.02 per share in the fiscal first quarter. H Contract, our line of upholstered seating and casegoods for upscale senior living facilities is now operating at breakeven compared to the startup-related losses of a year ago. Homeware, our online-only, direct-to-consumer brand of furnishings and home decor, continues to report an operating loss, but is operating close to expectations as we continue to invest in marketing and building brand awareness. At this time, I'd like to call on our President, Mike Delgatti, to comment on factors that drove our sales increase in casegoods and also to comment on progress in our upholstery division during the quarter.

Thanks, Paul. Good afternoon, everyone. Several factors converged during the quarter to contribute to a positive sales performance in casegoods. First of all, we are seeing clear benefits from the sales management reorganization we implemented during the middle of last year, in which we shifted from a sales management group organized around brand and product specialization to a regional management focus. The regional management strategy has helped our sales effort to be more effective across all 3 brands: Hooker, Bradington-Young and Sam Moore. The sales momentum in casegoods is also a result of continued success with the best category collections in our good, better, best assortment. These best priced collections, including lines such as Sanctuary, Rhapsody, Mélange and Solana comprise the bulk of our container-direct Asia warehouse program for retailers. As Paul pointed out earlier, a significant increase in container-direct shipments to retailers from our Asia warehouse program helped lead the way in our solid sales performance this quarter. In the last few years, we've built a strong stable of collections in this program that are all performing well at retail. We also have a wide breadth of assortment, which provides good mix ability for the retailer who does not want to buy deeply on any particular item or group. This scenario poses far less risk for retailers as they commit to a large ticket container purchase because they can obtain a large variety of products, all of which are proven bestsellers. As I mentioned during our last conference call, we introduced a new Vietnam warehouse container-direct program to retailers at the April Market, which we expect will strengthen container-direct sales even further. While the Asia warehouse program focuses on the best priced points in our good, better, best assortment, the Vietnam warehouse program focuses on the good and better price points. We are taking orders now for this program, and we'll begin flowing product into the warehouse as early as July. We expect to be fully operational in the fall, during what is historically the strongest selling season for furniture at retail. We believe this program will strengthen our value proposition at the retail level in the good and better price ranges. The savings to retailers in this container program compared to the same products sold out of our Martinsville warehouse will be in the high-single digits to low-double digit percentages. In addition to the strength of our best priced point products, our Asia warehouse container-direct program and our sales manager reorganization, another factor in the sales rise for casegoods this quarter was a national promotion on our Corsica collection, which we introduced during the mid-March to mid-April period. We experienced a lift in sales in our Corsica collection as a result of this effort, which achieved over 15 million consumer impressions for the collection across a wide spectrum of top digital and social media venues, including our own websites. While the increase in casegoods volume led the way in helping us improve our consolidated profitability, we were gratified that the sales increase was across the board for both wood and upholstered furniture. Sam Moore shipments were up 16% compared to a strong quarter a year ago, and Bradington-Young sales were up 4%. The only exception was our Hooker Upholstery line of imported leather upholstery, which was down 3%. In that case, Hooker Upholstery was impacted by some inventory outages. We have been out of stock of some bestsellers in the last couple of months and expect replenishment of those products in the middle of next month. We also made progress in other areas in the Upholstery segment. As Paul referenced earlier, we made great strides during the quarter, reducing our lead times for shipments to retail customers at Sam Moore. In mid-February, we reduced our shipment lead times from 10 weeks to 8 weeks and then from 8 weeks to 6 weeks by mid-May. Today, we are at 5.5 weeks, which is in with -- which is in reach of Sam Moore's goal to ship to retailers within 4 to 5 weeks after receipt of orders on a consistent basis. We expect to reach that goal in midsummer. Because of our improvement in service, we're hearing renewed confidence on the part of retailers and retail salespeople in selling the Sam Moore product line. The challenge now is to further rebuild retailer confidence as we continue to improve and maintain service levels and regain some retail floor space we lost as a result of our inability to service our products to dealer expectations over the course of the last year, as we experienced dramatic increases in sales and backlogs. We also had significant quarter-over-quarter improvement in operating profitability at Sam Moore, cutting our operating loss by almost 75% from the previous quarter. The surge in training cost we experienced from a ramp-up in production has now stabilized. Our overhead costs are down, and we are experiencing savings from the lean manufacturing process we put in place several months ago. We have recently been challenged by healthcare claims costs well above budget. Despite these higher costs, we intend and expect to return to operating profitability in the third or fourth quarter of this year at Sam Moore. At Bradington-Young, the most recent quarter marked our seventh consecutive quarter of profitability. Clearly, profitability is sustainable for Bradington-Young, assuming we maintain a good order rate. The rise in leather raw material cost continued to be the biggest factor impacting our business and is becoming a real challenge. In fact, we have had several additional price increases from leather suppliers since the April furniture market. The rise in leather cost has had some positive impact in reducing competition in the leather market. As leather has been positioned more firmly as a luxury product, the promotional players are moving away from leather to less-expensive alternate covers. However, more expensive leather furniture also makes fabric and leather alternative covers more attractive to consumers. While we are entering the summer selling season, in which we typically experience slower furniture sales at retail, we believe we are well positioned at Sam Moore, Bradington-Young and Hooker Upholstery with a strong product line, good inventory position and improving service levels to capture our share of the business. At this time, I'd like to call on Paul Huckfeldt to give us more details about the factors driving our operating results this quarter.

Thank you, Mike. There were a few key factors that drove our quarterly results. I'd like to review them by income statement category now. Net sales increased, thanks to increased casegoods unit volume and higher average selling prices in the Upholstery segment. Upholstery unit volume remained flat. However, it was more than offset by a 13.6% increase in casegoods unit volume compared to the prior year quarter due primarily to the increases in our container-direct sales. Volume of the new H Contract and Homeware divisions added about $900,000 to this year's -- this quarter's net sales. Consolidated average selling prices remained essentially flat, offsetting some of the impact of the higher unit sales. In the Upholstery segment, average selling prices were up about 7% due to price increases, as well as a shift to higher priced products, such as sofas and recliners at Sam Moore and higher grade leathers at Bradington-Young. Average selling prices in the casegoods segment decreased by around 3% due to heavier discounting in the quarter and an increase in direct containers sales which are, by design, lower priced. Gross profit margin for the quarter increased to 25.4% of net sales compared to 24.7% a year ago, primarily due to higher sales volume in both segments and lower casegoods segment warehousing and distribution expenses, partially offset by higher levels of discounting also in that division. Improvements were also partially offset by higher manufacturing costs at Sam Moore due to higher labor and benefit expenses during the quarter. Our selling and administrative expenses were about $686,000 higher than the prior year quarter, but decreased slightly as a percentage of net sales from 19% to 18.5%. The increase in spending was principally due to increases in our casegoods segment spending primarily due to an increase of about $200,000 in startup costs for the companies H Contract and Homeware divisions. Increases of about $451,000 in our Upholstery segment were due to higher employee benefit costs, ERP implementation-related costs, selling expenses on those higher sales and some bad debt expense due to higher accounts receivable balances related to those increase in sales. All these factors contributed to an operating margin increase both as a percentage of net sales and in absolute terms for the first quarter compared to the same quarter a year ago. At quarter end, we had cash of nearly $32 million, up about $8 million from year end, thanks to lower inventories and higher accounts payable, partially offset by the higher accounts receivable resulting from higher sales. Our inventories are close to target level and should be adequate to service incoming orders. Other than working capital fluctuations, we expect to invest about $800,000 on Phase 2 of our ERP projects over the remainder of the year and another $1 million to $2 million on other capital projects to improve our efficiency. We continue to be debt-free and have about $13 million available under our revolving credit facility, which remains in place until July 31, 2018. This morning, our Board of Directors declared a quarterly dividend of $0.10 per share, which represents an annualized dividend yield of about 2.9% based on yesterday's closing stock price. Now I'd like to turn this back over to Paul Toms for his outlook.

Thanks, Paul. Orders for the quarter were up over the same period last year, but honestly not quite as robust as we would have hoped for coming out of a relatively strong spring furniture market. While we are very well positioned internally, we're concerned about the retail demand environment and a little less bullish than earlier in the year due to a slower housing market, some inconsistency at retail and an economy that's not quite as robust as expected. However, as we head into the summer months, we expect to capitalize on any improvements in the external conditions with our good inventory position on bestsellers, strong product line across all companies, progress in our Upholstery segment and with our new business initiatives. This ends the formal part of our presentation. At this time, I'll turn the call back over to our operator, Sayeed, for questions.

[Operator Instructions] And our first question comes from Todd Schwartzman from Sidoti & Company.

A couple of things. There was an incident -- or incidents last month in Vietnam regarding an oil rig location. There was some protests temporarily. Did that affect you guys in any way?

Todd, this is Paul Toms. And, yes, it did affect us. I think the impact will be fairly minimal, but probably something along the lines of a 2- to 3-week delay in production. And we feel like we have sufficient inventories in the U.S. to mitigate that, so that there won't really be a disruption in service on inline products to our customers, probably a little bit more of an impact on initial cuttings of new groups coming out of the April Market and it might delay our being able to stock those new groups in our Vietnam warehouse and start the program of shipping mixed containers out of that Vietnam warehouse to our customers.

But no effect on delivered sales in Q1, right?

I think it would be minimal, no not really a noticeable effect.

And what about the weather, Paul, did that cost you any business -- any lost sales that you can tell, particularly in March?

I think, in certain regions of the country, they would tell you that they lost sales in February, which would have been the first month of our fiscal year. We lost a couple of production days at our domestic upholstery plants because of weather in February. So maybe a small impact both on what we're able to produce and ship out of the domestic upholstery plants and maybe an impact -- probably an impact in the Northeast and upper Midwest on retail conditions. But it's really hard to quantify what that is.

Got it. You had mentioned in the press release and reiterated a couple of minutes ago that orders were not as strong as you'd hoped, but they were up year-over-year. Could you quantify that?

Sure. I think we were up about 4.5% in Q1 over orders a year ago, and our orders were pretty consistent with shipments in the quarter. But sales were up 10%. Orders were only up 4.5%. So that gives us some concern, and it just feels like, in talking with the retailers at market and sensed that retail is inconsistent. There are pockets of stronger retail, but there's still a lot of parts of the country that it's just not as robust as people would have hoped at this point.

And how did that 4.5%, the increase, break out by segment?

Casegoods, maybe 2.5%, is that right? Or we probably need to do a little digging to get you that number -- or, Paul, you may have it?

Upholstery was pretty flat. So basically, I mean, 4.5% was the casegoods, too.

Okay.

So flat orders in upholstery and casegoods, give or take, mid-single digits -- low- to mid-single digits?

Right.

Okay. All right. That helps. What about the -- with regard to the new ventures, Homeware and H Contract, has there been any change in your expected marketing costs for the balance of this year?

Well, I think, at this point, we're still early in the year, and we expect it will -- that it would be what we would have projected earlier. I would say, in Q1, we spent a little more at Homeware than we maybe had envisioned, but not significantly more. And I still feel like, for the year, they'll be within the range. Probably a little -- or I guess cautioned or just conservative on revenue projections. I think we had expected to do maybe $4 million, $4.5 million in contract. And I think after Q1, maybe we'll dial that back $0.5 million dollars or something. But again, they're both startup businesses. It's really hard to tell how much traction you're going to get and how quickly you can ramp them up.

Right. Well, so far, what has Homeware taught you about the Internet and basically your approach to online order entry or your expectations regarding future online order entry by the consumer of the core Hooker products?

Well, this is Mike Delgatti. I think we've learned a number of things. Number one, through Homeware, we've been pursuing e-retailers, and we initially have had some good success through that channel. But we also, concurrent to that strategy, have gone directly to the consumer. And we're seeing a really good initial response that continues to grow. As a matter of fact, April, in terms of orders, was our best month to-date. And so far, in May, our order rate is exceeding our April order rate, and that's attributed to both the e-retailer channel, as well as our strategy to go direct to the consumer.

I think also, Todd -- this is Paul. We're -- we see a lot of strength in online retailing in our Hooker, BY and Sam Moore business, too. I mean, we're selling some prominent, national e-tailers and that channel is definitely growing.

Do you think you have a good handle on the demographics of the consumers that are buying online?

We believe we do. Yes, we sure do. We have been -- there's a lot of good information available. We've been real analytical or scientific in our approach to our Internet strategy. And, yes...

And what can you tell us...

Interestingly enough, a high percentages of the purchases online are driven by baby boomers.

So maybe skewing a little bit older than you might have anticipated?

Yes.

And what about from a net income or net worth perspective versus your previous core consumer, typical consumer?

My guess is that, in terms of income, that we're very comparable to our core customer. But we do not have specific information regarding incomes in network.

Got it. And I think I may have missed this, but did you quantify the loss at Sam Moore for Q1?

No, we didn't.

Okay. May I ask what that was?

You can ask, but I think we consolidated Bradington-Young, import upholstery and Sam Moore all together and we're profitable. And we did say that we're still slightly unprofitable at Sam Moore and expect to be profitable in the second half of the year.

Correct.

And I think that we expect to be at breakeven in the coming current quarter.

That being the case, how should we think about the rate of gross margin -- additional gross margin improvement as the rest of the year plays out, even into next year? I mean, when do you really stop getting that additional upside?

Since our operating loss was relatively small in Q1 and we're saying flat in Q2 and slightly profitable in the second half, I don't think it's going to be a tremendous impact on the consolidated gross margins. Sam Moore represents probably 13% or 14% of our total company. And I think there's some opportunity in the other upholstery divisions to do a little bit better profitability. But I don't think you're going to see more than a 30, 40 basis point impact in consolidated gross margins.

That's what I would guess, too, that ballpark. And of course -- and there are other fluctuations. We've got holidays in Q2. So...

So that --- just to be clear, that 30 to 40 basis points, that's from what period? From what as the base?

I would say from the upholstery profitability in Q1.

Q1, right.

So from Q1 to full year or Q1 to Q4?

Q1 to -- probably full year, yes.

Okay, great. One thing we haven't really heard too much about lately, the entertainment -- home entertainment category has been very important for Hooker for quite some time, albeit due to diversification maybe not as big a percentage as it was a number of years back, but can you talk about where that category is now, where Hooker is today, whether you think you're gaining share? And maybe, are you concerned that TVs of the future will largely be wall-mounted, making ASPs perhaps continue to slide or its total dollar value maybe not be what it was a number of years back when TVs themselves were a lot more expensive?

Sure. This is Mike. Certainly, the entertainment category has been impacted by changes in technology, flat-screen TVs, many of which are wall-mounted. It has been a category, where we have experienced declining sales over the last several years. We've leveled off to some respect. But the product line overall is going through a transformation, whereby we are moving from a -- what I'll label as a category killer focused on entertainment, home office, et cetera to more of a collections-centric company. We're having a lot of success in that area, particularly at the better, best categories. And the benefit of that strategy, one of those benefits is that collections pull on the sales of multiple product categories, including bedroom, dining room, occasional, entertainment and home office.

And is part of the diversification the fact that you were able to foresee that transformation, that change in consumer electronics?

Absolutely, absolutely. And interestingly enough, the home office category has also been challenging in recent years. However, despite the challenges and we're certainly not at the level we were several years ago, we are experiencing growth once again in that category and we attribute it to the collection strategy. We are clearly benefiting in the home office category as well, as a result of us becoming more of a collection-centric company.

Okay. And finally, cash is building nicely here. It did so in this most recent quarter. Any thoughts -- any new thoughts or changes in your thinking with respect to use of cash, including buybacks, dividends, acquisitions?

We talk about it all the time. I think, over the years, we've been really cautious and it's maybe a reaction to what our cash could -- how our cash cushion helped us through the recession. But we know we have a lot of cash, and we think about acquisition and we talk about what else to do, how to deploy cash. And I think we've just been really cautious. We're still considering the options, and we're still paying. Our dividend is still a fairly significant portion of our annual earnings. Even as our earnings increase, we're paying just under 50% in dividends. So I think we're just being cautious. And the board talks about it all the time, and I can't tell you -- give you a timeframe as to when we'll make decisions. But it's certainly something that's on our minds all the time.

Paul, is a special dividend something that's on the table or not necessarily off it or something that you've thought about internally in the past?

We've thought about it. But I'm not sure the market gives you a lot of credit for special dividend. I mean, it's almost like, I know that this is the shareholders' money, and we have that responsibility. But to distribute the money and not have -- not be able to sustain that, I don't think is as appealing to investors as being able to have a plan -- even if it takes us a little longer to put a plan together, whether that's investing in the business or buying stock back or increasing the dividend on an ongoing basis. I think a special dividend is more just giving away excess money at one point. I'm not sure you get the long-term credit for that -- that we'd like as we're managing our investors' money.

Right. Plus, you still have a better than 2.5% yield on the regular dividend even with today's move. So I see the point.

I see the point about it, too.

Our next question comes from Matt McCall from BB&T Capital Markets.

So, Paul Huckfeldt, you hit some items that were -- some were maybe nonrecurring in nature, onetime in nature. Can you just summarize some of the items? And I think Todd asked about the investment plans for the new businesses, but can you remind us of some of these items that won't recur or will start to dissipate in coming quarters and thus will have a benefit on the bottom line beyond just what's driven by the top line?

Well, as far as nonrecurring, I think the only thing that really affected us -- or were diminishing events. I think the only thing that really affected us this quarter was -- were the new initiatives, which I think we said what -- it will be $0.04 to $0.06 for the year, but that -- we had $0.02 worth of drag on our earnings from the new initiatives. So through the year, we'll continue to spend money and by the end of the year, we expect to be in a lot better position there. So that will start to diminish over the end of this year and into next year. We're investing in our ERP, which we had some costs there. Frankly, some of those costs are going to be offset by a little bit higher depreciation. So we may replace operating costs with a little bit higher depreciation going forward. But some of those costs should diminish as the year progresses as well. But not entirely. So I'm not sure you see that as a big change until maybe next year or on into later next year. But by next year, we expect Homeware will be profitable or will be approaching profitability late next year, and H Contract should be operating and contributing to profitability.

Another one I had was Sam Moore. Any type of outlook there on the incremental benefit?

Sorry. Could you repeat that?

Yes. Just Sam Moore, I think you didn't quantify the losses so maybe you can quantify what the incremental benefit would be as you just turn that business around next year? What's -- maybe what's the drag going to be this year and how is that going to turn into a benefit next year?

By the end of the year, they should be in the breakeven neighborhood with $1 million in profitability next year. I'm looking across the table with Mike.

Yes, I think that's fair.

So that's a turnaround. Some of that is contingent on our healthcare costs, which we don't want to -- we can't speculate on what's going to happen there. We're self-insured, and those claims have been very high. We expect to see them return to normal but that's a risk and I hate to make -- to sound like we're making excuses, but that's a real variable that we don't know at this point.

Healthcare costs for Sam Moore, Matt, have been running 13 percentage points over the budgeted amount. And so, clearly, they present a challenge for us.

Okay, okay. The -- you talked about casegoods, the ASP down. You talked about 2 drivers, the direct-container business and then discounting. Can you talk about -- I think your ASP was down 3%. How much of it was discounting?

0.5% to 1%. So more of it is probably due to container volume. And then just mix, too.

And mix. Okay. And then, on the container-direct business, can you talk -- it sounds like some success there. You're seeing some good growth, where has that business historically been, just your overall container-direct business as a percent of your casegood sales, where is it currently and where would you expect that to go?

The container business, historically, has been around 15% and then we fell back below 10%. And today, we're back closer to that 15% level. And I would project over the, I don't know, next 12 months or so that we may edge up to 18%, 20% of our business as we roll -- fully roll out and implement the Vietnam warehouse strategy.

And so, there is -- the [indiscernible] there is that there will be some ASP pressure, but I think, Paul, you said -- as or -- by design you'll see some ASP pressure there, but there's no margin delta. The margins are in line with the overall...

Yes.

Correct.

Okay. All right. Last one I had was the warehousing and distribution cost. Can you talk about the savings that you experienced there? And then, again, could I put that in the bucket of potential profit or profitability drivers outside of the top line as we move forward?

I don't think so, Matt, and the reason is that although warehousing and distribution costs were lower as a percent of sales and maybe even in absolute dollars than the prior period, we've got a couple of things going on that will actually increase warehousing and distribution costs. One is, locally, we've sold a 200,000 square foot warehouse that we owned and expanded into about 240,000 additional feet at some leased space. And so, our warehousing and distribution rental costs are going to go up starting with Q2. We're also launching the Vietnam warehouse this summer. So we'll have some lease cost there. We think that will be offset with increased volume, more than offset, but it is going to increase warehousing and distribution cost in absolute terms.

And it will take a couple -- we'll be filling the warehouse for several months before we ship anything out of it.

Right.

And I am showing no further questions at this time, gentlemen. I would like to hand the conference back over for any closing remarks.

All right. Well, we appreciate everybody joining us. We're happy to report a strong quarter and look forward to being back together in about 90 days. And hopefully, we can have some more good news at that time. Thank you for joining us today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.