Hooker Furnishings Corp (HOFT) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to Hooker Furniture's conference call for its fiscal year 2008 second quarter, reporting its operating results for April 30, 2007, through July 29, 2007. At this time, all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Larry Ryder, Executive Vice President of Finance and Administration. Mr. Ryder, you may begin.

Thank you, Lisa. Good morning and welcome to our quarterly conference call to review our second quarter 2008 sales and earnings. We certainly appreciate your participation this morning. Joining me today is Paul Toms, our Chairman, President, and CEO. Due to a change in our fiscal year, we are comparing our operating results for the 13-week second quarter of fiscal year 2008 with the 2006 three-month third quarter that ended August 31, 2006, referred to throughout in our remarks as the 2006 quarter.

During our call today, 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 are contained in our SEC filings and the press release announcing our second quarter 2008 results. Any forward-looking statements speaks only as of today and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after today's call.

Now it's time to get underway and Paul has some opening comments.

Thanks, Larry, and good morning, everyone. During our first quarter conference call in early June, we said we expected improved profitability in margin performance as this year progressed, even in a difficult retail environment. That expectation began to materialize this quarter as we achieved significant gains in both net profit and earnings per share compared to the 2006 quarter. Our 2008 second quarter net income of $4.9 million increased $3.6 million or 301% compared to the 2006 quarter net income of $1.2 million. Earnings per share of $0.39 increased $0.29 or 290% compared to the 2006 quarter earnings per share of $0.10. A substantial portion of those gains can be attributed to our improved operational performance, cost reduction, and significantly lower restructuring charges in the current quarter.

We are pleased with our 31.3% gross profit margin and our 10.2% operating income margin for the quarter, especially in light of a $9.6 million reduction in sales representing 11.5% decrease, which amounted to $73.4 million this year compared to $83 million in sales for the 2006 quarter. Compared to last quarter, we see solid improvement with our profitability. Operating income improved from 8% of sales in the 2008 first quarter to over 10% this quarter, getting us into the double digit operating margin range that we feel is sustainable given current or improved business operating levels. That operating margin came on the strength of our 31.3% gross margin we mentioned earlier, which was up 270 basis points from the 28.6% gross margin in the first quarter this year.

As we stated in our press release yesterday, our increased profitability confirms the opportunity we've seen for some time to improve financial and operational performance by realizing the efficiencies of our new business model, even without the topline increases we've seen historically at this company. The greatest overall contributor to our improved operating margins this quarter compared to the 2006 quarter was their $3.5 million or almost 19% decline in selling and administrative expenses. That decline was primarily driven by significant year-over-year decreases in warehousing and distribution cost from better management of our finished goods inventories and lower temporary warehousing and port storage costs.

Also, it's worth noting that we achieved the decline in selling and administrative expenses even with the addition of the selling and administrative expenses from Sam Moore Furniture. Our financial statements included the operating result of Sam Moore for the three months since we acquired them on April 28, 2007. As we've said before, we believe the major restructuring costs are behind us as the transition to our new business model is now complete. Our profitability benefited from a $2.4 million decrease in restructuring and asset impairment charges this quarter compared to the 2006 quarter. This quarter we recorded $473,000 in pretax restructuring charges or $0.02 per share after tax primarily for additional severance and related employee termination benefits and disassembly costs associated with the closing of our last domestic wood furniture manufacturing facility in Martinsville, Virginia, in March of this year.

During the 2006 quarter, we recorded $2.8 million in pretax restructuring charges, or $0.15 per share after-tax, related to the closing of our Virginia manufacturing facility. While our bottom line is on track for sustained improvement and solid performance, the industry wide business downturn obviously continued to impact our top line this quarter, with an 11.5% sales decrease,despite adding $6.7 million in revenue from Sam Moore. The addition of Sam Moore net sales for the quarter, essentially offset the year-over-year decline in domestic wood furniture sales we experienced in the 2008 second quarter. We expect retail conditions to continue to be challenging, yet even in the midst of one of the most difficult retail sales climates we've seen in years, we feel very positive about the direction of our company and the management team we have in place.

We're focused on improving those things over which we have some control in both sales and operations. These improvements are paying some dividends now, but hopefully will become much more evident when business conditions improve. On the sales and marketing side, we're forging more meaningful partnerships with our best customers, with programs like our Smart Living Showplace store within a store merchandising retail displays. Smart Living Showplace allows us to showcase a broad assortment of our product and gain additional product representation on our dealer's floors. We now have 26 of these retail displays open with 15 in progress. We expect to have 41 open by year end. We plan to open about 25 per year going forward.

We're also targeting large, national and regional accounts with private label product through the efforts of Bruce [Kohnauer] our conveniently appointed Senior Vice President of Business Development. We benefited from $6.7 million in net sales from Sam Moore Furniture this quarter and are pleased with our initial progress in expanding their sales force, which is already exposing Sam Moore to new retail customers. As we previously announced, early this summer we brought on board veteran upholstery furniture executive Alan Cole to oversee the operations of both Sam Moore and Bradington Young.

On the operations side during the second quarter, we began realizing the benefits of having our purchasing and global sourcing management system fully operational for an entire quarter, enhancing our coordination of information with offshore vendors and improving our sourcing operations, logistics efficiency, and communications up and down the supply chain. This system should continue to have a positive impact on inventory management as we improve forecasting and ordering and achieve virtual realtime exchange of production, shipment, and delivery information with our vendors. We began another major initiative to enhance administrations and operation this quarter as we kicked off Lean Six Sigma Office, a sustained value creation and business improvement program. We have leadership in place now for Lean Six Sigma and initial teams and projects are underway. Inventory management and cash generation continue to be bright spots of our financial performance.

At this point I'm going to call on Larry again to take us through our balance sheet highlights.

Thanks, Paul. While we're disappointed with our sales for the quarter, we are gratified by our continued reductions in inventory and our strong cash position. At the end of this just-completed second quarter, inventories were $51.6 million,excluding $5 million of Sam Moore inventory at July 29, 2007. This represents about a 24.3% decrease from $68.1 million at November 30, 2006. In addition, our inventories declined 38.4% from $83.8 million at the end of the 2006 quarter. We believe that the efforts we have made in our forecasting, logistics, and supply chain management have precipitated these decreases. We also believe we are adequately inventoried for the uptick in sales we typically see in the fall.

Partly as a result of the decline in inventories, we have been able to generate significant cash flow. During the 2008 first half, the company generated $23.8 million in cash flow from operations. The company used this cash flow and an additional $9.9 million in cash and cash equivalents during the 2008 six-month period to fund $18.4 million in common stock repurchases, $10.6 million for the acquisition of Sam Moore, $2.6 million for dividends, $1 million for capital expenditures, and $1.2 million for scheduled debt repayments. We ended the 2008 second quarter with cash and cash equivalents of $37.2 million.

At July 29, 2007, assets totaled just over $185 million, decreasing from $201 million at our last fiscal year end on November 30, 2006, highlighted by a $5.3 million increase in cash, a $10.6 million reduction in accounts receivable, and an $11.5 million reduction in inventories. Asset balances at July 29, 2007, include $3.3 million in accounts receivable, $5 million in inventories, and $3.4 million in other assets related to Sam Moore, who's operations were acquired on April 28, 2007. The company's long-term debt, including current maturities, declined by $1.8 million to $9.2 million at quarter end from $11 million on November 30, 2007 as a result of our scheduled debt repayments. As of July 29, 2007, the company has repurchased over 832,000 shares totaling $18.3 million, excluding commissions, or approximately 61% of the $30 million in shares of the company's common stock the Board of Directors authorized to be repurchased.

We continue to believe that purchasing Hooker shares represents prudent use of the company's cash and enhances shareholder value. Our strong financial condition and cash flow has allowed to us simultaneously take advantage of opportunities to purchase our stock at attractive prices while continuing our investment in the company's future growth. With that, I'm going to turn it back over to Paul for the outlook.

Thanks, Larry. Retail conditions continue to be very challenging for furniture stores. Certainly more so in some regions than others, but we do expect the typical uptick for furniture sales as we enter this fall. If we see a flat to moderately reduced sales environment, our financial performance for the remainder of this fiscal year should continue to compare favorably, year over year, as a result of our ongoing cost-cutting measures, continued progress in managing our supply chain, and the elimination of major restructuring and employee stock ownership plan cost. We expect continued year over year declines in warehousing and distribution costs due to better management of our finished goods inventory and lower temporary warehousing and port storage costs resulting from the continuing consolidation of our domestic warehousing operations. That pretty much sums up our remarks. Lisa, at this point, we'll take questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) and our first question comes from Matt McCall with BB&T Capital Markets. Please go ahead.

Good morning. This is actually Sean Connor for Matt. Matt's traveling today. I was hoping to try to understand the seasonality coming into next quarter. You guys commented that you do expect the -- an uptick from the fall selling season. If we look back in the previous years, historically moving into this time in the year, sales have gone up about $7 million, sequentially. Is that what we could expect in Q3 as well this year, or given the weaker first couple quarters, could we see a little bit of a stronger uptick? Just trying to understand the seasonality there and how that's going to affect any sort of continued margin improvement going forward?

John, this is Paul. I don't know that we would forecast a $7 million improvement in revenues in the third quarter versus the second quarter. I think the way we have looked at it historically is that in the September, October, November time period, which was our fourth quarter in prior years, we've typically done somewhere between 26 and 27% of our total volume for the year. And I think that's probably something that we would expect with our third quarter this year, which actually includes August and doesn't include November. But I still think our business and most furniture company's business typically takes a little bit of an uptick at Labor Day and we're certainly hopeful that's going to be the case this year and expect it to be sequentially better than the second quarter.

Okay. And given that sequential increase, how much -- I mean, just given significant margin improvements in this quarter, with higher revenue next quarter from the better selling season in the fall, how much leverage can you get to improve upon that margin? And is that the comparison that you're looking at when you say flat to moderately lower sales environment? Are you looking sequentially or are you looking year over year?

I think the better sales environment is looking sequentially. Now, I don't think comps versus prior year are going to be significantly different in the third quarter or probably the fourth quarter than they have been in the first and second quarter. So we're really saying that conditions typically improve in the fall versus what they are in the summer. And our business, typically the summer is the slowest season and the fall is the strongest season.

I think the opportunity for margin improvement is -- I don't know that our gross margins are going to improve much in our Hooker case goods business. I think those have been pretty stable, maybe a little bit better this quarter, but I think the opportunity for margin improvement is really with both of our upholstery companies, where the ability to run full schedules, I think we can leverage that with improved profitability at both Sam Moore and Bradington Young.

Great. Of all the nonrecurring items, quote/unquote from '06, the domestic inventory, the ESOP, the severance paid to Doug Williams, how much of that still remains to be worked through? It seems like there was some bit of an acceleration in Q2 of realizing some of those cost savings. I think we were expecting that pace to pick up in the second half. Just trying to get an idea of what's left for the back half of the year?

Sean, this is Larry. I think some of these things that we experienced in the second half of last year are pretty much through. ESOP, of course, is going to be continuing. We're going to see that continuing throughout the year in the year over year performance. Doug Williams, I think, is pretty much behind us, with that. And I think restructuring, of course, is pretty much behind us. There'll be some slight adjustments in restructuring as we finish up the closing of the Martinsville plant. We'll see slight amounts going through there, but nothing of any substantial nature.

Okay. Any color you can provide on the segment breakdown? I know you said that Sam Moore was $6.7 million in revenue and that pretty much offset the decline from domestic wood. What about Bradington-Young and the imported business? I guess the aggregate of that would be combined to be down the 11.5% that you reported, but was it broken out evenly or was one better performing than the other?

Mr. McCall, are you finished?

Well, I just asked a question about the segment breakdown, but I didn't know if I made it through?

Mr. Ryder?

Yes. We had to answer quicker, Sean. I think what you could say is the other parts of our business are probably not -- the biggest decrease in our business by far was the domestic case goods, which we said was offset almost exactly by Sam Moore at $6.7 million. Beyond that, Bradington Young and Hooker import business were both down double digits, -- But probably low double digits.

11%.

Anything else, Sean?

No. Thank you very much.

And our next question comes from Todd Schwartzman with Sidoti & Company.

Hi. Good morning, guys. First question is how sustainable are the lower freight and delivery costs that you realized in Q2?

I think -- Todd, this is Paul. I think they're sustainable in that we negotiate freight contracts generally for a year and we do that in May. I would expect at least for the next three quarters, two to three quarters, that they should be in that range or maybe some sort of seasonal surcharge or fuel went through the roof, there could be a fuel surcharge, but I feel pretty comfortable that those rates are going to be what we experienced for the next two to three quarters.

What was the EPS impact of the year-over-year benefit, if you will, in Q2?

The year-over-year benefit of what?

Of the lower delivery-related costs.

I don't know that we've really quantified that. I'm sorry.

Okay. Could you talk a little bit about what you're seeing, what you saw during the quarter and subsequent sales environment by region?

Yes. I think there are certainly pockets where business is okay. Texas, for us, all year has been reasonably good business environment, stable, up maybe modestly. But if you go into parts of the country where I think you had the highest appreciation in real estate, like Florida, southern California, maybe Arizona and a few other markets around the country, that seems to be where business has suffered the most. I guess Florida, they've got the additional problems of hurricanes and increased insurance costs and people still paying out-of-pocket costs for damage claims that they had from the hurricanes two years ago.

So I would say Florida and southern California probably the weakest markets, Texas the strongest, and the rest of the country, it's really sluggish, but probably varies a little bit from retailer to retailer depending on a person's business model. I don't see retailers really anywhere thinking that the next six months are going to be a lot different than the last six to twelve months. I think people feel like with what's going on in the housing market that we're probably in for tough conditions, not any worse than they've been, but probably not a lot better for the next six months.

So in terms of the number of your accounts that you may have previously looked at as at-risk, if you will, in terms of bad debt, that really sounds like it probably hasn't changed appreciably from the first quarter. Is that a safe assumption to make?

I think our reserves are -- first of all, we're adequately reserved, and second, I don't think they're significantly different this quarter than they have been previously. So, no, I don't see conditions deteriorating, I just don't see them improving a lot over the next six months.

Great. And in the July quarter, what was the gain on life insurance? Could you provide some color on that, please?

Todd, this is Larry. We had a life insurance -- a key man life insurance policy on A. Frank Hooker Jr., who was our former President, retired a number of years ago from the company. He died recently and the company collected approximately $550,000 in life insurance proceeds on that key man contract.

And what are you targeting for -- as far as tax rate for either the second half or full year '07 -- '08?

About 38.5%.

Finally, on the outlook, the favorable EPS comparison that you hope to see should things pan out for the top line flat to slightly down, what's the comparable prior-year number that we should be looking at, that you view as your bogey or hurdle to beat?

Todd, this is Paul. I think where we're coming from there is even taking out the restructuring charge, I think we had $0.29 per share in earnings in the fourth quarter last year, but our opportunity, in addition to not having the major restructuring charge at close of the Martinsville plant, we had significant selling and administrative expenses in last year's fourth quarter related to excess finished goods inventory. We had significant port storage charges, Demurrage, we had temporary warehousing here in Martinsville, and we have reduced -- first of all, we have no port storage charges at Demurrage this year and don't expect any for the balance of the year. We also have reduced our domestic warehousing footprint by over 0.5 million square feet and most of those warehouses have been taken offline in this just-completed second quarter. So really the reduced rent and labor related to those warehouses that we are no longer utilizing will show up more in the next quarter.

I didn't catch that number, Paul. What was the square foot reduction?

25 and 600,000 square feet.

Okay.

Which is about a third of the warehousing we had this time last year.

So you've got a couple more quarters of year over year benefit to go on that.

Yes.

Thanks, that's it.

(OPERATOR INSTRUCTIONS). And it appears there are no further questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

We really don't have -- I don't have any additional remarks. Larry?

Nope.

We appreciate everybody joining us this morning and look forward to reporting on another good quarter in three months. Thank you very much.

And that concludes today's teleconference. Thank you for your participation and you may now disconnect.