HOOKER FURNISHINGS Corp (HOFT) Q2 2024 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Hooker Furnishings Second Quarter 2024 Earnings Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Huckfeldt, Chief Financial Officer. Please go ahead.

Thanks, Catherine. Good morning and welcome to our quarterly conference call to review our financial results for the fiscal 2024 second quarter, which began May 1st and ended on July 30th, 2023. Joining me this morning is Jeremy Hoff, our Chief Executive Officer. We certainly appreciate your participation today. 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 2024 second 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. This morning, we reported consolidated net sales for the fiscal 2024 second quarter of $97.8 million, a decrease of $55 million or 36%, as compared to last year's second quarter, driven by industry-wide weak demand for home furnishings and the planned exit of unprofitable operations within our Home Meridian segment. Net sales decreased by $30 million in the Home Meridian segment and $18 million in our Hooker Branded Segment, as well as $7.4 million in the domestic upholstery segment. Consolidated net income was $785,000 or $0.07 per diluted share for the quarter, compared to $5.5 million or $0.46 per diluted share in the prior year period. For the fiscal 2024 first-half consolidated net sales were $219 million, down $80 million or 26.8%, compared to last year’s first-half. Consolidated net income was $2.2 million or $0.20 per diluted share, compared to $8.7 million or $0.73 per diluted share in the prior year six month period. Now, I'll turn the call over to Jeremy to comment on our fiscal 2024 second quarter results.

Thank you, Paul, and good morning, everyone. On our call today, we'll discuss second quarter and first-half results. In addition, we will report on our progress in strengthening our financial position in this challenging environment and strategically deploying capital and other resources to invest in future growth and higher visibility with potential customers. We believe the current industry-wide softer demand is driven by retailers continuing to sell through over-inventory positions and a glut of heavily discounted home furnishings in the market. In addition, the year-over-year comparisons reflect our exit from the higher-risk non-profitable operations in the Home Meridian segment. We are encouraged that incoming orders have trended higher each month through the summer, compared to the prior year, and consolidated orders are up by double digits versus a year ago. During the quarter, we bolstered our financial position generating over $51 million in cash from operations and ending the quarter with cash and cash equivalents of $50 million. Additionally, we reduced inventory levels by $70 million from a year ago and completed most of our targeted liquidation sales at the Home Meridian segment's discontinued inventories. The quality of our inventories is much better than it was at the end of last year and is aligned with expected demand. In addition, our investments focused on building a larger customer base are working. For example, the collective impact of our new showrooms in High Point, Atlanta, and Las Vegas increased our customer contacts from about 3,000 to around 14,000 annually, quadrupling our interactions with existing and potential customers. While we expect that the full impact of this investment will be mostly longer term, we've already opened 1,000 new accounts in the first-half of the year as visibility and engagement have increased. The transformation of the Home Meridian segment to a sustainably profitable business model is well underway. Most of the excess inventories connected to the business unit closures at the end of the last fiscal year have been sold and the related cost reduction efforts are paying off. In addition, we reduced our Georgia warehouse footprint by 200,000 square feet during the quarter and expect to reduce another 100,000 to 200,000 square feet in early calendar 2024. Rightsizing our footprint to align with our current demand when we no longer stock significant volumes of inventory for Accentrics Home will not only reduce cost, but it will improve liquidity and working capital levels. HMI recorded a small operating income in fiscal July, and while we continue to expect some short-term volatility in sales and earnings, we expect to achieve profitability in the second-half of this fiscal year. The hard work and difficult decisions we've made over the past 18 months are beginning to show benefits. We have reduced our overhead run rate from a high of over $40 million to about $32 million now and expect to be below $30 million by year's end coupled with improvements in contribution margin, we believe we will have lowered Home Meridian's breakeven point by over $150 million and will be able to focus on building stable, profitable volume for the segment. During the quarter, we were pleased to have completed the acquisition of Atlanta-based decorative accessories specialist BOBO Intriguing Objects. This acquisition broadens our product diversity to include lighting, decor, textiles, and wall art. Adding BOBO to our brand portfolio positions us as an even more valuable and comprehensive partner for our customer base. Like last year's Sunset West acquisition, we intend to scale BOBO using our existing sales, marketing, and operations teams to make it a material part of our consolidated sales in the medium to longer term. Now, I want to turn the discussion over to Paul, who will discuss highlights in each of our segments.

Thanks, Jeremy. Beginning with Hooker branded. Net sales in the segment decreased by $18 million or 34% in the fiscal 2024 second quarter, due to decreased unit volume. Furthermore, discounting was 240 basis points higher than the prior year quarter, which was unusually low. For the fiscal 2024 first-half, Hooker branded sales decreased by $18.5 million or 19%, compared to the prior year six month period. Sales decreases in both periods underscore the softer demand for home furnishings. Despite a decrease in net sales, gross margin increased due primarily to favorable product costs from lower freight rates and to a lesser extent decreased warehousing costs. The segment reported operating income of $3.2 million and an operating margin of 9.3%, compared to $6.1 million and a 11.5% in the prior year's second quarter. While the order backlog was lower than the prior year quarter end, it remains 40% higher than pre-pandemic levels at the end of the fiscal 2020 second quarter. Incoming orders increased by almost 19% compared to the prior year quarter, a significant portion of Hooker branded’s backlog consists of orders from new products received late last year and earlier this year, which are expected to ship in the second-half of this year and position the segment positively for upcoming quarters. Turning to Home Meridian, net sales decreased by $30 million or 51% in the fiscal 2024 second quarter, due to reduced demand for Home Furnishings and the absence of sales from exited higher risk, unprofitable operations. Sales decreases in the major furniture chains accounted for about 70% of the decline and the e-commerce channel accounted for about 15% of the decrease. Gross profit and margin both decreased in the 2024 second quarter, resulting from the net sales decline and under absorbed operating costs. Product costs decreased as a percentage of net sales due to lower freight costs, but fixed costs due to warehousing rent and labor expenses adversely impacted the gross margin, due to significantly lower net sales. For the six month period, Home Meridian sales decreased due to these same factors. As Jeremy mentioned earlier, we reduced our Georgia warehouse footprint by 200,000 square feet during the quarter and expect to further reduce that in the future, bringing total square footage to around 500,000 square feet in early calendar 2024 versus a 1 million square feet a year ago. This rightsizing will reduce costs and improve liquidity and working capital. Due to the significant sales decline, under absorbed operating costs, Home Meridian reported a $3.3 million operating loss for the quarter. However, its first-half operating loss was consistent with management's expectations. Quarter end backlog was lower than the previous year's quarter, and fiscal 2020 second quarter. This decline is attributed to the absence of orders from the exited operations, as well as a reduction in incoming orders from our retail customers, who are still carrying excess inventories ordered during the previous year. In domestic upholstery, net sales decreased by $7.4 million or 19% in the second quarter, due to sales decreases in Shenandoah and HF Custom formerly known as Sam Moore, partially offset by a 10% increase at Sunset West. Bradington-Young net sales were about the same as the prior year second quarter. Despite the sales decrease, gross margin was 200 basis points higher than the prior year, due to decreased direct costs, including more stable raw material costs and lower direct labor costs, due to reduced production at HF Custom in Shenandoah, partially offset by under absorbed indirect costs.

On the balance sheet, we made considerable progress in our cash and inventory position and in strategic capital investments. Cash and cash equivalents stood at $50 million at the fiscal 2024 quarter end, an increase of $31 million from the prior year. Inventory levels decreased by $35 million from year-end and $70 million from a year ago. During the six month period, $51 million of cash generated from operating activities funded $8.7 million in share repurchases; $4.9 million in cash dividends; $4 million in capital expenditures, including investments in our new showrooms; $2.6 million for the development of our cloud-based ERP system as well as $2.4 million for the BOBO acquisition. Since the share repurchase program began in the second quarter of last year, we spent approximately $22 million to purchase and retire 1.3 million shares of our common stock as of the end of this quarter. In addition to cash balances, an aggregate $27 million was available under our existing revolver at quarter end. For the remainder of the year, we plan to continue to strengthen our balance sheet, continue our share repurchase program as appropriate and continue to invest in organic growth opportunities, which we believe will position us favorably as business continues to improve. Now I'll turn the discussion back to Jeremy for his outlook. We believe there are mixed signals in the economy; a housing shortage and the over 20-year high fixed mortgage rates have slowed down housing activity. The continued rise in interest rates has suppressed consumer confidence. However, overall retail spending and activity in the manufacturing sector and new business startups is healthy, while the unemployment rate remains near a 30-year low. As we anticipated, the first-half of the year was difficult as the industry worked through bloated inventories and changing consumer spending habits. We expect demand and business to pick up in the second-half for several reasons. First, consolidated orders are up in the mid-double-digits over this time a year ago, with orders trending up in each segment for the past few months. Secondly, a significant portion of Hooker Branded's backlog consists of orders for new products launched at the High Point market and are expected to ship in the second-half of this year. Thirdly, in the second-half, Home Meridian expects to ship over 1,000 retail floors, what we believe to be the largest number of new product placements in its history. We believe all the right pieces are in place to return Home Meridian to profitability in the second half of the year. While we are focused on reducing overhead costs, keeping our balance sheet strong, and judiciously deploying capital, we have continued to invest significantly in initiatives that promote higher visibility with potential customers and ensure future growth, and believe these things will put us in the strongest position as demand continues to improve.

This ends the formal part of our discussion. And at this time, I will turn the call back over to our operator, Catherine, for questions. And our first question comes from Anthony Lebiedzinski from Sidoti & Company. Your line is open.

Good morning and thank you for taking the questions.

Good morning, Anthony.

Good morning. I'm interested in the sales trends from May to July, if you could share that information. Also, could you provide an early insight into Q3? I'm eager to know what feedback you're receiving from your retail customers regarding Labor Day, which is significant for the furniture industry.

Sure. When you say cadence of sales, you mean shipments or orders?

The shipments.

Okay. Just making sure we're on the same page. Regarding shipments, our backlogs reached a level that was not conducive to sustainable shipments throughout the quarter. As the quarter went on, orders increased, and our backlogs improved, but the timing issues definitely impacted us during the quarter. Feedback from Labor Day has been very positive. In almost every area we've checked, the reports indicated that results were either above last year or just at or slightly below last year, which was significant. We see this as a positive sign for us overall.

That's great to hear, Jeremy. You did a fantastic job improving your balance sheet with reduced inventories and a stronger cash position. Do you believe you can continue to make progress with inventories? Or do you feel that as the quarters advance, we might be at a low point for inventories? Could you shed some light on where you think inventories are headed from here?

We believe that inventories will stabilize from this point onward. This is the healthiest inventory position we've had since I started, especially considering the changes we've made with Accentrics Home and everything that has been publicly shared. Overall, I feel more confident about our controllables as a company than I have since I joined, largely due to our balance sheet and inventory levels. We are well-positioned in terms of demand related to our inventories, and our order rates have significantly increased. I feel very positive about the aspects we can influence.

Got you. Okay. And then so as order rates improve, as you talked about double-digit order increases that you've seen, does that imply that you'll see shipment and sales increases in the back half of the year? Or do you think there will still be somewhat of a disconnect there? And my question is on a year-over-year basis, by the way.

I would say year-over-year, we're going to compete pretty well in the second-half versus what we did in the first-half. I'm not ready to say that we'll beat the second-half last year, because it was a pretty substantial shipping half, because we were still somewhat inflated from sales from pandemic. But I do feel like it's going to be a little bit a tale of two halves for us, and we're going to have a lot more positive shipping and order rate throughout the second-half.

And we've reduced the operating costs.

Yes, right. So we're really going against a whole different denominator throughout that half as well.

Understood. Okay. Got you. Yes, I know it looks like you're making further progress with Home Meridian overhead and in their warehousing space. So it looks like Sunset West was one of the key highlights in the quarter here. What's driving that? And do you think that growth is sustainable?

We do. It's actually one of our larger growth initiatives with that throughout the whole company. And we see it as on several levels, a big opportunity. One is when we bought the company, they're very West Coast centric. So our ability to expand their distribution throughout the U.S. with our sales team throughout our territories, as you know whether you're talking Florida, South Carolina, Texas, anywhere throughout the U.S., we definitely have more representation and stronger relationships than what they had before we bought them. Number two, being able to position Savannah with Sunset West also doing some cuts so cushion stuff and things we need to do out of our HF Custom facility in Bedford, we've created the supply chain really on both sides of the U.S., which is going to really feed growth in the eastern half of the United States, due to the cost savings of freight and really just the visibility, again, before we bought them, they didn't have a High Point showroom. Now they're in, of course, our show place. They were in Chicago for the casual show there. Now they're in Atlanta. Their visibility has gone up exponentially and their ability to ship from both sides of the country. So all those factors are going to contribute in a pretty major way to their growth.

That's good to hear. You made a small acquisition in the quarter. I'm curious about your interest in pursuing additional acquisitions.

We remain open to new opportunities, but we are quite selective at this stage. Any potential acquisition must truly fill a gap in the market. We want to avoid anything that could undermine our current focus across our portfolio. For instance, with BOBO, we've noticed that a common question from our customers regarding Hooker case goods is about the lighting, specifically who made it and if they can purchase it. The main reason we acquired BOBO was to be able to answer that question positively.

That makes a lot of sense. Okay, I guess my last question is about the buyback. You have certainly done a good job of balancing capital allocation between dividends and buybacks. Do you have much left on the buyback, or have you exhausted the repurchase authorization? An update on that would be very helpful.

As of the end of the quarter, we had about $2 million to $2.5 million remaining. Since then, we have purchased another approximately $1 million. So we have a fairly small amount left on that repurchase, which we will continue to execute under a 10b5-1 plan. I believe this strategy has been effective, but we also need to focus on strengthening the balance sheet. The economy remains somewhat uncertain, so we are working to balance our capital allocation strategy while maintaining a strong balance sheet.

Understood. Well, thank you very much and best of luck.

Thank you, Anthony.

Our next question comes from Dave Storms with Stonegate. Your line is open.

Good morning.

Good morning.

Good morning, Dave.

Appreciate just taking my call. Just wanted to start towards the top of the balance sheet. It looks like gross profit margin is up about 350, 355 basis points or so. Can you just talk about what the drivers are of that on a year-over-year basis?

Currently, we are seeing advantages from lower costs. Our Upholstery margins have improved due to stabilized costs and better labor management. On the imported product side, we are benefiting from slightly lower factory costs, primarily due to reduced freight expenses and the adjustment of our higher prices, as we've lowered prices in line with these freight reductions. The remaining higher-priced inventories are now being phased out. Overall, combined with exiting some challenging businesses, our current gross margins might seem somewhat elevated compared to what we expect in the future, but they are more normalized than at this time last year.

Would it be fair to say that it's more a factor of pricing as opposed to volumes at this point?

Yes.

That's very helpful. Thank you. And then just looking downstream, you've mentioned that orders are really starting to increase, but downstream suppliers are still working through some of their inventory. Are you seeing that come to some sort of turning point just with the orders increasing? Or do you expect destocking to continue going forward?

Yes, we are noticing some loosening in inventory conditions, which has been an ongoing issue that varies from one retailer to another. It's challenging to provide a general response since each retailer is managing their situation differently based on their purchasing decisions. Overall, we are experiencing a somewhat more relaxed environment concerning inventory. I believe the robust Labor Day sales will contribute positively, although we will have to wait a few weeks to assess the full impact.

Very helpful. Thank you. Paul, you mentioned the importance of maintaining a strong balance sheet. Can you discuss your comfort with your current debt position and the availability of your revolving credit?

This company has always managed the balance sheet quite conservatively, which has served us well over our nearly 100-year history. It's a core value for us to maintain a strong balance sheet. Currently, we have $27 million available on our revolver, with $7 million tied up above that. Our revolver is $35 million, and $7 million is committed to letters of credit, leaving us with $27 million available. We also have $22 million in debt, which is a relatively low level. While this industry tends to be debt-averse, we feel comfortable with that level of debt. Additionally, we have $50 million in cash, which we believe is a solid position. As we observe the economy's development over the rest of this year, we plan to manage cautiously and make our capital allocation decisions for next year based on the outcomes we see in the upcoming months.

And we always mentioned we have a over 50-year history of paying our dividend as well.

Right. Right, which dividend yield is just under 4%.

Understood. One more question, if I could. From a modeling perspective, are CapEx budgets around $4 million to $5 million per quarter a fair estimate for the remainder of 2023?

Capital expenditures for the rest of this year are expected to be around $1 million. In a typical year, our capital expenditures are generally around $5 million to $6 million. This year is slightly higher due to new showrooms and our ERP project, so I would suggest planning for approximately $6 million annually for capital expenditures moving forward.

That’s all, very helpful. Thank you for taking my questions.

Yes, you’re welcome. Thank you.

We have a question from Budd Bugatch from Water Tower Research. Your line is open.

Thank you very much and thank you for taking my questions as well. Congratulations. I want to echo the congratulations on the way you've maintained your balance sheet and your financial condition and what's got to have been, I think, the most volatile time we've ever seen in the industry and maybe in society.

We appreciate that. Thank you.

You're welcome, and well deserved. When I think about Hooker, it has the widest diversity of customers in terms of geography, number of customers, and type of business model. Jeremy, could you share your insights on what you're hearing from different levels of customers? Specifically, I know the major companies seemed to have had a significant issue with the order book in HMI. As you look around the country and listen to the retailers, what are they discussing?

It's really interesting, Budd. That's a great question. What I've noticed and heard is that the inventory models each customer uses are significantly influenced by their current inventory levels. Larger customers are bringing in containers and larger quantities of inventory, making it more challenging for them to quickly turn things around. The container and case goods model has proven to be the toughest across our industry. When it comes to manufacturers with a domestic inventory position, where they can purchase items one at a time, that model has been less disruptive. This has allowed for orders to be placed in situations that didn’t fit the previous description, typically involving medium to smaller customers, interior designers, and e-commerce businesses. Additionally, in the sector of domestically made upholstery, I've found that it has been the most advantageous throughout this situation due to its reliance on custom orders and single-item purchases. Overall, different inventory models have shaped the positions of each retailer.

And digging deeper into Labor Day, which you may be familiar with, I understand this is anecdotal at this point. Are you noticing any differences in how demand is returning to these retailers and the various categories of retailers? Also, regarding the health of the inventories you mentioned, do you believe we have seen the end of destocking?

We believe they're getting in a much better position, but I think Labor Day, we're going to find out if that really put them over the line of feeling better about ordering more products. I think a lot of that has affected producers overseas. Of course, it's been slow. And in my opinion, and it's just strictly my opinion, I think that there will be some maybe overreaction in letting inventories get possibly too low. And then there might be, okay, how do I get things quick enough and we may be in a little bit of a bottleneck towards the end of the year? I don't know this, by the way, I'm just telling you what I think may happen.

Oh, well, we've seen it before in the industry. That's happened before...

Right, right. Exactly.

When you look at sales on a comparable basis, I realize we've got the ACH discontinuation. We've got some other things. How does it look on a same kind of same location basis segment by segment or overall company?

So I want to make sure I understand your question. Are you asking how we'll look across the different businesses now that ACH and the clubs business and whatnot are gone?

I'm not focusing on the future; I'm looking at the quarter or year-to-date. How does it appear when we exclude the discontinued operations and the initiatives that are being reduced? I'm sure you assess it on a comparable basis, as well as on a consolidated overall basis.

Yes. So ACH would have been $8 million to $10 million of that picture. I don't have the exact number you're looking for, but we'd be happy to jump on a call and figure that number out and give it to you later.

That would be great. You've mentioned the destocking with the major players and how you manage your inventory. You likely have one of the largest import operations too. What insights can you share about your efforts to reduce sourcing from China? This is obviously a significant issue currently. What progress have you made, and how are your suppliers in the Pacific Rim performing?

We feel really good about the health of our suppliers overseas. We're less than 10% now in China. We were as much as, I believe, I think we're around 35% at 1 point in China. So we've made a significant reduction in that. Also, a major improvement for us that we haven't talked about is the number of factories we used to deal with when we had the clubs business when we had Accentrics Home when we had we had RTA. I mean, just to give you an idea, just Accentrics Home at over 60 factories. So when you think about the people we have overseas, which is really a pretty substantial team, but them being able to focus on the number of factors we have now, which we feel is the correct number for our business, and it's not spreading out our team because we have quality and other individuals that have to be in those factories. So as you do that, you lose sight and focus on the things that actually matter, which is a big benefit to what we've done as well.

So Vietnam now the largest of your supply countries?

Yes.

Okay. And lastly, regarding HMI, are there any additional actions you're considering that you can share? I understand if there are some that might impact people and cannot be discussed, but are there any strategic moves you believe need to be made with Home Meridian?

No, the positive aspect about Home Meridian at this point is that we need to grow, and we're concentrating on expanding Pulaski, Samuel Lawrence, PRI, and our hospitality division. We have many initiatives, with over 1,000 store placements scheduled to occur right before and after this call, which we believe will significantly contribute to future revenues for HMI. Additionally, since the breakeven point for HMI has changed so much, we feel very confident about our performance in that business moving forward.

And I would have thought hospitality would have been a real strong point during the quarter with what's going on in the country. Is that true?

Yes, definitely bright spot. It was definitely a bright spot for us. Also the H Contract, which is focused on senior living was another bright spot for us throughout the quarter.

I'm sorry, Budd, the remaining cost reductions of those warehouse reductions that we've got planned, we don't have any personnel related actively say we don't have any personal related…

No, we feel really good about our overhead position and also the next cost reductions all relate to reducing space in Savannah to achieve the $500,000 we mentioned. Additionally, we believe there are labor efficiencies that will lead to savings in that area as well. Most of our cost reductions have already been addressed. Our plan moving forward is to operate a solid, sustainable business that is predictable, without the surprises we've faced in the past.

Okay. Paul, I would have thought one thing you did say is that the higher freight costs is that out of the inventory now, has impacted inventory it had to flow in there. Do you think all those excess of container rate costs are gone?

Yes. I think through the summer, we worked our way out of it by the end of the summer. I think most of the excess costs were gone.

Thank you. Well, congratulations, good luck on the next part of the year.

Thank you, Budd. We appreciate it.

Thank you. I would now like to turn the conference over to Jeremy Hoff for closing remarks.

I would like to thank everyone on the call for their interest in Hooker Furnishings. We look forward to sharing our fiscal '24 third quarter results in December. Take care.

This concludes today's conference call. Thank you for participating. You may now disconnect.