Hooker Furnishings Corporation (HOFT) Q4 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 fourth period. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Huckfeldt, Vice President, Finance and Chief Financial Officer for Hooker Furniture Corporation.

Thank you, Josh. Good afternoon and welcome to our quarterly conference call to review our results for the fiscal 2019 fourth quarter and full year, which ended on February 3, 2019. We certainly appreciate your participation today. Paul Toms, our Chairman and CEO; and Doug Townsend, Co-President of our Home Meridian division, will join me for prepared remarks. For the question-and-answer portion of the call, we also have several of our business units heads available to take questions as well, including Michael Delgatti, President of Hooker Furniture Domestic Upholstery and Emerging Channels; Lee Boone, Co-President of our Home Meridian division; Jeremy Hoff, President of our Hooker Branded segment; and Anne Jacobson, our Chief Administrative Officer. 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 filing announcing our fiscal 2019 year-end 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. Last night, we reported consolidated net sales of $683.5 million and net income of $39.9 million or $3.38 per diluted share for our fiscal 2019 year ended February 3, 2019. For the year, net sales increased approximately 10% or $63 million compared to last year, and net income increased 41% or $11.6 million. Earnings per diluted share increased 40% from $2.42 a year ago. For the fiscal 2019 fourth quarter beginning October 29, 2018, and ending February 3, 2019, consolidated net sales were $200 million with net income of $14.7 million or $1.24 per diluted share. Net sales increased $25 million or approximately 14.2% compared to last year's fourth quarter, buoyed by net sales increases across both reportable segments and All Other. Net income increased 72.4% in the quarter. Now Paul Toms will comment on our fiscal 2019 and fourth quarter results.

Thank you, Paul, and good afternoon, everyone. Hooker Furniture performed extremely well during the year, growing sales and improving profitability in all segments and increasing sales in 9 of our 11 business units and 7 -- profits in 7 of the 11 business units. Our robust results were achieved despite several challenges. These included an unexpected 10% tariff on finished goods and component parts imported from China, implemented September 24, 2018, and management transition in the Home Meridian segment and several of our business units. We believe that our solid performance validates our strategy to diversify our corporate portfolio and focus our investments in products, programs and personnel around winning channels of distribution while keeping a strong presence in traditional channels. The fiscal 2019 sales increase was driven by organic growth as well as the addition of the full year sales from Shenandoah Furniture, which we acquired in September of 2017. Prior year results include only 4 months of earnings for Shenandoah Furniture. Excluding Shenandoah's full year impact on shipments, sales grew organically approximately 6%. Also favorably impacting sales, fiscal 2019 had 53 weeks while fiscal 2018 and '17 each had 52 weeks. The additional week in 2019 increased consolidated net sales by $13.4 million based on the average net sale shipping -- per shipping day. The 41% net income improvement for the year was favorably impacted by the Tax Cuts and Jobs Act of 2017. We were also pleased to report a 15.9% improvement in operating income for the year, with significant increases in both our Hooker Branded segment and All Other, which includes our domestically produced upholstery divisions and the H Contract furnishings division for senior living facilities. We finished the year with an especially strong fourth quarter. As Paul Huckfeldt mentioned, net sales increased $25 million or just over 14% compared to last year's fourth quarter, and net income increased 72.4%. Home Meridian led the way in our fourth quarter sales upsurge, and the additional shipping week contributed about 7% of the higher year-over-year sales for the quarter. The 72% net income improvement in the quarter was driven by higher incremental sales and lower income tax rates. Taking a closer look at each of our segments. I'll begin with Hooker Branded segment, where sales increased approximately $12 million or 7.2% in fiscal 2019. Hooker Casegoods reported a 6% sales increase and Hooker Upholstery reported a double-digit increase. Hooker Upholstery continues to perform very well due to product line extensions, dedicated management and several strong product introduction cycles. With the high-fashion, high-quality and high-value positioning of this brand, we believe that Hooker Upholstery offers good growth potential in the short to medium term. We're particularly pleased to report sales and profitability growth in the Hooker Casegoods division, a traditionally profitable but slower-growing part of our business. We attribute the improvement to reenergized leadership, an expanded team of merchandising and product development managers that are developing exceptional new products. For example, at the just-completed Spring High Point Furniture Market, we launched an exciting 100-piece addition to our Sanctuary collection, which has been our best-selling furniture collection since its initial debut 10 years ago. At market, the new Sanctuary offerings in bedroom and dining room, home entertainment, home office and accent furniture pieces received substantial commitments from our customers. Complementing the strength of our whole home collections like Sanctuary, we've also renewed our focus on the key categories of home entertainment, home office and accent furniture. Leadership in these key categories was foundational to our growth for many years, and our renewed emphasis on category innovation is resonating with our customers. Their enthusiasm for this renewed emphasis on the specialty categories is underscored by commitments to new and in-line products in these categories at market. At this time, I'd like to turn the call over to Doug Townsend to update us on HMI's performance and progress this year.

Thanks, Paul. In the Home Meridian segment, net sales in the fourth quarter were up 17% compared to last year, and operating profit for the quarter was up 22% over the prior year. For the full fiscal year, HMI sales were up $22.4 million, a 6% increase; and operating profit was $18.8 million, a $1 million higher than the prior year and flat as a percentage of sales. Fiscal year 2019 profitability was below expectations due to a combination of sales mix changes, investments to grow our business in advantaged channels, temporary sourcing disruptions from the China tariffs and a significant customer return in the fourth quarter. We ended the quarter with orders up 10.5% compared to the same period a year ago and backlog up 3.2%. Our mega account strategy continued to deliver strong results with sales to those customers up 10% for the year. Our mega accounts now represent over 70% of HMI's revenues. Advantaged channels of distribution now account for 47% of our business and continue to deliver greater sales growth than traditional channels, with business from advantaged channel customers up 28% and traditional channel customers down 4% on the year. While our sales with the traditional customer base are down overall, we feel this is temporary and that the channel will return to modest growth as we roll out new products and improve service levels. We continue to invest in our advantaged channel business with positive results. Our e-commerce sales were up 41% versus the prior year and remain our fastest-growing sales channel. We have focused our resources, including product development, content and image creation, data analysis, specialized warehousing, fulfillment and system support on the largest e-commerce players in furniture who see value in partnering with a company that has the foresight, infrastructure and expertise to support the unique needs of e-commerce. SLH, our hospitality and kitchen cabinet business, excelled this year as well, as hotel and other commercial renovations continue to drive business. SLH's net sales were up 70% for the year, and order backlog at year-end was up 300% over the prior year. The division has a large pipeline of potential projects for fiscal year 2020 so we expect continued growth this year. Our Clubs business finished fiscal year 2019 up 3% and would've been better were if not for a significant product return in the fourth quarter. We have implemented necessary countermeasures to address that problem. The tariffs had a disruptive impact on about 1/3 of our business in Q4 and are driving us to resource a significant amount of production from China to other countries. While those changes are mostly in place, it will take a few months for some of the new facilities to get up to speed. As a result, we will continue sourcing some tariffed products from China to ensure continuity of supply for our customers. While we had a slight timing issue in the beginning with matching the tariff cost increase to customer price increases, that is no longer the case. 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. In addition, we have identified a new set of target mega accounts that we are beginning to develop from both traditional and advantaged channels. We expect sales from these accounts to be a foundation for our continued growth this year and upcoming years. At the recently completed High Point Market, Home Meridian enjoyed a well-attended market with retailer traffic up 5% over last year -- over last April. We successfully launched several initiatives that we expect to have near-term and long-term positive impact, including: Pulaski Furniture entered the leather upholstery category, a line extension that was very well received, aligning its position to compete in the marketplace above our PRI products and below the Hooker Upholstery lines. The introduction was very successful and the first production orders have already been placed. SLF launched a new Vietnam-based mixing warehouse program, enabling retailers to flow inventory from multiple factories on a single shipping container, which was met with enthusiasm from traditional dealers. PRI launched an RTA dropship upholstery program, offering easy-to-deliver-and-assemble products that appeal to a broad range of e-commerce and omnichannel retailers. Accentrics Home won significant new commitments from multiple major retailers to develop new e-commerce business. Overall, HMI made significant strides toward developing a new mass channel business, which will generate sales growth across a broad range of mass and club channel retailers. This new business is incremental to our existing sales and is clearly advantaged with today's customers. We expect solid sales growth in this space over the next few years. At this time, I will turn the call back over to Paul Toms.

Thank you, Doug. The All Other category in our segment financial statements includes our domestic upholstery operations, Bradington-Young, Sam Moore and Shenandoah Furniture, along with H Contract. We reported a sales increase of $28.6 million or 32.3%, primarily driven by the inclusion of Shenandoah's full year sales, and to a lesser extent, due to steady sales growth at Bradington-Young and H Contract. In fiscal 2019, Bradington-Young orders and net sales increased by 7.2% and 8.2% respectively, due to increased demand for its luxury motion upholstery. At the recent High Point Furniture Market, we introduced a merchandising program called [ Lux Living ], which we expect to increase luxury motion sales further. This program allows consumers to choose between motion, stationary or sleeper sofas and select their style, cover and arm type through special order. Each contract continued to grow with orders up over 12% for the year and backlog up 73% compared to prior year-end. Recently, H Contract successfully introduced a dining room chair program, which is a top category in both the senior living and the retirement center furnishings industry. The increases in those 2 divisions were partially offset by decreased sales at Sam Moore. However, thanks to cost reductions and better-controlled operating expenses, operating margins improved for the year. Sam Moore also enjoyed a lot of momentum at the High Point Furniture Market, where we introduced a very well-received program called [ Loft Living ], a group of 18 sofas, sectionals and swivel chairs in soft modern styles, allowing the consumer to special order these pieces with their choice of arm styles and covers. At this time, I'd like to turn the call back over to Paul Huckfeldt, who will elaborate further on our quarterly results.

Thank you, Paul. Consolidated average selling prices increased almost 3% mostly due to higher average selling prices at Home Meridian and in All Other. Most of the change in ASP was the result of product and customer mix. Unit volume increased 3.5% on a consolidated basis, but there were significant changes between segments, again, driven by product and customer mix as well as the significant sales increase in Hooker Branded segment. In All Other, the inclusion of Shenandoah Furniture this quarter and increased sales of higher-priced Bradington-Young luxury motion products helped offset decreased sales at Sam Moore. Consolidated gross profit increased $12.2 million to $147 million for fiscal 2019 but decreased slightly as a percentage of net sales. Hooker Branded segment gross profit increased both in absolute terms and as a percentage of net sales due to higher net sales and a favorable customer mix, partially offset by higher freight costs and a $500,000 casualty loss at one of our warehouses earlier this year. Gross profit declined as a percent of net sales at Home Meridian due to a greater mix of lower-margin sales programs as well as higher product costs attributable to the imposition of tariffs on certain Chinese products. Gross margin increased in All Other primarily due to the inclusion of the full year of Shenandoah's results as well as moderately lower direct labor and material costs in our other domestic upholstery units. Consolidated SG&A expenses increased $4.6 million but declined as a percentage of net sales as we were able to leverage our fixed costs over a larger sales base in fiscal '19. The addition of the full year of Shenandoah's operations, higher selling expenses on higher sales volume, higher employee benefits costs and the cost of investments in people and systems drove increased spending, which more than offset a company-owned life insurance gain and the absence of $700,000 of acquisition-related costs in the prior year. For these reasons, operating income increased in fiscal '19 by $7.2 million to $52.7 million. Operating income increased from 7.3% to 7.7%. Our cash balance decreased $20 million from the prior year to $11.4 million at year-end. Some of the main factors contributing to this decline were $19.3 million in debt and interest payments, including the payoff of the Shenandoah acquisition-related term loan; $6.7 million of cash dividends; and $3 million of additional pension contributions as well as the timing of sales in our fourth quarter. We also strategically increased some inventory levels during the fourth quarter to support sales growth and to bring in product ahead of tariffs. At the end of fiscal '19, we had access to $27.7 million on our revolving line of credit and $24 million of cash surrender value of company-owned life insurance, which gives us additional financial flexibility. In December, we also increased our quarterly dividend to $0.15 per share based on our continued confidence in the long-term prospects and the strength of our business model. Now I'll return the discussion to Paul Toms for some closing remarks and his outlook.

Thanks, Paul. Fiscal 2019 was a year of many changes and adaptations, some planned and others unplanned. As we look back over the year, we're particularly gratified about 4 areas for accomplishment: First was a successful navigation of the 10% tariff on furniture and component parts imported from China implemented last fall. The situation had impacted about 40% of our corporate-wide shipments during the fourth quarter. We were able to mitigate much of the impact through small price increases to our customers without compromising the quality and service they expect. We also appreciate the cooperation of our supply partners, the understanding of our customers and the adaptation of our management teams for this unexpected situation. Second was our navigation of leadership transitions, including the new co-presidents at HMI after the retirement of George Revington, and several other leadership transitions at the division, president and executive level. Additionally, we intentionally invested in outside leadership development programs and in promoting collaboration between our various business units. Third, we successfully integrated Shenandoah Furniture into our operations this year. Finally, we strengthened our balance sheet, paid down debt, some ahead of schedule; while making $5 million in capital investments, investing in programs, systems, people and product line extensions. During the year, we launched comprehensive initiatives to better serve the winning and growing channels of distribution we've identified. For example, for the international channel, we introduced bedroom groups specifically designed for that market, both in Vietnam in March at the recently concluded High Point Furniture Market. At Home Meridian, we invested in software to facilitate e-commerce deliveries, and in inventory and systems to better service all of our customers. Last fall, we launched 2 programs to address interior designers: Design Pro, a paid membership program providing features and benefits to interior designers; and MARQ, a line of modern upholstery and premium bedding specifically designed for and available exclusively to the interior design trade. To better serve the interior design and e-commerce channels, we launched project [ Eagle ], a system that converged our Hooker Branded websites and Bradington-Young and Sam Moore websites to a time-saving B2B e-commerce site for interior designers and smaller to midsized retailers via a log-in feature. The functionality is similar to what users would find on any leading B2C e-commerce site and also includes nearly all aspects of ordering and service-related functions. As we look ahead to the remaining weeks in the first quarter and the balance of the year, many long-term economic indicators are positive. Especially encouraging are developments in the housing market, including more affordable mortgage rates, a near record level of home remodeling activity and the highest rate of homeownership in 5 years. We have seen a softening of demand in retail activity in the furniture space in the last 2 months. This trend was reinforced at the recent High Point Market by retailers who consistently pointed to a downturn in business since late January. For the fiscal 2019 fourth quarter, incoming orders were essentially flat. However, in March -- February and March, incoming orders were down on a consolidated basis, 13.6%, and backlogs were down 16%. We expect these are short-term headwinds. Our business plan for the current fiscal year is built on an anticipation of growth in both sales and profitability. We continue to believe that plan is achievable despite the softness we have experienced recently. Longer term, we remain very confident in our business model and strategies and in our strategic execution. Our diversified business model allows us to perform well through economic fluctuations, and we're making the necessary investments in products, programs, systems and people to continue to perform at a very high level. This concludes the formal part of our discussion, and I'll turn the call back over to Josh at this time for questions.

[Operator Instructions] And I'm not showing any further questions at this time. I would now like to turn the call back over to Paul Toms for any further remarks.

We don't have any additional remarks. I appreciate everybody joining us for the call today. We're proud to report the results from the fourth quarter and for the full year fiscal 2019. We look forward to being back with you in about 2 months to report results for the first quarter. Thank you for joining us.

Thank you. 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 wonderful day.