Hooker Furnishings Corp (HOFT) 2009 Q3 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to Hooker Furniture's quarterly investor conference call, reporting its operating results for the fiscal third quarter. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(OPERATOR INSTRUCTIONS)

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. Mr. Ryder, you may begin.

Thank you, Connie. Good morning, and welcome to the quarterly conference call to review our sales and earnings performance for the fiscal 2009 third quarter and the first nine months, which both ended on November 2nd, 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 third quarter 2009 results. Any forward-looking statement 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 let's get underway with some opening comments from Paul.

Thanks, Larry, good morning everyone.

We are modestly pleased with our third quarter results, given the economic recession and historically low levels of consumer confidence. As we reported in our press release last night, net sales for the third quarter of $69 million decreased 17.6%, and net income of $3 million decreased 50% from the same period a year ago. For the first nine months of fiscal 2009, net sales of $204.7 million declined 12.7% compared to $234.5 million for the first nine months of last year; while net income declined to $7.6 million compared to $15.1 million the first nine months of fiscal 2009.

Operating income for the 2009 second quarter decreased to $4.7 million or 6.8% of net sales, compared to operating income of $8.9 million or 10.6% of net sales in the same quarter a year ago. However, our operating income margin improved compared to both the 2009 second quarter and the first half. 2009 third quarter operating margin of 6.8% improved compared to 4.8% in the second quarter and 5.2% for the first half of this year.

These quarter-to-quarter margin improvements are primarily a result of higher net sales compared to the 2009 second quarter, along with cost-cutting measures the company has taken over the last three quarters and higher restructuring credits recorded during the 2009 third quarter. Under the circumstances of the prolonged downturn in the industry, we believe we are performing relatively well to have remained profitable and to have improved our net income, earnings per share and operating income margin compared to the second quarter.

Our net income this quarter of $3 million improved 42% from a net profit of $2.1 million in the second quarter, and earnings per share this quarter of $0.27 improved 50% from our earnings per share last quarter of $0.18. Mainly for the reasons I just cited, it drove the improvement in operating margin compared to last quarter in the 2009 first half. We remain confident that our business model and long-term strategy is keeping us on track to be competitive, profitable and well positioned, despite unprecedented economic adversity.

Before we get into the financial details of the third quarter and the first nine months, I would like to discuss our progress with several strategic initiatives in sales, marketing and operations that we believe position us for optimum growth once the economy rebounds. First, at the recent fall furniture market at High Point we introduced an upscale European traditional style collection, 70 pieces, at higher than average price points for Hooker furniture. We also launched into a more transitional style direction at lower price points than normal, with two bedrooms targeted to a younger, slightly less affluent consumer. Both were well received, despite significantly lower dealer attendance and buying appetite at the market. Partially because we were able to pre-sell the European collection prior to market, the overall order writing for market introductions was consistent with recent market totals in spite of approximately 22% less attendance. The lower-priced transitional bedrooms represented the beginning of a new division, a lifestyle division aimed at younger consumers aged 25 to 45. Based on this successful market launch, we expect to ship close to $500,000 of this product by the end of January 2009, just prior to the close of the current fiscal year.

We have also continued to increase our penetration of the youth furniture market through the Opus Designs product line we purchased a year ago. We have increased sales of youth bedroom products this year despite the negative growth environment, as a result of adding the Opus Designs product line. Significantly, we've added 500 new accounts since acquiring Opus Designs last December. Combined with the original Opus Designs customers at the time of acquisition, we are now selling over 700 dealers, and feel like we have good potential to further expand our account base for this product line.

We're continuing to improve the management of the Company's supply chain, warehousing and distribution operations. Our youth bedroom supplier in China just added a warehouse facility to facilitate quicker shipments of Opus Designs products, and we're also now stocking those same products at our West Coast distribution center in Carson, California. The addition of these distribution centers in China and California are helping us to improve our service and delivery, while reducing freight costs and transit times for many of our dealers, enhancing the value add of the Company's products. Finally, we're continuing to expand our product placements with national accounts through sales programs and the development of proprietary products.

When we analyze the recently completed third quarter, another positive point was a $1.7 million reduction in selling and administrative expenses. While selling and administrative expenses increased as a percent of net sales, actual selling and administrative expenses declined 9.5% to $15.7 million in the 2009 third quarter, compared to $17.3 million in the same period a year ago. The decrease in spending during the Q3 can be attributed to several factors including lower selling expenses and commissions as a result of lower sales; a decline in legal and professional fees; measures to defer, reduce or eliminate certain spending plans; lower salaries and benefits reflecting the Company's August 2008 layoff of 25 employees in operations, warehousing and administration at our Wood Furniture Division based in Martinsville, Virginia. We also announced a permanent layoff of 54 employees in operations and administration at Bradington-Young, our Leather Division, early in November, which represented a reduction of approximately 15% of Bradington-Young's work force. The Company will begin seeing the financial benefits of these cost reductions in the 2009 fourth quarter.

We believe we have right-sized our cost structure and employment levels to our current volume of business. Our estimate of annual savings from the cost-cutting and work force reductions ranges between $5 million and $5.5 million. We benefited from a portion of these savings in the third quarter, and should benefit even more in the fourth quarter. So despite our year-over-year decreases in sales and earnings, we are gratified by the quarter-to-quarter improvements and remain optimistic we are positioned to thrive once the economy rebounds.

Now let's look in more detail at the 2009 financial results compared with last year. Fiscal 2009 third quarter net income of $3 million, or $0.27 per share, compares to net income of $5.9 million and earnings per share $0.48 during the same period a year ago. The year-over-year decreases in income were driven primarily by lower net sales, along with a decline in gross profit margins to 28.7%, compared with 31.8% in the prior year quarter. The reduction in gross margin was driven by the rising cost of imported wood products and higher raw material costs for upholstered furniture, along with increased overhead absorption as a percent of net sales for domestically-produced furniture.

Our declines in income were partially mitigated by actions taken by the Company to improve profitability and reduce costs, several of which I mentioned previously, including the reduction of spending and work force reduction at Hooker. In addition, an increase in selling prices that we implemented in early September had a positive impact on margins this quarter, and we expect a greater impact next quarter. The decline in year-over-year profitability was partially offset by a restructuring credit of $561,000 or $350,000 after tax, approximately $0.03 per share, recorded in the 2009 third quarter, for previously-accrued healthcare benefits that are not expected to be paid for terminated employees at the Martinsville and Roanoke manufacturing facilities we previously closed. During the same 2008 quarter, the Company recorded restructuring charges of $419,000, or $260,000 after tax, representing $0.02 per share, for asset impairment and disassembly costs related to the closure of the Martinsville, Virginia manufacturing facility.

Moving now to the top line, net sales of $69 million decreased $14.8 million or 17.6%, compared to the fiscal 2008 third quarter sales of $83.8 million. The net sales decline for the 2009 third quarter was driven by lower unit volume and lower shipments of discontinued domestically-produced wood furniture, and lower average selling prices. Factors driving the lower average selling prices included the higher proportion of lower-priced imported wood furniture in the product mix, and sales discounts extended to dealers to promote product. While unit volume decreased compared to the same period a year ago across most wood and upholstery product categories, unit volume actually increased for youth bedroom products due to the addition of the Opus Designs product line, and it increased for upholstered seating products manufactured by Sam Moore.

This is a good time to point out that Sam Moore sales seem to have fared better than Hooker or Bradington-Young recently. This is partially a tribute to Alan Cole's leadership. Alan Cole, you may remember, was named Chief Executive Officer and President of our Upholstery Division during the last quarter. He has taken on day-to-day leadership at Sam Moore as a result of the reorganization of our Upholstery Division.

Now, turning to the financial results for the 2009 first nine months, net income for the period declined to $7.6 million or $0.68 per share, from $15.1 million or $1.19 per share in the fiscal 2008 nine-month period. The Company's operating income for the first nine months of fiscal 2009 decreased to $11.8 million or 5.7% of net sales, compared to operating income of $22.6 million or 9.6% of net sales in the first nine months of the previous fiscal year. Net sales for the fiscal year 2009 nine-month period declined $29.9 million or 12.7% to $204.7 million, compared to $234.5 million for the first nine months of last year. The decline in net sales for the nine-month period was partially offset by the addition of net sales from upholstered seating specialist Sam Moore. Net sales for Sam Moore amounted to $20.1 million in the first nine months of this year, compared to $13.9 million for the six months we had them during the 2008 period; remembering that our acquisition was early last year, and we started recording the results in what would be our second quarter. 2009 nine-month period unit volume decreased compared to the same 2008 period across all wood and upholstered product categories, with the exception of Sam Moore upholstered products and youth bedroom products from Opus Designs.

Looking ahead to the next quarter and beyond, we have seen a significant decline in year-over-year incoming order rates over the last two months. We believe we could possibly have to operate in this current environment for another nine to 12 months. Until we start to see the real estate and financial markets stabilize, and an improvement in credit availability and consumer confidence, we believe the consumer will continue to stay on the sidelines. As we mentioned in the press release, we did experience a modest increase in incoming order rates this quarter compared to the second quarter, staying true to a historical upward trend in order rates following the Labor Day holiday. While we don't expect an economic recovery any time soon, we do expect our business model and strategies will continue to help us perform relatively well and profitably under the circumstances, and position us for maximum growth once the economy rebounds.

At this point, I'm going to call on Larry Ryder to take us through our balance sheet and cash flow discussion. Larry?

Thanks, Paul.

We have now completed our $50 million stock repurchase program, which accounted for $14 million of the $21 million of cash that we've used this year. We continue to believe that the repurchase program enhanced our Company's value to our shareholders, and will continue to provide value in the future. However, we also believe that in the current business climate, conserving cash is an appropriate strategy going forward.

We continuously work to balance inventories with sales. Year-to-date we have grown inventory by $5.5 million, mainly due to slower than anticipated sales. As a reaction, we have adjusted our ordering plans downward in anticipation of continued soft sales. With our wood furniture business model, we have the flexibility to reduce orders without the need to absorb the fixed cost of owning the factories, but due to lead times we don't see the affects of those adjustments immediately.

We also paid dividends of $3.4 million and made debt payments of $2 million during the year, which brings our outstanding debt down to just $5.9 million. With $12.4 million in cash, relatively modest bank debt, and an unused revolver of $13 million, we believe we are well positioned to ride out the current recession. We've continued to generate profits and a positive cash flow despite the slowdown. We have invested $1.8 million in capital improvements and systems, and expect to spend between $750,000 and $1.5 million during the fourth quarter this year. We have reduced capital spending for non-essential items as well as other costs, in response to lower profitability and the challenging economy.

Cash generated from operating activities was down $32 million from the third quarter of fiscal 2008, due primarily to lower sales and earnings, but also due to increased purchases of imported inventory and higher payments to suppliers, due to higher costs for delivered product. We have worked to minimize the impact on our margins by increasing prices and adjusting our cost structure over the past several months. Finally, income taxes paid were down $5 million on lower profitability.

That concludes our formal remarks. Now I will turn it back over to our Operator to ask if there are any questions that you may have.

Thank you.

(OPERATOR INSTRUCTIONS)

We will take our first question from Todd Schwartzman from Sidoti & Company.

Hi, Paul, hi, Larry. I guess first thing it, I'm just curious what the magnitude us was of the year-over-year decline in orders in November and December thus far?

Todd, I would say the order rate has dropped probably an additional 15%, but we were experiencing - in the second and first quarter.

And on a year-over-year basis?

It varies, we track it by month. We are down anywhere from 15% to 30%.

Okay. SG&A as a percentage of sales came down again for the second straight quarter; do you expect this to continue in Q4?

In absolute dollars I expect it to continue, and actually to have a little bit more savings than we realized in the third quarter.

Okay.

Up to your previous question though, Todd, I think we are sitting here trying to figure out what sales rate to model in. Obviously, things kind of fell off the cliff for most people selling discretionary purchases in early October, as the market tanked and credit availability was restricted. We saw a lot of cancellations of large stock orders in late October and early November that impacted our order rate pretty significantly. I think going forward there is definitely going to be less demand by the consumer, but I don't think we will see the types of cancellations we saw in late October and November, because quite honestly we don't have a lot of large stock orders in the system. So as we try to model for the next nine to 12 months, we don't anticipate sales are going to be as good as they were in the first two quarters of our fiscal year, but I don't think think are necessarily going to be as bad as they were in October and November. So it is probably closer to October and November than it is earlier in the year.

How many customers did those cancellations span?

It was primarily in our container direct business, and I would say you're probably looking at half a dozen customers.

I think - maybe in general, could you speak to the overall health of the customer base, maybe give the change in [doubtful] accounts?

We have reserved probably an additional 30% more than we had in reserves a year ago; that's in the statements, I don't have it right here in front of me. But I think we have concerns. Actually we haven't had that many large credit losses, we've only had one large credit loss this year, which was I guess included in the results for the third quarter. But obviously if this demand environment continues for another six to nine months, I don't think there is question you are going to have some shake out at retail and probably on the wholesale level as well.

Were there any geographic markets that were particularly strong or weak that you would want to highlight for the third quarter?

The ones that are weak are the same ones we've talked about all year, southern California, Arizona, Las Vegas, Florida, markets where you had the highest run up in real estate prices are probably the ones that have fared the worse over the last two years or year and-a-half. Probably west Texas and Texas in general have held up a little bit better, and the Midwest is okay. Again it goes back, I think, to real estate prices, and markets that didn't overheat didn't have the decline in prices, I don't think, since the turndown in the real estate market, so they have fared a little bit better. Then you have maybe specific economies like Oklahoma and west Texas that are perhaps more oil-related, they have done a little bit better.

In those weaker markets, the weak real estate markets, are you seeing any signs of the declines decelerating?

It's hard to say based on what has happened in the last 60 days, I think the last 60 days it's impacted every market. Consumers are just on the sidelines until they feel better about their wealth and their income, and I think consumer sentiment is probably down across the country. So I would say relatively, probably the markets are as they were before October.

Got it. Where do you see inventory at year end?

Probably not a lot different than where we are today. It may be up or down a few million dollars, but I think although we curtailed ordering - I say curtail, we reduced ordering in probably July and August, what we really hadn't modeled was what's happened since October 1st. So in spite of us receiving less inventory in the end of this quarter and through the fourth quarter, sales are less than what we modeled, so we are really not making the progress on reducing inventory that we had hoped. I think we will make the progress, but I would say it's probably deferred into the first couple of quarters of next year.

We also actually tried to move our ordering up for inventory on products that we introduced at the October market that we felt good about. We mentioned them in the conference call; our higher-end European traditional style collection that we've placed really well, and our lower-priced transitional style bedrooms that we've placed well. We ordered those early to try to get production out in December and January, ahead of Chinese New Year, and so that will impact our inventory. It will also impact our shipments positively in the fourth quarter in those two months.

With respect to that new bedroom collection aimed at the 25 to 45 year-old age group, I think it was you said, was there incremental spending involved on consumer research, for example, associated with this launch?

Not - no I wouldn't say there was. We went through our normal product development process, which is collaborative with our retailers and with some sales associates, but we didn't spend any additional -- I think what what we have learned from our bounce back cards we have been doing for 8 or 9 years is that the Hooker consumer is generally an older consumer, a baby boomer, 45 to 64 years old, household incomes of $100,000 and up. And so we know that we are not strong in the younger age brackets and slightly less affluent income brackets, and we - our Opus Designs acquisition was partially to try to become more important in those price points, and then the launch of this new more transitional less price - lower-priced product line was also targeted to those same consumers.

All right. Great, those were my questions. Thank you.

(OPERATOR INSTRUCTIONS)

We will go next to Matt McCall from BB&T Capital Markets.

Good morning. This is actually Sean Conner for Matt. I was wondering if you could quantify the amount of price that you guys realized in the third quarter?

Sean, this is Paul. I'm not sure I understand exactly, quantify the price increase?

Yes.

Okay. The price increase across our entire line averaged about 7.1% or 7.2%. It was implemented September 2nd, and I think that we've looked at the impact in November - no, October shipments. The last month of the third quarter it impacted about 75% of the shipments. There was no impact in the first two months of the quarter.

Okay.

Nothing significant.

Okay. And looking at the inflationary pressures that you guys are seeing, one from the higher price of imported wood products, and also your raw materials and upholstery, from an order of magnitude which one of those is more challenging for you right now, and then as we look forward to the next six to nine months?

Well, I guess because wood is about 70% of what we do, the impact of price increases out of Asia would have a more material impact on our financial performance. However, I think in both cases the pendulum has swung back the other way. I think with our Chinese suppliers, the government has probably reversed a little bit of the VAT refund that they had taken completely away, and now they have, I think, reinstated part of it. Exchange rates have actually, I think, trended - stabilized first, and then maybe bumped back a little bit in favor of a stronger dollar. I think they're probably still struggling with capacity issues that impact their profitability, but anything that's petroleum-related has come down. So I think we are not seeing the types of dramatic increases in costs in Asia that we did earlier this year.

The same would be true for our upholstery. I think the dollar has strengthened against the Euro, and a lot of our hides are bought in Europe, so the cost of leather has probably come down a little bit, and steel mechanisms that went up 20% to 25% in a matter of weeks earlier this year, steel prices have gone the other way, and hopefully we are going to see some benefit from that from our suppliers of steel mechanisms.

Okay. You touched on some of the progress in the strategic national accounting initiatives; are there any thoughts of how that may benefit your top line in fiscal '10? I know I think at one point - I think it was like expectations were so much per product line introduced at some of these new relationships. Are you seeing those trends continue? Are the expectations higher or have they gotten worse with the last couple of months?

Actually, if you looked at our top 25 accounts, about three of them are people that we did virtually no business with a year ago. So Bruce Cohenour' efforts are having an impact, and next year that impact may grow by another $5 million. That's probably a good number, $5 million, $6 million, $7 million. Unfortunately, I'm not sure that it's enough to offset what's happened in a lot of our traditional channels and customers that we've had for a long time. The independent furniture store channel is really under stress right now.

I know the demand environment is going to be tough to try to get a handle on, but if you're talking about volume declines at the magnitude that you mentioned on some previous questions, with the cost savings that you announced, the head count reductions at Bradington-Young, the reductions announced I guess in August, pricing benefit from your higher price increases, maybe some raw material FX benefit; even with volumes down, you know, 15%, 20% next year, is modest margin expansion a reasonable expectation?

That's the million dollar question, and it's an awfully difficult one to answer because we have to many things going in so many different ways right now. We expect, as we said, $5 million to $5.5 million coming in annually from the work force reductions. But I think all we can say right now, Sean, is the -- we believe that the model we have got in place is flexible. Obviously, we've taken a tremendous amount of the fixed cost out of our systems in wood furniture. We think it's -- we think we've got the best model going forward, but it's awfully difficult to say whether we can at this point project margin improvement, with the uncertainty we've got in the financial - in the markets out there right now.

Okay, fair enough. Thank you very much.

Thank you.

At this time, we have no further questions in the queue. I would like to turn the conference back over to your presenters for any additional or closing remarks.

I think we've pretty much given our outlook earlier. I think the Company is better positioned with the type of environment we are in than we have been at any time recently. We've lowered our break-even point in both of our Upholstery Divisions, and we've tried to take any unnecessary costs out. So we are also in a very strong financial condition, with more cash on hand than we have debt, total debt, and I think we have the right group of people here to weather the storm. So I think it's going to be tough for another nine to 12 months, but I feel like we are well prepared and we will get through it better than most.

Thank you all for participating.

This concludes today's conference. We thank you for your participation. You may now disconnect.