Hooker Furnishings Corp (HOFT) 2010 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to Hooker Furniture's fiscal 2010 first quarter earnings conference call. Reporting its operating results for February 2, through May 3, 2009. At this time, all participants are in a listen-only mode. 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 and CFO. Mr. Ryder, you may begin.

Thank you. Good morning and welcome to our quarterly conference call to review our sales and earnings performance for the fiscal 2010 first quarter which ended on May 3, 2009. We appreciate your participation this morning. Joining me today is Paul Toms our Chairman, President and CEO; and Alan Cole our President of Hooker Upholstery.

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 2010 first quarter 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. As we reported yesterday, net sales for the first quarter were $52.1 million we incurred a net loss of $456,000 or $0.04 per share. Net sales for the first quarter of fiscal 2010 decreased $19 million or 26.7%, compared to $71 million for the first quarter fiscal 2009. Net income for the quarter decreased $3.1 million, compared to net income of $2.6 million or $0.23(Sic-see press release) per share for the fiscal 2009 first quarter. Now Paul will comment on our first quarter results.

Thanks, Larry and good morning everyone. The current economic recession has resulted in another disappointing quarter. However, we're more confident today than we were during our last conference call eight weeks ago that we have hit the bottom and we'll begin to see modest improvement by late summer or early fall. Meanwhile, we're continuing to manage well those aspects of our business that are within our control. Our balance sheet is strong. We're reducing inventories while maintaining service levels to our customers, increasing cash, controlling cost, and improving both product quality and packaging, as well as the service we deliver to our customers. We were able to post a small operating profit before impairment charges this quarter, despite the steepening sales declines across the Company and significant excess capacity and fixed cost burden in our Upholstery Divisions. Two areas under our control that we've managed particularly well are our balance sheet and cost structure.

First in regards to the balance sheet, we were able to increase cash and cash equivalents y $14.4 million to $26.2 million as of the close of the first quarter on May 3. This compares to a cash level of $11.8 million at the end of the 2009 fiscal year on February 1. The growth in cash was accomplished primarily through inventory reductions during the quarter in response to reduced incoming orders and shipments. We're in an environment where conservation of cash is paramount and we've been able to grow cash and reduce inventories which positions us well to weather the balance of the downturn. We have very little debt with our total long and short-term debt standing at less than $5 million. We reduced inventories to $47.1 million as of May 3, compared to $60.2 million at the beginning of the fiscal year. This represents more than a 20% reduction from the last quarter. We expect to continue to reduce inventories modestly in the next month or two. However, as we move towards the fall, we expect to see a slight increase in inventories as we prepare for the expected uptick in business around Labor Day.

Another area which we have control over is our spending and cost structure. We decreased selling and administrative expenses by $1.6 million to $11.2 million in the first quarter. The decrease in selling and administrative expenses was driven by lower selling expenses related to lower sales, and specific actions to curtail spending. A key factor in the decrease was lower compensation benefits and other expenses as a result of workforce reductions at Hooker, Bradington-Young and Sam Moore last year. The favorable impact of these reductions was fully reflected in the financial results for the just-completed quarter. Through the layoffs last year and the recently announced management consolidation at Sam Moore, we're reducing the cost and overhead structure of the business to increase efficiencies and competitiveness, and better align the size of our workforce to the current lower sales levels.

The ongoing economic downturn has also presented a good opportunity for us to look inside our Company and focus on making improvements in every functional area. Currently, we have over a half dozen cross-functional continuous improvement teams under way in areas such as warehousing, delivery, customer service, packaging. We have achieved some quick wins with some of these continuous improvement efforts and are actively engaged across our Company in improving everything we do.

Over a year ago, Hooker, Bradington-Young and Sam Moore made a long-term commitment to environmental stewardship and pursuing environmental best practices. Last month our Sam Moore division completed a furniture industry specific environmental management program known as EFEC. Stands for Enhancing Furniture's Environmental Culture. We expect that both Bradington-Young and Hooker will also achieve EFEC certification for their facilities by the end of the next quarter. In the process of recycling, saving energy, saving water and landfill space through environmental best practices, we have also realized a monetary savings of approximately $0.5 million. It's been gratifying to see so many of our employees actively live out our core value of citizenship, caring, responsibility, through environmental best practices. And at the same time, achieve substantial cost savings for the Company.

A major event during the recently completed quarter was the spring international furniture market in High Point, North Carolina. At the market, we successfully repositioned Hooker, Sam Moore and Bradington-Young by layering in more transitionally styled products at lower price points to reach a broader consumer demographic. Dealers responded to the new products with enthusiasm, and commitments for floor placements. These new styles and price points should allow us to expand floor placements with current and new dealers, rather than simply replacing old products on the dealers' floors. Even though overall attendance was down at the market by approximately 20%, attendance was up 40% for both Sam Moore and Bradington-Young as we relocated the Sam Moore showroom to have them co-located with Bradington-Young in a prime location in the international Home Furnishings Center. And we remodeled both of of their showrooms.

We believe we made strides towards market share gains during the market and that upon economic recovery, we will be well positioned to respond quickly to increased demand. At this point, I'd like to call on Larry to discuss factors that drove sales and earnings performance for the quarter.

Thanks, Paul. The recession continued to be the primary driving factor in our sales and profit picture. Our 26.7% sales decline compared to the same quarter last year was primarily due to lower unit volume from the industry-wide slowdown in business at retail. Almost every product line and category reported lower sales volumes versus a year ago. With the exception of our recently introduced Envision line in more moderate price points and transitional styling to reach a younger consumer.

Unit volume decreased for Hooker's wood and metal furniture as well as for Bradington-Young's domestic and imported leather -- I'm sorry, imported furniture. Compared to the fiscal 2009 first quarter. Sales of imported wood and upholstered furniture both declined approximately 25% from the prior year quarter while domestic upholstery sales declined approximately 30% in the same period. Overall, average unit selling prices increased slightly during the fiscal 2010 first quarter compared to the fiscal 2009 first quarter primarily because of selling price increases we implemented during fiscal 2009 in response to cost increases for imported finished goods and raw materials.

On the profitability side the net loss of $456,000 included an asset impairment charge related to our Bradington-Young trademark. In light of the continuing economic recession we evaluated the carrying value of our trade names again this quarter and determined that the Bradington-Young trade name was further impaired compared to the adjusted carrying value we recorded as of February 1, 2009. As a result, we recorded an additional intangible asset impairment charge of $673,000 during the first quarter. The aftertax effect of this impairment was $419,000, or approximately $0.04 per share.

Although we were able to generate a small profit before the impairment charge, the decline in the bottom line was primarily impacted by steepening sales declines across the Company and excess capacity and higher fixed costs as a percentage of sales in our upholstery divisions. Our gross profit margin improved slightly in the Hooker Wood Furniture division this quarter but not enough to offset a significantly lower gross margin in the upholstered furniture divisions due to their higher fixed cost business model. Even with that downward pull on gross margins from the upholstery side, our overall gross margins were 21.6% of sales, a decrease from 23.6% of sales during the same quarter a year ago. Operating margin decreased in the 2010 quarter to a loss of $627,000, or 1.2% of net sales. From income of $4 million or 5.6% of net sales in the 2009 quarter, principally due to lower net sales, higher operating and operating expenses, overhead and operating expenses as a percent of sales, and a trademark related impairment charge for Bradington-Young.

On the positive side, our balance sheet is very strong as Paul said earlier. We maintain a solid cash position, have good credit availability, have no unused assets and little debt. During the recently completed quarter, cash generated from operations of $16.7 million principally from the reduction in inventories, funded a $14.4 million increase in cash and cash equivalents to $26.2 million as of May 3, as well as other financing and investing activities during the quarter. Inventories declined over 20% to $47.1 million at the end of the quarter, compared to $60.2 million at the end of fiscal 2009, mainly due to lower imported wood furniture inventories resulting from reduced purchases of finished inventory in response to lower incoming order rates.

Long-term debt including current maturities decreased to $4.5 million as of May 3, from $5.2 million at the end of the previous quarter, as a result of scheduled debt repayment. Also, as of May 3, total assets were $149.4 million, decreasing from $153.5 million at the end of the 2009 fiscal year, principally due to decreases in inventories, accounts receivable, prepaid expenses, and other current assets, and partially offset by increases in cash and cash equivalents and cash surrender value of life insurance policies. Working capital decreased by $3.1 million or 3.4% to $88.2 million as of May 3, from $91.3 million at the end of fiscal 2009 as a result of a $4 million decrease in current assets, partially offset by $1 million decline in current liabilities. Our working capital ratio was 7 to 1 as of the end of the quarter. Now I'll turn the discussion back over to Paul for his outlook.

Thanks, Larry. The trend of year-over-year declines in incoming orders which began in late 2006 continued in this year's first quarter. We expect the upcoming quarter will also be very challenging, but we continue to believe that business will improve marginally this fall. We're actually more confident in an uptick later this year than we were during our last conference call eight weeks ago. Because of improvements since then in consumer confidence, solid gains in the stock market and improvements in the housing market. While there is still the cloud of high unemployment and continued devaluation in real estate, the news is generally more positive than it has been for the last nine months. We have also been hearing more favorable reports from some retail customers about business since early May.

Once we see some recovery in sales, we continue to believe that the moves we've made to reduce costs and reposition the Company will lead to improved profitability. This concludes our formal remarks and at this point we'll turn the call back over to our Operator for questions. Thank you.

(Operator Instructions) And we will take our first question from Matt McCall with BB&T Capital Markets.

Thank you. Good morning, everybody.

Good morning, Matt.

Let's see. So Paul, you talked about the expectation of the pickup. Just want to make sure I understand. You talked about I think will improve marginally in the back half. If we look at February, March, April, I think you just said that the order pattern that started, the trend of declines that started last year, continued in Q1, anything that can you see in your business that would coincide with what the retailers are telling you about May activity?

Matt, we've seen a little bit of an uptick of orders in May versus April; however, the furniture market was in late April and we typically will see orders for new product placed along with existing demand for in line products. So I don't know that us seeing a small uptick in weekly orders May to April would necessarily be sustainable. It's more just anecdotal reports of better business. We had about 15 of our customers in High Point last week for our design meeting and they were pretty disbursed geographically and different size customers and I think most of them said April was not good at all. But it had seen better business generally in May. I still think May, June, July are our toughest months every year and I don't expect that to be different this year. But still hopeful that for August and really leading up to Labor Day and then after Labor Day, that there would be your normal uptick and I think we're maybe encouraged beyond just that normal uptick because the Envision product that we launched this market that was targeted at a younger, slightly less affluent consumer was probably the biggest success we had at market and most of that product will be available in late July, early August, to ship from our Asia warehouses and actually we'll have it over here maybe by mid-August. So probably available mid-July in Asia and available in our warehouses over here in mid-August and I think that will make an impact, a small impact on our business.

Okay. And you talked about the traffic up 40%, Sam Moore and Bradington-Young. Did that turn into orders or is it just that you think it's just a matter of better placement and maybe it will turn into orders later? Have you seen any success, other than just increased traffic?

You know what? I'm going to defer to Alan Cole. We're fortunate to have Alan join us today and he's responsible for Bradington-Young and Sam Moore. So I'll maybe let him answer that.

Okay. Hi, Alan.

Good morning, Matt. Matt, I think the traffic increase is a good indicator of better placements for the fall, but I wouldn't say that we saw it necessarily translate into significantly higher orders at the market itself. So the fall we think will generate placements in our upholstery companies but given the environment at market, we didn't see a corresponding bump in orders.

Okay. That's helpful. Thank you. Paul or Larry, I can't remember, one of you guys talked about the SG&A savings year-over-year. If I look sequentially, I think I know the answer to this, sequentially versus Q4, you were up a little bit on the SG&A line on a lower top line. I know you have High Point. I'm assuming that that's the reason. But as we look forward, are we talking about a $10.5 million run rate on the SG&A line or are we going to -- back to those Q4 levels or are we going to remain north of $11 million going forward? Any type of savings initiatives ongoing?

Matt, I think we're going to -- I think some of the cost decreases that we've seen are permanent in nature and I think we're going to see them stay down. I don't think that we're going to be coming back to the fourth quarter levels, but there may be some slippage in what we've got right now. You're right. There is some expense in this quarter with the furniture market in High Point. But I think most of the changes that we've made, we feel are permanent changes and we don't see a lot of slippage back the other way.

So the High Point -- can you quantify what the -- kind of the seasonal impact from High Point is?

Matt, this is Paul. I want to jump in too. I think if you looked at this quarter, some of the things that were probably larger than they were in the fourth quarter, is related to year-end audits. Also had debts that were higher. Whether they were higher than the fourth quarter, I would have to go back and check but they were higher, a good bit higher than they were a year ago.

Right.

And then we did have market expenses that you wouldn't have had in the fourth quarter. I think there is actually opportunity for us to take additional costs. We're looking at some consolidation in warehousing that would reduce our warehousing and distribution cost a little bit and the caveat, though, is if we see an uptick in business, you can expect a corresponding increase in sales and marketing expense because really a lot of the reduction in selling administrative this quarter versus last year's first quarter was sales commissions.

Yes, I think it really depends on whether you're talking about as a percentage of net sales or whether you're talking about real dollars, because I think as Paul points out, we've had a decrease in the real dollars, although the percentages haven't come down because the top line is so depressed at this point.

Right. Right.

I agree with what Paul says. I think we have some consolidation opportunities in front of us. I think there's some opportunities for lowering some of those costs. Bad debts was higher this quarter, as you might imagine, from the current environment and that's probably going to be with us for some time to come before we completely get out of this, but we're -- so far we're able to work through it.

What was that bad debt expense, relative to last quarter or last year?

Well, I can tell you that the bad debt expense for this quarter is about 8 times our average historical rate of bad debts. Bad debts for us historically has been about 0.5 of 1% and right now it's running about 4%.

Going into the leaner summer months you wouldn't expect that actually to go lower? Or are you pretty comfortable with where it is?

I don't know. It's hard to say what that's going to be. I don't expect -- like we've said, we don't expect business to get all that much better in the summer months, so I expect the challenges are still going to be out there for the retailers through the summer and into the early fall.

I think the longer we're in this environment, the more attrition you're going to see in.

Okay. And then one more, I'll hop off. You commented qualitatively about the gross margin performance. Can you talk about again, qualitatively about the profitability performance of the different businesses, maybe talk about the BY versus Sam Moore and Opus and then the overall -- and in the Hooker business, just what was profitability like before, I don't know how you want to do it but just talk qualitatively about profitability in the quarter and then based on some of those comments about taking some costs out what does the profitability look like across those segments for the rest of the year?

I'll take a stab and then Larry and Alan may want to jump in too. Hooker even in a sales decline environment like we've had, and Hooker case goods experience as far as top line declines was pretty similar to the combined Company's just slightly less but not significantly less percentage-wise and we're still profitable. Not at the levels we have been, but I guess some comfort in the fact that we've still been able to bring some profit to the bottom line. Bradington-Young has seen larger sales declines than Sam Moore. I think that's a function of maybe leather hasn't done as well recently and I think Bradington-Young is positioned a little bit higher in the marketplace than Sam Moore or Hooker and I think that's probably been a tougher place to be. Both upholstery companies are struggling with absorption of fixed cost and at the current levels we're running we're not profitable in upholstery. We think we've done some things and maybe Alan can speak to those that will reduce our losses but really I think for us to become profitable, we've got to get back to a demand environment that's maybe similar to earlier last year, maybe the first half of last year.

Okay.

No, I think that pretty well sums it up. Obviously, what we're faced with in the Upholstery divisions are what we used to be faced with in our domestic case goods plants, the problem with absorbing the overhead that we have. Fortunately, in the upholstery area, as opposed to case goods, the fixed costs are significantly less than they are in the case goods, so that's the good sign. But as Paul says, at the current levels of revenue generation that we've got at both companies right now, it's a struggle to get up to a breakeven point right now.

Okay. Thank you all.

(Operator Instructions) And we have no more questions in the queue so I would like to turn the call back over to our presenters for any additional or closing remarks.

We really have no further remarks. We appreciate everybody joining us today and we're available any time they have questions. Thank you.

And this does conclude today's conference. We thank you for your participation.