Hooker Furnishings Corporation (HOFT) Q3 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen; and welcome to the Hooker Furniture Quarterly Investor Conference Call reporting its operating results for the Third Quarter. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Paul Huckfeldt, Vice President, Finance and Chief Financial Officer for Hooker Furniture Corporation.

Thank you, Candice. Good afternoon and welcome to our conference call to review our sales and earnings for our fiscal 2015 third quarter and first nine months, both of which ended on November 2, 2014. We appreciate your participation today. 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 third 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. Earlier today, we reported net sales of over $63 million for the fiscal third quarter, which was nearly 7% higher than the same period last year and our highest quarterly sales in the last six years. Net income for the quarter increased over 50% or about $1.1 million to $3.2 million from $2.1 million last year, due primarily to higher sales volume, lower cost of sales as a percentage of sales, and lower price of discounting. For the nine months of fiscal 2015, sales increased 5.1% to $179 million; net income increased over $2 million to $8.3 million, representing a nearly 40% increase compared to last year. We reported earnings per share of $0.30 per share in the fiscal 2015 quarter compared to $0.20 per share last year, and year-to-date EPS is $0.77 per share compared to $0.55 a share to the same period last year. Now I'll ask Paul Toms to comment on our results.

Thanks Paul and good afternoon everyone. Our overall performance for the first nine months of this year, is one of the best I can remember, and our net sales for the quarter were the highest in six years. Today, in early December, we are on the front end of the historically strong fourth quarter and the top and bottom line momentum of the most recently completed quarter, positions us very well for continued success. Demand is strong, with uptick in incoming orders that began in August continuing to play out, with an 8% year-over-year increase in orders for the third quarter, orders remain brisk through November, the first month of our fiscal fourth quarter, with a 10% consolidated increase versus last November. It's especially gratifying to see the casegoods segment leading the way in sales growth. Growth we are seeing in casegoods is having a significant positive impact on our consolidated results. A number of factors are contributing to sales momentum in casegoods, those include the strength of our product line, the initial shipments of several top selling April market introductions during the quarter; the good inventory position on best sellers, and national digital advertising campaign during the quarter, and overall improvement in the casegoods market, as housing activity increases. It was also gratifying to post the year-over-year consolidated operating income increase of nearly 55% or $1.7 million. While this increase was driven by the casegoods segment, upholstery segment operating profitability continues to improve as well, increasing by $335,000 or about 62%. Same work continues to make strides in profitability, and this was a second consecutive quarter, with breakeven or better performance in that division. Bradington-Young, our leather specialty upholstery company again posted stable consistent results, as we continue to improve manufacturing efficiencies, reduce costs and grow sales. As far as profitability metrics are concerned, I wanted to point out, that we achieved one of our internal targets in the casegoods segment this quarter, by attaining an operating profit margin of over 10% in that division. The 10.6% operating profit margin of the most recent quarter compares to an 8% margin a year ago. We were pleased to hit this intermediate target, and expect to improve further, as we move forward. At Bradington-Young, we are in the mid-single digits in operating margin today, and expect we can get to the mid to high single digits next year. At Sam Moore, our intermediate goal is to achieve breakeven or better performance for this year, and we expect to achieve a low single digit operating margin next year. Our new business ventures, H Contract and Homeware are now being reported as our all other segment. In the third quarter, this segment contributed $1.6 million to net sales. Year-to-date, H Contract and Homeware contributed $3.7 million to net sales. Operating losses for these ventures totaled $209,000 and $886,000 for the fiscal 2015 third quarter and year-to-date periods respectively. H Contract is operationally profitable and gaining momentum, with both sales and incoming orders increasing. We are still investing significant amounts in building brand awareness and web site traffic for Homeware, and it has not yet reached breakeven in that operation. At this time, I'd like to turn the call over to Mike Delgatti, our President, to give more details on the factors driving our results this quarter.

Thank you, Paul, and good afternoon to everyone. I agree with Paul, that the third quarter results are quite encouraging, and position us well for the historically [ph] fourth quarter at retail. In addition, we gained some positive momentum in the fall high point furniture market in late October. We had a really good casegoods market, both in our best products, with 75 new pieces and a five year anniversary introduction for our Sanctuary collection and with a couple of well received collections in our growing better price point range. We also were pleased with a more contemporary collection, Studio 7H, targeted at younger urban lifestyles, was well received, since that was an unexpected look for Hooker and a higher risk introduction that paid off for us. At Bradington-Young, we had a very good response to a comprehensive new motion upholstery program with many functional features, as well as a moderately priced sofa and a recliner program. At Hooker Upholstery, our imported leather upholstery line, we also had a good market. Sales at Hooker Upholstery have been flat to slightly off in the first half of the year, but in the last couple of months, sales have been picking up and market reflected that uptick. At Sam Moore, we had a strong rebound market, following a lackluster market this past April. During April, we were still challenged with long leadtimes, resulting in a reduction of written business at market. Now that we have reduced our order backlogs and achieved our objective to ship orders in four to five weeks, our written business at market was at a level prior to the service issues we had. We believe, this is further indication that we have regained the confidence of retailers and retail sales professionals, that we will deliver Sam Moore products in a timely manner. In addition to the positive reception to our production introductions at market, we found retailers across all regions of the country to be more optimistic than recent memory. Overall this quarter, we had solid performance for Upholstery across all brands. On the profitability side, Paul discussed Upholstery segment improvements earlier, specifically the continuing improvements at Sam Moore and steady performance of Bradington-Young. On the sales side, Upholstery revenues were up across all Upholstery brands, with Bradington-Young leading the way with an approximate 5% increase. We believe the sales performance of Bradington-Young was driven by our introduction of the element's moderately priced leather recliner program, and in-stock Quick Ship program, Bradington-Young Express or BYX, both of which we introduced this summer. As we continue to grapple with increases in leather raw material costs, it's especially encouraging to see the sales uptick at Bradington-Young, as the luxury leather market has become a very tough category. At this time, leather pricing is actually somewhat stabilized. We remain cautious, and know we need to continue to be aggressive and innovative in our programming and merchandising in order to stay strong in this category. We continue to do whatever we can, mitigate rising leather costs, without sacrificing gross margins. In terms of Upholstery segment, demand remains good at Bradington-Young, with incoming orders up year-over-year during the third quarter. At Sam Moore and Hooker Upholstery, orders were down slightly against some very strong comparisons for the same period last year. In the marketing arena, Paul mentioned earlier, our national digital advertising and online campaigns. During October and November, we conducted a national campaign promoting our top selling casegoods Rhapsody collection that achieved a total of 86 million consumer impressions, and directed consumers to our web site and retailer locator. This was by far the highest number of brand impressions we have achieved with a digital campaign, and encompass both display advertising and paid social media. During our last conference call, we announced our new state-of-the-art consumer centric web site design for Hooker Furniture. All the metrics related to performance of the new web site, including traffic and visits to our Find it Now retailer locator are trending positively. One of the most interactive features of the web site is Live Chat, which is now typically found on furniture manufacturer web sites, but is a feature we wanted to offer because of the unique ability Live Chat provides to directly engage consumers in real time. Since the web site went live in August, we have logged over 6,000 unique chats. Our trend line shows that we have grown from less than 40 chats a day, when we started to around 100 chats a day by mid November. Hookers own internal customer care team is staffing the Live Chat, and we are pleased that consumers who rate their chat experience with us have given us a 98% satisfaction rating. The chatters on Hooker's customer care team constantly receive feedback telling them how valuable they are and how much they are appreciated for being there to help assemble something or give directions on how something works. We believe that the chatters are a bonus to customers and prospects, who can now reach out to us during the evening, and get an answer without having to wait for reply through e-mail or phone call, when the office is open. Overall, we believe all our brands are positioned very well to benefit from the continuing economic recovery, and are optimistic about business in the next several months. At this time, I'd like to call on Paul Huckfeldt, to give us more details about factors driving our operating results this quarter.

Thanks Mike. Looking at our quarterly results, I'd like to point out a few highlights. Net sales increased due to higher average selling prices in all segments, partially offset by slightly lower casegoods segment unit volume. Part of the increase in ASP is attributable to much lower discount in our casegoods segment, a byproduct of the strong product, and also the improved inventory management process we have been implementing over the last couple of years. Consolidated unit volumes decreased less than 1%, with unit volumes down 4% in the casegoods segment, partially offset by a 1% increase in unit volume in the Upholstery segment. Our new initiatives, H Contract and Homeware contributed a combined $1.6 million to consolidated net sales for the quarter, compared to about $0.5 million the same quarter last year. Gross profit increased due to both higher sales volume, which accounted for about $1 million of the increase, and improved gross margin. For the quarter, gross margin increased to 25.4% of net sales compared to 23% a year ago, primarily due to decreased casegoods segment discounting, but also contributing to the improved gross margin were modest improvements in upholstery manufacturing costs, as a result of continuing cost containment efforts, and to a much lesser degree, changes in product mix in the casegoods segment, which shifted towards higher priced and higher margin products. Our selling and administrative expenses were about $700,000 higher in the prior year quarter, but were essentially flat as a percent of net sales of 17.6%. Casegoods segment SG&A expenses increased, both as a percentage of sales and in absolute terms, primarily due to bonus expense on higher earnings, commissions due to higher net sales and a bad debt we wrote off during the quarter from a large customer. These and some other smaller increases were partially offset by lower benefits expense, due to lower medical claims experienced during the quarter, and increases in the cash surrender value of company-owned life insurance. Professional service expenses were also a little bit lower this quarter, due to lower compliance related costs compared to the prior year. Upholstery segment SG&A expenses were essentially flat in absolute terms, and decreased as a percentage of net sales, as we are able to leverage our fixed SG&A over the higher net sales. SG&A in the all other segment, decreased as a percentage of net sales, primarily due to higher sales, but increased in absolute terms, due primarily to increase salaries and benefit, as we grow these business initiatives and add some personnel and commissions on the higher sales volumes. Our balance sheet remains strong and stable. At quarter end, we had cash of over $33 million, up $9.5 million from year end. The higher cash balance is due primarily to lower accounts receivable and a reduction in inventory levels since the end of last year, which more than offset our capital spending and dividend payments. During the remainder of the year, we expect to spend between $500,000 and $750,000 on capital expenditures, primarily our ERP implementation and other projects to improve our manufacturing efficiency and capacity. We continue to be debt free and have slightly over $13 million available under our revolving line of credit facility, which remains in place until July of 2018. And lastly, our Board declared a quarterly dividend of $0.10 per share a couple of weeks ago, and that represents an annualized dividend of 2.6% or -- well that was based on yesterday's closing price. Now I'd like to turn the conversation back to Paul Toms for his outlook.

All right. Thanks Paul. Based on the momentum of the most recent quarter, which continued into the first month of the fourth quarter, we have a very optimistic outlook for this fiscal year and beyond. In a larger economic outlook, it's hard to find many negatives. As housing steadily improves, consumer confidence is on an upward trajectory, and the stock market experiencing all time highs. Our product line is strong, we are properly inventoried and our retail customers are more upbeat than we have seen in quite a while. Therefore, we expect and are planning for continued strong business in the near term. This concludes our formal remarks, and at this time, I will turn the call back over to our operator Candice for questions. Thank you.

[Operator Instructions]. And our first question comes from the line of Todd Schwartzman of Sidoti & Company. Your line is now open.

Hi, good afternoon gentlemen.

Hey Todd.

Wanted to make sure I heard correctly, the operating margin in casegoods for the quarter was 10.6%?

That's correct.

And that's versus a percent, prior year third quarter?

That's correct. 8.1

8.1, great. Got it. Just looking at raw materials on the Upholstery side I think in particular, you talked a little bit about leather stabilizing now. Could you talk to maybe some of the energy base inputs, poly and such to a wide extent if any that might currently be serving as somewhat of an offset, or more importantly going forward this quarter and in the near term, in terms of future costs?

In terms of raw materials, as we said, leather price increases have pretty much been put behind us at least recently. As far as other materials, such as foam, there has been some conversation, some discussions about potential cost increases, but we are trying to mitigate those potential cost increases by putting some of our materials out for bid, and through that process, we have been able to actually reduce some material costs, particularly in the area of foam and kits, so that has been a positive as a result of that initiative.

It sounds like the net effect has been positive?

It has been.

Okay. Net effect of all raw materials that is?

Right.

Given the progress you've made thus far in Sam Moore, and obviously there is a little more to go there, and also assuming housing stays strong, assuming though supply chain issues materialize, nothing new there. How much additional consolidated gross margin runway do you have, how should we think about that in kind of a mid-60s kind of quarterly revenue level?

Well in terms of gross margin, we are focused now on reducing cost of sales for both Sam Moore, as well as a BY. We believe there is more upside with a Sam Moore, just based on where they are in the turnaround of process. But as we mentioned, the third quarter represented second quarter, where we came in just north of breakeven, and we anticipate Sam Moore's performance to steadily improve over the coming quarters, and hope to get into the low single digits on a consistent basis next year.

I think also, Todd, this is Paul Toms. In casegoods, I don't know that there is lot of opportunity to drive higher gross margin than where we are. I think the opportunity is more to leverage sales increases and driven down selling and administrative expenses. But with some of the recent increased freight costs from Asia and probably modest inflation and products coming out of Vietnam and China and Indonesia, that are driven by wage increases over there, up about 15% in each of those countries, we feel like our gross margin is probably not going to vary a whole lot. But I don't see an improvement significantly.

Right. There will be improvement in upholstery, but we are close to the top in casegoods, so it's going to be difficult to push it up a lot more [ph].

And in Upholstery, can you speak to custom versus non-demand trends?

Well if you're speaking of domestic versus our imported leather upholstery, you know with BY, we continue to grow that business. Frankly, at San Moore, while sales are up rather significantly year-over-year, and our business is up significantly with our major retailers, we are still in the process of earning back business with mid-tier retailers, where we lost some slots, real estate, as a result of service issues, all of which have improved. On the import leather side, as I alluded to, orders slightly down earlier in the year, but that business has become really robust of the last couple of periods. As a matter of fact, November, was the best shipping period of the year, and orders increased 5% in the month of November, so that business is once again starting to get some traction for us.

Great. Paul, just turning to the all other segment for a second, could you quantify H Contract's profit and Homeware's loss for the quarter?

We probably should. I think we did say that H Contract was in the ballpark of its modest operating profitability and Homeware is not yet profitable. That's close.

Okay. All right. I guess I will have to live with that Paul, not a problem. Staying with Homeware, you see any -- anecdotally at least, any impact of another home furnishing web site that recently IPOed, in terms of visibility, competitive standing, I mean what are the puts and takes that we should maybe consider, vis-à-vis your Homeware business?

That company that you're referring to is actually a good customer of Homeware, and its -- I think our biggest opportunity in the near term is to partner with online retailers that have a lot more scale, than we have or even hope to have on our own site. And so, I think the whole dynamic of more and more of the furniture being sold online, plays well for Homeware, and the fact that it can be delivered via FedEx or UPS to the home, makes it an attractive product for those online retailers to offer. I think that's our opportunity.

Fair enough. In November, you mentioned that the orders are up 10%. Any reason why you didn't speak to the first week and a half of December, is it just that the numbers have not been compiled yet, or is there any difference there from the first month of current quarter?

Actually for us, fiscal November is a five week period. So that does go through last Sunday.

Okay. So that really is current. Perfect. I know that you have been diversifying away from home entertainment as a category. Can you give us a sense of the makeup of the casegoods sales by room or by product category, and how that's been trending over the last few quarters?

Actually our home entertainment and wall business is down a little bit this year. The home office category, while it's certainly not at a level that it once was, it is growing once again. Our XM business, which represents a significant percentage to our total business is also growing. But where we have had explosive growth, has really been in the areas of bedroom and dining room and our occasional business is very strong, and many of those product categories have been driven by the fact that, we have become much more of a collections centric company, and through the selling of collections, you pull through bedroom sales, dining room, occasional -- helps our home office business, and even to some extent, our entertainment business.

And with regards to the acceleration in written business that you have seen in the past few months, relative to the delivery sales for Q3, is there any change in the mix? Any difference I should say, in the mix?

Some change in that, and I don't know in specific terms, but I am sure that dining room and bedroom represented a higher percentage, than in prior quarters, particularly because of a really strong April market, and those products started to ship during the third quarter, and we sold those product categories very well, plus the continuing of success with many of our inline products, and both the better, and they are the best categories. Again, driven by bedroom and dining room sales.

I think also Todd contrary to what we are seeing over the last two to three years, casegoods in total grew faster increases versus prior year were greater than our upholstery products.

And it seems that you've been stacking growth on top of growth in the casegoods business for a little while now; is that a market share story that's running its course or what factors you might see that continuing?

I don't know that we can really say on a quarter or two basis, how much of that is market share gains. I do think we are probably growing casegoods faster than the companies that you can see, publicly reporting companies. Our container direct business has really driven a lot of our growth in casegoods too, so that tells us that -- I think our customers are more willing to make a little bit bigger inventory commitment when they buy container than order in one at a time out of our U.S. warehouses. I think it speaks to the strength of our line, where I think we have more good selling product available to mixing containers, so they don't have to go as deep on one group or collection; and it probably speaks to the -- that housing is recovering. I think casegoods are probably more closely correlated with housing turnover. Where in Upholstery, you can see that being replaced, even in the absence of housing turnover. It is dated quicker, wears out faster, it’s a quicker replenishment. But to me, bedroom, dining room, even home office, a lot of times that's kind of a byproduct of housing turnover.

Sure. And my last question, I do assume that there is no issues to really call out with regard to the supply chain, but in terms of the mix of casegoods sold in the quarter by country of origin versus a year ago, is there any real noticeable change how much of an impact -- it had a slight shift, maybe toward Malaysia, Vietnam, make in terms of the delivered sales?

I don't think really think there has been much -- we are not in Malaysia, but we are in Indonesia, Vietnam and China; and China is still about 60% to 62% of our casegoods volume. We have intentionally deemphasized Indonesia a year or so ago. Not moving product out of Indonesia, but just not putting as many new groups there, and trying to become more important in Vietnam, as we targeted more moderate price points over our good/better/best, a more better product, it is placed in Vietnam, and also to try to gain skills that would help us with a successful Vietnam consolidated warehouse program. So it's really kind of boiling down to about a 30% to 40% of our business in Vietnam and balance in China, with a little bit still remaining in Indonesia.

Terrific. Thank you.

Thank you.

Thank you. And I am showing no further questions at this time. I would like to turn the call back over to Mr. Paul Toms, for any further remarks. End of Q&A

All right. I really don't have any additional remarks. We are glad to bring a good quarter. We are optimistic about our prospects for finishing the year on a strong note, and we appreciate everybody joining us today. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day everyone.