Hooker Furnishings Corp (HOFT) 2009 Q2 法說會逐字稿

We are about to begin. Good day, ladies and gentlemen. Welcome to the Hooker Furniture quarterly investor conference call, reporting it's operating results for the fiscal second quarter 2009. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Instructions will be given at that time. As a reminder, today's conference is being recorded.

It is now my pleasure to introduce your host, Mr. Larry Ryder, Executive Vice President of Finance and Administration, and CFO. Please go ahead, sir.

Thank you Gwen. Good morning and welcome to our quarterly conference call, to review our sales and earnings performance for the fiscal 2009 second quarter and first half which ended on August 3rd 2008. We appreciate your participation this morning.

Joining me today is Paul Toms, our Chairman, President, and CEO. 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 is contained in our SEC filings, and the press release announcing our second quarter 2009 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.

Now let's get underway with some opening comments from Paul.

Thanks, Larry. Good morning everyone. As we said in our press release last night, the summer business environment proved to be even more challenging than we anticipated, resulting in another disappointing quarter, with financial performance below what we have achieved historically at Hooker Furniture.

As we reported, our net sales for the second quarter of 64.6 million decreased 12%, and net income of $2.1 million decreased 57% from the same period a year ago. For the first half, net sales of $135.7 million decreased 10%, while net income of $4.7 million decreased 49%, compared to the fiscal 2008 first half. Our disappointing performance through the fiscal 2009 first half is driven primarily by the decline year-over-year in sales revenue, due to the industry-wide business downturn that has been deeper and longer than most people expected.

The Company's exit from domestic wood furniture manufacturing also has been a factor in our revenue decline, along with lower average selling prices, primarily due to the mix of product shift. While it is beyond our control to change the difficult economic and industry environment, we have been busy this spring and summer addressing everything possible that is within our control, to improve profitability and stabilize sales. We believe these measures address the challenges we are facing, and position us well to leverage an improved demand environment when that materializes.

Key steps, initiatives and measures taken in recent months include, the difficult but necessary decision in late August to permanently lay off 25 employees in operations, warehousing and administration at our Wood Furniture division, based in Martinsville, Virginia. Those layoffs represented 9.1% of our wood furniture work force of 263 employees, and a 2.6% reduction in our corporate-wide work force of 912 employees, including upholstery companies Sam Moore and Bradington-Young, although employees at those two divisions were unaffected.

This work force reduction will insure that we remain competitive, and that our infrastructure is in-line with the lower sales levels at Hooker today, along with the measures we have taken to defer, reduce and eliminate nonessential spending, we believe we have right-sized our cost structure to our current level of business. These reductions will help us stabilize and begin to reverse the trend we have seen in recent quarters of increased selling and administrative expenses as a percentage of sales, which has negatively impacted profit margins.

Also in August, we reorganized our upholstery companies, Bradington-Young and Sam Moore under the executive leadership of Alan Cole, who has been named President and Chief Executive Officer of Hooker Furniture's upholstery division. Alan's day-to-day leadership at Sam Moore should put our growth strategies there on a faster track.

In July, we named Bruce Cohenour to the new position of General Manager for Opus Designs. Bruce will set the overall direction for the youth furniture specialist we acquired about nine months ago in December of 2007. Having an executive of Bruce's capability with overall responsibility for Opus Designs, will help us fully maximize the opportunity that product line represents, to expand our business and reach beyond our core consumer demographic, to attract a younger, slightly less affluent consumer.

We continue to make refinements and improvements in managing our supply chain, warehousing, and distribution operations. Over the past few months, we have built a strong inventory position, particularly on our best sellers. This inventory availability should help us take advantage of any uptick in business during the fall season. We are working with our retail customers on promotions for the fall season to stimulate sales, and finally our fall shipments will be positively impacted from the new business development efforts we have had underway for over a year, to increase placements with national accounts, key accounts, and new distribution channels.

We plan to ship an estimated 2 to $3 million in new business for both Hooker and Opus Designs this fall. So while the short term picture is quite challenging, the long term outlook for Hooker Furniture remains bright. The Company is financially strong, with a good cash position and very little debt. We are still investing in our business, with around 2.5 to $3.5 million in capital expenditures planned for the balance of this year, primarily in the area of information systems. We believe that our ability to generate a modest profit, despite this prolonged economic malaise, continues to validate our business model.

Now let's take a detailed look at our financial results for the recently completed 2009 second quarter and first half, which both ended August 3rd, 2008. Fiscal 2009 second quarter net income of $2.1 million, or $0.18 a share, compares to net income of $4.9 million, or $0.39 per share, in the second quarter a year ago. The earnings per share decrease resulting from lower net income was partially offset by a decrease in weighted average shares outstanding, from the repurchase of 2.5 million shares of common stock since February 2007.

Gross profit margin for the quarter decreased to 28.3% of net sales, compared to 31.3 in the fiscal 2008 second quarter. The reduction in gross margin was driven by an increase in the delivered cost of imported wood furniture as a percentage of net sales, along with higher sales discounting to stimulate sales, and substantial discounts on discontinued domestically produced wood furniture.

Another factor was higher raw material and overhead costs as a percentage of net sales for our domestically produced upholstered furniture lines. Since this spring we have received cost increases from our offshore suppliers on imported furniture, as well as increases in transportation costs, raw materials for upholstered furniture, and for other operating expenses.

These inflation pressures along with an increase in selling and administrative expenses to $15.4 million, or 23.9% of net sales, compares to $15.1 million, or 20.5% of net sales for the prior year period, resulted in operating income for the fiscal 2009 second quarter of $3.1 million, or 4.8% of net sales. That compares to $7.5 million, or 10.2% of net sales in the same period a year ago. The Company has recently implemented a price increase, intended to offset the cost increases from our suppliers, and to improve margins compared to second quarter 2009 levels.

During the 2009 second quarter the Company reported a restructuring credit of $258,000 for previously accrued health care benefits that are not expected to be paid, for terminated employees at the former Roanoke and Martinsville Virginia manufacturing facilities. In the 2008 second quarter, we recorded restructuring charges of $473, primarily for additional asset impairment and disassembly costs related to the closure of the Martinsville, Virginia facility.

Moving now to the top line, net sales for the fiscal 2009 second quarter of $64.6 million decreased $8.8 million, or 12% compared to the fiscal 2008 second quarter net sales of $73.4 million. As I mentioned earlier, the net sales decline was driven by lower unit volume from the industry-wide business slump, lower shipments of domestically produced wood furniture that has been discontinued, and lower average selling prices.

Factors driving the lower average selling prices included a higher proportion of lower priced imported wood furniture in the product mix, and sales discounts extended to dealers to promote sales. Excluding discontinued domestically produced wood furniture, net sales declined 7.7% year-over-year. Nearly 40% of our sales decline for the 2009 second quarter related to discontinued domestically produced wood furniture. This should be less of a factor in the future.

I would also like to point out that while second quarter unit volume decreased compared to the same 2008 period across most wood and upholstered product categories, unit volume actually increased for youth bedroom products, due to the addition of the Opus Designs product line, and for home entertainment and home theater furniture, including living room wall systems and consoles. This is gratifying since home entertainment furniture has been a strong niche for Hooker for many years.

Now turning to the financial results for the 2009 first half, net income for the period declined to $4.7 million, or $0.41 per share, compared to $9.1 million, or $0.71 per share in the fiscal 2008 six month period. Gross profit margin for the first half decreased slightly to 29.2% of net sales, compared to 29.9% in the fiscal 2008 first half. Drivers for the slight decrease in gross profit margin included an increase in the delivered cost of imported wood and upholstered furniture as a percentage of net sales, discounts from discontinued domestically produced wood furniture, and higher raw material and overhead costs as a percentage of net sales for domestically produced upholstered furniture.

In the first six months of fiscal 2009, selling and administrative expenses increased $1.7 million, or 5.5% to $32.8 million, compared to $31.1 million in the fiscal 2008 first half. As a percentage of net sales, selling and administrative expenses increased to 24.2% in the fiscal 2009 first six months, from 20.6% in the fiscal 2008 first half. These increases were driven primarily by selling and administrative expenses at Sam Moore, which was acquired at the end of the first quarter of fiscal year 2008, costs to operate two new distribution centers during the 2009 first half, one located in Carson, California, which opened in January 2008, and one in China, which opened in May 2008.

Additionally we had increased advertising and promotional spending to market Opus Designs youth bedroom furniture. The Company's operating income for the first six months of fiscal 2009 decreased to $7.1 million, or 5.2% of net sales, compared to operating income of $13.7 million, or 9.1% of net sales in the first six months of fiscal 2008.

Net sales for the fiscal year 2009 first half declined $15.1 million, or 10% to $135.7 million, compared to $150.7 million for the fiscal 2008 first half. These declines in net sales were partially offset by the addition of net sales from upholstered seating specialist Sam Moore. Net sales for Sam Moore amounted to $13 million for the 2009 first half, compared to $6.7 million for the three months during the 2008 period, following the acquisition of that company at the end of April 2007. Excluding discontinued domestically produced wood furniture and net sales from Sam Moore, net sales declined 8.8% year-over-year for the first half.

Looking ahead to the next quarter, we anticipate that business' fall will be marginally better than the summer. However the fundamental economic problems that impacted us in the summer, such as the troubled housing sector, tight credit, high energy prices, and historically low levels of consumer confidence are still in place.

For all of these reasons, we expect demand for furniture to be softer over the next several months than we have experienced in recent years. As we have discussed, we believe we are well-prepared to deal with that challenge, through our improved cost structure and operating efficiencies, and a strong inventory position on our best sellers, to support any uptick in business this fall.

At this point, I will call on Larry to take us through balance sheet and cash flow statement.

Thank you, Paul. As Paul stated, we are disappointed with our declining sales and profit, even in this tough economic environment. We do however, still strongly believe that we have established the right business model, and believe we are working on the right initiatives to further refine our business, and position us well when business conditions do improve.

We believe our inventory position is appropriate for the current business conditions, and we continue to maintain good cash position. Since the end of the last fiscal year, the Company has redeployed more than half of it's available cash and cash equivalents. Cash and cash equivalents declined by $17.3 million since February 3rd 2008.

We used this available cash plus $1.9 million in cash flow from operations to fund the repurchase and retirement of common stock of $14.1 million, payment of cash dividends of $2.3 million, scheduled principal payments on our long term debt of $1.3 million, capital expenditures of $1.3 million, and additional expenditures in connection with the acquisition of the Opus Designs youth product line of $181,000. Our cash generated from operations during the first six months of fiscal 2009 decreased $1.9 million, compared with $23.8 million generated during the six month period ended July 29th, 2007.

The decrease was primarily due to a decrease in cash received from customers, higher payments made to suppliers and employees, and a decrease in interest income earned, partially offset by a decrease in income tax payments. The decline in cash received from customers is primarily attributed to lower net sales. Payments to suppliers and employees increased as a result of higher inventory purchases in the Sam Moore operation.

During the prior year quarter, inventory levels were higher than in the 2009 first half, consequently last year's purchases were lower. Also, payments to suppliers and employees for the 2008 first half only included the operating costs of Sam Moore for the three month period following it's acquisition in April of 2007. Working capital decreased by $13 million, or 12.7%, to $89.3 million as of August 3rd, 2008, from $102.3 million at the end of fiscal 2008, primarily as a result of a decrease in current assets.

The Company ended the fiscal 2009 second quarter with $15.8 million in cash and cash equivalents, which compares to $33.1 million at the end of the 2008 fiscal year. Inventories were $57.8 million, a 14.4% increase, from $50.6 million at the end of the 2008 fiscal year. The increase in inventories was largely due to an increase in imported wood furniture inventory in preparation for the fall selling season, lower sales than anticipated during the summer, and an increase in raw materials related to Bradington-Young's leather upholstery lines.

At the end of the 2009 second quarter assets totaled $161.2 million, decreasing from $175.2 million at February 3rd, 2008, primarily due to decreases in cash and cash equivalents and Accounts Receivable, partially offset by an increase in inventory and the cash surrender value of life insurance policies. The Company's long term debt including maturities decreased to $6.6 million at August 3rd, 2008, from $7.9 million at February 3rd, 2008 as a result of scheduled debt repayments. Shareholders equity at August 3rd, 2008 decreased to $129.2 million, compared to $140.8 million at February 3rd, 2008, due to common stock repurchases and dividends paid, partially offset by net income earned for the period.

During the 2009 fiscal year, the Company has spent $14.1 million to repurchase 798,000 of the Company's common stock. Since February 2007, the Company's board has approved, and the Company has spent $50 million in total authorizations to repurchase 2.5 million shares of the Company's stock. We believe that the repurchase of Hooker shares is represented as a prudent use of the Company's excess cash, and has enhanced shareholder value.

That concludes our formal remarks, now I will turn to back over to Gwen to ask for questions.

Thank you. (OPERATOR INSTRUCTIONS). We will pause for just a moment to assemble our queue. We will go first to Matt Mccall with BB&T Capital Markets.

Good morning. This is Sean calling in for Matt. I have a quick question on the domestic wood business, the more aggressive discounting that impacted the margins. How much business is still there to work through? I kind of thought that was pretty much all behind you guys?

Sean, this is Paul. There right now remaining domestic wood inventory represents about 1 to 0.5% of our finished goods inventory at selling price. At cost it is higher than that, maybe 3%, a little less than 3%. But it is not a significant amount, but it is still there, and we are working through it. I feel like we will work through it by the end of this fiscal year.

But if you were to compare back to prior periods, I think in the second quarter of last year, there was about 7 million, maybe $4 million in volume in the second quarter, there was $7 million in volume in the first quarter. And so the fact that we are selling smaller amounts of it this year, and we are selling it at a more discounted value, makes the comparisons very difficult on that particular product.

Did you comment, I know you commented that your youth furniture line was up year-over-year driven primarily by Opus. Did you comment on what level of contribution Opus had to your top line? Was it still running at about that what $7 million annual run rate? Is that right?

That is for the first half, maybe slightly less, but I think we anticipate for the year, it is going to run right at 7 to $7.5 million annualized.

And what about Sam Moore? Did that show any growth this quarter? Is the growth, the first half growth primarily the inclusion in Q1?

Sam Moore on a versus prior year basis is experiencing the same sorts of sales declines as Hooker and Bradington-Young.

Okay. Trying to figure out the back half, is the seasonality that we saw in the second half last year, is that still, would that still be applicable to this year do you think? It looks like your inventory ramp at the end of Q2 was similar to the levels that you had on the books last year, a little bit higher. Should we, expect 52 to 55% of full year revenue to show up in the second half again, or do you think Q3 may be a little bit weaker, given your comments over the next couple of weeks?

We think the third quarter is going to be better than the second quarter just for seasonality. I think the demand compared to a year ago, same quarter last year is probably off proportionately. But the third quarter is typically our strongest quarter, the second quarter is typically our weakest. So I think you will see some improvement quarter-over-quarter, and I would say the second half of the year, somewhere between 52 to 55% is probably a fair guess at how much of the business would fall on those two quarters.

Okay. And then just trying to, in looking at the gross margin lines, is the discounting, is that expected to continue? And maybe help me understand what the discounting impact, I don't know if it can be quantified to how that specifically impacted your gross margins, but I guess what I am trying to figure out is, can the 30% level we saw in Q1, is that possible again once you get your price increases through, and offset some of the raw material pressure and increased labor from overseas?

30% gross margins achievable with the price increase?

Yes.

I don't know that we forecast margins, but I do think we should see some improvement in margins with the impact of a price increase that we implemented September 2nd. That price increase averaged about 7.2% across our lines. We also have had significant cost increases earlier in the year from our Chinese suppliers, for cased goods and imported leather, and we have also seen container costs, freight ocean container costs go up pretty significantly.

However I will say I think recently it seems like the dollar has at least stabilized against the Chinese currency, and our ocean freight contracts have an inflation/deflation clause in them, that is tied to the price of oil. With oil coming down, I don't know that we will see it immediately. I think it trails by like a quarter, but I think certainly within three months or so, we should see some stabilization, maybe a decline in the cost of ocean freight.

Sean, this is Larry. Also as Paul pointed out in his comments earlier, we have strived to take a lot of costs out of the business during the summer months. That should bode well for us as we get into the fall, stripping out some of the overhead expenses that we pick up primarily in SG&A, the reduction of employees that he talked about, as well as other cost reductions. And also the inventory that he talked about building in anticipation of the better fall months, should serve us well in that a great deal of that inventory came in before the price increases.

I don't guess you guys quantified the overall expectation of cost savings from your recent announcements?

This year I think it will be about $2 million in cost savings for the fiscal year 2009.

And did any of that show up this quarter, because it looks like despite the lower top line, you had about 50 points of sequential SG&A leverage?

No. I don't think much of those changes have showed up in the second quarter at all. It will be third quarter and beyond.

Okay. Any help in the incremental versus Q1 cost of the Chinese facility added, so we can help to gauge a baseline on what the true SG&A level is?

What facility, the distribution center?

The distribution center, yes.

I don't know that we have that, can really quantify that.

Okay. Well, thank you guys.

All right.

(OPERATOR INSTRUCTIONS). We will go to Todd Schwartzman with Sidoti & Company.

Hi Paul and Larry, a couple of things. When will you see the full benefit of the price increases you are implementing now?

This is Paul. Good morning. There was, we saw a little bit of a surge in orders the week before the price increase. So there is a little bit of a backlog at old prices, but I would think you would start to see some impact within the next month or so, probably 60 to 70% of our business is special order.

It is a customer going into a store, maybe not seeing exactly what they want on the floor, but some going to a catalog and ordering, and those we would see immediately the impact, because they are ordered at the higher price. For the next month or so you may have a little higher proportion of stock orders that were placed prior to the increase than normal, but we will see some impact starting this month, and it will get significantly larger as we go forward.

Okay. And can you talk about your allowance for doubtful accounts, maybe quantify any change during the quarter, if there was a change?

Not much of a change really, Todd. This is Larry. Our analysis of Accounts Receivable that we do on an on going basis, has not shown any particular weaknesses in the collectibility of those accounts.

We of course have our normal watch list out there, but aging has remained fairly steady. We have been very, very fortunate to maintain a good quality Accounts Receivable. So we don't see, we don't forecast a lot of problems in that area that we haven't already reserved for.

As far as the pockets of relative strength during the quarter, I could see why youth bedroom was up, due to the inclusion of Opus Designs, but what was the driver on the home entertainment side? Also what was either the percentage change in that category, or dollar change?

Well, Todd. The percentage change would have been modest growth, meaning single digit, mid single digit growth, as opposed to shrinkage in almost every other category. And as far as the reasons, I don't know that I can really explain, give you the reason.

In a sense home entertainment furniture average ticket size is probably going down, because where we used to sell multiple pieces with an armoire in the middle, to house older picture tube TVs, now we are selling consoles a lot more frequently, that may or may not have tiers and a light bridge, and they are designed to take plasma or LCD or DLP televisions. Average ticket has gone down, but obviously we are selling more units in that product line. We probably saw some benefit from the, maybe some benefit from the April market.

In terms of total unit sales, what was the decline for the quarter? I don't know if you quantified that?

I do not have the numbers on unit sales.

How much were ASPs down roughly?

Give us just a minute. We are looking.

Great.

For the quarter, Todd it looks like they were down about 0.6 of a percent.

That is selling price?

Yes, average selling price.

Got it. And to what extent has discounting continued in Q3. Where is it, did it get worse, is it about the same?

Q2 or --?

Q2 to Q3, to date.

I would expect that we are going to make similar efforts in the current quarter, to stimulate sales and promote business as we did in the summer, and that is on in-line products across all three companies, and there will be some impact also to move the remaining domestic inventory. So I think we are well reserved against the remaining domestic inventory, but I would say the pattern of discounts probably is going to be significantly different in Q3, than it was in Q2.

Okay.

Let me interrupt, and correct something I said earlier. I said 0.6 of a percent.

Right.

It is 6%.

So ASPs were down 6% for the quarter?

That is correct.

Okay. Thanks, Larry. My final question is, is a re-up on the share repurchase authorization off the table for the time being?

The Board of Directors did not take any action yesterday in the Board meeting, and I believe with our cash position being what it is right now, I think that is probably off the table for a while anyway.

Thanks, guys.

Thanks, Todd.

And there are no other questions at this time. I would like to turn things back to our speakers for any additional or closing remarks.

I don't think we have any. We really appreciate everybody being on the call today, and look forward to talking to you again at the end of the third quarter.

Thank you everyone. That does conclude today's conference. You may now disconnect.