Hooker Furnishings Corporation (HOFT) Q1 2018 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 2018 first quarter. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [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. Please go ahead.

Thank you, Candice. Good afternoon, and welcome to our quarterly conference call to review our sales and earnings for the fiscal 2018 first quarter, which ended April 30, 2017. We certainly appreciate your participation today. Joining me today are Paul Toms, our Chairman and CEO; George Revington, Chief Operating Officer of the Hooker Furniture and President and Chief Operating Officer of our Home Meridian segment and Michael Delgatti, President of our Hooker Legacy brand. 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 press release and SEC filings announcing our fiscal 2018 first quarter results. Any forward-looking statements speak only as of today and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today's call. This morning we reported consolidated sales of $130.9 million and net income of $4.7 million, or $0.41 per diluted share, for our fiscal 2018 first quarter. This marks the anniversary of our acquisition of the business Home Meridian International, which we completed on February 1, 2016, the first day of our prior 2017 fiscal year. For the quarter, consolidated net sales increased over 7% compared to a year ago. Primarily due to increased sales in the Home Meridian segment, modest increases in Upholstery and all other segment. And flat sales in our Hooker Casegoods segment. Earnings per share increased to $0.41 per share compared to $0.22 per share in the prior year quarter. Now Paul Toms will comment on our first quarter results.

Thank you, Paul, and good afternoon, everyone. We're pleased to report higher sales and earnings on a consolidated basis for the first quarter building on the positive momentum with which we ended our last fiscal year. At the same time we believe there is room for improvement. We recognized the need to grow our Hooker legacy business to long-term and to convert higher sales to increase profitability in our HMI segment. With these objectives we've recently completed a strategic review of the business under the direction of George Revington our Chief Operating Officer for Hooker furniture. George will comment further on the strategy and organization we put in place in just a few moments. During the quarter, Hooker Casegoods continue to trend line set at the end of the last fiscal year, with orders up but flat sales and with strong profitability performance. We're encouraged that both year to date orders and backlogs increased approximately 7% over last year and expect to see those increases begin to be reflected in shipments later in our second quarter and beyond. For the second quarter in a row we benefited from fast tracking orders and shipments of well received collections from the October high point market, which were delivered to retailers in the fourth quarter of last year, positively impacting both last quarter and this quarter sales. We had a solid April high point market and are employing the same fast track strategy with two well received collections, American Life and Boheme. We expect to start shipping both to our largest retailers in June and out of our Martinsville warehouse in August, meaning there should be some positive sales impact in the second quarter. Moving to our upholstery segment. Consolidated upholstery sales for Bradington-Young, Sam Moore and our imported Hooker upholstery line picked up slightly by 1.3%. Year-to-date orders in this segment were up nearly 3% and the backlog is up 21%. Bradington-Young are domestically produced premium leather line continued success in the luxury motion furniture category, sparked the sales increase of over 7%. In addition the quality related issues that negatively impacted sales in our imported Hooker upholstery line most of last year is now behind us. And Hooker upholstery sales order backlog was up over 85% from the prior year period. We are also pleased with new placement activity from April market that we are seeing in each of our upholstery units. And while our all leather segment is relatively small part of our consolidated results, we are gratified that each contract continues to make significant inroads in the senior living segment of the contract furnishings industry. Sales there increased nearly 7%, orders were up 28% for the quarter and the backlog was up over 30% in quarter end compared to the prior year. At this time I would like to call on George Revington who will comment on the results for our Home Meridian segment as well as the strategic reorganization of our Hooker legacy business units.

Thank you Paul. Home Meridian sales for the quarter were robust, up 13% over the prior year as our core sales strategies remained on target. However, as a result of product mix at change and a short fall in our hospitality segment, the shifts and shifts within ecommerce segment we were disappointed with the operating profit. Strong sales momentum continues however with orders and backlog for the quarter up 43% and 29% respectively. Sales in our emerging channels were 36% of total sales for the quarter and were up 57% over the prior year. In addition, sales to customers on our traditional channels were up in the quarter. While the first quarter of last year was particularly weak and these increases show the success we are having with our current sales strategies. These increases more than made out for declines in hospitality which experience delays on several projects. As a reminder HMI's business is seasonal with Q1 being only 20% of annual sales and then even lower percent of the annual profitability. Profitability in the first quarter was lower than expected due to excess distribution expenses related to one major customer, customer mix, a significant bad debt and higher professional fees. We put remedies in place for all of these issues and we expect to see the impact of these remedies in the second quarter. Our new fashion based Eccentrics Homes division whose lifestyle products are tailored to customers and emerging channels was up 95% in the quarter. We continue to invest and enhance our quality teams and processes in United States and Asia developing real time cloud based analytic systems that will help us continuously improve. We expect profitability of HMI to rebound next quarter as positive sales trends continue. I would like to comment on the strategic reorganization of the company's legacy business units that we announced last week. Following the comprehensive data driving analysis for the business, we put in place a robust strategy, a profitable growth with the dedicated management focus on each of our Hooker legacy brands. Each of these units Hooker Casegoods, Hooker Upholstery, Bradington-Young and Sam Moore targeted different market niche and now has a completely dedicated leadership and product sales team and an operations team. The simplicity, simplified organizational structure creates more direct accountability and positions each of our businesses to pursue emerging channels of distribution and product categories that offer higher growth opportunities. We feel very good about the progress made so far. As part of the strategic organization, three of the company's executives have been promoted to new positions of division presidents. Steve Lush has been promoted to the new post of President of Hooker Casegoods based in Martinsville Virginia. Steve is a 34 year veteran at the furniture retail, manufacturing and interior design industry and joined Hooker in 2016 as Executive Vice President, Hooker Casegoods sales and merchandizing. Craig Young has been promoted to the new post of President of Bradington-Young. The company's out scale leather upholstery brand based in Hickory, North Carolina. Craig has been with Bradington-Young and Hooker for 24 years, most recently as Vice President Sales, Eastern region for all Hooker brands. Frank Richardson has been promoted to President of Sam Moore, our custom fashion upholstery brand based in Bedford, Virginia. Frank has been with Hooker for 24 years most recently as VP Sales Development. He also served previously for five years as the VP of Sales for Sam Moore. Our search is currently underway for a President for Hooker upholstery, our import leather upholstery line with more moderate price points. Also as part of the reorganization, Matt Cowan has been promoted to the new position of Vice President of Sales, Hooker Casegoods. Matt has been with Hooker for 27 years beginning as a Sales Representative in Texas, prior to being promoted to Western regional Vice President in 2012. At this time, I would like to turn the call over to Paul Huckfeldt, who will give more details on our financial performance for the quarter.

Thanks George. As I reported earlier sales increased about 7% over the prior year quarter, due mostly to higher sales in our Home Meridian segment, small increases in upholstery and all other segments, and flat sales in Hooker case goods. Consolidated unit volume increased almost 16% which more than offset to 5.6% decline in average selling price. Both of these changes were driven by the relative sales growth and our generally lower priced Home Meridian segment, compared to the generally higher price traditionally Hooker products. Home Meridian's unit volume was up almost 21% and ASP was down about 3% reflecting to some degree, the increased sales in ecommerce channels which tends to favor smaller and low priced products. Unit volume and upholstery was up about 3% with 2.4% decline in ASP. And the Hooker Casegoods units were up slightly, offset by a small decline in average selling price. Consolidated gross profit increased 1.5 million, much of it due to increased sales in Home Meridian and to a lesser extent lower cost to goods sold as a percent of sales in the Hooker Casegoods and Upholstery segments, which resulted from lower ocean freight costs, improved domestic manufacturing efficiency. Consolidated gross margin declined slightly due to the mix impact increased volume in our traditionally lower margin Home Meridian segment, as well as decrease in Home Meridians gross margin which was the result of higher distribution cost related to a large customer as well as higher allowances on increased sales to certain customers, these factors more than offset [Audio gap] 200 plus basis point gross margin improvement in Hooker Casegoods and Hooker upholstery. Consolidated selling and administrative expenses decreased in absolute dollars as well as a percentage of net sale. However last year's SG&A included about $1 million of acquisition related costs. Excluding these costs SG&A was up about 700,000 primarily due to $330,000 bad debt during the quarter as well as higher compliance related professional fees. Amortization of acquisition related intangibles was also lower in fiscal 2018 because we fully amortized the margin and acquired backlog during the early part of fiscal 2017. The remaining intangible amortization will continue at about 333,000 per quarter for a number of years into the future, borrowing future changes in our business. For these reasons operating income for the fiscal 2018 first quarter was 7.1 million or 5.4% of net sales compared to 4 million or 3.3% of net sales in the fiscal 2017 first quarter. Our balance sheet remains strong despite the use of cash and long-term debt incurred to acquire the business of Home Meridian last year. At the end of the quarter we had cash and cash equivalents of nearly $54 million available to provide the required working capital and to service our acquisition related debt, which stood at 46 million at the end of the quarter. We also have access to $28 million on our revolving credit line and about 23 million of cash surrender value of company owned life insurance, which gives us additional financial flexibility. In today's release we also announced a quarterly dividend of $0.12 per share which represents slightly over 1% dividend yield. Now, I’ll turn the discussion back to Paul Toms for his outlook.

Thanks Paul. Boosted by favorable, economic and industry trends as well as continued strength in order since the end of Q1, we expect to see growth above industry levels in our consolidated businesses, including better growth in our Hooker legacy businesses and increased profitability at HMI in the short-term. While encouraged by our overall profitability and sales performance, we're optimistic about the improvements we can achieve through our new strategic plan and the adjustments we've made recently. That ends the formal part of our discussion. At this time I’ll turn the call back over to our operator Candice for questions.

[Operator Instructions] And our first question comes from Anthony Lebiedzinski from Sidoti & Company. Your line is open.

Good afternoon and thank you for taking the questions. So, first I just wanted to clarify as far as the product mix at Home Meridian, is that mostly because of the shift that you talk about as far as the sales short fall in hospitality or is there is something else that I should know about?

This is George, it's primarily the result of the shift in the hospitality business. We had jobs that we pulled forward into last year and then we had jobs that slipped into the next quarter and that business is traditionally carries a higher gross margin than the other part of our business. So that was a really big part of it.

So when you look at the all of Home Meridian's products, can you give us a sense as to how much hospitality is as a portion of the overall segment business?

So, it could easily be -- typically approximately 10%. Maybe 7% to 10%. It varies quite a bit. That business is episodic, because it comes in big jobs.

Okay thanks for that. And you also cited temporarily higher ecommerce cost large bad debt expense higher professional fees, is it possible for you guys to quantify the impact of these? And I know the ecommerce issue you cited as temporary, so it sounds like it’s a one quarter issue as far as the other two bad debt expense and higher professional fees, are these kind of one offs or is this something that we should continue to expect on a go forward basis?

So the bad debt expense was $320,000 related to Hhgregg. And that is a one off and is typical. And the administrative fees were a little bit less than that. But they were pretty high relatively in the first quarter.

Compared to last they were significantly higher.

It’s a pretty good bad debt experience; I mean they can't guarantee anything but typically our extension is pretty good. This was an unusually [indiscernible].

Thanks for the clarification about Hhgregg. Certainly aware of their issue going bankrupt. Then switching over to just to couple of other items. And then thanks for giving some color about giving its first ASP, so going forward do you expect that dynamic to continue as far as units versus ASP? Or would you see that changing over the course of the fiscal year?

So I think that the trend is there, but I think the first quarter was unusually in the mix of sales was unusually balanced to ecommerce in the lower value products. So I think overall the trend is there but it seems very, it seemed extreme in the first quarter.

And Paul I think you also mentioned the impact of lower freight cost, is it possible for you to quantify how much of favorable impact that was?

It's probably in the ball park of 50 to 70 basis points. And we've enjoyed that for a while, but we are getting to the end of that because we enjoyed low freight cost for a while now.

But that was probably in last year's first quarter as well, significant difference in trade.

It was lower during the end of last year until it -- it started to tick back up so yes, couple of little bit now but so as we cycle through inventory this is...

So really if we are calling out freight is a lower cost helping us to keep margins higher. It's not that it's any lower or higher than it was a year ago, it's just continuation of pretty low rates which we just renewed contracts for the coming year and freight cost will go up about 10% or so on average for containers but overall impact to our profit margin is not very significant.

And then as far as the strategic review that you outlined, can you share with us some of what you think will be your near term goals versus your longer term goals as far as the whole strategic review process?

There are sort of the two elements, the first element is getting focus on the four primary niches of the business we are in and we've accomplished that pretty nicely and I think that our leadership there is comfortable and moving forward and I think that will really help us. The other piece is, how we are organized to sell into the four emerging channels that we've got and that’s basically ecommerce, international, contract and the design trade. And between the two strategies, I think it's pretty effective way to reorganize and focus -- get focus on the business unit and then shift sales into emerging channels of distribution and kind of seeing the Home Meridian example how extreme the growth is in those emerging channels and to certain extent, I think we can make that happen in Hooker.

Got it, okay. Thanks very much.

Thank you. And I am showing no further questions at this time. I would like to turn the conference back over to Paul Toms for any further remarks.

We appreciate everybody dialing in for today's call. We are encouraged by the quarter, we know we got opportunity to improve but I think all in pretty good improvement over the first quarter of last year. We look forward to getting together again in about three months and reporting on a successful second quarter. Thank you for joining us.

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