HOOKER FURNISHINGS Corp (HOFT) Q1 2021 Earnings Call Transcript

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call reporting its operating results for the first quarter 2021. 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, Joel. Good morning, and welcome to our quarterly conference call to review our preliminary financial results for the fiscal 2021 first quarter, which ended May 3, 2020. We certainly appreciate your participation this morning. Paul Toms, our Chairman and CEO; Jeremy Hoff, President of our Hooker Legacy Brands; and Doug Townsend, Co-President of our Home Meridian division, are joining me today. For the question-and-answer portion of the call, our executive officers will also be available to take questions, including Anne Smith, our Chief Administration Officer; and Lee Boone, Co-President of Home Meridian. During our call, we may make forward-looking statements, which are subject to risks and uncertainties. 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 preliminary fiscal 2020 first quarter results. Any forward-looking statement speaks 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. COVID-19 had a material impact on our financial performance in the fiscal 2021 first quarter and on market valuations, discount rates, and other inputs used in our intangibles valuation analysis. Consequently, and despite having completed a similar intangible asset valuation during our fiscal 2020 fourth quarter, we determined that another intangible asset valuation was appropriate given our performance and these changing market dynamics. Given the effort and complexity involved in this project, we need additional time to complete this analysis. Therefore, the results reported this morning and that we'll discuss on this call are preliminary and do not include any noncash impairment charges on our intangible assets, which could result from the impairment analysis that is currently underway. Actual results may differ materially from these preliminary unaudited results that are provided this morning and discussed on this call. We expect to complete the intangibles valuation and finalize the amount of impairment, if any, in connection with the filing of our Form 10-Q for the fiscal first quarter ended May 3, 2020, which we expect to file on or before the extended due date of July 27, 2020. Impairment charges, if any, will not affect our cash position but would adversely affect operating loss, net loss, loss per share, total comprehensive loss, deferred income taxes, intangible assets, and retained earnings. This morning, we reported consolidated net sales of $104.6 million for our fiscal first quarter, a 22.8% or $30.9 million decrease compared to last year. For the first time since 2009, we reported a preliminary net quarterly loss in the amount of $1.1 million, a $3.1 million decrease compared to the $2 million net income in the prior year first quarter due to the severely negative impact of the COVID-19 pandemic across all 3 of our reportable segments: Hooker Branded, Home Meridian, and Domestic Upholstery. We reported a preliminary loss of $0.09 per share compared to $0.17 earnings per share in the prior year. Now Paul Toms will comment on our fiscal '21 first quarter results.

Thank you, Paul, and good morning, everyone. The COVID-19 crisis drove the most significant downturn in our business in over 50 years. The pandemic, stay-at-home restrictions, and an economic shutdown from mid-March to mid-May throughout the U.S. resulted in double-digit sales decline in the company's first quarterly operating and net income losses in over a decade. After beginning the fiscal year on an upturn with an 8.3% year-over-year increase in consolidated incoming orders in February, orders plummeted in March and April as many of our retail customers temporarily closed. Large customers canceled stock orders and others deferred orders. Also contributing to the quarterly income loss and operating margin reduction was a temporary shutdown of production at 5 of our 6 domestic upholstery plants in Virginia and North Carolina, which resulted in unabsorbed fixed costs and operating inefficiencies. However, the business disruption has not been as severe as we initially feared. While consolidated orders declined steeply by over 70% and 65%, respectively, in March and April, we had a significant month-over-month improvement in consolidated order rates in May. Orders in fiscal May were down about 7% for the period, and since mid-May, consolidated orders have generally compared above the same period last year. Retailers in some regions of the country have glowing reports about their business over the past few weeks, including strong Memorial Day holiday weekend sales. We believe there are several positive factors in play, including pent-up demand, more focus on home environments from people spending so much time in their homes over the last few months, and less competition for discretionary consumer spending from travel, eating out, and other activities. In addition, Hooker's domestic upholstery manufacturing facilities for Bradington-Young, Sam Moore, and Shenandoah began ramping up production in early May and are currently operating at approximately 75% capacity on a consolidated basis, increasing efficiencies and cost absorption. Reflecting on the company's response to the international health and economic crisis, we are proud of how our team weathered the storm during this unparalleled time of challenge. First and foremost, we are grateful that none of our 1,000 employees in the U.S. at any locations have tested positive for the virus to date. That's quite an accomplishment and a testament to the diligence with which human resources implemented best practice safety protocols at all locations. Our employees also followed best practices at home and work and adapted to working remotely while staying productive, positive, and engaged. We believe we responded with appropriate mitigation measures to reduce operating expenses and preserve cash with difficult but necessary decisions, such as furloughing 600 manufacturing, warehouse, and administrative employees, closing 5 of 6 domestic upholstery manufacturing facilities during the month of April, temporarily reducing officer and manager salaries and Board of Directors' fees, and delaying all noncritical capital spending. Unfortunately, we had to reduce our workforce by 35 employees, but we're able to keep 97% of our employees on board during this time. We're also pleased to declare a quarterly cash dividend of $0.16 per share to shareholders of record on June 16, 2020. We're confident in our long-term strategies and gratified to have been able, even in these extreme circumstances, to maintain our 50-plus year history of consistently paying dividends. With the steady improvement in orders and shipments at the end of the first quarter on May 3, we expect that our low fixed cost business model, which served us well during the Great Recession, will continue to serve us in this current disruption. Additionally, our ongoing strategy to sell through multiple distribution channels proved itself again during this crisis. While most traditional bricks-and-mortar furniture retailers were closed for 2 months, other channels such as e-commerce, hospitality, and clubs flourished and provided a source of revenue. Importantly, our cash position remains strong and has continued to improve since our fiscal year-end in early February. We generated $18.9 million in cash from operations this quarter, which contributed to a $15.2 million increase in our cash balance since the end of fiscal 2020. At this point, I'd like to turn the call over to Jeremy Hoff, President of Hooker Brands, to comment on that division.

Thanks, Paul. In the Hooker Branded segment, net sales declined $12.4 million or 31%. In the Domestic Upholstery segment, net sales declined $8.5 million or 33.7% during the first quarter. Turning to a more detailed look at each of our segments. I'll begin with the Hooker Branded segment. Because traditional furniture stores and small and regional chains, which comprise the lion's share of Hooker Brand’s distribution base, were closed during the economic shutdown, incoming order rates dropped dramatically during the quarter. Despite the sales decline, the segment's low fixed cost and high variable cost model enabled it to maintain a 29.5% gross margin and a 4.9% operating income margin during the quarter. Also, the Spring High Point Furniture Market, originally scheduled for late April, was canceled, and High Point showrooms were closed. Despite that, Hooker Casegoods has been able to sell new collections originally set for spring introductions during a virtual showroom presentation on a password-protected area of the company's website. Before the showroom closed, we prioritized upscale, environmental, and detailed photography of 4 new collections that are already in production. We have done very well selling through the first cuttings via this online presentation to our retail customers, which is very encouraging. Our next step is to produce a 360-degree-style video tour of the collections in our showroom this month. In the Domestic Upholstery segment, incoming orders fell 40% during the quarter. During the month of April, manufacturing plants at Bradington-Young and Shenandoah were temporarily closed, while Sam Moore operated at about 50% capacity. Employees returned to the factories and production restarted the week of May 4, and currently, the segment is operating at approximately 75% capacity. Sales declines and operating inefficiencies from the temporary shutdown resulted in significantly decreased gross margins and an operating loss. For all other, which includes H Contract and the newly formed lifestyle brands, net sales stayed essentially flat, and we reported an operating income of $387,000 due to continued solid performance at H Contract, which achieved a 16% increase in incoming orders and a 68% higher backlog compared to the prior year first quarter. Now I'd like to call on Doug Townsend to give more detail on the HMI segment this quarter.

Thank you, Jeremy. Good morning, everyone. HMI's first quarter sales were $57.7 million, down 14.7% from the prior year. Preliminary Q1 operating loss was $2.4 million, an improvement of 52% over the prior year results. While the global economic slowdown from COVID-19 significantly impacted Q1 orders, sales, and profits, the HMI bottom-line improvement over prior year results is attributable to the company's fundamental turnaround strategy. Some of these improvement indicators are: First quarter allowances were 21% below prior year, contribution margin as a percent of net sales improved 360 basis points over the prior year and the fixed expenses were $1.5 million below prior year. These are all areas of concentrated management focus, among many others. The COVID-19 pandemic significantly interrupted our Asian supply chain during the first half of Q1. Our factories were unable to operate normally due to the massive quarantines in Asia, and many production facilities were forced to close temporarily. All of our factories in China and Malaysia were closed for a month as those countries had country-wide shutdowns. The nationwide retail shutdowns in the U.S. that started in mid-March severely impacted our shipments for the balance of Q1. Only recently are we beginning to see conventional furniture retailers reopened for business. Nonetheless, there were some bright spots that outperformed expectations during the quarter. Specifically, our e-commerce business increased significantly, outperformed all expectations, and accounted for 35% of our total sales in the quarter. Business with several of our Mega and Mass accounts held up much better than originally projected. Fortunately, some of our customers, such as wholesale clubs, big box stores, and Mass merchants were able to remain open, while dedicated furniture retailers in many locales were forced to close temporarily. These bright spots, combined with major spending reductions and other cost control measures, enabled HMI to significantly outperform prior year results. While only two of our business units reported an operating profit in Q1, 4 of 6 units beat the prior year results. Accentrics Home benefited from exploding e-commerce demand, and Samuel Lawrence Hospitality benefited from a healthy backlog of hotel projects that were already in process. Thanks to significant new business with a major Mass channel account and having completed our resourcing of the entire product line or its entire product line out of China, PRI's upholstery sales were 83% of prior year despite the COVID-19 crisis and gross margin improved by 610 basis points over the prior year. PRI also significantly outperformed last year's dismal bottom-line results. Samuel Lawrence Furniture improved prior year bottom-line results by virtue of margin improvements and spending controls as well. The coronavirus economic slowdown provided us the impetus to implement numerous new cost control measures, some temporary and others permanent; staff and compensation reductions, employee furloughs, lease cost reductions, product cost reductions, and curtailment of all nonessential operations and spending are just a few of the many measures in place. These measures have partially mitigated the losses from the sudden significant revenue drop. Inventory reduction is another area where we have made much progress. As of the end of May, our inventories have decreased approximately $19 million or 29% from the beginning of the fiscal year. While the decrease was intentional, we are now in a position of needing to replenish stocks to maintain an acceptable service level. Our manufacturing partners have suffered during this difficult time as well. They have experienced erratic flow of materials and components, labor shortages, government-mandated shutdowns, as well as other cancellations and delays. Nonetheless, we are very pleased with the way our factory partners have weathered this storm and supported our business in every manner possible. We are very fortunate to have an exceptionally strong stable of suppliers, many of whom have been our partners for 10 to 20 years. Looking forward, we have several business growth initiatives to increase sales. First, we are hosting several Mega account retailers at our showroom this summer for private product presentations, which will help mitigate the impact of the cancellation of the High Point Spring Furniture Market and hopefully generate new product placements. We have several other initiatives intended to grow sales, including a new branded license collection in the works, a new Mass channel customer partnership, our HMIdea RTA product launch, our club business regrowth efforts, our PRI upholstery business reboot, and perhaps, most importantly, given the current circumstances, a major effort to maximize sales through our e-commerce channel. While we feel we are weathering the storm, it is important for us to keep our teams and collective thinking in alignment on the most important issues we face, especially since most of our staff is working remotely. For now, our focus is on these issues: the health and welfare of our people, a thoughtful and careful return of employees to the workplace when conditions permit, regular open and candid communications with all stakeholders, cost control and profitability, and the adaptation of our organization and strategies to be well-positioned for the post-pandemic future. While the economic impact of the coronavirus will continue to affect Q2 and likely the balance of the year to some degree, we are encouraged that April and May results were much better than we had forecasted at the beginning of the crisis. We are cautiously optimistic that the worst of the retail slowdown is behind us, and we are starting to see stronger demand for shipments as we enter the summer and the majority of our customers reopen their retail stores. At this time, I'd like to turn the call over to Paul Huckfeldt, who will elaborate further on our quarterly results.

Thanks, Doug. Average selling prices were up in the low to mid-single digits in both the Hooker Branded and Home Meridian segments. However, consolidated average selling prices decreased 2.1% due to a change in the mix between divisions. Unit volumes in the higher-priced Hooker Branded and Domestic Upholstery segments were down in the low to mid-30% range, much more than the 18% decline in the Home Meridian segment. Increased average selling prices in the Hooker Branded and Home Meridian segments were attributable to favorable product mix and helped to offset a small decrease in average selling price in the Domestic Upholstery segment. However, these factors were not sufficient to offset the nearly 21.6% unit volume decrease, which resulted from lower orders across all 3 segments. Consolidated gross profit decreased $6.9 million from $25.5 million to $18.7 million and from 18.8% to 17.8% as a percent of net sales. Hooker Branded gross profit decreased in absolute terms and as a percentage of net sales due principally to the net sales decrease. In the Home Meridian segment, despite a net sales decline, gross profit increased in absolute terms. And as a percentage of net sales, reflecting some of the turnarounds Doug referred to earlier. In the prior year period, Home Meridian's gross margin was negatively impacted by unexpected quality-related chargebacks as well as unrecovered tariff and freight costs. These issues did not recur in fiscal 2021, which we believe is the result of the resourcing transition to Vietnam, which has helped to reduce product costs and the exit of temporary warehouses, which has reduced warehousing and handling costs. The Domestic Upholstery segment's gross profit decreased significantly in absolute terms ahead of percentage of net sales due to the net sales decline and the inefficiencies resulting from operating at significantly reduced production volumes. As mentioned before, we temporarily closed 5 of Hooker's 6 domestic upholstery plants in April. Bradington-Young and Shenandoah essentially did not report sales in April, while Sam Moore's April net sales were only 37% of the prior year amount. Preliminary consolidated selling and administrative expenses decreased in absolute terms due to decreased selling expenses on the lower net sales base and cost reductions that we made in response to the COVID-19 pandemic, such as decreased employee compensation, reduced temporary salary reductions, furloughs, and the elimination of positions, as well as decreased travel and furniture market-related expenses. These decreases were partially offset by higher bad debt expense, including the recognition of current expected credit losses under the newly adopted ASC 326 accounting standard. For these reasons, preliminary operating profit for the fiscal 2021 first quarter decreased $4 million to a preliminary $1.1 million loss compared to $2.9 million operating income in the prior year first quarter. Operating margin decreased from 2.1% to a minus 1.1% this quarter. Despite these operating losses for the quarter, our cash balance increased about $15 million from the fiscal 2020 year-end to just over $51 million. We've generated $18.9 million in cash from operating activities, much of it from the significant reduction in inventory levels since year-end, and the collection of accounts receivable as well as the benefits of spending reductions and rationalizing purchase orders with our suppliers. In addition to our cash on hand, we have access to almost $26 million on our revolving credit facility and just under $26 million of cash surrender value of company-owned life insurance. This gives us additional financial flexibility to navigate these difficult times. Despite the lower profitability, we're confident in our financial conditions, and we believe we have the financial resources to weather the expected short-term impacts of COVID-19. So in June, our Board of Directors approved a $0.16 per share dividend, which at the current share prices gives us a dividend yield of 3.2%. However, an extended impact of a crisis could materially affect and adversely impact sales, earnings, and liquidity going forward. Now I'll turn the discussion back to Paul Toms for an outlook.

Thanks, Paul. While we have limited visibility of how the economic and health crisis may fluctuate in the coming months and still face significant headwinds from the high level of unemployment, our business is improving, and we are in a better position than we expected to be at this time. The company remains in exceptional financial condition. In times like these, we believe a strong balance sheet is even more important than the income statement. We're grateful for the adaptability and resilience of our employees and look forward to bringing back our administrative and management team members into the offices when the states say we can. More importantly, when we feel it's safe based on the status of the virus and the communities around our corporate locations. We expect the second quarter to be significantly better than the first. Barring a second wave of infection, we expect business each quarter to improve as we go through the year. We're confident we will emerge from this crisis as a stronger company. This ends the formal part of our discussion. At this time, I'll turn the call back over to Joel for questions.

Our first question comes from Anthony Lebiedzinski with Sidoti & Company.

So first, I just wanted to get a better sense about your sales channel mix. Obviously, you called out that within HMI, 35% of the sales came from e-commerce, which is much higher than typical. So just wanted to get a sense as to what that was for the entire company? And also, if you could comment on the warehouse clubs. And also, just overall, broadly speaking, as far as your sales penetration to nontraditional sellers of furniture that were not closed during the pandemic?

All right. Yes, that's a lot of questions within that question. But I'll take a stab at it. I don't think Hooker's Legacy Brands sales in the e-commerce channel were to the same degree that Home Meridian's. In other words, they weren't 35% of our volume in Q1, I don't believe. I don't have a number for overall, but I would guess that it's somewhere in the 15% to 20% range. Our Domestic Upholstery has very little penetration in the e-commerce channel. So that would kind of bring the overall down. We are fortunate to sell through e-commerce, and in addition, we're fortunate to be in clubs like Costco or Sam's or other warehouse-type clubs that were able to operate. We're in other retailers that were open during this period because they sell some groceries and were considered essential. So we had some big-box retailers and customers that were also able to operate in this. I'm not sure what other parts of your question, have I not answered. So I'll take a stab at that.

Anthony, this is Doug. I'll just chime in a little. HMI's sales to those other emerging channels, Mass merchants that were open, clubs, and then hospitality hotels that we were still developing represented another 20% plus of HMI's business on top of the e-commerce to give you some flavor.

Got it. That's very helpful. Doug, you mentioned some cost control measures that you implemented. Could you elaborate on those and possibly quantify what some of these overall permanent cost control measures are?

We have implemented various cost control measures that Paul discussed earlier, focusing on reducing spending wherever we could. This includes cutting salaries by 10% to 15%, laying off about 10% of our workforce, and furloughing around half of our corporate office staff on a rotating basis. These actions, along with managing our expenses in a strict manner to ensure safety, have allowed us to reduce our overall fixed cost base by $2 million compared to our budget for the first quarter.

Got it. Okay. That's very helpful. And as far as your exposure to China, obviously, because of the tariffs, you've been reducing your product sourcing there. So where did you guys wind up at the end of Q1?

In Q1, 12% of our shipments came from China. Obviously, a little deflated by the fact that China was closed for a whole month. If you looked at it over the 6-month period, it's about 18%. Going forward, that's probably something in between those two numbers.

Got it. Okay.

And I think if you look at total company, that number that we gave being around 22% of sales at the end of last year, probably not significantly different. It might be in the high teens for Q1.

Got it, Paul. I have a couple of questions if I may. You mentioned seeing better results so far in your second quarter. Can you remind us about the different regions within the country and where you have the most exposure? I assume the Northeast might be lagging behind the rest of the country, but if you could elaborate on that, it would be great.

I believe that the Northeast, along with parts of the upper Midwest and northwest, may be slower to reopen compared to regions in the south or west. While we can analyze our traditional customers to understand where sales are occurring, it's more challenging to pinpoint how e-commerce and catalogs are performing in this region. However, it’s likely safe to say that, particularly for the Hooker Branded and Domestic Upholstery segments, we are more focused in the southern areas, such as Texas and Oklahoma in the Sunbelt, than in the Northeast. Nonetheless, we do have a strong presence in the Northeast, especially with some distribution channels, likely more so with Home Meridian compared to the other two segments.

Got it. Okay. So, regarding operations, you have your domestic upholstery plants that are now running at 75% capacity. I'm curious about what changes you are making in terms of safety protocols. Also, while I understand it might be challenging to be as efficient as pre-COVID, I would like to know how to assess the additional costs associated with managing the impact of COVID.

Anthony, this is Jeremy. We have been following all the CDC guidelines and are being as careful as possible. Our top priority throughout this crisis has been the safety of our employees, and that will continue to be our focus. We are implementing social distancing in our factories and using masks. As for the additional costs related to these safety measures, I don’t see any significant extra expenses arising from the protocols we have established.

I agree that it's different from a meatpacking plant where people are very close together. In a manufacturing facility, people are generally more spread out. However, I’m not sure we can quantify the financial impact of taking more safety precautions.

That would suggest that it's not material.

The big part of this is communication, Anthony. Every week, we have calls to make sure we understand the dynamics that are today, and we do that on almost probably more of a daily basis than a weekly basis. So as this thing changes, we change with it. And we want to make sure we stay on top of that.

Got it. Okay. And then my last question is, I've read about that, obviously, you have sold home office type of furniture for a while. Just wondering, as in the new post-COVID world, how are you guys thinking about the new product categories or collections? And if you could expand on your exposure to home office, that would be great.

On the Hooker Legacy side of the business, particularly in casegoods, we were fortunate to be planning a major launch of a new home office program for this fall, which is quite timely. I would say it's a bit of luck, to be honest. We are well-positioned for the upcoming trends we anticipate. Additionally, we are introducing a new casual dining program. Both of these categories are experiencing positive trends in the market. Now, I will pass it over to Doug for his insights on his part of the business.

Sure. Yes. Home office products, unfortunately, for Home Meridian have been a fairly small category for us. But obviously, once we saw this trend two months ago, we started additional product development in the category. So we're racing to add products in the category.

Our next question comes from JP Geygan with Global Value Investment.

The COVID-19 situation has overshadowed some existing issues, namely product quality issues and tariffs, and I know you addressed each of those to some degree. But can you add any color around those, particularly the success of your efforts to rebuild your club relationships?

Sure. JP, this is Doug. Yes, our relationships with our clubs are strong. Our sales are growing slightly with them after the fallback that we took last year. We've got no quality issues, no problems. We're both growing with them in their retail stores as well as on their online dot-com sites. And yes, really no issues. Those issues are behind us.

It's Home Meridian, so I'll let Doug Townsend answer that.

In terms of tariffs, we mentioned before, we've moved a substantial portion of the business out of China and into Vietnam and Malaysia. And the few products that we still have in China that we're paying the 25% tariff on are products that inside the marketplace can withstand those cost increases. And so we pass those on.

Great. Looking ahead, can you talk generally about the outlook of your customers, especially considering that the COVID-19 pandemic might have brought about an acceleration in changes of consumer behaviors in the way consumers shop?

Anybody is welcome to chime in. But I would say, I mean, obviously, we've seen e-commerce strengthening this. I think some of that will be sustained. I don't think it will be at the level it was when bricks-and-mortar were closed, but I think people probably that weren't shopping online before have gotten somewhat comfortable doing that. So I expect that channel of distribution to remain advantaged. Other channels, clubs, that's been pretty steady. We had a little bit of a hiccup last year, obviously, but I think we've gotten past that. Catalogs seem to have done equally well in the downturn. Bricks-and-mortar, I think it really varies by the individual retailer. We've had some small mom-and-pop independent retailers that have actually gone out of business here in the last few months. That's not totally unexpected and may have happened even absent the crisis of the pandemic. But you also have strong regional players that I think are going to do very well going forward. Some of them didn't close all their stores, I don't think closed any of their stores. I would say a lot of our bricks-and-mortar customers significantly increased their e-commerce business here in the last few months, which wasn't a big part of their business before, but maybe it goes from 2% to 10%. So I think they've learned that they can sell online and maybe have found ways to take advantage of that as the stores reopen as well. So that would be my response, but certainly, Doug or Jeremy are welcome to chime in or leave.

Yes, I have one comment or two comments on that. One is, in terms of channels, I think the hospitality channel is going to be challenged, at least in the near-term with all the disruption that hotels have gone through and just the reduction of travel and how many empty hotels we have. So I think that's one channel that's going to be challenged for the near term, at least. And then in terms of the brick-and-mortar and traditional channel, there is going to be disruption. Some people have gone out of business, some of the weaker ones are having issues. But it's going to create huge opportunities for the stronger ones. A lot of the bigger players that we deal with are actively looking for those opportunities, waiting for those opportunities, and looking to do some expansion and things like that. So while there will be some deduction, I think there's also going to be growth with some of the stronger ones.

Great. That's good detail. Finally, as manufacturing ramps up again, both internationally and domestically, can you elaborate on any supply chain constraints that you might see?

When the pandemic began and stores had to close in mid-March, the immediate reaction from nearly everyone was to slow down operations and cancel orders. We experienced this from our large customers, which we communicated to our suppliers in Asia. We canceled some stock orders ourselves, particularly at Home Meridian, where we had an excess inventory, and less so at Hooker, where we were actually seeking more inventory. After the suppliers in Asia returned from the Chinese New Year, many of their plants faced challenges because employees were sheltering at home and there were government mandates for closures. They also encountered disruptions in acquiring the necessary components and subparts. Just as they managed to ramp up production, the pandemic hit here, leading to further order cancellations. Some suppliers laid off employees and reduced their operations. By mid-May, many in the industry, including us, recognized that the situation might not be as severe as initially anticipated, prompting us to begin placing orders again. This back-and-forth is certainly challenging for manufacturers. We are already observing longer lead times from suppliers in Asia. However, for most of our sourcing partners, we are a significant customer, if not their largest, which positions us well to receive preferential manufacturing time. They are putting in significant effort to meet our needs. Doug, would you like to add anything?

No, I would just reiterate kind of with as big of a disruption as this was, with the massive cancellations of orders in retail that flowed all the way to Asia and with many of our factories shutting down for 2 to 4 weeks at a time just to preserve cash on their end. It's amazing to bounce back and the lack of disruption we're having. And we have longer lead times here or there a couple of weeks. But nothing material, nothing that's affecting the business in a big way, and I'm actually very impressed with how that's happened in the supply chain.

Our next question comes from John Deysher with Pinnacle.

I was just curious about the product that's coming in from China, subject to the tariffs, where you still feel you can bring that in and raise prices. What type of product is that from China that you feel you can bring it in and pass through the price increases?

The business spans several areas within Home Meridian. Some of the hospitality products sourced from China are difficult to find in other countries. For large upholstery orders that customers may place, it's often more efficient to produce those in China, with the customer handling the import and paying any related tariffs. Our contract hospitality customers typically cover these tariffs, especially for items produced in China within our curios category, where we hold a significant market position. This niche market means certain products are better made in China, allowing us to benefit financially. On the Hooker side, we have worked with a vendor in China for 20 years, who has also started a newer facility in Vietnam. However, their China location produces unique products with high levels of craftsmanship that are difficult to replicate in mass production. Historically, we have been able to command higher prices from this plant. We increased prices to account for tariffs, first when they reached 10% and later as they rose to 25%, successfully passing most of those costs onto customers, with some support from our vendor. Currently, our customers are accepting of the tariffs, marking a shift from last year when we faced unrecovered costs. The items we source are now more deliberate, and while our Chinese sourcing is gradually decreasing, our position regarding tariffs on Chinese production has significantly improved compared to a year ago.

Okay. That's helpful. I'm a little fuzzy on the headcount right now. At year-end, you had approximately 1,250 full-time employees. Where are you with full-time employees approximately today? And where do you see that number going as you get to the point where you think you'll be operating over the next few months or so?

Okay. And I can understand you being confused because we throw numbers around 1,000 employees and 1,250. At the end of last year, we had 1,250 employees, about 250 of those were in Asia, in Vietnam and China, primarily with a few in Malaysia. The U.S. employees, the 1,000, I would say that we reduced headcount by about 35. So we're at 965. Some of those are furloughed, but I expect most of those employees to remain employees. I don't see our business being impacted long-term where we need to shrink our workforce beyond what we already did. In Asia, we were probably somewhat inflated in that 250 employees because we were in the process of moving production out of China to Vietnam. So last year, you had employees both in China and in Vietnam, trying to move the production. And I think we're at a point now where we don't need all of those and actually reduced headcount there, I guess, and Doug, you can help me here, but maybe 50 to 75 people out of that 250, and that's probably...

Yes, that's a good number.

Okay. So the headcount is going to come down a little bit. But overall, you'll be slightly below where you ended last year.

Maybe 100 employees, so 8%, something like that. And the majority of that would be in Asia.

Okay. Is the CapEx budget still targeted for $3 million this fiscal year?

That's likely a reasonable figure, but we are keeping an eye on it and will assess each project as it arises. In a situation like this, prioritizing cash conservation is essential, so we will keep reviewing that. However, our typical capital expenditure remains low even in a strong year.

Yes. No. That's one of the benefits of owning your company is a low CapEx. Where are we with the refinancing? I know both the term and the revolver come due February 1, about 7 or 8 months away. Where are we with refinancing? And does the write-down, if it happens, impact any of the covenants for the existing debt facilities?

The covenants are based on EBITDA, so we don't anticipate any issues there. To be straightforward, our refinancing plans are currently on hold as we wait for more market stability. Fortunately, we have sufficient financial resources, meaning we won't need to refinance the term loan by the end of the year. If the terms are not favorable, we would prefer to refinance, but we have alternative resources, such as the cash surrender value of life insurance, which means that if we don't refinance, it won't impact our operating cash position. Therefore, the refinancing is temporarily on hold. We expect to resume that process shortly as we begin to see more clarity in our results. Until yesterday, we believed there was also greater clarity in the financial markets.

Okay. So even in a worst-case scenario with the write-down of the intangibles, you don't expect that to impact the refinancing process?

Yes.

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.

Thanks, Joel. I really have no additional remarks. We appreciate everybody joining us today, although we never liked to have a loss. We hadn't had one in 10 years. I think given what we've just gone through, it's not bad performance, and we certainly are very encouraged by what we've seen since about the third week or middle of May, and we hope that that's sustainable. We think that furniture is advantaged right now, and we're in a good position to take advantage of any uptick in business, including what we've seen over the last 3 or 4 weeks. So we look forward to being back with you in early September, hopefully having better results to talk about then. And again, thank you for joining us today. Good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.