Earnings Call Transcript - HOFT Q2 2022

Operator, Operator

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call reporting its operating results for the second quarter of fiscal 2022. 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.

Paul Huckfeldt, CFO

Thank you, Gigi. Good morning, and welcome to our quarterly conference call to review our financial results for the fiscal 2022 second quarter, which began May 3, 2021 and ended on August 1, 2021. Joining me this morning is Jeremy Hoff, our Chief Executive Officer. We certainly appreciate your participation this morning. 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 2022 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 of $162.5 million and net income of $7.5 million or $0.62 per diluted share for our fiscal 2022 second quarter, which ended on August 1. Compared to last year's second quarter, net sales increased by $32 million or 25%, while net income increased $1.7 million or 29%. Earnings per diluted share also increased 29% from $0.48 a year ago. All three reportable segments reported year-over-year sales increases of more than 20%. For the fiscal 2022 first half, consolidated net sales were $325.4 million, up $90 million or 38% compared to last year's first half. We reported net income of $16.9 million or $1.40 per diluted share compared to a net loss of $29 million, or $2.46 per diluted share a year ago, principally due to $44.3 million or $33.7 million net of tax in non-cash impairment charges last year. Now, I will turn the call over to Jeremy to comment on our fiscal 2022 second quarter results.

Jeremy Hoff, CEO

Thank you, Paul, and good morning, everyone. We are pleased that Hooker Furnishings achieved double-digit sales and profitability increases for the second consecutive quarter. Each of our reportable segments, Hooker Branded, Home Meridian, and Domestic Upholstery, also achieved double-digit sales gains of 29%, 23%, and 29%, respectively. While we expected improvements compared to the early months of the pandemic a year ago, we continue to surpass our goal to return to our pre-pandemic growth track. Consolidated sales were up over $10 million compared to the second quarter of fiscal 2020 and profits were up about 79% compared to the same quarter. Consumer and retail demand remained historically strong, with consolidated backlogs doubling compared to last year and incoming orders up 27% over the last six-month period. Industry-wide demand continues to be high. However, we are facing significant headwinds on the supply side that will impact us in the short term. The surge of the Delta variant of COVID-19 has caused factories in our source countries of Vietnam and Malaysia to close temporarily, with recent talk of reopening in Vietnam around September 15. In addition, global logistics challenges with higher freight and transit costs and lower transportation capacity, along with raw materials inflation and some labor shortages remain ongoing. We are utilizing all available levers to help mitigate these headwinds, and we remain optimistic about our long-term position as we work our way through these transitory disruptions. Now I want to turn the discussion over to Paul Huckfeldt, who will discuss highlights in each of our reportable segments.

Paul Huckfeldt, CFO

Thanks, Jeremy. I'll begin with the Hooker Branded segment, which performed exceptionally well for the second consecutive quarter, exceeding expectations in sales, profitability, product flow, and efficiency. Net sales increased by $11 million or 29% versus the prior year period. Incoming orders increased by 38%, and the backlog tripled compared to the prior year second quarter. Operating income in the fiscal 2022 second quarter was $8.9 million or 17.9% operating margin compared to $6.1 million or 15.7% margin in the second quarter of last year. Hooker Branded contributed over 90% of the consolidated operating profit during the period. We attribute our vibrant sales and profitability performance in the Hooker Branded segment to high industry-wide demand and the dramatic improvements and expansions of our product lines. The recent June High Point International Market was the best for Hooker Branded written orders since April of 2016. We're also seeing success with new lines such as the Commerce & Market collection, which offers pricing, scale, and styling targeting Millennials and is one of the largest accent furniture launches in our company's history. In addition, our strategy to rationalize our stocking inventory to focus on top sellers is helping us maximize shipping and production capacity, product flow, and cash utilization. Having best sellers in stock enabled us to limit our order cancellation rate to single digits and to ship more than expected despite limitations on ocean and land shipping capacity. Additionally, we're able to increase prices to mitigate higher product costs from rising ocean freight expenses and inflation on goods sourced from Asia. Turning now to the Home Meridian segment, HMI's second quarter sales were $87 million, up approximately 23% over the prior year. Revenues were boosted by continued strong retail demand versus especially weak shipments during the second quarter last year due to COVID-19-related disruptions. Year-to-date, we've seen a strong sales rebound with our traditional furniture channel retail base, as those customers pick up share lost to emerging channels during the opening months of the pandemic shutdowns last year. In contrast, emerging channel sales have declined somewhat due to exceptionally strong sales in the prior year period, combined with global supply chain challenges. Lower allowances and reduced fixed expenses were not enough to mitigate the impact of all-time record high freight costs. The Home Meridian segment finished the quarter at essentially breakeven, despite higher sales due to these high freight costs. Incoming orders increased about 4% compared to the fiscal 2022 first quarter but decreased by about 35% compared to the prior year second quarter when business rebounded dramatically after the height of the initial COVID crisis. Backlog at the end of the quarter was 62% higher than the prior year second quarter, the result of strong incoming orders but also somewhat attributable to production and shipping delays. Our Pulaski Furniture division delivered particularly strong Q2 results, with net sales exceeding the prior year by 68% and operating income increasing by $1.3 million. 83% of PFC's shipments in Q2 were via containers shipped directly to large retail warehouses. New orders and backlog at PFC remain robust, but current factory closures in Vietnam could hamper shipments for at least the next several months. Samuel Lawrence Furniture, our value-focused case goods division and PRI, our promotional upholstery division, also recorded strong double-digit sales increases in Q2, with year-over-year increases of 38% and 75%, respectively. Backlogs were also up in both divisions compared to last year. The temporary factory closures in Vietnam will negatively impact Q3 shipments. As mentioned in previous quarterly results, SLH, our hospitality division, continues to struggle with significantly diminished demand in the COVID disrupted hospitality sector. Net sales were off 48% in the period and incoming orders were practically non-existent. SLH will continue to operate at a loss until the contract hospitality sector ultimately rebounds, which we expect to begin next year. ACH, our e-commerce-focused business unit, struggled with extremely unfavorable ocean freight costs in Q2. In addition to excessive freight costs, ACH was impacted by supply chain-related service issues and diminished order demand resulting from our efforts to pass along portions of the freight cost increases. The price-sensitive nature of much of ACH's business limited sell-through, thereby reducing the benefit of our price increases. While we have mitigating measures in place to reduce excess freight costs, we cannot eliminate them, and therefore, these headwinds are expected to continue impacting ACH results for the remainder of this fiscal year. In the Domestic Upholstery segment, net sales increased by $5 million or 29% in the fiscal 2022 second quarter compared to the prior year quarter due to significant sales increases at Bradington-Young and Shenandoah and to a lesser extent our Sam Moore division. Operating income for the fiscal 2022 second quarter was $457,000 or 2% of net sales compared to a small operating loss in the prior year second quarter. Backlogs at all three divisions were at historical highs, and incoming orders increased by 73% compared to the prior year second quarter. There's a lot of optimism in the Domestic Upholstery segment for the second half of this year. In addition to strong demand, we've seen a stabilization of some raw material issues such as foam allocation shortages that impacted us near the end of Q1 and earlier this quarter. Our management focus is on servicing backlogs with quality product and improved speed of delivery. In All Other, sales increased by $300,000 or 10% in the second quarter compared to the prior year period due to an 11% sales decrease at H Contract. Operating income for the quarter was $230,000 or 8.5% of net sales compared to $350,000 or 11.5% of net sales in the prior year. As the retirement living market begins to slowly recover, H Contract incoming orders were up 6.4% over the prior year second quarter, and the backlog is 49% higher than the prior year quarter end. Finally, touching on our cash and inventory position, cash and cash equivalents stood at $37.4 million at the end of the quarter, a decrease of $28 million compared to the fiscal 2021 year end due primarily to a $33 million increase in inventory as we continue to build inventories to meet increased customer demand and prepare for the holiday selling season. We have a substantial amount of inventory in transit, much of which is sold and can be shipped to customers shortly after receipt in our warehouses. Accounts receivable balances increased by $15 million as a result of increased net sales. We used existing cash to pay $4.3 million in cash dividends and $3.5 million of capital expenditures, which is more than we typically spend because we're in the process of upgrading our end-of-life ERP systems with newer technology and we began equipping our new, more efficient Georgia distribution center, which is expected to go online in October of this year. Now, turning back to Jeremy for his outlook.

Jeremy Hoff, CEO

Thank you, Paul. As we look ahead, significantly increased demand continues while we are still dealing with many of the same logistics and supply issues. The recent COVID-related factory shutdowns in Vietnam and Malaysia will particularly have negative ripple effects throughout the global supply chain for a period of time. The recent news of possible reopening in Vietnam this month is encouraging. Our Hooker Branded and Domestic Upholstery segments, where we have the ability to keep product flowing and to ship from our significant warehousing capacity, are less challenged than Home Meridian. Home Meridian ships primarily to larger customers via container and is more quickly impacted by the shutdowns. Our strong balance sheet and variable cost business model gives us confidence that we can weather this current industry-wide challenge and should allow us to take advantage of the healthy consumer demand environment, long-term positive economic indicators, and demographic trends for home-related industries. Lastly, I would like to mention that Lee Boone, who most recently served as President of HMI, has left Hooker Furnishings. This change is part of an overall effort to reorganize and realign the Home Meridian division, while reducing operating costs and improving segment profitability. While we are not making wholesale changes at HMI, we have changed some reporting relationships to better align with strategic initiatives, reduced the executive team, eliminating some unnecessary layers and will exit a high-cost West Coast warehouse by the end of the first quarter of fiscal '23 without significant negative impact on our revenues. These changes further streamline the organization and reduce cost. We appreciate Lee's dedicated service and contributions to the company over the last 9.5 years as he served in various roles, including President and Co-President of HMI and Division President of Samuel Lawrence Furniture. This ends the formal part of our discussion. And at this time, I will turn the call back over to our operator Gigi for questions.

Operator, Operator

Our first question comes from the line of Anthony Lebiedzinski from Sidoti.

Anthony Lebiedzinski, Analyst

So first, I guess a couple of just more or less some housekeeping things here. So, as far as the second quarter, I just wanted to get a better idea about pricing versus unit volume on a consolidated basis, if you have that information.

Paul Huckfeldt, CFO

Well, obviously, pricing is going to be a big part of it. Give me a second to...

Anthony Lebiedzinski, Analyst

Sure.

Paul Huckfeldt, CFO

If you would like to move on to your next question, I will review those numbers so I can provide you with the information, as we are filing our Q later today.

Anthony Lebiedzinski, Analyst

Got it. Yes, no worries. I just wanted to understand whether you plan to implement additional price increases and if you will be applying them to the existing backlog.

Jeremy Hoff, CEO

Anthony, this is Jeremy. So, we are taking it more through e-commerce currently. Through our ACH business, we had to adjust more drastically than we thought originally. And so, that's ongoing, and a lot of those went in place to the back. They did affect backlog. So, that's the case on that. We're getting cost increases from suppliers for raw materials kind of on a daily basis. So typically, we don't raise prices through our backlogs throughout our company. We, of course, would do so if we really had to, but we feel like we're in pretty good position other than the first part of what I mentioned.

Anthony Lebiedzinski, Analyst

Got it. Okay. Understood. Do you have a dollar amount for the backlog at the end of the second quarter? I know it's up overall.

Paul Huckfeldt, CFO

Backlog's $320 million.

Anthony Lebiedzinski, Analyst

Okay. Got it. Thank you for that. And then, so Jeremy, you did mention a few times that industry demand is strong, which is encouraging to hear. Can you give us a sense as to, like what you've heard from retailers here for the Labor Day weekend?

Jeremy Hoff, CEO

Yes. What we've heard is Labor Day weekend was really strong and we continue to hear positive things from our retail partners.

Paul Huckfeldt, CFO

Okay. Anthony, going back to your other question, unit volume's up 4.4% consolidated and average selling price is up 12.2%.

Anthony Lebiedzinski, Analyst

Got it. Okay. Thanks, Paul. Jeremy, you mentioned using your available levers to help mitigate the supply chain challenges. Can you provide more specifics on what you're doing, especially since Vietnam is still in shutdown mode? It would be very helpful if you could expand on your efforts to address the supply chain constraints.

Jeremy Hoff, CEO

Separating the factory shutdown from everything else, it's challenging to address that situation. The good news is that we have heard the factories in Vietnam might reopen as early as the 15th of this month. Now, concerning logistics, it mainly pertains to the additional costs of goods. We pay a certain amount, which might be around $15,000 to $20,000, and we've seen figures as high as $28,000, with $30,000 also mentioned for a container.

Paul Huckfeldt, CFO

Unless it's not clear.

Jeremy Hoff, CEO

Our mitigation efforts focus on evaluating each of our businesses. For lower price point segments where higher container costs are unfeasible, we have implemented measures to make quicker decisions than in the past. We're not just accepting excessive container costs for businesses that can't bear them. This is a significant step we’re taking. For higher-priced products, we can absorb more costs, but we must ensure we maintain sufficient margins. In our warehouse-supported businesses, particularly with the Hooker Branded line, maintaining product availability and flow without running low is crucial. We are not as impacted by higher container prices, and we have managed to maintain averages above our usual levels, though lower than some of the extreme rates you've heard. Our goal is to keep our average costs minimized, and we've consolidated our logistics team to enhance coordination because it's truly an all-hands-on-deck effort. It requires ongoing attention to secure the best possible rates. A critical aspect of this is capacity management — we aim for consistency in our bookings for our contract countries. However, the current factory shutdown in Vietnam complicates this effort. We strive for a steady number of containers from our primary factories to secure favorable rates. Additionally, managing containers once they arrive in the United States poses another significant challenge. We're focusing on dedicating sufficient resources to each problem and monitoring them daily. It's not an issue that can be neglected for a month; otherwise, the consequences will be undesirable.

Anthony Lebiedzinski, Analyst

Got it. Okay, yes, thanks for the detailed explanation, Jeremy. Given the supply chain constraints that exist, how are you considering your strategy moving forward? Are you planning to diversify your sourcing capabilities in the long term based on these developments? I would like to hear your high-level thoughts on this.

Jeremy Hoff, CEO

Yes. We're continuously seeking additional sourcing opportunities to diversify our operations. One potential area is Mexico, which we are exploring, although it's more challenging than it seems. Another significant area is in imported upholstery, rather than domestic sources. We have successfully diversified away from Vietnam and are now also in Thailand and other regions. We have even revisited China when necessary. If a country offers more stability at a given time, we will adjust our sourcing accordingly. Upholstery is generally easier to relocate than case goods, especially when it comes to higher-priced case goods, which make diversification more difficult from a factory perspective.

Anthony Lebiedzinski, Analyst

Got it. Okay. And then, as far as Home Meridian, you did mention about the leadership change there. I mean, as far as longer-term, how should we think about the opportunities for HMI? Obviously, there are some near-term challenges, I certainly understand that, but how should we think about HMI from a sales and profitability standpoint longer term?

Jeremy Hoff, CEO

We are very focused on working closely as a team to ensure we are all moving in the same direction, which I believe is crucial. Additionally, we have strong businesses that have been somewhat overshadowed by a few weaker ones. We are actively working to address these weaker areas, whether by reducing their prominence or adjusting their pricing, even if it means sacrificing some volume. Our priority is to invest in the businesses that show strong potential now and moving forward. I am confident that once we implement these changes, we will see a significant improvement. We are fortunate to have strong leadership in each of those businesses, which makes it challenging to add another layer of management. Despite the current challenges, particularly with factory closures impacting us quickly, I remain very optimistic about our position.

Anthony Lebiedzinski, Analyst

Okay. That's great to hear. And then last question from me. I mean, obviously, you guys have a strong balance sheet and I know the current environment, as far as the supply chain, is constrained. But just wondering what is your appetite for acquisitions, especially in light of potential changes to the tax laws? I mean, are you seeing or are you interested in doing any M&A activity?

Jeremy Hoff, CEO

We are definitely open to opportunities and are actively reviewing potential options. Our Board of Directors is supportive of this approach. One of our key strategies is to grow through acquisitions, but it’s important to execute this correctly, ensuring that any business we consider aligns well with our overall operations and culture. While I may not be providing all the details you’re seeking, I can confirm that we are certainly open to the idea of acquisitions.

Operator, Operator

Our next question comes from the line of John Deysher from Pinnacle.

John Deysher, Analyst

I was curious about the shutdowns in Vietnam and Malaysia; what was the timing of those events? In other words, were the shutdowns in effect for the entire quarter, or did they occur towards the end of the quarter? Please help me understand how this impacted the current quarter.

Jeremy Hoff, CEO

This is Jeremy. We actually started down that road around August 1, which is when the government became involved. The situation in Malaysia occurred a bit earlier, probably June or July.

Paul Huckfeldt, CFO

Yeah. Malaysia was earlier, but Malaysia was a pretty small part of it.

Jeremy Hoff, CEO

It's not as big and Vietnam is bigger for us, the bigger footprint. So 8/01 would be the answer on that.

Paul Huckfeldt, CFO

It was quite dramatic. It went from just a few cases when the Delta variant emerged to very aggressive lockdowns, primarily because Vietnam was not well vaccinated at that time, and the government was very strict about enforcing shutdowns.

John Deysher, Analyst

Okay. So August 1, so it really didn't impact the last quarter. Do you anticipate being able to meet your sales going forward? I know inventory is up, but if the factories don't come back online anytime soon, could there be a shortfall in terms of lost sales?

Jeremy Hoff, CEO

Yes, that's a good question. We believe we will be in a better position for Hooker Branded and Domestic Upholstery. HMI is closely linked to production and the shipping of containers from production, so we think there might be a shortfall there.

Paul Huckfeldt, CFO

It's temporary, but until the pipeline refills, it's certainly probable.

John Deysher, Analyst

Okay. So HMI is the most vulnerable at this point. And during the last quarter, how much actually came out of Vietnam as a percentage of sales roughly?

Paul Huckfeldt, CFO

Probably about half. Yes, I'd say it's closer to around half.

John Deysher, Analyst

Around half. And what was China roughly for that quarter? Sorry?

Paul Huckfeldt, CFO

20%.

John Deysher, Analyst

20%. Okay. All right.

Paul Huckfeldt, CFO

Domestic and other.

John Deysher, Analyst

Yes. All right. Okay. I think that does it. Thanks.

Operator, Operator

Our next question comes from the line of Jeff Geygan from Global Value Investment. Your line is now open.

Jeff Geygan, Analyst

Can you go back to the HMI transition, give us an expected timeframe and financial impact on that?

Jeremy Hoff, CEO

I'll start with the timeframe and then let Paul discuss the financial impact. It's somewhat fluid due to some unknowns. We've received what we believe is positive news that Vietnam plans to open up on September 15. The challenge will be starting at a low capacity; when you shut down a factory, you don't just jump from zero to full capacity immediately. There might be challenges as capacity gradually increases. However, more vaccines are being distributed in the country, and we are hearing that the government is encouraging fully vaccinated individuals to return to work. Therefore, we don't anticipate a significant delay in individuals returning to work once they are either vaccinated or have recovered from COVID. I think we can expect that it will affect HMI for one quarter specifically.

Paul Huckfeldt, CFO

Third quarter HMI could miss sales by 30%.

Jeremy Hoff, CEO

Yes, right. Right.

Paul Huckfeldt, CFO

It's going to be significant.

Jeremy Hoff, CEO

And then I believe we'll start to make somewhat of a comeback, but not recover for the year. But I think we'll start to see much better shipments in the fourth quarter, but it will still be a recovery. And I think we'll hit first quarter in a healthier way with HMI. Is that fair, Paul?

Paul Huckfeldt, CFO

Yes, it is. But that's all predicated, of course, on the behavior of the macro events like the virus. So that's our thinking today.

Jeff Geygan, Analyst

All right. And then, I guess two follow-ups. Number one, I was more specifically interested in leadership changes there or conceivably, you do have the leadership team you want right now. But secondly, given the percentage of revenue represented by HMI, but the 0 margin contribution. On a 30% lower revenue, could you actually start seeing margin contribution from that division?

Paul Huckfeldt, CFO

No, we don't expect to see margin contribution in the third quarter. We think that some of these restructuring moves and then as we rebuild, we're focusing on profitable businesses. And so, I think we expect them to be back in the margin contribution world, maybe fourth quarter, but third quarter, it's going to be tough with the sales miss like that.

Jeremy Hoff, CEO

When factories are closed and we can't ship, it creates a challenging situation for a while, but we believe it will be temporary.

Jeff Geygan, Analyst

All right. Thanks. Regarding the logistical issues and Asian supply chain challenges you're facing, how do you expect that to impact your holiday sales and what contingencies have you made?

Paul Huckfeldt, CFO

Holiday sales really aren't a big driver, except in the ACH division. Those will probably be adversely affected. The Hooker side of the business, I mean, we participate in Wayfair's Cyber 5. And it's important to us, but it's not a key and that's all business shipped out of our warehouse already. So, we don't expect to see a major impact there. I think the ACH division is the only division that specifically could be adversely affected in the, like a holiday sales expectation.

Jeff Geygan, Analyst

Can you provide more details on the impact of your SKU rationalization on your P&L or balance sheet?

Jeremy Hoff, CEO

At the beginning of the pandemic, we made significant efforts to adapt to the changing demand, particularly for Hooker Branded products. Once we navigated the initial challenges and demand increased, we focused on optimizing our warehousing processes. This led us to reduce our product offerings by about 18% last year, and we have continuously monitored this effort. We prioritized our top-selling items, mainly focusing on the best performers. Each month, we assess shipping rates for these products, ensuring all of our top items are sold, while also evaluating any lower-performing products. This ongoing strategy has positively influenced the bottom line for Hooker Branded.

Paul Huckfeldt, CFO

Top line too.

Jeremy Hoff, CEO

Yes, top line and bottom line because we've been able to get the right production for the right pieces, and so that really has had a major positive impact for the company.

Jeff Geygan, Analyst

And can you speak to your balance sheet, inventory as well?

Paul Huckfeldt, CFO

I think we're reasonably happy with the inventory flow on the Hooker Branded side of the business, given the constraints. HMI is facing challenges because their inventory flow is quite different. They have built inventory, but many of their sales are dependent on container direct sales, which accounts for the 30% sales miss we are anticipating. The inventory hasn't been built yet. However, on the Hooker side, we are fairly satisfied with our inventory under the current circumstances. Naturally, with the demand, we would prefer to have more, but I believe we are exceeding our expectations each month and servicing reasonably well compared to previous periods.

Jeremy Hoff, CEO

We believe on the Hooker Branded, it's more of a hiccup as long as it opens in the time, and we think it's going to open. And then on the other side, we've talked about where it's definitely more impactful.

Jeff Geygan, Analyst

Thank you. For my last question, Paul, referring back to your earlier answer to Anthony, I understood that your average selling prices increased by about 12% and volumes by approximately 4.5%. If that's accurate, does that suggest that you're still experiencing strong organic demand with unit volume growth of roughly 4.5%?

Paul Huckfeldt, CFO

The demand is likely higher than what we're currently able to ship, as our backlogs continue to grow. The 4.5% reflects our shipping capacity, and we are very confident in the demand. We are not experiencing any significant cancellations, and I believe that the overall demand in the industry is quite strong. Therefore, I think the reality is that demand exceeds 4%, but the 4% is the level we can currently service.

Jeff Geygan, Analyst

I see. Thank you. Good luck. I think the issues you're facing are being faced by everybody that's moving product around the world. So, we'll get through this and look forward to seeing it on the other side.

Operator, Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Jeremy Hoff for closing remarks.

Jeremy Hoff, CEO

Thank you, Gigi. We would like to thank everyone for their participation in today's call. We look forward to sharing our third quarter results in early December with you. Thank you and have a great day.