Hooker Furnishings Corporation (HOFT) Q2 2019 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 2019 Second Quarter and First Half. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce your host, Paul Huckfeldt, Vice President, Finance and Chief Financial Officer for Hooker.

Thank you, Joel. Good afternoon and welcome to our quarterly conference call to review our sales and earnings for our fiscal 2019 second quarter, which ended July 29, 2018. We certainly appreciate your participation today. Paul Toms, our Chairman and CEO will join me for our prepared remarks, for the question-and-answer portion of the call several of our business unit heads will be available to take questions including Michael Delgatti, President of Hooker Domestic Upholstery and Emerging Channel; HMI, Co-Presidents, Doug Townsend and Lee Boone; and Jeremy Hoff, President of our Hooker Branded Casegoods and Upholstery Division. 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 2019 second quarter results. Any forward-looking statements speak 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 consolidated net sales of $168.7 million and net income of $8.7 million, or $0.74 per diluted share for the fiscal 2019 second quarter, which ended July 29, 2018. For the quarter, consolidated net sales increased 8% compared to a year ago, primarily due to increased sales in our Home Meridian segment and our all other business units. Earnings per share increased to $0.74 per share compared to $0.67 in the prior year quarter. Now, Paul Toms will comment on our second quarter results.

Thank you, Paul, and good afternoon everyone. Thanks for joining us today. We are pleased to report a solid quarter with sales of 8% and net income up almost 12%. Retail business was challenging throughout the summer and we are encouraged that year-over-year order rates have ended up briskly in most divisions since the beginning of August. With in coming orders in our Hooker branded segment up 20% so far in the third quarter and Home Meridian's order backlog 15% over the same period in the prior year. During the quarter, sales softened in the Hooker branded segment following a four consecutive quarters of year-over-year revenue growth. The Home Meridian Segment rebounded a bit from a small sales dip in Q1 reporting an approximate 4.8% net sales increase. HMI resolve the disruptions with Asian suppliers that negatively impacted shipments in the first quarter. And all other, our sales increase was primarily driven by the addition of Shenandoah's net sales which we acquired in last year's third quarter. Consolidated operating income stayed essentially flat in the second quarter. Higher consolidated employee medical benefit cost, weather related property damage at one of our warehouses, price increases for materials and components in the domestic upholstery divisions all negatively impacted consolidated operating income in the quarter. This was partially offset by increased operating profit in the Home Meridian segment. Taking a closer look at each of our segments, I will begin with our Hooker branded segment. As I mentioned, sales leveled off at both Hooker Casegoods and Imported Upholstery during the quarter. After two consecutive quarters of growth, however, we are encouraged in August by 28% up tick in orders for Hooker Upholstery and an 18% up tick in orders at Hooker Casegoods versus a first four weeks of Q3 last year. We are focused on growing Hooker branded sales with some timely promotions taking advantage of a strong in-stock position on bestselling items and groups. During the summer, and in a recently concluded design meeting in high point, we previewed several new Hooker Casegoods collections to approximately 80 retailers. Based on a very positive feedback from those retailers and it is part of our strategy to increase speed to market. We are presently ordering two major Casegoods collections being introduced at the upcoming October High Point Furniture Market. This will allow us to ship these products to our retailers 2 to 3 months earlier than its typical, thereby increasing turns next year and taking advantage of traditionally strong retail sales in the first quarter. We expect a positive impact as we began to shipping these collections to our largest retailers and direct containers out of Asia by the end of this calendar and shipping from our U.S. warehouses to other retailers, by the end of the fiscal 2019 period in early February. Hooker Upholstery continues to have good momentum with three consecutive strong High Point markets. We attribute the flat sales in the second quarter to the typical seasonal pattern of lower sales of leather upholstery in the summer months. We have an optimistic outlook for Hooker Upholstery heading into the fall selling season but the strong inventory position on bestsellers and a good line of new product introductions for the October market. Our long range strategy to develop and grow our business in emerging and winning channels of distribution for Hooker, Bradington-Young, Sam Moore and Shenandoah is gaining traction particularly in the interior design and e-commerce channels. Sales in these channels are up 12% and over 25% respectively. To further faster growth in these channels, we're launching several comprehensive programs at the October High Point Furniture Market. For the interior design channel, we're launching Design Pro a paid membership program that provides interior design clients with features and benefits including sales aides, special promotional periods, higher service levels and more. We're also set to launch a new line of modern upholstery and premium bedding called Marq, M-A-R-Q designed especially for an available exclusively to the interior design trade. This October, we're launching Eagle, a rollout of Web sites featuring B2B e-commerce, designers, small-to-midsize retailers and retail sales associates will be able to shop on our site view our entire product line and place orders online. On those sites designers and retailers will see pricing at their tier and be able to see and order sale sites, samples and much more. This is a significant investment into a best of class B2B e-commerce platform for the Hooker legacy brands. During the quarter, we were happy to add some fresh new management talent to an already strong team and a Hooker branded segment. At Hooker upholstery we added a leather upholstery specialist with over 25 years of experience to direct merchandising and product development. At hooker Casegoods, we welcome the new merchandising executive with strength in developing upscale, higher end products and merchandise for international accounts. Both of these individuals report to Jeremy Hoff who was recently promoted to serve as President of both Hooker Casegoods and Hooker Upholstery, a new position. Turning now to the Home Meridian segment we also added a top executive to run the Samuel Lawrence furniture division replacing Lee Boone after his promotion to Co-President of HMI in June. Net sales in Home Meridian were up 4.8% over the prior year and operating margin for the quarter was 5.6% a significant improvement from the first quarter. On a year-to-date basis sales are even with last year an operating profit is below prior year. The result of higher spending and investments we've made in the emerging channels of the business. Our current backlog is up 15% over prior year orders for the second quarter were soft down approximately 14/7%. However, orders have bounced back in August, fiscal year-to-date orders were up approximately 8%. The episodic nature of large orders from our largest customers creates small distortions in year-over-year comparisons at Home Meridian. Emerging channels continue to deliver better sales growth compared to traditional channels based on this established trend. We're making significant investments in our business units focused on the emerging channels. Our e-commerce business is the fastest growing and delivers consistently good margins. This channel is clearly advantaged based on the rapidly changing buying habits of consumers today. We continue to invest in the human resources, digital marketing and data analytics vital to developing this channel. Further, we're building out increased capabilities for 3D imaging technology in our Asia offices that will deliver additional sales growth on a relatively low cost basis thus enabling us to maintain premium margins in the channel. SLH, our hospitality business enjoyed significant sales and margin improvements in the second quarter. The result of investments made earlier this year. The Samuel Lawrence hospitality backlog was up 54.8% over the prior year and incoming orders in the second quarter were up 24.5% over the prior year. This growth is supported by both an increase in hotel projects and the new kitchen cabinet business we entered earlier this year. We expect this business to continue growing significantly into next year. Our club channel business at HMI is also enjoying record orders and backlog that will deliver a strong performance in the second half, clubs or another channel increasingly favored by today's consumer. We believe we are well positioned to capture incremental sales based on this trend. Our model for spotting style trends early, creating new proprietary products and delivering them quickly to advantage channels diversifies our business risk while providing exciting growth opportunities. Sales in our traditional channels were down 2.9% on a year-to-date basis. This is an improvement from the first quarter and we expect further improvements in the second half of the year based on strong retail performance of several new collections. Within the traditional retail channel, the biggest retailers continue to outperform the smaller stores and our mega account strategy of providing proprietary products and services for those retailers puts us in a strong competitive position. Our biggest product launch in the traditional channel will be a relaunch of our exclusive Eric Church Highway to Home brand that will begin shipping in Q4. This relaunch is ideally time to take advantage of the new Eric Church Album and Tour scheduled for early next year. Social media promotional campaign is being planned to tie in with Eric Church's activities. We should grow sales from this brand substantially next year. In addition, we've identified a new set of target mega accounts that we are in the initial stages of selling both traditional and emerging channels. We expect sales from these accounts to be a foundation of our growth in the next fiscal year. Finally, our new China retail initiative where we have licensed our designs to one of the largest Chinese retailers started shipping in Q3 and will give us significant growth opportunities in the fastest growing consumer market in history. We have a strong partnership with an established China based retail company that gives us immediate access to that business and additional growth opportunities. Overall, based on the in coming order rate and time phase backlog at HMI, we expect Q3 to remain soft. However, we have enough backlog and new program launches that allow us to expect Q4 will be very good. Finally, all leather which includes our domestic upholstery operations Bradington-Young, Sam Moore and Shenandoah Furniture along with H Contract reported a sales increase primarily driven by the addition of Shenandoah's net sales acquired in last year's third quarter. Our Bradington-Young sales were up only slightly, they continue along a steady path of growth. In coming orders increased 6.6% year-over-year during the quarter and their backlog is up over 35%. In addition, Bradington-Young has broken ground on a factory expansion that will increase their capacity by about 50%. All upholstery divisions experience a negative impact on margins from price increases in materials and components such as foam plywood and steel. We experienced the lag between those cost increases and our own price increases to customers. However, we expect to catch up by the third quarter. Additionally Sam Moore and Shenandoah changed our vacation schedules and both had approximately one less week of production than in the same quarter a year ago. Higher medical benefit costs also impacted the segment and the loss of a key retail customer who has decided to shift to an in-house supplier model had a material impact on Sam Moore during the quarter. However, signs are encouraging with two strong back to back High Point Markets and new placements with key accounts. Shenandoah's order rates and sales are steadily improving as we progress through the year. And we're in good position with major retail customers who've expanded their assortments as we head into the fall selling season. At H Contract, we're planning several new product launches in the next few months and plan to dramatically pick up the pace of product introductions over the next year. This should help to continue growing H Contract sales in both the short and long-term. At this point, I'll turn the call back over to Paul Huckfeldt, who will give more details on our financial performance for the quarter.

Thanks Paul. Consolidated average selling price decreased 6.7% mostly due to lower ASP at Hooker branded. Unit volume increased 8.4% primarily due to a 10.9% increase in unit sales at Home Meridian which continues to trend towards higher volume but lower priced fuel unit price items. Hooker branded segment ASP increased due to lower discounting and its unit volume decreased slightly as business slowed a bit from last quarter. In all other the inclusion of Shenandoah Furniture this quarter and increased sales of higher priced Bradington-Young products helped to offset the sales decrease at Sam Moore. As Paul noted earlier, consolidated gross profit increased $2.5 million in the quarter mostly due to increased sales in the Home Meridian segment and all other. Hooker Branded segment gross profit stayed flat in absolute dollars and increased slightly as a percentage of sales. Consolidated selling and administrative expenses increased in absolute dollars. And as a percentage of net sales higher employee benefit costs, investments in people and systems particularly at HMI and higher compliance-related costs drove the increased spending, but we are able to better leverage fixed costs on the higher sales this quarter. Amortization of acquisition related intangibles was higher in this year's fiscal first quarter -- in this fiscal quarter due to adding amortization of Shenandoah's intangibles from our acquisition of that business in the third quarter last year. For these reasons operating income for the fiscal 2019 second quarter stayed flat and 11.9 million or 7% of net sales. For the fiscal 2019 first half, consolidated operating income increased $2.1 million to $21.2 million or 6.8% of net sales thanks primarily to a $24 million increase in net sales. Our balance sheet remains strong despite the use of cash and additional long-term debt incurred to acquire the business of Shenandoah Furniture last year and the unscheduled $10 million debt payment made earlier this year. At the end of the quarter, we had cash and cash equivalents of over $29 million available to provide the required working capital and to service our acquisition related debt. We also have in excess of $28.5 million on our revolving credit facility and $23 million of cash surrender value, company-owned life insurance, which gives us additional financial flexibility. In today's press release, we also announced a quarterly dividend of $0.14 per share which represents about 1.5% dividend yield. Now will turn the discussion back to Paul Toms for his outlook.

Thanks Paul. Given the improving conditions at retail, recent in coming order trends and increased backlogs at 6 of our 10 divisions, we're encouraged about our position going into the fall season. We do have some concern about the prospects of tariffs being imposed on finished goods and component parts imported from China. This would have a negative impact on a significant portion of our business, elevating costs both on finished goods imports from China and on component parts and materials used in our domestic upholstery manufacturing. We've been actively involved in submitting briefs for the hearings about tariffs in Washington D.C. and we do have strategies in place to mitigate the impact of tariffs if imposed. A generally positive macro environment is driven by GDP growth of 4.1% in Q2, a stock market pushing all time highs. Strong employment and consumer confidence are at record levels. Retail is improving and demographic trends definitely favor our industry. Our expectation for the fall selling season and the balance of the year is guardedly optimistic. This ends the formal part of our discussion. At this time, I'll turn the call back over to our operator Joel for questions.

Thank you. [Operator Instructions] Our first question comes from Anthony Lebiedzinski with Sidoti. Your line is now open.

Thank you. And thank you for taking the questions. So first, I guess I wanted to follow-up about to get a better sense as to the water rate trends. Obviously they have picked up since early August. Is this just a timing issue or maybe you can perhaps better explain the order flow that you've seen so far and perhaps the reasons for that?

Okay. Anthony, this is Paul Toms. And order trends have improved significantly in August over the prior August. And as I noted in my comments we were with about 40 or 50 key retailers at a design meeting in early August and almost to a person they reported improving conditions at retail over what they experienced through the summer. So that's encouraging. Business always improves in the fall, it seems like the summer people are on vacation and not really focused on the interior of their homes as they are once they get back from vacations the kids are in school and they start thinking about the holidays. So it's pretty typical. But again we're comparing to the same season last year. So, I would say summer was a little slower than we would have expected and since early August it's been better than we expected. Within our businesses Hooker gets a more immediate read on business because most of our customers don't order things until they've sold something. And we shipped about 85% of our orders padded up in our warehouses in Virginia. Home Meridian on the other hand is dealing with large customers that are programming orders out months in advance. And I don't know that we feel the impact immediately from those large customers of what their experience in retail every day and home meridians orders, you have two or three large orders fall in one quarter versus another it can make a significant dent in the order trends for that quarter. So we're probably Hooker maybe a better read in a short period three to four weeks than Home Meridian but orders have improved and both divisions and fairly significantly.

Okay. Thank you. Yes. That's certainly good to hear. And yes, so it does sound like there was more lumpiness with the HMI business. As far as the all other segment, you talked about the factory expansion for BY, what's the timing as to when you expect to complete that and do have a couple of other questions as well.

Hi, Anthony. This is Michael Delgatti. We expect to complete the expansion in early 2019. The manufacturing portion of the expansion should be completed before that and we hope that will start producing some product before the end of the calendar year. And then they move to consolidate our corporate office since this is new facility probably take place in February of 2019.

Got it. Okay. And as far as the change in vacation schedules at Sam Moore and Shenandoah, was this simply a shift from 2Q, I'm sorry, from 3Q into 2Q or maybe there was some other timing issue with that and you -- is there any way you guys can quantify as to what the impact of that was towards the top or bottom line?

Certainly had an impact on both operations, Shenandoah over the years as always level out their business so to speak during vacation period. So this is the first time they ever had a three week period. Sam Moore also went along with Shenandoah to the same vacation policy plan that we have had B-Y over the years, whereby we shut down for a week in July and shut down for a week in December as well. And obviously, those shutdowns impact shipping, and in turn, profitability because of lower sales volume against fixed expenses.

Okay.

I guess to add on to that Mike. Previously they would have just rotated people's vacations throughout the year. So it's actually a full week down -- the extra full week down over what they had previously.

Okay. All right. Thanks for that color. And as far as the loss of a key retail customer, it appears that only for that Sam -- for the Sam Moore more brands? Is that correct or is there any [indiscernible] to any other? Okay.

Those spill over [and more often] [ph].

Okay. And the impact of that on as far as annual sales volume certainly could quantify that?

This account represented around 8% of their total business last year. However, fortunately on a year-to-date basis we have made up about half of that loss and well on our way to making up all that and we believe into early next year.

Okay. So, can you give us a better sense -- Sam Moore, how big of a brand is it in the big scheme of things? What's the typical sales volume that you do just for Sam Moore?

Sam Moore is around $35 million business for us. As you know, Anthony, it's a chair company that's what drives the vast majority of their volume. They're a good sized company considering they produce primarily chairs.

Got it. Okay. All right. Thanks for that. And as far as the commentary about Home Meridian, one of the things that you touched on was increased spending. Is this something that we should expect on a year round bases, or did you spend more to gain business in the second quarter than what you would have previously spent?

Hi, Anthony. This is Doug Townsend. Our spending is up and as we've mentioned a lot of it is, is investments into some of our emerging channels and emerging customers. I think now in terms of where we are it'll stay where it is and we have different spending control programs in place to make sure that we stay within our limits. So we don't foresee making major additional investments at this time.

Got it. Okay. And lastly, as far as the potential tariff impact, can you give us a sense as to -- if these tariffs do get implemented, if you can give us a better sense as to how this would impact your business, if you could give us some quantifiable measures that would be great. Thank you.

So, Anthony this is Paul Toms, again. The tariffs if implemented will impact different parts of our business in different ways. We have several divisions that import upholstery and most of the imported upholstery, I would venture maybe 90% of the upholstery that's imported into the U.S. comes out of China. Our general strategy is to put surcharges on our furniture that's impacted by tariffs equal to about the amount of the tariff. In the case of a category like import upholstery where everybody is impacted, it's easier to do that. There's other parts of our business that Casegoods and the Hooker division. Over half of our volume comes out of China and in that case our competitors don't all have as higher percentage of their volume out of China. So we're a little less ability to pass through every bit of the surcharge or the impact through a surcharge. We'll do that. We'll work with our vendors to try to negotiate a little bit better price to offset some of the impact of the tariffs. We will continue to -- we brought in a good bit of inventory to try to get ahead of any prospective tariffs. We have a very good inventory position already in the U.S. on products from China that of course wouldn't be subject to tariffs because they were already brought in. That will help us for a while. But it really varies by division even our domestic upholstery division. The three companies are impacted differently. But we import a lot of fabrics from China. We import some of the mechanisms from China. We import some of the other component parts frames and screws and springs that we use. And again, it varies by division but there is some impact in most of the parts of our business and our strategies are to pass those increases due to tariffs along and a surcharge to negotiate with our suppliers in Asia to try to offset some of that impact, so we don't have to raise the price of products as much. And then, to continue to lobby or present in Washington for the hearings and we filed written briefs both as an individual company and also through our trade association as part of the industry. As far as the exact financial impact, I'm not sure that we can say that at all. In our HMI business, they don't ship a lot out of warehouses in the U.S. So but they will see it more immediately, but a lot of their customers are the importer of record. So the tariffs will actually be borne by whoever is the importer of record and that helps mitigate a little bit of that with Home Meridian.

Okay. All right. Well, thank you and hopefully cooler heads will prevail in Washington so we'll stay there. Thank you.

All right. Thank you.

Thanks Anthony.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Paul Toms for closing remarks.

All right. Well, we appreciate everybody joining us today. We weren't completely satisfied with the quarter, we would have liked to done a little bit better. But all things considered, I think we did reasonably well, we've got good momentum heading into the third quarter. We're encouraged about August as well as the rest of the quarter. We look forward to getting back within December and updating you on the results from that. Thanks again for joining us.

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